Title: FINAL RULE--Organization--12 CFR Part 611
Issue Date: 05/16/1985
Agency: FCA
Federal Register Cite: 50 FR 20396
___________________________________________________________________________
FARM CREDIT ADMINISTRATION

12 CFR Part 611

Organization

AGENCY: Farm Credit Administration.

ACTION: Final rule.

SUMMARY: The Farm Credit Administration (FCA), by its Federal Farm Credit Board (Federal Board), adopts new regulations and amends existing regulations concerning amendments to Federal land bank association (FLBA) and production credit association (PCA) charters and procedures for effecting mergers or consolidations of such associations. These new regulations and amendments improve the procedures for amending association charters and effecting mergers and consolidations. In addition, the merger and consolidation procedures set forth the requirements for disclosure of information to voting stockholders to ensure that they are adequately informed regarding association merger or consolidation proposals.

EFFECTIVE DATE: Thirty days from this publication date, provided either or both Houses of Congress are in session. Notice of the effective date will be published.

FOR FURTHER INFORMATION CONTACT:

Rose M. Ferguson, Office of Examination and Supervision (703) 883-4430, or

Kenneth L. Peoples, Office of the General Counsel (703) 883-4024
Farm Credit Administration, 1501 Farm Credit Drive, McLean, VA 22102-5090.

TEXT:
SUPPLEMENTARY INFORMATION: In the July 20, 1984 Federal Register (49 FR 29404-29408), FCA published proposed revisions to its regulations concerning the procedures for amending FLBA and PCA charters and for effecting mergers or consolidations of associations operating under the same title of the Farm Credit Act of 1971, as amended (Act). The comment period closed on September 19, 1984. The FCA received a large number of comments and requests to extend the comment period to allow for more indepth review of the proposed rules. Due to those requests, the comment period was extended to November 5, 1984. Notification of this extension was published in the September 19, 1984 Federal Register (49 FR 36655). A detailed explanation of the proposed amended regulations, 12 CFR 611.1120-611.1125, may be found in the preamble to the proposed rulemaking in the July 20 Federal Register (49 FR 29404-29408). The Federal Board considered over 70 comments from Farm Credit System (System) institutions, commercial banks, members of Congress, private attorneys, agricultural organizations, and farmer/borrowers. The Federal Board considered each of the comments received, made changes to the proposed regulations where appropriate, and adopted final regulations at its February 4-6, 1985 meeting.

A large number of the commentators objected to the regulations covering charter amendments, particularly the proposed regulation 611.1120 setting forth the Governor's authority to direct charter amendments on his own initiative. They alleged that the regulation usurped control of the association from the farmer/owners, violating the Act. Many of these commentators demanded public hearings on the regulations.

The Federal Board believes these commentators have incorrectly read the proposed regulation as authorizing the Governor to require merger or consolidation of associations through charter amendments. While the Act specifically authorizes the Governor to approve association charter amendments or to make charter amendments at his own initiative, 12 U.S.C. 2031, 2091, this authority does not include the power to merge or consolidate associations. Although certain charter amendments may be necessary to effect a merger or consolidation, a merger or consolidation is a form of corporate reorganization which goes beyond amendments to the charter, and which ordinarily requires shareholder approval. However, it should be noted that the Act specifically reserves authority to require merger or consolidation of associations to the Federal Board whenever it determines, with the concurrence of the district Farm Credit board, that an association has failed to meet its outstanding obligations or has failed to conduct its operations in accordance with the Act. The Federal Board believes that this misunderstanding of the purpose and effect of the proposed amendment has been resolved by restructuring and editing the proposed regulation.

The Federal Board does not believe public hearings on these regulations are warranted due to the extended comment period which has afforded active public participation. The FCA is not required to hold public hearings for this informal rulemaking undertaken pursuant to the Administrative Procedure Act. The large number of comments received indicates that an adequate opportunity has been afforded the public for participation in the rulemaking process.

One System institution commented that the approval of the association's supervising bank board should be necessary to approve a charter amendment request under 611.1121. Another commentator stated that this section should provide for stockholder approval of charter amendments. The Federal Board declined to adopt either suggestion. Bank board approval is not necessary and should not be a prerequisite to Agency action. The Federal Board noted that the regulation does require that the supervising bank review an association's request for a charter amendment and forward it to the FCA with its recommendations. The Federal Board did not think it appropriate to require stockholder approval for charter amendments since the Act does not impose such a requirement.

A large number of commentators made suggestions for changes to proposed new 611.1122. The regulation specifies the information required to be disclosed to association stockholders when stockholder approval of a merger or consolidation proposal is sought. One System bank suggested that the FCA delegate the responsibility for the merger and consolidation approval process, including the determination of the scope and method of financial disclosure, to the System banks. The Federal Board rejected the suggestion on the belief that approvals of corporate reorganizations and the uniform standards for disclosure of information to stockholders voting on such proposals are Agency actions of a regulatory nature that cannot be delegated. Disclosure standards for mergers and consolidations should follow a Systemwide standard established by FCA regulation.

Two System banks contended that association voting stock is not a security and therefore the disclosure required by the regulation is far too extensive. Alternatively, they suggested that no financial information be sent to stockholders but that the association develop the information and have it available for viewing by interesting members at the association. A representative of some FLBA stockholders went further to assert that the FCA does not have the statutory authority to require such financial disclosure. Other FLBAs argued that the regulations imposing financial disclosure on associations are unnecessary, time consuming, and expensive. A farm credit organization suggested that more financial disclosure to stockholders is needed and stated that FCA would withhold information from the farmer/owners by not requiring distribution of a copy of the merger agreement or bylaws to the stockholders.

The Federal Board did not agree with these positions. The FCA does not base the promulgation of the disclosure regulation on the assumption that voting stock of an FLBA or PCA is a security for purposes of Federal or State securities statutes. The importance of a merger or consolidation decision to stockholders' interests makes it imperative that farmer/borrowers have adequate information available to make informed decisions on the advisability of a proposal. Section 1.1(b) of the Act directs the FCA to encourage participation of the association members in the management, ownership, and control of the associations. Few corporate decisions are more important than a merger or consolidation. The Act authorizes voluntary association merger only with the affirmative vote of a majority of the voting stockholders present and voting or voting by proxy vote for the merger at a duly called meeting at which a quorum is present. The Federal Board believes that it will not have discharged its responsibility to the owners of the Farm Credit System if it does not require dissemination of the minimum information necessary to make an informed decision on a merger or consolidation proposal. The proposed disclosure requirements provide the type of information that any farmer or rancher would want to have in making a decision on whether to acquire a business. The Federal Board believes that stockholders who are asked to approve a transaction that significantly affects their interests should be furnished with the disclosure material along with the proxy solicitation and should not have the burden of obtaining information materials about the proposal.

The FCA's authority to require financial disclosure derives from its authority to approve mergers and consolidations pursuant to section 5.18(a) of the Act. Under that section, the FCA has the power and responsibility to approve mergers or consolidations of FLBAs and PCAs and the consolidation of territories they serve, and to prescribe rules and regulations necessary and appropriate for carrying out these actions. Requiring disclosure of financial information necessary for stockholders to make an informed decision on a merger or consolidation proposal is an important part of the FCA's responsibility to protect both the safety and soundness of System institutions and the rights of its owner/borrowers to information.

A farm credit organization stated that the proposed 611.1122 has two deficiencies: (1) The FCA will not approve a merger or consolidation until after stockholder action; and (2) the section does not provide for dissenting stockholders' rights. The commentator believes that the FCA has a duty to advise the association members on merger proposals and to assure farmers that all factors of the proposed merger or consolidation meet with the FCA's approval. The commentator believes that the final decision should rest with the stockholder and not a Government agency, and that the stockholders should have the opportunity to present their views prior to the final meeting. The commentator also expressed concern that stockholders are not currently able to obtain stockholder lists to make such communications and do not have the financial or administrative capabilities to present dissenting views.

The Federal Board disagrees that the FCA has a duty to scrutinize a merger or consolidation proposal and evaluate it for borrowers. Associations are privately owned and operated institutions. Stockholders have the responsibility to make their own informed business judgment on whether to vote for a given proposal. The FCA's approval is based on its judgment that the merged entity, based on the information presented by the associations, will be financially viable and able to continue providing adequate agricultural credit and financial services to farmers in the territory. A preliminary FCA approval is given prior to the stockholder vote based on the information available at the time of application. Similarly, the Federal Board does not agree that a merger or consolidation proposal should be presented to stockholders only after the FCA has given it its final approval. Such a procedure would unnecessarily restrict the right of stockholders to alter a proposal as presented because it has already received final regulatory approval. Finally, it is not the responsibility of the FCA to evaluate the merits of a merger or consolidation proposal as it relates to each borrower, nor should the bank, association, or any director, officer, or employee represent that the FCA has passed on the merits of the merger or the effect on particular borrowers. The proposed regulation has been amended to reflect this.

The commentator's demand for dissenters' rights is misplaced. Under general corporate law, dissenters' rights are specifically set forth in the enabling corporate state and allow shareholders who disagree with a proposal for a merger to have the value of their stock determined by independent appraisal and redeemed in cash, rather than having it exchanged for the stock of the continuing association. The Act does not provide for dissenters' rights. Nor are the considerations that underlie such statutory rights present in mergers of solvent associations, since the stock in every System association is purchased and redeemed at the same par value. Where a majority of stockholders approve a merger and thereby bind all stockholders, an unsatisfied stockholder has the option of paying down his or her loan, requesting that the association retire the supporting stock, and seeking financing elsewhere. As for communicating with other stockholders, an association stockholder has the same rights as other stockholders of entities under general corporate law to communicate with fellow stockholders. The FCA has taken the position that an association stockholder has a right to obtain the stockholder list for a proper corporate purpose. However, the issue is not appropriate for a regulation setting forth procedures for effecting mergers or consolidations.

Several System banks suggested new language to permit the supervising bank to determine the list of documents and the type of disclosure required to be given to stockholders voting on a merger or consolidation proposal. The banks believe that this will enable the supervising bank to tailor disclosure to fit a particular proposal. The Federal Board rejected the suggestion on the belief that the FCA must set forth in regulations the minimum Systemwide standard for disclosure of financial information to stockholders in connection with a merger or consolidation vote. The type of required disclosure proposed is minimal. It is relevant in all cases, and should be made available to all stockholders in all mergers and consolidations. There may be cases where additional information must be disclosed to give stockholders a complete picture of the proposal. As a condition of its recommendation on the transaction, the supervising bank may require additional information when it believes that such a condition is present.

Special situations are presented when a proposed merger or consolidation will involve more than three associations. In such cases, the Federal Board believes the FCA should have the discretion to require the supplementation or allow the condensation of certain information to ensure that adequate information is provided to stockholders in a meaningful form, without requiring an unwieldy disclosure package. This is a particularly important point where a proposed merger or consolidation is designed to implement a partial or comprehensive reorganization of association territories within a district. A new paragraph has been added to afford the FCA related flexibility. The amount of information and the level of disclosure will vary depending upon the condition of the constituent merging or consolidating associations.

Several System banks suggested that the required inclusion in the disclosure to stockholders of a statement that the FCA does not pass on the accuracy or adequacy of the disclosure information be deleted. They asserted that this is not true because the FCA approves the merger. On the other hand, one System bank suggested that an additional phrase be added to the disclaimer to the effect that no representation to the contrary shall be made and that a statement be added prohibiting the making of false or misleading statements. A farm credit organization expressed its view that the FCA's primary role is to audit an association's books to inform stockholders that the information presented on a proposed merger is accurate and adequate for making the decision. The commentator further stated that the FCA should perform an audit and not require the association to spend funds to have an outside party prepare financial statements.

The Federal Board believes that the disclaimer that the FCA has passed on neither the accuracy nor the adequacy of the disclosed information is accurate and appropriate, and should be retained. The responsibility for the accuracy and adequacy of the disclosure to stockholders rests squarely with association management and directors. In approving a merger or consolidation proposal and clearing the disclosure for distribution, the FCA does not guarantee the accuracy of data. That responsibility properly rests with the association which produces the data. The FCA's approval of a merger or consolidation proposal and the clearance of the disclosure material for distribution does not imply that the information is adequate. When the FCA reviews and approves a proposal, it scrutinizes the information made available by the association in the merger or consolidation application to determine whether the requirements of the regulation are met, whether the disclosure is internally consistent, and whether there is anything to suggest that the information is inaccurate. The proposed regulation set forth only the minimum requirements and are not intended to provide a format for every line item. There may be other facts or financial data that are necessary to state fully the financial condition of the association, and the association is charged with providing any additional information that may be necessary to ensure that the information is not misleading.

The Federal Board does not agree that the FCA should perform a special audit of associations for the stockholders prior to a merger or consolidation. Associations are owned and operated by their farmer borrower/owners. With that ownership goes the responsibility by both directors and stockholders to examine merger proposals closely. Association boards of directors are responsible for ensuring that the information is accurate, and the regulation requires a representation to that effect. The Federal Board does believe that if a board of directors is not comfortable in representing that the data is accurate, it should have the option of obtaining comfort through an opinion of independent accountants, as provided by an amendment to the regulation. However, ultimate responsibility for its accuracy remains with the board. The Federal Board has added a statement prohibiting false and misleading statements.

A spokesman for a family farm organization stated that when the merger of System associations takes place the stockholders should receive adequate equity for their shares, as in the case of a merger of private banks. The commentator stated that the regulations allow the FCA to bring about mergers with less concern for the farmer/owners' rights and equities. Many comments of individual farmer/borrowers stated their position that the regulations limited farmer input into the decision to merge or consolidate and suggested that the regulations be directed toward protecting the rights and interest of the farmer/owners.

The Federal Board does not agree with these commentators and believes that the proposed regulations reflect concern for stockholder equity. The proposed 611.1123(a) requires that the merger or consolidation agreement set forth a formula for the exchange of equities. Association stock is not precisely equivalent to stock in a private bank in that as there is no reasonable expectation of appreciation, there is no secondary market in the stock, and the stock is transferable only to other eligible borrowers. Voting stock of a solvent association is both acquired and retired at par value. An association's stockholders may receive more than par value only in the unlikely event that the association is liquidated before its surplus has been depleted. The proposed disclosure regulations require that the stock exchange ratio be disclosed, and leave it to the stockholders to evaluate this information and vote on the proposal. The Federal Board believes that the regulations will assure that stockholders are provided with the information necessary to make informed decisions on merger or consolidation proposals, and that these requirements adequately reflect the concern for a stockholder's rights.

One System bank suggested that the phrase "generally accepted accounting practices" (GAAP) is proposed 611.1122(c)(8) be replaced with "accounting guidelines prescribed by the Farm Credit Administration and the supervising bank" because the associations do not prepare financial statements in all respects in accordance with GAAP. Another System bank believes that the requirement to disclose separately all significant interest-earning assets and interest-bearing liabilities as well as interest and expense accruals in 611.1122(c)(7) should be eliminated as redundant in view of the requirements in 611.1122(c) (5), (6), and (8).

The Federal Board agrees that the financial statements of the associations are not prepared in all respects in accordance with GAAP. However, the proposed regulation only requires that the financial position be stated in accordance with GAAP, "except as otherwise qualified." The differences from GAAP must be fully explained in the notes to the financial statements. In addition, the Federal Board believes that the requirement for disclosing interest-earning assets and interest-bearing liabilities separate from other financial disclosure is not redundant, but emphasizes a very important aspect of an association's financial condition.

One bank suggested that the requirement in 611.1122(c)(8) that the board of directors certify the financial statements of the association should also include a requirement that they be certified by the chief executive officer. Several System banks suggested that the requirement be deleted altogether. One System bank stated that it is the management that bears the responsibility for the financial statements and that any board member would be relying upon the professional staff or outside accountants. One farm credit organization stated that the association board of directors should not be required to make such representation because association directors do not generally have the technical expertise to make such an auditing statement and that the FCA should do an audit and provide the stockholders with an auditing statement and report.

The Federal Board does not agree that management alone bears responsibility for an associations financial statements. An association board of directors is charged with the responsibility of overseeing the management of the association, although day-to-day operations are generally conducted by the officers selected by the directors. Responsibility for the financial condition of the institution rests ultimately with the board. It is not the FCA's function to conduct a financial audit of an association every time the institution pursues a transaction such as a merger or a consolidation requiring an audit. FCA examinations are for the general regulatory and supervisory purpose of protecting the safety and soundness of System institutions, and not for purposes such as facilitating a merger or consolidation proposal. The Federal Board recognizes that many business organizations have outside accounting firms audit the company's financial condition, which provides a level of comfort that the entity's financial statements are accurate. For these reasons, the Federal Board has added an option to 611.1122(c)(8) permitting an association board to obtain an opinion of an independent accounting firm in lieu of providing the representation of the association's financial condition. This, of course, does not relieve a board of its ultimate responsibility for the association's financial statements. The Federal Board has also adopted the suggestion that the chief executive officer of an association be required, consistent with management responsibilities, to certify the accuracy of the association's financial statements.

One System bank suggested that the requirement in 611.1122(c)(9) requiring disclosure of information from the latest credit review of the association be replaced with the requirement to disclose nonperforming loans that must be reported to the FCA in accordance with FCA's letter of May 30, 1984. The Federal Board agrees with this comment and has amended the regulation accordingly.

One System bank commented that association information concerning the amount of chargeoffs taken in the previous 2 years in not meaningful to the association members voting on a merger. The institution also did not believe a borrower could obtain any meaningful information from interest rate comparisons of constituent associations, particularly given the power of the board to change interest rates. The Federal Board believes the information regarding the previous 2 years of chargeoff experience is essential to explain the financial statements of the association and to indicate its potential for continuing as a sound institution. In addition, the Federal Board believes that the interest rate comparisons required present a history of incremental changes in the past that may indicate a future trend. This information is valuable to stockholders, notwithstanding the association board's authority to change the interest rate.

A farm credit organization stated that a copy of the entire bylaws should be sent to stockholders in connection with a merger or consolidation proposal in 611.1123. The Federal Board agrees that stockholders should be able to obtain a copy of the association's bylaws. However, the Federal Board considers this a general right of stockholders and not limited to mergers or consolidations and, therefore, should be the subject of a separate regulation. Accordingly, the Federal Board has developed 611.1125 to address this issue.

A System institution stated that association directors or officers should not have a right to terminate a merger agreement or consolidation agreement after a stockholder vote for the proposal and that 611.1123(g) should be amended to reflect this. The Federal Board disagrees with this suggestion. Merger or consolidation agreements for corporations typically give directors or designated officers the authority to terminate a merger or consolidation agreement in case some event occurs making the merger or consolidation less viable. Those reasons are no less applicable here. To prohibit such terminations would unnecessarily restrict the authority of managements and boards of directors and the ability of the associations to develop a favorable merger or consolidation plan.

One System institution suggested that stockholders involved in a territorial transfer as in 611.1124 should be given the same information as stockholders involved in a merger or consolidation. The Federal Board agrees and has amended proposed 611.1124 to indicate that stockholders and the holders of participation certificates involved in a territorial transfer have the right to receive the latest financial information relating to both associations. Another System bank believes that it was not intended to require all loans of borrowers to be transferred in a territorial transfer and that the regulation should be amended to reflect this. The Federal Board believes that associations should not be allowed to transfer territory without transferring all loans of borrowers in that territory to the transferee association (unless otherwise approved by the FCA), and the regulation has been amended accordingly.

There were many conditional comments that were technical and editorial in nature. The Federal Board considered each of the comments and adopted the suggestions where appropriate.

List of Subjects in 12 CFR Part 611

Agriculture, Banks, Banking, Organization and functions (Government agencies), Rural areas.
PART 611 -- ORGANIZATION

As stated in the preamble, it is proposed that Part 611 of Chapter IV, Title 12 of the Code of Federal Regulations, be revised as follows:

1. The authority citation for Part 611 is revised to read as follows:

Authority: Secs. 1.13, 2.10, 4.12, 5.9, 5.12, 5.18, Pub. L. 92-181, 85 Stat. 619, 620, 621 (12 U.S.C. 2031, 2091, 2183, 2243, 2246 and 2252).

611.1130 [Removed]

611.1115 [Redesignated from 611.1140]

2. Subpart F is amended by removing 611.1130 and redesignating 611.1140 as 611.1115.

3. A new Subpart G is added, consisting of 611.1120 which is revised and redesignated from subpart F to new subpart G, and 611.21-611.25 to read as follows:

Subpart G -- Mergers, Consolidations, and Charter Amendments of Associations

Sec.

611.1120 General authority.

611.1121 Charter amendment procedures.

611.1122 Requirements for mergers or consolidations.

611.1123 Merger or consolidation agreements.

611.1124 Territorial adjustments.

611.1125 Association articles and bylaws.

Subpart G -- Mergers, Consolidations, and Charter Amendments of Associations

611.1120 General authority.

(a) An amendment to an association charter may relate to any provision that is properly the subject of a charter, including, but not limited to, the name of the association, the location of its offices, or the territory served.

(b) the Farm Credit Administration may make changes in the charter of an association as may be requested by that association and approved by the Farm Credit Administration pursuant to 611.1121.

(c) The Farm Credit Administration may, by order of the Governor and on its own initiative, make changes in the charter of a Federal land bank association or a production credit association where the Governor determines that the change is necessary for the accomplishment of the purposes of the Act.

611.1121 Charter amendment procedures.

This section shall apply to any request by an association to amend its charter.

(a) An association which proposes to amend its charter shall submit a request to its supervising bank containing the following information:

(1) A statement of the provision(s) of the charter that the association proposes to amend and the proposed amendment(s);

(2) A statement of the reasons for the proposed amendment(s), the impact of the amendment(s) on the association and its stockholders, and the requested effective date of the amendment(s);

(3) A certified copy of the resolution of the board of directors of the association approving the amendment(s);

(4) Any additional information or documents that the association wishes to submit in support of the request or that may be requested by the supervising bank.

(b) Upon receipt of an amendment request from an association, the supervising bank shall review the materials submitted to determine whether they are responsive to these regulations and shall communicate with the association concerning any deficiency. The bank shall forward the request with attachments, to the Farm Credit Administration, together with the bank's recommendation on the request, the reasons for the recommendation, and any analysis the bank believes appropriate.

(c) Upon receipt of an association's request for a charter amendment forwarded by a supervising bank, the Farm Credit Administration shall review the materials submitted and either approve or disapprove the request. The Farm Credit Administration may require submission of any supplemental materials it deems appropriate.

(d) The Farm Credit Administration shall notify the supervising bank of its approval or disapproval of the amendment request, and the supervising bank shall notify the association. A notification of approval shall be accompanied by a copy of the charter, as amended.

611.1122 Requirements for mergers or consolidations.

This section shall apply to any request for approval of a proposed merger or consolidation of associations. A merger involves the combination of one or more associations into a continuing constituent association, which retains its charter and bylaws (except as amended to effect the merger proposal). A consolidation involves the combination of two or more associations into a newly organized association having a new charter and bylaws.

(a) Where two or more associations plan to merge or consolidate, the constituent associations shall jointly submit a request to their supervising bank containing the following:

(1) In the case of a merger, a copy of the charter of the continuing association reflecting any proposed amendments. In the case of consolidation, a copy of the proposed charter of the new association;

(2) A statement of the reasons for the proposed merger or consolidation, the impact of the proposed transaction on the associations and their stockholders, and the planned effective date of the merger or consolidation;

(3) A certified copy of the resolution of the board of directors of each association approving the merger or consolidation;

(4) A copy of the agreement of merger or consolidation;

(5) All of the information specified in paragraph (e) of this section; and

(6) Any additional information or documents each association wishes to submit in support of the request or that the supervising bank or the Farm Credit Administration requests.

(b) Upon receipt of a request for approval of an association merger or consolidation, the supervising bank shall review the materials submitted to determine whether they are responsive to these regulations and shall communicate with the associations concerning any deficiency. When the bank preliminarily approves the request to merge or consolidate, it shall forward the request with attachments to the Farm Credit Administration, together with:

(1) A statement of the reasons for the bank's approval and any analysis the bank believes appropriate; and

(2) Statistical data for each constituent association on credit quality and loan-related assets based on a credit review completed by the supervising bank no earlier than 180 days prior to the date the request for clearance is forwarded to the Farm Credit Administration. The data shall include, at a minimum, the percentage and amount of adversely classified loans. The Farm Credit Administration may waive the 180-day requirement if, in its judgment, the most recent credit review completed by the bank appropriately reflects the credit quality of the loan portfolio of each constituent association as of the date of the request for preliminary approval.

(c) Upon receipt of an association merger or consolidation request from a supervising bank, the Farm Credit Administration shall review the request and either deny or give its preliminary approval to the request. When a request is denied, written notice stating the reasons for the denial shall be transmitted to the bank, and thereafter by the bank to the constituent associations. When a request is preliminarily approved, written notice of the preliminary approval shall be given to the bank, and thereafter by the bank to the constituent associations. Preliminary approval by the bank or the Farm Credit Administration shall not constitute a definitive approval of the merger or consolidation. Final approval of a merger or consolidation shall be only pursuant to paragraph (g) of this section.

(d) Upon receipt of preliminary approval by the Farm Credit Administration of a merger or consolidation request, each constituent association shall call a meeting of its voting stockholders. The meeting shall be called on written notice to each stockholder entitled to vote on the transaction, and held in accordance with the terms of each association's bylaws. The affirmative vote of a majority of the voting stockholders of each association present and voting or voting by written proxy at a meeting at which a quorum is present shall be required for stockholder approval of a merger or consolidation proposal.

(e) One notice of the meeting to consider and act upon a proposed merger or consolidation of associations shall be accompanied by the following information covering each constituent association:

(1) A statement either on the first page of the materials or on the notice of the stockholders' meeting, in capital letters and bold face type, that:

THE FARM CREDIT ADMINISTRATION HAS NEITHER APPROVED NOR PASSED UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION ACCOMPANYING THE NOTICE OF MEETING OR PRESENTED AT THE MEETING AND NO REPRESENTATION TO THE CONTRARY SHALL BE MADE OR RELIED UPON.

(2) A description of the material provisions of the agreement of merger or consolidation and the effect of the proposed merger or consolidation on the associations, their stockholders, the new or continuing board of directors, and the territory to be served. In addition, a copy of the agreement must be furnished with the notice to stockholders.

(3) A summary of the provisions of the charter and bylaws of the continuing or new association that differ materially from the existing charter or bylaw provisions of the constituent associations.

(4) A brief statement by the boards of directors of the constituent associations of the basis for the recommendation that stockholders approve the merger or consolidation.

(5) A description of any agreement or arrangement between a constituent association and any of its officers relating to employment or termination of employment and arising from the merger or consolidation.

(6) A presentation of the following financial data:

(i) A balance sheet and income statement for each constituent association for each of the 2 preceding fiscal years.

(ii) A balance sheet for each constituent association as of a date within 90 days of the date the request for preliminary approval is forwarded to the Farm Credit Administration presented on a comparative basis with the corresponding period of the prior fiscal year.

(iii) An income statement for the interim period between the end of the last fiscal year and the date of the required balance sheet presented on a comparative basis with the corresponding period of the preceding fiscal year. The balance sheet and income statement format shall be that contained in the association's annual report to stockholders; shall contain any significant changes in accounting policies that differ from those in the latest association annual report to stockholders; and shall contain appropriate footnote disclosures, including data relating to nonperforming loans and related assets and allowance for loan losses, including net chargeoffs as required in paragraph (e)(10) of this section.

(7) The financial statements (balance sheet and income statement) shall be in sufficient detail to show separately all significant categories of interest-earning assets and interest-bearing liabilities and the income or expense accrued thereon.

(8) Attached to the financial statements for each constituent association, either:

(i) A statement signed by the chief executive officer and each member of the board of directors of the association that the various financial statements are unaudited, but have been prepared in all material respects in accordance with generally accepted accounting principles (except as otherwise disclosed therein) and are, to the best of the knowledge of the board, a fair and accurate presentation of the financial condition of the association; or

(ii) A signed opinion by an independent certified public accountant that the various financial statements have been examined in accordance with generally accepted auditing standards and, accordingly, included such tests of the accounting records and such other auditing procedures as were considered necessary in the circumstances, and, as of the date of the statements, present fairly the financial position of the association in conformity with generally accepted accounting principles applied on a consistent basis, except as otherwise noted thereon.

(9) A presentation for each constituent association regarding its policy on accounting for nonperforming loans together with the number and dollar amount of loans in all nonperforming loan categories, including all nonaccrual, restructured or reduced rate loans, and other high risk loans.

(10) Information on each constituent association concerning the amount of loans changed off in each of the 2 fiscal years preceding the date of the balance sheet, the current year-to-date net chargeoff amount, and the balance in the allowance for loan losses account and a statement regarding whether, in the opinions of management, the allowance for loan losses is adequate to absorb the risk currently existing in the loan portfolio. This information may be appropriately included in the footnotes to the financial statements.

(11) A pro forma balance sheet of the continuing or consolidated association presented as if the merger or consolidation had occurred as of the date on the balance sheets required in paragraph (e)(6) of this section, as recommended to the stockholders. A pro forma summary of earnings for the continuing or consolidated association presented as if the merger or consolidation had been effective at the beginning of the interim period between the end of the last fiscal year and the date of the balance sheets.

(12) A description of the type and dollar amount of any financial assistance that has been provided during the past year or will be provided by the supervising bank or other party to assist the constituent or the continuing or new association(s), the conditions on which financial assistance has been or will be extended, the terms of repayment or retirement, if any, and the impact of the assistance on the subject association(s) or the stockholders.

(13) A presentation for each constituent association of interest rate comparisons for the last 2 fiscal years preceding the date of the balance sheet, together with a statement of the continuing or new association's proposed interest rate and fee programs, interest collection policies, capitalization rates, dividends or patronage refunds, and other factors that would affect a borrower's cost of doing business with the continuing or new association. Where agreement has not been reached on such matters, current related information shall be presented for each constituent association.

(14) A description for each constituent association of any event subsequent to the date of the financial statements, but prior to the merger or consolidation vote, that would have a material impact on the financial condition of the constituent or continuing or new association(s).

(15) A statement of any other material fact or circumstance that a stockholder would need in order to make an informed decision on the merger or consolidation proposal, or that is necessary to make the required disclosures not misleading.

(16) Where proxies are to be solicited, a form of written proxy, together with instructions on the purpose and authority for its use, and the proper method for signature by the stockholder.

(f) No bank or association, or director, officer, or employee thereof, shall make any untrue or misleading statement of a material fact, or fail to disclose any material fact necessary under the circumstances to make statements made not misleading, to a stockholder of any association in connection with an association merger or consolidation.

(g) Upon arrival of a proposed merger or consolidation by the stockholder of the constituent associations, a certified copy of the stockholders' resolution shall be forwarded to the supervising bank for transmittal to the Farm Credit Administration, together with the bank's final approval of the merger or consolidation. The merger or consolidation shall be effective when thereafter finally approved and on the date as specified by the Farm Credit Administration. Notice of final approval shall be transmitted to the supervising bank and thereafter by the bank to the constituent associations.

(h) No director, officer, or employee of a bank or an association shall make an oral or written representation to any person that a preliminary or final approval by the Farm Credit Administration of an association merger or consolidation constitutes, directly or indirectly, either a recommendation on the merits of the transaction or an assurance concerning the adequacy or accuracy of any information provided to any association's stockholders in connection therewith.

(i) The notice and accompanying information required under paragraph (e) of this section shall not be sent to stockholders until cleared by the Farm Credit Administration.

(j) Where a proposed merger or consolidation will involve more than three associations, the Farm Credit Administration may require the supplementation, or allow the condensation or omission of any information required under paragraph (e) of this section in furtherance of meaningful disclosure to stockholders. Any waiver sought under this paragraph shall be obtained before preparation of the financial statements and accompanying schedules required under paragraph (e) of this section.

611.1123 Merger or consolidation agreements.

(a) Like associations operating under the same title of the Act may merge or consolidate voluntarily only pursuant to a written agreement. The agreement shall set forth all of the terms of the transaction, including, but not limited to, the following:

(1) The proposed effective date of the merger or consolidation.

(2) The proposed name and headquarters location of the continuing or consolidated association.

(3) The names of the persons nominated to serve as directors until the first regular annual meeting of the continuing or consolidated association to be held after the effective date of the merger or consolidation. Any director of a constituent association may be designated in the agreement to serve as a director of the continuing or consolidated association for a period not to exceed his or her current term, after which he or she must stand for reelection. However, the terms of the agreement must provide for the election of at least one director at each annual meeting subsequent to the effective date of the merger or consolidation. The bylaws of the continuing or consolidated association shall reflect the provisions of the merger or consolidation agreement regarding director terms.

(4) A statement of the formula to be used to exchange the stock of the constituent associations for the stock of the continuing or consolidated association. No fractional shares of stock shall be issued.

(5) A statement of any conditions which must be satisfied prior to the effective date of the proposed transaction, including but not limited to approval by stockholders, the supervising bank, and the Farm Credit Administration.

(6) A statement of the representations or warranties, if any, made or to be made by any association, or its officers, directors, or employees that is a party to the proposed transactions.

(7) A statement of the rights of the constituent associations to terminate the agreement before the effective date.

(8) A description of the legal opinions or rulings (including those related to tax matters), if any, that have been obtained or furnished by any party in connection with the proposed transaction. Also, refer to paragraph (a)(5) of this section.

(9) A statement of the authority of those persons designated to carry out the terms of the agreement, including the authority to waive provisions of the agreement and to execute any documents necessary to perfect title, on behalf of the constituent associations.

(b) As an attachment to the agreement, set forth those provisions of the charter and bylaws of the continuing or consolidated association which differ from the existing charter or bylaw provisions of the constituent associations.

611.1124 Territorial adjustments.

Territorial adjustments are subject to the following requirements:

(a) All stockholders, participation certificate holders, and borrowers whose real estate or operations are located in adjusted territories shall be informed in writing of the territory adjustment, and the transfer of their loans to the transferee association. All loans of the transferor association which finance operations located in the transferred territory must be transferred to the transferee association unless otherwise approved by the Farm Credit Administration. Also, the stockholders, participation certificate holders, and borrowers shall be notified of the transfer of their loans and the exchange of related equities for equities of like kinds and amounts in the transferee association. If a like kind of equity is not available in the transferee association, similar equities shall be offered which will not affect adversely the interest of the owner. Each stockholder shall be informed that the latest financial and related information of the associations is available for stockholders' review upon written request.

(b) The Agreement of Transfer of Territory and the Notice of Territory Transfer shall give stockholders 60 days from the date of the notice to notify either association in writing of their decision to decline acceptance of the equities of the transferee association and to remain with the transferor association for normal servicing until the current loan is paid. Any application by the borrower for renewal or for additional credit shall be made to the transferee association, except for those applications permitted under 614.4070 of this chapter.

(c) This section shall not apply to territorial transfers initiated by order of the Governor of the Farm Credit Administration or to territories transferred due to the liquidation of the transferor association.

611.1125 Association articles and bylaws.

Upon request by a stockholder, the association shall provide a copy of the Articles and bylaws of the association to the stockholder.

4. Sections 611.1150 and 611.1160 of Subpart F are redesignated as a new Subpart H and 611.1160 is redesignated as 611.1151, the table of contents to read as follows:

Subpart H -- Service Organizations

Sec.

611.1150 Incorporation of service organizations.

611.1151 Incorporated and unincorporated service organizations.

Donald E. Wilkinson,

Governor.

[FR Doc. 85-11836 Filed 5-15-85; 8:45 am]

BILLING CODE 6705-01-M