STOCKS; BUSINESS (GENERAL); BANKS AND BANKING;

BANKS;

Connecticut laws/regulations;

You asked what state approvals New Haven Savings Bank must acquire to convert from a mutual bank to a capital stock bank. You also wanted to know if People’s Bank created a mutual holding company during its conversion to protect against a hostile takeover.

SUMMARY

The state statutes and regulations detail the process for converting from a mutual savings bank to a capital stock bank. These sections are attached for your reference. A converting bank must apply for the banking commissioner’s approval on several occasions throughout the conversion process, and the regulations specifically prohibit a bank from converting without the commissioner’s written approval. A converting bank must file certain documents with the commissioner, including its proposed plan of conversion. A converting mutual savings bank may also choose to organize a holding company to hold all of its capital stock upon conversion. People’s Bank did so when it converted to a capital stock bank in the late 1980s.

CONVERSION PROCESS

The statutes allow a mutual savings bank to convert, with the banking commissioner’s approval, to a capital stock bank. The commissioner can deny the application after allowing the applicant a reasonable opportunity to be heard. The converting bank must file with the commissioner a (1) proposed plan of conversion, (2) copy of the proposed amended certificate of incorporation, and (3) certificate by its secretary that the proposed plan of conversion has been approved by a majority of the governing board. The commissioner may only approve the conversion if he determines that (1) the converting institution has complied with all applicable laws, (2) the conversion would not result in a reduction of the converting institution’s equity capital, (3) the conversion would not result in the converting institution’s taxable reorganization under the federal tax code, and (4) the plan of conversion is fair to depositors (CGS § 36a-136). As of October 1, 2003, the commissioner must also consider whether the converting bank has adequate anti-money laundering programs, policies and procedures, and a record of compliance with anti-money laundering laws and regulations (PA 03-259).

The regulations spell out the process in greater detail. They prohibit the commissioner from approving an application if he finds that (1) the plan of conversion does not comply with applicable laws and regulations, (2) the conversion would reduce the bank’s amount of equity capital, (3) the conversion would result in the applicant’s taxable reorganization, (4) the converted bank would not have deposit insurance, or (5) the plan of conversion is not fair to depositors (Conn. Agencies Regs. § 36-142m-3).

Application for Approval of Plan of Conversion

The regulations require the mutual savings bank’s governing board to adopt a plan of conversion, but do not require its depositors to vote on the plan. Once the board adopts the plan, the bank must file three copies of an application for approval of the plan with the commissioner, stating the form to which the bank intends to convert. The application must contain:

1. a certificate by the bank’s secretary that the governing board has approved the plan of conversion;

2. a copy of the proposed plan of conversion;

3. a duly adopted amendment to the bank’s bylaws specifying that its conversion will be in accordance with state regulations, regardless of any by-law provision to the contrary;

4. any proposed plan for stock options to be granted to the converted bank’s officers or employees;

5.

a copy of the notice and accompanying materials to be sent to depositors;

6. five copies of the proposed offering circular for the subscription offering;

7. for mutual savings banks converting to state chartered capital stock banks, a proposed amended certificate of incorporation as the appropriate type of capital stock bank; and

8. such other information as the commissioner requires.

Elements of Plan of Conversion

The plan of conversion must:

1. state the business purposes that the plan of conversion will accomplish and the type of capital institution the converted bank will become;

2. provide that the converting bank will issue and sell its capital stock at a title price and a per-share price established according to the regulations;

3. provide for distribution of subscription rights in accordance with the regulations;

4. provide for a subscription offering for the converted bank’s stock in accordance with the regulations;

5. provide that any share of the converting bank’s stock not sold in the subscription offering will be sold either in a public offering through an underwriter or by the converting bank in a direct community offering, subject to the applicant’s demonstrating to the commissioner the feasibility of the method of sale and to such conditions as may be provided in the plan of conversion;

6. establish a time period, not more than 24 months from the date the governing board approves the plan of conversion, within which the conversion will be completed;

7. provide that the converting bank’s savings account holders will receive, without payment, an equivalent withdrawable deposit account or accounts in the converted bank;

8.

provide for establishing and maintaining a liquidation account, for 10 years from the conversion date, for the benefit of eligible account holders in the event of the converted bank’s subsequent complete liquidation;

9. provide for an eligibility record date, which cannot be less than 90 days before the converting bank’s governing board adopts the plan of conversion;

10. provide that the governing board may substantively amend the plan of conversion as a result of comments from regulatory authorities, and at any time with the commissioner’s concurrence, and that the board may terminate the conversion at any time;

11. provide that holders of the converted bank’s capital stock will have exclusive voting rights in the converted bank;

12. provide that the converting bank will (A) promptly after the conversion, register the securities pursuant to the Securities Exchange Act of 1934, and undertake not to deregister the securities for three years; (B) use its best efforts to encourage and assist a market maker to establish and maintain a market for its securities; and (C) use its best efforts to list shares issued in connection with the conversion on a national or regional securities exchange or the NASDAQ;

13. provide that the expenses incurred in the conversion will be reasonable;

14. contain no provision that the commissioner will determine to be inequitable or detrimental to the applicant or its savings account holders, or contrary to the public interest; and

15. provide that nontransferable subscription rights to buy capital stock received by the converting bank’s officers and directors and their associates based on their increased deposits in the converting bank for the year preceding the eligibility record date will be subordinated to the subscription rights of eligible account holders.

The regulations also allow the plan of conversion to provide for any or all of the following: (1) that any insignificant residue of shares in the converting bank not sold in the subscription offering, public offering, or direct community offering may be sold in another manner provided in the plan, with the commissioner’s approval; (2) that any person exercising subscription rights to buy capital stock will be required to buy a minimum of up to 25 shares to the extent that the shares are available (but the total price of any minimum share purchase cannot exceed $ 500); (3) that the converted bank will issue and sell, in lieu of shares of its capital stock, units of securities consisting of capital stock and long-term warrants or other equity securities; or (4) that the converting bank’s officers, directors, and employees who are not account holders will receive, without payment, nontransferable subscription rights to buy up to a maximum of . 5% of the total number of shares of capital stock the bank is offering, to the extent that shares are available after satisfying the subscriptions of eligible account holders and tax-qualified employee stock benefit plans (Conn. Agencies Regs. § 36-142m-5).

Commissioner’s Approval

The commissioner may conduct any investigation or examination he finds necessary to ascertain that the applicant has complied with all provisions of law and that the proposed conversion will serve the public necessity and convenience. He may also choose to hold a public hearing on the proposed plan of conversion. After the investigation or examination and public hearing, if any, the regulations allow the commissioner to approve the application for conversion to a capital stock bank. He may deny an application only after allowing the applicant a reasonable opportunity to be heard. Upon approving a plan of conversion, the commissioner must issue a certificate of approval, authorizing the converting bank to proceed with its conversion plan. He may add such conditions to the certificate of approval as he deems appropriate (Conn. Agencies Regs. § 36-142m-6).

The converting bank must notify the commissioner in writing that (1) all of the converting bank’s shares being offered have been subscribed for in the subscription offering or (2) the subscription offering, and if applicable the direct community offering, have been completed and the converting bank has entered into an agreement with an underwriter to sell the remaining shares in the public offering or (3) the subscription offering has been completed and the bank received subscriptions for the remaining shares in the direct community offering. Upon receiving such certification, and after determining that all applicable requirements of law have been met, the regulations require the commissioner to issue to the converting bank a certificate of authority to operate as a state chartered capital bank. The converting bank must then file the certificate of authority and amended certificate of incorporation with the secretary of the state, at which time it ceases to be a mutual savings bank and becomes a capital stock bank (Conn. Agencies Regs. § 36-142m-11).

PEOPLE’S BANK CONVERSION

In the late 1980s, People’s Bank converted from a mutual savings bank to a capital stock bank and formed a mutual holding company to hold the majority of its stock. The regulations allow a mutual savings bank to convert to a capital stock bank as part of a transaction in which a holding company is organized to acquire upon issuance all of the converted institution’s capital stock (Conn. Agencies Regs. § 36-142m-14). People’s retained a majority of the converted institution’s stock and issued the remainder to depositors, the community, and the public. According to the Banking Department, forming a mutual holding company during a conversion protects a converting bank from a hostile takeover by allowing the holding company to maintain a controlling interest in the bank. But it also lessens the speculative value of the shares, because there is no possibility of a hostile takeover, which would increase share values. The possibility of such an increase in share values is part of what makes a stock attractive to prospective purchasers.

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