Title: PROPOSED RULE--Organization--12 CFR Part 611
Issue Date: 07/20/1984
Federal Register Cite: 49 FR 29404
FARM CREDIT ADMINISTRATION
12 CFR Part 611
AGENCY: Farm Credit Administration.
ACTION: Proposed rule.
SUMMARY: The Farm Credit Administration ("FCA"), by its Federal Farm Credit Board ("Federal Board"), publishes for comment proposed amendments to its regulations concerning changes to Federal land bank association ("FLBA") and production credit association ("PCA") charters, including those related to mergers or consolidations of associations. These amendments are intended to set forth the procedures applicable to various charter amendments and to make the merger and consolidation process operate more efficiently and to ensure that voting stockholders are adequately informed regarding the issues affecting the association.
DATES: Written comments must be received on or before September 19, 1984.
ADDRESSES: Submit any comments in writing to Donald E. Wilkinson, Governor, Farm Credit Administration, 1501 Farm Credit Drive, McLean, VA 22102-5090. Copies of all communications received will be available for examination by interested parties in the Office of the Director, Congressional and Public Affairs Division, Office of Administration, Farm Credit Administration.
FOR FURTHER INFORMATION CONTACT:
John A. Weaver, Office of Examination and Supervision, (703) 883-4182, or
Kenneth L. Peoples, Office of General Counsel, (703) 883-4020, Farm Credit Administration, 1501 Farm Credit Drive, McLean, VA 22102-5090.
On June 5, 1984, the Farm Credit Administration, by its Federal Farm Credit Board ("Federal Board"), adopted for publication in the Federal Register and public comment proposed revisions to its regulations concerning the procedures for the amendment of charters of Federal land bank associations ("FLBAs") and production credit associations ("PCAs") of the Farm Credit System ("System"). The proposed regulations address all amendments of association charters, including those related to a merger or consolidation of like associations.
Under the Farm Credit Act of 1971, as amended ("Act"), FLBAs and PCAs can merge or consolidate voluntarily with like associations with the approval of their respective stockholders and the FCA. The Act also confers authority upon the Federal Board to require such mergers under specified circumstances. For purposes of the proposed regulations, the FCA considers a merger to be a transaction where two or more associations combine into one constituent association, and a consolidation to be a transaction where two or more associations combine to form a new organization.
Applicable sections of the Act require that farmers, ranchers, producers or harvesters of aquatic products, and cooperatives eligible to borrow from a System bank or association purchase voting stock in that institution as a precondition to obtaining credit. Under the Act and the bylaws of System institutions, the borrower, as a stockholder, is entitled to specified rights to participate in the affairs of the institution and is "at risk" financially to the extent that the voting stock of the institution may become impaired and retained earnings may be dissipated as a result of losses. The subjects of corporate action to which the voting rights of stockholders specifically attach under the Act are the election of directors or a merger or consolidation of the institution. While stockholders generally do not have the right under the Act to vote on charter amendments, those amendments which relate to a merger or consolidation of an institution naturally are included within the approval requirements applicable to the overall transaction.
The vast majority of corporate activity related to charter amendments concerns associations. To date, merger or consolidation activities have been confined exclusively to associations. Because the Act does not specify procedural requirements with respect to association charter amendments generally, the setting of related standards is relegated to the board of directors of the association through the adoption of bylaws and to the FCA through its rulemaking authority. Financial difficulties, as well as coordination initiatives among System institutions, have brought about a substantial increase in the number of association mergers in the past 2 years and the number is expected to increase. The FCA has initiated this rulemaking in order to clarify the related procedural steps, to make the approval process more efficient, and to ensure that voting stockholders are adequately informed to vote on issues affecting the association.
In the case of amendments which involve a proposed merger or consolidation of associations, stockholders of all associations have a right to be fully apprised of the significant aspects of the proposal, including the financial condition of the constituent associations, in order that they can make informed decisions in voting on the proposal. Although the FCA has issued guidelines on the subject, current FCA regulations governing mergers and consolidations do not contain any specific requirements regarding the type of financial and other disclosures associations must make to their stockholders in soliciting ballots or proxies for voting on such a transaction.
After careful consideration, the Federal Board concluded that the requirements contained in the proposed amended regulations would not be overly burdensome to associations. Much of the costs of drafting the disclosure materials will be incurred in any case in developing the financial and operational terms of a proposed merger or consolidation. When added to the information already required to be furnished to stockholders, the costs of sending the additional materials will not be significantly increased as the additional information required to be disclosed normally amounts to a small number of pages making duplication and mailing costs minimal.
The type and volume of information which the proposed amended regulation would require to be disclosed to association stockholders in seeking their vote on a merger or consolidation proposal is similar to that which any farmer-, rancher-, or aquatic producer-borrower would want in deciding whether to acquire a production or processing operation or related business. Both the type and volume of materials required to be sent to stockholders are significantly less than that required to be furnished to the stockholders of a publicly-owned commercial bank or other financial institution involved in a merger or consolidation transaction. It should be noted that the voting stock of System institutions is owned by approximately one million members, and many associations have thousands of voting stockholders.
The Federal Board believes these disclosure requirements will provide significant benefits to System associations and their stockholders. A greater dissemination of information about the financial condition and operations of associations will encourage greater stockholder participation in, and loyalty to, those cooperative institutions. Disclosure of material information about proposed mergers or consolidations will assure that stockholders are adequately informed regarding such transactions in view of the typically short notice periods and low stockholder quorum requirements provided in association bylaws. The proposed regulations should also further an objective stated in the Act of encouraging greater stockholder participation in association activities. Pursuant to its authority under the Act to approve mergers or consolidations, the FCA has previously issued guidelines setting forth a description of the information which must be provided to shareholders in seeking their approval on proposed merger or consolidation transactions. Those guidelines will remain in effect pending definitive action by the Federal Board on these proposed amended regulations.
Summary of Changes
The proposed regulation amendment § 611.1120 sets out procedures for the exercise by the Governor of the FCA's authority to amend association charters consistent with sections 1.13 and 2.10 of the Act. The proposed regulations § 611.1121-611.1123 reorder current § 611.1120 (b) and (c) to differentiate requirements for the types of charter amendments, including those involving mergers or consolidations. Proposed § 611.1121 sets forth the procedures for effecting charter amendments not involving a merger or consolidation. Paragraph (b) of § 611.1121 requires that the supervising bank review and make a recommendation on the request. Proposed § 611.1122 provides the procedures for amendment relating to association mergers or consolidations, and specifies the information that must accompany the notice to stockholders of a meeting to consider a merger or consolidation proposal. Paragraph (a)(2) of § 611.1122 indicates that initial FCA action on the request will relate to clearance for the associations to proceed to a shareholder vote on the merger or consolidation proposal, with a determination on approval of the merger or consolidation to be made subsequently. Paragraph (c)(1) of § 611.1122 requires a legend on the notice of shareholders meeting or disclosure materials that the FCA has neither approved nor passed upon the accuracy or adequacy of the information presented to shareholders. Proposed § 611.1123 sets forth the provisions to be covered n a merger or consolidation agreement. Proposed § 611.1124 restates current § 611.1120(d) relating to association charter amendments involving only territorial changes.
List of Subjects in 12 CFR Part 611
Agriculture, Banks, Banking, Credit and rural areas.
As stated in the preamble, it is proposed that Part 611 of Chapter VI, Title 12 of the Code of Regulations, be amended as follows:
1. The authority for Part 611 is revised to read as follows:
Authority: Sec. 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).
2. By adding a new Subpart G to the table of contents of 12 CFR Part 611:
Subpart G -- Amendments to Association Charters and Mergers and Consolidations
611.1120 General authority.
611.1121 Charter amendment procedures generally.
611.1122 Requirements as to mergers and consolidations.
611.1123 Merger of consolidation agreements.
611.1124 Territorial adjustments are subject to the following requirements.
* * * * *
3. Sections 611.1130, 611.1140, 611.1150 and 611.1160 of subpart F are redesignated as new Subpart H, the table of sections to read as follows:
Subpart H -- Association Liquidation, Insolvency and Incorporation of Service Organizations
611.1130 Liquidation of associations.
611.1140 Impairment of stockholders or patron equities: Insolvency -- banks and associations.
611.1150 Incorporation of service organizations.
611.1160 Incorporated and unincorporated service organizations.
* * * * *
4. Section 611.1120 is revised to read as follows:
Subpart G -- Amendments to Association Charters and Mergers and Consolidations
§ 611.1120 General authority.
(a) The authority to amend the charter of a Federal land bank association or a production credit association shall rest exclusively within the discretion of the Farm Credit Administration.
(1) The Farm Credit Administration may, by order of the Governor and on his own initiative, make such changes in the charter of any association based on a finding by the Governor that such change is necessary for the accomplishment of the purposes of the Act.
(2) The Farm Credit Administration may make such changes in the charter of any association as may be requested by that association or its supervisory Federal land bank or Federal intermediate credit bank in accordance with the terms of this regulation.
(3) When the Farm Credit Administration or the Governor consider taking any action or making any finding under paragraph (a)(1) of this section, the affected association(s) shall be given written notice of the matter to be considered and shall be afforded a reasonable period within which to submit views in writing, after which the Agency may take final action and given notice thereof.
(b) Any amendment of an association charter under paragraph (a)(2) of this section shall require review and recommendation by the respective supervising bank and approval by the Farm Credit Administration. A request for amendment may relate to any provision which is properly the subject of a charter, including, among other things, the name of the association, the location of its offices, the territory served, or the merger or consolidation of the association with one or more like associations.
5. Section 611.1121 is added as follows:
§ 611.1121 Charter amendment procedures generally.
This section shall apply to any request by an association to amend its charter other than to accomplish a merger or consolidation.
(a) An association which proposes to amend its charter shall submit a request to its supervisory bank containing the following information:
(1) A statement of the provision(s) of the charter as proposed to be amended;
(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 planned 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) Such other information or documents or information as the association may wish to submit in support of the request or which may be requested by the supervising bank.
(b) Upon receipt from an association of an amendment request, the supervising bank shall review the materials submitted to determine whether the requirements of these regulations have been met, and shall communicate with the association to correct any deficiency. The bank shall thereafter forward the association's request with attachments to the Farm Credit Administration, together with the bank's recommendation on the request, the reasons for that recommendation, and any analysis it believes appropriate.
(c) Upon receipt of an association amendment request from a supervising bank, the Farm Credit Administration shall review and analyze the materials submitted and either approve or disapprove the request.
(d) The Farm Credit Administration shall give notification of its approval or disapproval of the amendment request to the supervising bank, which shall notify the association(s). A notification of approval shall be accompanied by a copy of the charter, as amended.
6. Section 611.1122 is added as follows:
§ 611.1122 Requirements as to mergers and consolidations.
This section shall apply to any request by an association to amend its charter to facilitate a merger or consolidation.
(a) Where an association makes a request to amend its charter to accomplish a proposed merger or consolidation, the requirements and procedures of § 611.1121 (a) and (b) shall apply.
(1) In addition to the information detailed in § 611.1121(a), a copy of the agreement of merger or consolidation and all of the information specified in paragraph (c) of this section shall be attached to the request.
(2) Upon receipt of the request from the supervising bank, the Farm Credit Administration shall analyze and review the request, and either deny or give clearance to the request. Where a request is denied, written notice of such denial and the reasons therefore shall be transmitted to the bank, and thereafter by the bank to the constituent associations. Where a request is cleared, notice of such clearance shall be given to the bank, and thereafter by the bank to the constituent associations. Clearance of the request shall not constitute any approval of the merger or consolidation, or of the information provided by an association in paragraph (c) of this section in seeking related shareholder approval. Approval of a merger or consolidation shall be only pursuant to paragraph (d) of this section.
(b) Upon receipt of clearance from the Farm Credit Administration of a request, each constituent association shall call a meeting of its voting stockholders. The meeting shall be called and held and notice thereof given to each stockholder 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 shall be required to approve the merger or consolidation proposal.
(c) The notice to stockholders of a meeting to consider and act upon a proposed merger or consolidation of associations shall be accompanied by the following information and documents:
(1) A statement either on the first page of the materials or on the notice of the shareholders 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.
(2) A thorough statement of the material provisions of the agreement of merger or consolidation, and the impact of the proposed merger or consolidation on the associations, their stockholders, the succeeding board of directors, and the territory to be served, et cetera. It should be indicated that a shareholder will be furnished with a copy of the agreement upon request to the association.
(3) A statement of those provisions of the charter or bylaws of the continuing or consolidated association which differ from the existing charter or bylaw provisions of the constituent associations.
(4) A brief statement of the reasons for which the board of directors of the association is recommending clearance and approval by stockholders of the merger or consolidation.
(5) A balance sheet for each constituent association as of a date within 90 days of the date the request for clearance is forwarded to the Farm Credit Administration. The balance sheet format shall be that contained in the Annual Report to Stockholders.
(6) An income statement for each constituent association for each of the two (2) fiscal years preceding the date of the balance sheet, and for the interim period between the end of the last fiscal year and the date of the balance sheet presented on a comparative basis with the corresponding period of the preceding fiscal year. The income statement format shall be that contained in the Annual Report to stockholders.
(7) Financial statements (balance sheet and income statements) shall be in sufficient detail as to show separately all significant categories of interest earning assets and interest bearing liabilities and the income or expense thereon.
(8) Attached to the financial statements (balance sheet and income statements) for each constituent association a statement by the board of directors of the association that the financial statements are unaudited, but were 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.
(9) A presentation of 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. When material to the financial statements, the data shall also include the amounts and number of nonperforming loans, loans in process of liquidation, loan delinquencies, and acquired properties.
(10) Information on each constituent association concerning the amount of loans charged off in each of the two (2) fiscal years preceding the date of the balance sheet, the current year-to-date chargeoff amount, and the balance in the reserve for loan losses account.
(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 of the balance sheet required in paragraph (c)(5) 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 end of the interim period between the end of the last fiscal year and the date of the balance sheet.
(12) A description of the type and dollar amount of any financial assistance which has been or will be provided by the supervising bank or other party to assist the constituent or the continuing or consolidated association(s), the conditions on which financial assistance has been or will be extended, the terms of repayment or retirement, and the impact of the assistance on the subject association(s) or the stockholders.
(13) A presentation on each constituent association of interest rate comparisons for the last two (2) fiscal years preceding the date of the balance sheet, together with a statement of the continuing association's proposed interest collection procedures, capitalization rates, dividends or patronage refunds, and other factors that would affect a borrower's cost of doing business with the continuing or consolidated association. Where agreement has not been reached on such matters, current related information shall be presented for the constituent associations.
(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 consolidated association(s).
(15) A statement of any other material facts or circumstances which a shareholder would need in order to make an informed decision on the merger or consolidation proposal, and which are necessary to make the required disclosures not misleading.
(16) A form of written proxy, together with instructions as to the purpose and authority for its use, and the proper method for signature by the stockholder.
(d) Upon approval of a proposed merger or consolidation by the stockholders of the constituent associations, a certified copy of the shareholders resolution shall be forwarded to the supervising bank for transmittal to the Farm Credit Administration. The merger or consolidation shall be effective when thereafter approved and on the date specified by the Farm Credit Administration. Notice of such approval shall be transmitted to the supervising bank and thereafter by the bank to the constituent associations.
7. Section 611.1123 is added as follows:
§ 611.1123 Merger or consolidation agreements.
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:
(a) The proposed effective date of the merger or consolidation.
(b) The proposed name and headquarters location of the continuing or consolidated association.
(c) 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.
(d) 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.
(e) A statement of any conditions which must be satisfied prior to effectiveness of the proposed transaction, including but not limited to approval by stockholders, the supervising bank, and the Farm Credit Administration.
(f) A statement of the representations or warranties, if any, made or to be made by any party to the proposed transactions.
(g) A statement of the rights of the constituent associations to terminate the agreement before effectiveness.
(h) A statement as to the method by which the expenses connected with the merger or consolidation will be borne by the constituent associations.
(i) A description of the legal opinions or ruling (including those related to tax matters), if any, to be obtained or furnished by any party in connection with the proposed transaction. Also, refer to paragraph (e) of this section.
(j) 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.
(k) As an attachment to the agreement, set forth those provisions of the charter or bylaws of the continuing or consolidated association which differ from the existing charter or bylaw provisions of the constituent associations.
8. Section 611.1124 is added as follows:
§ 611.1124 Territorial adjustments are subject to the following requirements.
(a) All stockholders and all borrowers whose operations are located in adjusted territories shall be informed in writing of the territory adjustment. Also, they 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 interests of the owner. Upon written request, each stockholder shall be informed of the availability of the association's latest financial and related information for review by the stockholder.
(b) The Agreement of Transfer of Territory and the notice of territory transfer shall provide 60 days from the date of the notice for stockholders 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.
[FR Doc. 84-19125 Filed 7-19-84; 8:45 am]
BILLING CODE 6705-01-M