[Federal Register Volume 73, Number 132 (Wednesday, July 9, 2008)]
[Rules and Regulations]
[Pages 39216-39220]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-14374]


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DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

12 CFR Part 575

[No. OTS-2008-0005]
RIN 1550-[AC15]


Optional Charter Provisions in Mutual Holding Company Structures

AGENCY: Office of Thrift Supervision, Treasury.

ACTION: Final rule.

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SUMMARY: The Office of Thrift Supervision (OTS) is amending its mutual 
holding company (MHC) regulations to permit certain MHC subsidiaries to 
adopt an optional charter provision that would prohibit any person from 
acquiring, or offering to acquire, beneficial ownership of more than 
ten percent of the MHC subsidiary's minority stock (stock held by 
persons other than the subsidiary's MHC).

DATES: Effective Date: This final rule is effective on October 1, 2008.

FOR FURTHER INFORMATION CONTACT: Donald W. Dwyer, (202) 906-6414, 
Director, Applications, Examinations and Supervision--Operations; or 
David A. Permut, (202) 906-7505, Senior Attorney, Business Transactions 
Division, Office of Chief Counsel, Office of Thrift Supervision, 1700 G 
Street, NW., Washington, DC 20552.

SUPPLEMENTARY INFORMATION:

[[Page 39217]]

I. Background

    On June 27, 2007, OTS published a notice of proposed rulemaking 
(NPR) that proposed to amend the MHC Regulations to permit certain MHC 
subsidiaries to adopt an optional charter provision that would prohibit 
any person from acquiring, or offering to acquire beneficial ownership 
of more than ten percent of the MHC subsidiary's minority stock (stock 
held by persons other than the subsidiary's MHC).\1\
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    \1\ See 72 FR 35205 (Jun. 27, 2008).
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    Under the MHC Regulations, a subsidiary MHC, or, where there is no 
subsidiary MHC, the former mutual savings association that reorganized 
into an MHC structure (collectively, Subsidiary Company), may sell less 
than 50 percent of its voting stock to parties other than the top-tier 
MHC.\2\
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    \2\ See 12 CFR 575.7 and 575.14(b)(2008). See also 12 U.S.C. 
1467a(o)(8)(B).
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    Under the MHC Regulations, a Subsidiary Company may adopt a charter 
provision that prohibits any person from acquiring, or offering to 
acquire, beneficial ownership of more than 10 percent of the Subsidiary 
Company's stock during the five years after a minority stock 
issuance.\3\ The purpose of this provision, as is the case with the 
provision when applied to fully converted associations, is to lessen 
the vulnerability of the entity to attempts to take unfair advantage of 
the results of the offering, to protect the integrity of the offering, 
and to ensure that the offering is completed in a manner that 
strengthens the issuer.\4\
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    \3\ See 12 CFR 552.4(b)(8) and 575.14(c)(2)(2008).
    \4\ See, e.g., Federal Home Loan Bank Board Order No. 84-90 
(Feb. 23, 1984).
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    OTS has become aware of several situations in which minority 
stockholders have acquired positions in the minority stock of 
Subsidiary Companies, and have taken actions that appear intended to 
influence management to engage in stock repurchases or in a sale of the 
institution. Because a top-tier MHC is required to retain more than 50 
percent of the stock of any Subsidiary Company, holders of minority 
stock (minority stockholders) cannot control the outcome of most issues 
presented to the stockholders of a Subsidiary Company. However, there 
are circumstances where OTS's regulations provide that a majority of 
the minority stock must approve a proposal.\5\
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    \5\ See 12 CFR 563b.500(a)(7), 563b.555, 575.11(i) and 
575.12(a)(3) (2008).
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    Minority stockholders may acquire a significant percentage of the 
minority stock without involving either the OTS Acquisition of Control 
Regulations (Control Regulations) or the charter provision discussed 
above, both of which are triggered by an acquisition of more than ten 
percent of the outstanding stock. Thus, for example, if a Subsidiary 
Company issues thirty percent of its stock in a public offering, a 
minority stockholder could acquire a third of those shares without 
implicating either the Control Regulations or the charter provision. In 
such a case, the minority stockholder may obtain a significant amount 
of influence, based on its ability to vote on the issues that must be 
presented separately to minority stockholders.
    OTS believes that such a result would be contrary to the purposes 
of the restrictions addressing post-offering acquisitions of stock in 
the context of conversions and minority stock offerings, that is, 
lessening the vulnerability of the entity to attempts to take unfair 
advantage of the results of the offering, to protect the integrity of 
the offering, and to ensure that the offering is completed in a manner 
that strengthens the issuer. Therefore, OTS proposed to add a provision 
to the MHC Regulations, which could be adopted only by Subsidiary 
Companies, that would provide that no entity, or person or group acting 
in concert could acquire more than ten percent of the outstanding 
minority stock of the Subsidiary Company during the five years after a 
Minority Stock Issuance. If a stockholder violated this charter 
provision, the stockholder would not be permitted to vote any stock the 
stockholder acquired in excess of the limit.
    OTS proposed that the charter provision would not limit the 
stockholdings of the parent MHC, because the parent MHC, under the Home 
Owners' Loan Act, must own more than fifty percent of the Subsidiary 
Company. In addition, OTS proposed that the charter provision except 
stock held by the Subsidiary Company's Employee Stock Ownership Plan 
(ESOP) from this limitation, because ESOP acquisitions do not present 
the concerns that have resulted in OTS limiting post-conversion 
acquisitions of stock.\6\
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    \6\ See 12 CFR 563b.525(c)(4)(2008), and the optional charter 
provision at section 552.4, both of which except ESOPs from the 
post-conversion acquisition restrictions of section 563b.525.
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II. Public Comments

    OTS received 8 comments, from 7 commenters, regarding the NPR. Of 
these comment letters, four were from trade associations, three were 
from law firms and one was from an investment firm. Five of the comment 
letters supported the proposal and three (including two letters from 
one commenter) opposed the proposal. Four of the five comments in favor 
of the proposal were submitted by trade associations, and one was from 
a law firm. Of the three comments opposing the proposal, one was from 
the investment firm, and the other two were from an attorney who wrote 
on behalf of his client.
    All of the comments in favor of the proposal supported OTS's 
reasoning as set forth in the NPR, and evidenced a belief that the 
proposal would appropriately limit the amount of influence minority 
shareholders would have over management. One commenter stated that the 
proposed restriction was reasonable in order to keep activist 
shareholders from ``engaging in control'' over an MHC.
    The two commenters who opposed the proposal cited several arguments 
supporting their position. They asserted that the optional charter 
provision would make already illiquid stock less liquid; would 
disenfranchise shareholders, and violate fundamental shareholder 
rights; was overkill to stop minority shareholders from taking actions 
to influence management; and was proposed in order to assist management 
to avoid shareholder accountability and undo the requirement that a 
majority of minority shareholders vote in favor of management stock 
benefit plans. These commenters also asserted that the proposed charter 
provision has no nexus to protecting the conversion (or the minority 
stock offering process).
    In addition, the comments raised technical issues regarding the 
proposed charter provision.
    OTS has carefully considered the public comments. Specific topics 
addressed by one or more commenters are discussed below. Except as 
otherwise noted in the discussion below, OTS is adopting the amendments 
to its regulations as proposed in the NPR.

A. Adoption and Retention of the Charter Provision

    Three commenters addressed the time period during which a 
Subsidiary Company could enact and retain the optional charter 
provision. Two commenters asked for clarification regarding when the 
provision could be adopted. In addition, two commenters addressed the 
length of time for which a charter could include the provision in 
question. One commenter suggested that Subsidiary Companies should have 
the ability to determine how long to retain

[[Page 39218]]

the charter provision, with five years as the outside limit, and 
another suggested that OTS should permit a Subsidiary Company to retain 
the charter provision as long as the company considers it appropriate.
    OTS is revising the final regulation to provide clearly that, 
subject to certain limitations discussed below, a Subsidiary Company 
may adopt the optional charter provision before it conducts its first 
minority stock offering, at the time of a minority stock offering, or 
at any time during the five years following the closing of the minority 
stock offering. However, regardless of when the charter provision is 
adopted, the charter provision must expire at some time during the five 
year period that commences upon the closing of the minority stock 
offering.
    OTS has considered the comment requesting that OTS permit the 
Subsidiary Company to decide for itself how long the charter provision 
should remain in place. The NPR stresses that the purpose of the 
charter provision is to lessen attempts to take unfair advantage of the 
results of an offering, protect the integrity of the offering, and 
ensure that the offering is completed in a manner that strengthens the 
issuer. OTS believes that these concerns lessen significantly when more 
than five years have elapsed since the completion of the offering in 
question. Accordingly, OTS is retaining the requirement that the 
provision may be in place only during the five years after the closing 
of an offering.

B. Applicability of the Charter Provision Where a Shareholder Has 
Already Acquired More Than Ten Percent of the Minority Stock

    The comments that opposed the optional charter provision raised 
several issues that ultimately related to the manner in which the 
provision would operate if a shareholder had acquired more than ten 
percent of the minority stock before the charter provision had been 
adopted. In this regard, the comments asserted that the rule 
disenfranchises large stockholders, and that sterilization of shares in 
excess of ten percent of the minority shares is inappropriate. One of 
the commenters urged that OTS make the rule applicable only 
prospectively.
    OTS has carefully considered these comments. The NPR did not 
specifically discuss situations in which a minority shareholder had 
acquired shares in excess of the limit in the optional charter 
provision prior to adoption of the provision, and did not contemplate 
situations in which a shareholder who held shares before adoption of 
the charter provision would no longer be able to vote those shares.
    OTS considered prohibiting a Subsidiary Company from adopting the 
charter provision only where a party had already acquired more than ten 
percent of the minority shares, and also considered excepting 
(``grandfathering'') parties who had acquired more than ten percent of 
the minority shares at the time of the adoption of the charter 
provision from the restrictions in the optional charter provision. OTS 
does not believe that either approach would work well, due to 
difficulties in knowing how many shares a minority shareholder holds at 
a particular time. For either approach to work, it would be necessary 
for shareholders who would not otherwise be subject to reporting 
requirements to provide information regarding their holdings, and OTS 
does not believe it is appropriate to impose special reporting 
requirements on minority shareholders of Subsidiary Companies.
    Accordingly, OTS is revising the final regulation to provide that 
only Subsidiary Companies that have not engaged in minority stock 
issuance prior to the effective date of the regulation, may adopt the 
optional charter provision.
    OTS is not prohibiting Subsidiary Companies that engage in their 
initial minority stock offering after the effective date of this 
regulation from adopting the optional charter provision, even if they 
do so after a minority stock issuance, and after a minority shareholder 
acquires more than ten percent of the Subsidiary Company's minority 
stock. In order to adopt the optional charter provision after a 
minority stock issuance, however, the Subsidiary Company must provide 
full disclosure in the offering materials regarding the possibility 
that the optional charter provision may be adopted at a later time.\7\ 
Accordingly, even if there was no restriction at the time a shareholder 
acquires a Subsidiary Company's minority stock, such a shareholder will 
do so with knowledge that its voting power may be adversely affected if 
the Subsidiary Company later adopts the optional charter provision.
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    \7\ If the Subsidiary Company engages in multiple minority stock 
issuances, it would have to make the appropriate disclosures in all 
such offerings.
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    OTS believes that this approach eliminates concerns that the 
charter provision inappropriately sterilizes votes,\8\ violates 
shareholder rights, or is in any way inconsistent with sound corporate 
governance.
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    \8\ OTS has long considered sterilization to be appropriate 
where an acquiror has violated a regulatory or charter restriction. 
Both the OTS Mutual-to-Stock conversion regulations and the charter 
provision at 12 CFR 552.4 include sterilization provisions that 
apply where the acquiror has violated OTS regulations, or a charter 
provision, and have included such provisions since the 1970s.
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C. Liquidity

    The commenter who addressed liquidity stated that the proposed 
charter provision would reduce liquidity of the stock of recently 
converted Subsidiary Companies, because acquirors who otherwise wished 
to purchase more than ten percent of the Subsidiary Company's shares 
would not be allowed to do so. OTS notes, however, that such purchases 
may ultimately decrease liquidity, by reducing, possibly significantly, 
the number of minority shareholders. The proposed rule may ultimately 
have the effect of increasing the number of minority shareholders over 
the number that would otherwise be the case, thereby increasing 
liquidity. Accordingly, the effect of the charter provision on 
liquidity is unclear. OTS does not believe that the charter provision 
will raise significant liquidity concerns.

D. Management Accountability

    Comments that opposed the proposed charter provision asserted that 
the provision helps management avoid accountability to shareholders, 
and conflicts with the final rule promulgated in 2007 that required 
that a majority of the minority shareholders vote in favor of stock 
benefit plans proposed by Subsidiary Companies.\9\
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    \9\ See 72 FR 35145 (2007).
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    OTS does not believe the charter provision either enables 
management to avoid shareholder accountability or conflicts with the 
2007 final rule requiring a majority of the minority vote in favor of 
stock benefit plans. The proposed charter provision merely prohibits a 
single entity from acquiring more than ten percent of the minority 
shares. Where a separate minority shareholder vote is required, a 
majority of such shareholders must vote in favor of a matter in order 
for it to be passed. Accordingly, management remains accountable to 
shareholders, and the charter provision does not raise the conflict of 
interest issues that led OTS to continue to require a majority of the 
minority vote.\10\
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    \10\ See 72 FR 35145, at 35147-35148 (June 27, 2007).
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E. Purpose of the Charter Provision

    With regard to the comments that the only purpose of the charter 
provision is to make it easier to pass benefit plans,

[[Page 39219]]

and that the charter provision is intended to protect insiders' 
interests, OTS set forth the rationale for the proposed charter 
provision in the NPR, and has repeated the rationale above. The charter 
provision does not prevent minority shareholders from voting in 
opposition to a proposed benefit plan. The charter provision would make 
it more difficult for a single shareholder to prevent the passage of 
stock benefit plans, but minority shareholders, as a class, continue to 
have the power to vote down a stock benefit plan.

F. Treatment of Proxies

    One commenter requested clarification regarding whether the charter 
provision would prohibit a shareholder from soliciting revocable 
proxies. The regulatory restriction regarding acquisitions of more than 
ten percent of a class of voting stock after a mutual-to-stock 
conversion, at 12 CFR 563b.525, provides that ``a person acquires 
beneficial ownership of more than ten percent of a class of shares when 
he or she holds any combination of * * * stock or revocable or 
irrevocable proxies under circumstances that give rise to a conclusive 
control determination or rebuttable control determination under 
Sec. Sec.  574.4(a) and (b) of this chapter.'' The corresponding 
optional charter provision at 12 CFR 552.4 has been interpreted to 
apply to proxies in the same manner.\11\ OTS is not aware of any reason 
to treat proxies differently in the context of the charter provision 
addressed herein.
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    \11\ See FHLBB Ops., Dep. G.C. (Aug. 14, 1986, and Oct. 21, 
1988).
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III. Regulatory Findings

A. Paperwork Reduction Act

    OTS has determined that the final rule does not involve a change to 
collections of information previously approved under the Paperwork 
Reduction Act (44 U.S.C. 3501 et seq.).

B. Executive Order 12866

    The Director of OTS has determined that the final rule does not 
constitute a ``significant regulatory action'' for purposes of 
Executive Order 12866.

C. Regulatory Flexibility Act

    Pursuant to section 605(b) of the Regulatory Flexibility Act (RFA) 
(5 U.S.C. 601), the Director certifies that the final rule will not 
have a significant economic impact on a substantial number of small 
entities. The final rule would permit Subsidiary Companies to adopt an 
optional charter provision. Accordingly, OTS has determined that a 
Regulatory Flexibility Analysis is not required.

D. Unfunded Mandates Reform Act of 1995

    OTS has determined that the final rule will not result in 
expenditures by state, local, or tribal governments or by the private 
sector of $100 million or more and that a budgetary impact statement is 
not required under Section 202 of the Unfunded Mandates Reform Act of 
1995, Public Law 104-4 (Unfunded Mandates Act). The final rule would 
permit Subsidiary Companies to adopt an optional charter provision. The 
final rule changes should not have a significant impact on small 
institutions. Accordingly, a budgetary impact statement is not required 
under section 202 of the Unfunded Mandates Act.

List of Subjects in 12 CFR Part 575

    Administrative practice and procedure, Capital, Holding companies, 
Reporting and recordkeeping requirements, Savings Associations, 
Securities.

Authority and Issuance

0
For the reasons set forth in the preamble, OTS is amending Chapter V of 
title 12 of the Code of Federal Regulations, as set forth below:

PART 575--MUTUAL HOLDING COMPANIES

0
1. The authority citation for 12 CFR part 575 continues to read as 
follows:

    Authority: 12 U.S.C. 1462, 1462a, 1463, 1464, 1467a, 1828, 2901.


0
2. Amend Sec.  575.9 by redesignating paragraph (c) as (d), and adding 
a new paragraph (c) as follows:


Sec.  575.9  Charters and bylaws for mutual holding companies and their 
savings association subsidiaries.

* * * * *
    (c) Optional charter provision limiting minority stock ownership. A 
federal resulting association or federal acquiree association that 
engages in its initial minority stock issuance after October 1, 2008 
may, before it conducts its initial minority stock issuance, at the 
time of such minority stock issuance, or at any time during the five 
years following a minority stock issuance that such association 
conducts in accordance with the purchase priorities set forth in 12 CFR 
part 563b, include in its charter the following provision. For purposes 
of this charter provision, the definitions set forth at Sec.  
552.4(b)(8) of this chapter apply. This charter provision expires a 
maximum of five years from the date of the minority stock issuance. The 
federal resulting association or federal acquiree association may adopt 
the charter provision after a minority stock issuance only if it 
provided, in the offering materials related to its previous minority 
stock issuance or issuances, full disclosure of the possibility that 
the association might adopt such a charter provision.
    Beneficial Ownership Limitation. No person may directly or 
indirectly offer to acquire or acquire the beneficial ownership of more 
than 10 percent of the outstanding stock of any class of voting stock 
of the association held by persons other than the association's mutual 
holding company. This limitation expires on [insert date of minority 
stock issuance] and does not apply to a transaction in which an 
underwriter purchases stock in connection with a public offering, or 
the purchase of stock by an employee stock ownership plan or other tax-
qualified employee stock benefit plan that is exempt from the approval 
requirements under Sec.  574.3(c)(1)(vii) of the Office's regulations.
    In the event a person acquires stock in violation of this section, 
all stock beneficially owned by such person in excess of 10 percent of 
the stock held by stockholders other than the mutual holding company 
shall be considered ``excess shares'' and shall not be counted as stock 
entitled to vote and shall not be voted by any person or counted as 
voting stock in connection with any matters submitted to the 
stockholders for a vote.
* * * * *

0
3. Amend Sec.  575.14 by redesignating paragraphs (c)(3) and (4) as (4) 
and (5), respectively, and add a new (c)(3) to read as follows:


Sec.  575.14  Subsidiary holding companies.

* * * * *
    (3) Optional charter provision limiting minority stock ownership. A 
subsidiary holding company that engages in its initial minority stock 
issuance after October 1, 2008 may, before it conducts its initial 
minority stock issuance, at the time it conducts its initial minority 
stock issuance, or at any time during the five years following a 
minority stock issuance that such subsidiary holding company conducts 
in accordance with the purchase priorities set forth in 12 CFR part 
563b, include in its charter the provision set forth below. For 
purposes of this charter provision, the definitions set forth at Sec.  
552.4(b)(8) of this chapter apply. This charter provision expires a 
maximum of five years from the date of the minority stock issuance. The

[[Page 39220]]

subsidiary holding company may adopt the charter provision after a 
minority stock issuance only if it provided, in the offering materials 
related to its previous minority stock issuance or issuances, full 
disclosure of the possibility that the association might adopt such a 
charter provision.
    Beneficial Ownership Limitation. No person may directly or 
indirectly offer to acquire or acquire the beneficial ownership of more 
than 10 percent of the outstanding stock of any class of voting stock 
of the association held by persons other than the subsidiary holding 
company's mutual holding company parent. This limitation expires on 
[insert date of minority stock issuance] and does not apply to a 
transaction in which an underwriter purchases stock in connection with 
a public offering, or the purchase of stock by an employee stock 
ownership plan or other tax-qualified employee stock benefit plan which 
is exempt from the approval requirements under Sec.  574.3(c)(1)(vii) 
of the Office's regulations.
    In the event a person acquires stock in violation of this section, 
all stock beneficially owned in excess of 10 percent shall be 
considered ``excess stock'' and shall not be counted as stock entitled 
to vote and shall not be voted by any person or counted as voting stock 
in connection with any matters submitted to the stockholders for a 
vote.
* * * * *

    Dated: June 20, 2008.

    By the Office of Thrift Supervision.
John M. Reich,
Director.
[FR Doc. E8-14374 Filed 7-8-08; 8:45 am]
BILLING CODE 6720-01-P