As published in the Independent Community Bankers of South Dakota newsletter, August 2016 edition. Sign up for ICBSD e-news here.
Bank acquisitions in South Dakota and neighboring states slowed down substantially during the past recession, almost coming to a complete standstill during the 
depths of the recession and its immediate aftermath. Bank acquisition activity has picked up significantly over the past few years, however, and this may be a good time to consider the different ways in which an acquisition can be structured.
One should first be precise about what exactly “bank” means in referring to bank acquisitions. Is the acquirer interested in acquiring the target’s bank holding company, just the target bank, or only certain assets of the target bank such as one or more branches?
Community bank acquisitions are not often structured as an acquisition of the target’s bank holding company – the acquiring party often already has a holding company (and it might be the holding company itself which is the acquirer) and has little need to add another holding company to its corporate structure. However, on occasion, whether for tax or other reasons, a bank acquisition sometimes is structured as an acquisition of the target’s holding company, and the acquirer would then need to determine whether it wants to keep the acquired BHC as a separate entity or simply merge it into the acquiring BHC and thus merge it out of existence. In any event, the target bank of the acquired BHC will remain a separate banking organization and charter unless it too is merged out of existence (into the acquirer’s bank).
If the acquirer is interested in purchasing only the target bank and not its BHC, the most straightforward way to accomplish the acquisition is to buy the outstanding shares of the target bank. The acquirer would need to purchase 100% of the target bank’s shares if it wants to avoid having minority shareholders. On the other hand, minority shareholders can be avoided by structuring the acquisition as a cash-out merger of the target bank into the acquiring bank. Generally, a merger only acquires approval by a majority of the target’s board of directors and a simple majority of its shareholders, and if those approvals are received the target bank can be merged into the acquirer, with the shareholders receiving cash for their cancelled shares rather than stock in the surviving entity. One should note, however, that in a cash-out merger, if a shareholder of the target is dissatisfied with the terms of the merger, he or she may exercise dissenter’s rights created by South Dakota corporate law and seek to have a judicial determination made of the “fair value” of his or her shares.
Finally, there may be situations in which the parties desire to enter into a sale of only a portion of the target bank, such as one or more of its branches. A branch acquisition is almost always structured as a purchase of assets (the loans and tangible assets, for example, of the target branches) and an assumption of the deposit liabilities of the acquired branch(es).
A complication exists in the case of bank acquisitions that does not exist with the sale of most other businesses – the need for regulatory approvals. The burden to obtain that approval falls on the acquiring party, who must have the transaction approved by its primary regulator(s). Thus, a national bank must submit an application to and have the application approved by the OCC to acquire a bank (regardless of whether the target bank is a national bank or a state bank), and a state bank must obtain approval both from its state banking regulator and the FDIC or the Federal Reserve depending on whether the acquirer is a member of the Federal Reserve. Any BHC which is making a banking acquisition would need to obtain the approval of the Federal Reserve.
The application forms and process are different if an individual (a natural person) is acquiring a bank. In that case the individual would need to file a Notice of Change in Control with the primary regulator(s) of the target bank and obtain approval from that regulator.
Bankers may also want to be aware of the concept of an “interim” bank which is sometimes used for a banking acquisition. An interim bank is a new entity which is granted a bank charter but which will never actually conduct any business and will be merged out of existence (usually immediately after it was created). The reasons for using an interim bank in an acquisition may be tax related but other structural or transaction-specific considerations may be facilitated by an interim bank. For example, our firm assisted a banking client that acquired a target bank with shareholders too numerous to guarantee that it could get 100% ownership of the target (and it did not want minority shareholders) so a cash-out merger was the logical route to avoid having minority shareholders. On the other hand, however, our client wanted to preserve the separate charter and legal existence of the target bank, which would not have happened in a typical cash-out merger as the target bank would be merged out of existence. An interim bank was the solution that allowed for a cash-out merger of the target (which cashed out all of its shareholders whether or not they wanted to sell) but still left a separate legal entity to survive the acquisition.
Banking acquisitions can be considerably more complicated than the relatively simple summary provided in this article, and a number of considerations ultimately will drive the parties’ decision on how the transaction should be structured. Not surprisingly, tax considerations often loom quite large for both parties as they negotiate for an acceptable structure.
Bank acquisitions are complex transactions involving financial, legal, tax, and accounting skills plus the business acumen of the parties involved. The goal, of course, is to get to a closing of the transaction that satisfies both parties.
Davenport, Evans, Hurwitz & Smith, LLP, located in Sioux Falls, South Dakota, is one of the state’s largest law firms. The firm’s attorneys provide business and litigation counsel to individuals and corporate clients in a variety of practice areas. For more information about Davenport Evans, visit www.dehs.com.