General Motors Corporation (GM) filed a Form 8-K on Friday providing details on the use of an $884 million loan from Treasury to invest in GMAC LLC (GMAC), including the loan and security agreement between GM and Treasury and the equity pledge agreement which serves as collateral for the loan. In December, Treasury had committed to lend GM up to $1 billion for this transaction. However, the ultimate amount of funding was related to the level of investor participation in GMAC’s rights offering, and the final level of funding from Treasury to GM for the investment in GMAC was $884,024,131. As a result of GM’s purchase, GM has increased its common equity interest in GMAC from 49% to 59.86%.
In December, GMAC received approval from the Federal Reserve to become a bank holding company – giving it access to up to $5 billion in funding under Treasury’s Troubled Asset Relief Program. Friday’s filing by GM indicated that the increased ownership in GMAC was “in furtherance of GMAC’s successful effort to become a bank holding company under the Bank Holding Company Act of 1956, as amended.” The terms of the Bank Holding Company Act and the Federal Reserve’s regulations specify that entities engaged in certain “non-financial” activities are not permitted to hold a controlling interest in a bank holding company. GM’s business operations are outside the scope of permitted activities for a company controlling a bank holding company. In order to satisfy these restrictions on ownership of a bank holding company, GM entered into agreements with Treasury and the Federal Reserve to place its ownership interest exceeding 9.9% in two trusts by March 24, 2009. The first trust will hold the membership interests purchased with the $884 million loan from Treasury with GM as the beneficiary. The trustee for this trust will be appointed by Treasury, will be independent from GM, and will have authority to vote and dispose of the trust assets. The second trust will hold the remainder of GM’s common equity interest over and above the 9.9% interest GM will retain. GM will be beneficiary of this trust and will appoint an independent trustee who must be approved by the Federal Reserve to manage the trust’s assets.
GM also has entered into several commitments consistent with those received by the Federal Reserve in approving a rebuttal of control, including that GM (i) “will reduce its ownership interest (including interests as to which it is the beneficiary under the [trusts]) in GMAC to less than 10% of the voting and total equity of GMAC” within two years of GMAC having become a bank holding company; (ii) will not seek representation on the board of managers of GMAC, other than one non-voting observer; and (iii) that existing veto rights it has under the GMAC LLC Agreement will be terminated.