It can and does happen quietly, without fanfare, and often without your knowledge. Your list of shareholders grows little by little through family gifts, deaths, sales, divorce, and other distributions, and/or through acquisitions where you issued stock, and you awake one day to find that you have exceeded the number of shareholders which trigger the obligation to register with the United States Securities and Exchange Commission (“SEC”).

Congratulations! You are now a “public company” with the fun, excitement, disclosure, visibility, distraction, transparency, accountability, liability, and cost, including comprehensive compliance with the infamous Sarbanes-Oxley Act, that comes with your newfound status! And your directors and executive officers are sure to enjoy the ongoing ownership reporting requirements of Section 16 and the compensation reporting requirements contained in the proxy rules that come with public company registration!

Community banking organizations are particularly subject to the chance, really the likelihood, that their shareholder base is growing slowly but surely, and that “shareholder creep” is quietly setting in. For institutions looking for liquidity and who don’t particularly care whether they become subject to SEC reporting and regulation it may not matter, however for many if not most institutions the potential cost and exposure (and administrative oversight and distraction) that comes with being a “public company” is something that they may wish to avoid, or at least anticipate and be prepared to address in a controlled fashion.

Becoming a public company brings with it a plethora of additional cost and expense considerations, as well as reporting and disclosure obligations, which institutions may not anticipate or be prepared to handle. It entails living with a new regulator, new detailed and complex rules regarding everything from your audits to board composition, compensation and ownership disclosures, and enhanced shareholder scrutiny. And the list keeps growing.

Conducting business as a public company results in a more complex and challenging business environment, and the trend in that direction shows no sign of waning. There is a reason why public companies are “going private” or “going dark” at a record pace.

So how do you keep a handle on your shareholder base? And how do you avoid becoming a public company without planning to do so?

Counting Your Shareholders

Bank and thrift holding companies become subject to SEC regulation when and if (along with other criteria) there are 500 or more shareholders of record.

In general terms, the SEC looks to your shareholder list to determine the number of shareholders for counting purposes. Shares held in “street name” by brokerage firms are aggregated by brokerage firm, as are shares held by a trustee. Somewhat detailed SEC regulations establish with some specificity when shares are deemed “held of record” by shareholders, and care must be taken to calculate the holdings consistent with the applicable regulations.

Shareholder lists can and do change with some frequency, and institutions should continually monitor their shareholder base in order to avoid inadvertently slipping over the threshold to become a reporting company without appropriate planning.

Methods of Retaining Control

Obviously the easiest and best method of retaining control on the number of shareholders is to enter into direct shareholder agreements with restricted shares requiring issuer approval for sale or distribution. In that way the institution can monitor its shareholder base and ascertain that distributions do not inadvertently result in unwanted SEC registration requirements.

Institutions may also want to consider formal buyback programs or tender offers, assuming they have adequate capital to do so. Whether financed directly by the institution from earnings or from debt (such as issuance of trust preferred shares), the institution will need adequate cash resources to undertake a buyback initiative and will need to be prepared to deal with shareholder questions and issues.

Institutions may also wish to consider a more structured reverse stock split or merger transaction which will serve to reduce the number of shareholders following the transaction or transactions. This can be a somewhat costly process which again requires adequate funding, but has the advantage of relative certainly with respect to outcome. Shareholder-approved amendment of governance documents may also help in limiting shareholder growth, as may the use of ESOP’s where appropriate.

These transactions are often used by public companies desiring to “go private” or “go dark” in reducing the number of shareholders to return to non-public status. Each creates certain shareholder issues and concerns, and must be carefully considered and structured so as to avoid creating a cure which is worse than the disease. Particularly in community banks and thrifts, shareholders are also customers and avoiding misperception and mishandling of the transaction from a shareholder/customer relations perspective is imperative for the transaction to be a success.

Related Opportunities

Institutions which consider adjusting their shareholder base may also want to consider whether structuring the shareholder base for subchapter S eligibility at the same time may be appropriate. Recent changes in sub-S qualifications may provide an opportunity to address two significant issues simultaneously.

Potential Downside

Institutions seeking liquidity for their shares, using shares for acquisition purposes, using shares for compensation purposes, or generally contemplating growth may find that the foregoing is inconsistent with their organizational goals. In that instance, it may be better for those institutions to have enhanced access to the public markets in order to achieve their purposes, and the expense and administrative distraction of being a public company may be appropriate, and simply a cost of doing business, in light of their overall institutional goals.

Each institution must approach the issue on an individual basis, and consider the pros and cons in the context of the individual goals of the institution. As in most business considerations, there is no “one size fits all” and boards are well-advised to review and consider the issues in light of all the facts and issues and what is in the best interest of their particular constituencies. As noted previously, care must be taken to consider the impact on long-term shareholder and customer relations as well in order to avoid creating adverse business consequences for the institution and potential costly and divisive litigation.


Institutions should be in a position to anticipate and recognize “shareholder creep”, and to monitor and manage, if appropriate, their shareholder base. Waking up to find that your institution is a “public company” can be a rude and costly shock. Institutions must take care to continually monitor their shareholder base so as to avoid inadvertently triggering SEC registration requirements, and should undertake preparedness for that potential eventuality well in advance. Weighing the tangible and intangible costs of public company status is something directors and management should assess on an ongoing basis, and the decision can vary depending on the goals and objectives of the institution. The underlying consideration is of course always the best interests of the institution and its constituencies. Planning for the long-term objectives of the organization is critical.

Whether your institution decides to “go public” or remain non-public is a consideration the board and management need to assess on an individual institution basis, but it should be a conscious decision that is not suddenly and unexpectedly forced upon the institution as a result of unanticipated and uncontrolled “shareholder creep”.