In an effort to improve investment conditions in banks or bank holding companies, the Federal Reserve Board ("Board") on September 22, 2008, issued a policy statement affirming a more relaxed attitude toward private investment in these banking organizations. The Bank Holding Companies Act ("BHC Act") imposes Board oversight on banking organizations and investors in those organizations who are able to exercise a controlling influence on the organization's management or policies.

Under the BHC Act, an investor has control over the banking organization if the investor has the power to vote 25 percent or more of any class of voting securities in the banking organization or otherwise is able to exert control over the banking organization. 12 U.S.C. §1841(a)(2). The policy statement expounds on the analysis of what constitutes "control" under the BHC Act, particularly for investors that own between 10 and 24.9 percent of the banking organization. The Board recognizes that strict quantitative metrics do not appropriately identify whether the investor is in control of the banking organization and therefore the Board will look at all of the facts and circumstances of the investment.

Based in part on the Board's 1982 policy statement, minority investors have avoided acquiring control over banking organizations by, among other things, restricting investment size, avoiding certain shareholder covenants, not attempting to influence decision making, and limiting business relationships with the banking organization. The current policy statement addresses these issues and relaxes the umbrella under which a minority investor can invest in a banking organization without exerting control. 

The policy statement erases the previous seemingly bright-lined rule that an investor with greater than 25 percent ownership of a banking organization have a controlling interest. The Board's new policy reads that an investor may, in a few limited instances, own more than 25 percent of the total equity of the banking organization, depending on the nature and extent of the investor's overall investment. An investor that owns a combination of voting and non-voting shares that, when aggregated, amounts to less than one-third of the total equity of the banking organization is not considered to be in control, as long as the investor does not own, hold, or vote more than 15 percent or more of any class of voting stock. Non-voting but convertible shares are at all times considered, for the purposes of calculating equity ownership, to be voting shares.

In addition, the Board now permits (with limitation) minority investors to have representation on the banking organization's board of directors. A minority investor, defined as one who has acquired between 10 and 24.9 percent of the voting stock of a banking organization, can now have a representative on the bank's board of directors. When another shareholder of the banking organization is a bank holding company in control, a minority investor may, without other indicia of control, have up to two representatives on the banking corporation's board as long as that representation is proportionate to the investor's total interest (the greater of its voting interest or its equity interest) in the banking organization and less than 25 percent of the voting members on the board. A minority investor's board representative may be neither chairman of the banking organization's board of directors nor chairman of any board committee, but may sit on a committee as long as the representation does not constitute more than 25 percent of the seats.

The policy statement also acknowledges that, like any other shareholder, a non-controlling minority shareholder may communicate with banking organization management regarding any of the organization's policies and operations, including advocacy for change in the organization's management and recommendations for new policies. However, because the BHC Act is concerned with investors controlling banking organizations, the Board makes it clear that an investor may never threaten, either explicitly or impliedly, the banking organization or its management by way of disposing its shares or sponsoring proxy solicitation as a condition for action or non-action.

Finally, minority shareholders can now have business relationships with the banking organization without exerting control; these relationships must be on market terms, non-exclusive, and terminable without penalty by the banking organization.

While, just as it did before the current economic turmoil, the Board considers the totality of the facts and circumstances of an investment to determine if the investor exerts control, the Board has now publicly relaxed its judgment parameters. This policy statement should encourage more private equity interest in these banking organizations and will give confidence to investors that they may be vocal with their investments without exerting control under the BHC Act.