The U.S. Department of the Treasury has announced the terms of its Capital Assistance Program (CAP) under which Treasury will make capital available to the U.S. banking system. While banking regulators will conduct “stress tests” to assess the 19 largest U.S. banks’ potential capital needs if the economy performs worse than expected, eligible U.S. banking institutions with consolidated assets below $100 billion may also obtain capital from the CAP.

Interested institutions must apply before 5:00 pm (EDT) on May 25, 2009. Institutions will have up to six months after receiving preliminary approval to close the transaction. This extended period of time to complete the transaction will give companies time to evaluate their need for Treasury’s investment and to find private capital to supplement or replace Treasury’s investment.

This program currently is available only to publicly traded companies. A publicly traded company is one whose securities are traded on a national securities exchange and which is required to file periodic reports with either the Securities and Exchange Commission or its appropriate federal banking regulator. Separate term sheets are expected to be made available later for institutions that are not publicly traded or are organized as subchapter S corporations or in mutual form.

The minimum investment is an amount equal to 1% of risk-weighted assets and the maximum is an amount equal to 2% of risk-weighted assets. Institutions may receive additional capital to the extent such funds are used to redeem preferred shares issued in the Capital Purchase Program, thus effecting an “exchange” of the convertible preferred stock for the preferred stock sold under the Capital Purchase Program. Capital in excess of these amounts may be available on a case-by-case basis and will constitute “exceptional assistance” requiring additional terms and conditions.

Preferred Stock Terms

The investment by Treasury under the CAP will be in the form of cumulative mandatorily convertible preferred stock. The shares will qualify as Tier 1 capital for holding companies and must rank pari passu – that is, at an equal level in the capital structure – with the most senior preferred shares of the institution that are outstanding. The preferred shares will pay a cumulative dividend at a rate of 9% per year.

The preferred shares will be convertible into common stock at a price equal to 90% of the average closing price for the 20 trading day period ending February 9, 2009. Upon conversion, any accrued and unpaid dividends will be paid at the option of the institution in either cash or shares of common stock.

The preferred shares will mandatorily convert to common stock after seven years. Prior to that time, the preferred shares are convertible in whole or in part at the option of the institution, subject to the approval of the institution’s primary federal regulator. The preferred shares also will be convertible at the option of the holder upon specified corporate events, such as certain sales, mergers or changes of control.

The preferred shares may be redeemed, subject to regulatory approval, in whole or in part at any time solely with the proceeds of a common stock offering that results in aggregate gross proceeds of not less than 25% of the issue price of the preferred shares or with additions to retained earnings. Redemptions within the first two years of issuance will be at par, plus any accrued and unpaid dividends. After the first two years, the redemption price will be the greater of par plus accrued and unpaid dividends and the as-converted value. Following redemption of all of the preferred shares, the institution will have the right to repurchase the accompanying warrant and any common stock then held by Treasury under the CAP at fair market value.

The preferred shares will be non-voting, other than class voting rights on matters that could adversely affect the shares. However, if dividends are not paid in full for six dividend periods, whether or not consecutive, Treasury will have the right to elect two directors. Upon conversion of the preferred shares to common stock, Treasury will have voting rights in the common stock. Treasury intends to publish a set of principles governing its exercise of voting rights.

Treasury may transfer the preferred shares, or the common shares acquired upon conversion, to a third party at any time. The institution must file a registration statement with the SEC covering the preferred shares and the underlying shares of common stock promptly after the issuance of the shares and take all necessary action to have the registration statement declared effective as soon as possible. If requested by Treasury, the institution must use reasonable efforts to have the preferred shares listed on a national securities exchange.

Warrant Terms

In conjunction with the purchase of preferred shares, Treasury will receive a warrant to purchase common stock with an aggregate market price equal to 20 percent of the preferred stock investment. The exercise price of the warrant will be the conversion price for the preferred stock. The warrant will have a term of 10 years and be exercisable immediately. The warrant will be transferable and must be covered by a registration statement filed with the SEC. Treasury will agree not to exercise voting power with respect to any shares of common stock issued to it upon exercise of the warrant. If the institution ceases to be listed, Treasury has the option of exchanging the warrant for senior term debt or some other instrument with comparable value.

Dividend and Repurchase Restrictions

For so long as the preferred shares are outstanding or Treasury owns any common stock of the institution, common stock dividends may not exceed $0.01 per quarter, unless Treasury consents to a higher amount, and Treasury consent will be required for any share repurchases, subject to certain exemptions similar to those that exist for participants in the Capital Purchase Program. In addition, while the preferred shares are outstanding, no dividends may be declared or paid on any junior preferred shares, preferred shares ranking pari passu, or common shares, and no such shares may be repurchased or redeemed, unless all accrued and unpaid dividends on the preferred shares are fully paid.

Shareholder Consent

If a participating institution does not have sufficient available authorized shares of common stock for issuance upon conversion of the preferred shares and exercise of the warrant and/or stockholder approval is required for the issuance under applicable stock exchange rules, the institution must call a meeting of stockholders as soon as practicable to increase its authorized shares or otherwise obtain the necessary approvals. Failure to obtain the necessary stockholder approvals within specified time periods will result in adjustments to the conversion price, dividend rate, and warrant exercise price.

Disposition of Common Stock by Treasury

After the mandatory conversion of the preferred shares, Treasury must make reasonable efforts to sell at least 20% of the shares of common stock acquired upon conversion each year. Following conversion of the preferred shares, the institution will have the right, subject to regulatory approval, to repurchase any of the common shares held by Treasury at a price equal to the greater of the conversion price and the current market price. Any such repurchase must be made with the proceeds of a common stock offering or additions to retained earnings. Following repurchase of all of the common stock held by Treasury, the institution will have the right to repurchase the warrant (and any common stock issued upon its exercise and then held by Treasury) at fair market value.

Conditions for Participating Institutions

Companies participating in the program will be subject to Treasury’s standards for executive compensation and corporate governance for the period during which Treasury holds equity issued under this program, as required by the Emergency Economic Stabilization Act of 2008, as recently amended. The Treasury will shortly be releasing rules to implement these amendments.

As part of the application process, the institution must submit a plan for how it intends to use the capital obtained under the CAP to preserve and strengthen its lending capacity. Specifically, the plan must show how the institution will increase lending above levels relative to what would have been possible without government support. Treasury intends to make these plans public when the institution receives the capital under the CAP. Taxpayers will be able to monitor the performance of institutions receiving capital under the CAP. Institutions receiving capital will be required to submit to Treasury monthly reports on their lending broken out by category. These will be posted on www.FinancialStability.gov .

Finally, participating institutions will be subject to restrictions on pursuing cash acquisitions.




Knowledge Center

Match our knowledge to your needs

PRO BONO DISPUTE OF THE YEAR

PRO BONO DISPUTE OF THE YEAR

Won The American Lawyer’s “2015 Global Citizenship Award - Global Pro Bono Dispute of the Year” for the Signal International Litigation.