National Bank Appeals Process:
Reporting Requirement of Securities Exchange Act (First Quarter 1997)
Background
A bank appealed the decision rendered by OCC District Counsel
regarding certain reporting requirements of the Securities Exchange Act of
1934. The bank issued stock on two occasions during the first six months of the
year totaling $6.2 million. The bank filed a registration statement and the
periodic reports required by section 13 of the Securities Act. First, the bank
requests clarification of the term "alternate reports" in the statute. As an
alternative, bank management sought permission to file a call report and
management statement in lieu of Form 10-QSB. The appeal states that Form 10-QSB
is burdensome and provides no tangible benefit to shareholders or the public.
Second, bank management asked if its duty to file periodic reports under OCC's
Securities Offering Disclosure Rules became suspended in the fiscal year
following the effective date of the registration statement, regardless of the
time of the fiscal year in which the statement became effective. In other
words, could the bank have reduced its reporting requirement by filing a
registration statement that became effective in the fourth quarter instead of
an earlier quarter during the year?
Discussion
The Securities Exchange Act of 1934(Exchange Act) requires any
issuer with a class of securities listed on a national securities exchange, and
any issuer with more than $10 million in assets and a class of equity security
held by more than 500 persons, to register that class of security with the
Securities and Exchange Commission (SEC). 15 USC 78/(b), (g); 17 CFR 24. 12g-1.
Issuers generally must file periodic reports containing financial information.
National banks must register and file with the OCC instead of the SEC. 15 USC
78/(i).
National banks which file a registration statement with the
OCC must file the periodic and current reports required by section 13 of the
Exchange Act (15USC 78m), as if the securities covered by the registration
statement were securities registered pursuant to section 12 of the Exchange Act
(15 USC 78/). Banks must file periodic and current reports in accordance with
Commission Regulation 15D (17 CFR 240.15d-1 up to but not including 240.15a-1).
Alternate reports. The Exchange Act provides that the SEC may
allow the submission of alternative reports of comparable character to periodic
reports (15 USC 78m©). However, it offers no guidance concerning acceptable
alternative reports. The SEC has not approved any alternative report by
regulation.
Suspension of reporting requirements. The bank's duty to file
periodic reports under 12 CFR 16.20 is suspended if, at the beginning of the
fiscal year, fewer than 300 persons of record hold the class of stock for which
the bank filed the registration statement. The bank must still file Form 15
giving notice of the reason that the duty is suspended.
Conclusion
The Ombudsman determined that the bank may not substitute a
call report and management statement in lieu of Form 10-QSB. Although call
reports may arguably serve as a rough proxy for financial statements, they are
not an appropriate substitution for purposes of investor protection. Call
report lack the explanatory information contained in footnotes to financial
statements. Likewise, the attestation by insiders to information contained in
call reports does not provide the level of independence provided in financial
statements that have been reviewed by accountants. Regarding the timing issue,
the Ombudsman determined that the bank could have reduced its reporting
requirements if it had filed its registration statement in the fourth quarter
rather than earlier in the year. Because the bank has fewer than 300
shareholders, its reporting requirements cease for the next fiscal year.
However, the bank must still file Form 15 giving notice of the reason that duty
is suspended.
APPRAISAL OF STOCK DISSENTING SHAREHOLDERS
IN MERGE TRANSACTION (First Quarter 1997)
Background
A bank appealed the OCC's
appraisal of the stock of certain dissenting shareholders in a merger
transaction. Bank A entered into a plan of merger and acquisition with Bank B.
The merger agreement was approved by the requisite number of shareholders of
Bank B. Shareholders presenting 22 percent of Bank's B issued and outstanding
shares of common stock voted against the proposed merger and perfected their
rights as dissenting shareholders.
Discussion
National bank shareholders who
dissent from a merger consummated under 12 USC 215a are entitled to receive the
cash value of their stock. To perfect this right, dissenting shareholders must
either vote against the merger or give notice at or before the shareholder
meeting of their dissent, and make a written request for payment accompanied by
their shares of stock within 30 days of consummation of the merger. Paragraph
(c) of this section delineates the process of valuing the shares of dissenting
shareholders in merger transaction - an appraisal by a three-person committee
representing the majority shareholders, the directors of the receiving
institution, and a third party selected by the two so selected. Any dissenting
shareholder who is unsatisfied with the appraised value of his or her shares,
so determine, may appeal to the Comptroller. However, if the bank and
dissenting shareholders do not succeed in selecting the committee or in
determining the value of the shares within 90 days of consummation of the
merger, any interested party may request the OCC to appraise the shares.
After consummation of the merger,
the dissenting shareholders appointed an individual to participate in the
appraisal committee as prescribed in the statute. However, Bank A was of the
opinion that the dissenters had not perfected their rights and as such, Bank A
had no obligation to form an appraisal committee for the purpose of determining
a value for the dissenting shareholders' stock. In addition, Bank A sought a
restraining order in court to prevent the dissenting shareholders from seeking
an appraisal of their stock by the OCC. The court ruled that: 1) it was the
OCC's responsibility to determine whether a dissenting shareholder has
perfected his or her rights to an appraisal by the OCC; and 2) Bank A was in
error in assuming that it had the right to determine if the dissenting
shareholders had perfected their rights. The court instructed the dissenting
shareholders to seek an appraisal of their stock by the OCC, which would
include a determination by the OCC on whether or not the dissenters had
perfected their rights for an OCC appraisal of their stock.
The OCC determined that the former
Bank B shareholders had perfected their rights as dissenting shareholders under
the National Bank Act, 12USC 215a. OCC determined that the value of the bank
shares held by the dissenting shareholders on the date of the merger was
approximately $5.00 higher than the price paid to the shareholders of Bank B
who voted in favor of the merger agreement and took cash in exchange for their
Bank B stock at closing. Bank A appealed this decision to the ombudsman.
Conclusion
After giving careful consideration to the broader implications
of this situation, the ombudsman decided not to accept the appeal through the
national bank appeals process. The Comptroller, having once been appealed to
functions, according to the statute, as an independent third party in this
valuation process. The standards that the Comptroller is required by statute to
apply are impartial and do no necessarily favor either party. The statute also
specifies that the appraisal rendered by the OCC shall be final and binding as
to the value of the shares of the appellant. Therefore, although this situation
is not specifically excluded from the definition of an appealable matter by
statute or OCC policy, for the reasons mentioned above the ombudsman decided
that an additional reappraisal would not be appropriate.
|