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F ed er a l Reser ve Ba n k o f D allas DALLAS, TEXAS 75222 Circular No. 77-32 February 25, 1977 S T A T E M E N T OF P O LIC Y CO NCERNING D IV E S T IT U R E S BY BANK HO LDING COMPANIES T O A L L BANK HOLDING COMPANIES AND O THERS CO NCERNED IN TH E ELE V E N TH FE D E R A L RESERVE D IS T R IC T : On F e b r u a r y 15, 1977, the Board of G o v e rn o rs of the F e d e ra l R e s e rv e System issued a p o lic y statement on d iv e s titu r e s r e q u ir e d of b a n k h o ld in g c o m p a n ie s . On a n u m b e r of re ce n t occasions the Board of G o v e rn o rs has been p r e sented w ith d iffic u lt issues c o n c e rn in g the tim ing of d iv e s titu r e s r e q u ir e d e ith e r b y statute o r Board o r d e r . As the 1980 d e a d lin e app roaches fo r d iv e s titu r e s u n d e r the 1970 Am endm ents to the B a n k H o ld in g Com pany A c t, th e Board expects that the fr e q u e n c y of such p rob lem s w ill in c re a s e . Com panies c o ve re d by the 1970 Am endm ents to the B a nk H o ld in g Com pany A c t ha ve u n til D ecem ber 31, 1980, to d iv e s t h o ld in g s that a re not clo se ly re la te d to b a n k in g as d e fin e d by the B o a r d , o r to d iv e s t t h e i r b a n k in g in te re s ts . T h e Board has no a u th o r ity to e x te n d this d e a d lin e . T h i s p r o v is io n does not a p p ly to h o ld ings that a r e g r a n d fa th e r e d u n d e r the A c t. In its statem ent, the Board u r g e d b a n k h o ld in g companies to take e a r ly steps to c a r r y out d iv e s titu r e o r d e r s . It also suggested e a r l y subm ission of a d i v e s titu r e p la n and p e r io d ic p ro g re s s r e p o r ts . P r in te d on the fo llo w in g pages is the te x t of the statem ent issued b y the Board of G o v e r n o r s . A n y questions should be d ir e c te d to o u r R egulations D e p a r t m ent, E x t. 6169. A d d itio n a l copies of th e p o lic y statem ent w ill be fu r n is h e d upon re q u e s t to the S e c r e ta r y 's O ffice of th is B a n k (E x t. 6267) . S in c e r e ly y o u r s , R o b e rt H . B o y k in F i r s t V ic e P re s id e n t Banks and others are encouraged to use the fo llo w in g to ll-fr e e incoming WATS numbers in contacting th is Bank: 1 -8 0 0 -49 2 -4 40 3 (in tra s ta te ) and 1 -8 0 0 -5 2 7 -4 9 7 0 (in te rs ta te ). For c a lls placed lo c a lly , p le a s e use 651 plus the extension referred to above. This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) STATEMENT OF POLICY CONCERNING DIVESTITURES BY BANK H O LD IN C COMPANIES From tim e to tim e th e Board of C o v e rn o r s re ce ive s requests from companies s u b jec t to the Bank H o ld in g Com pany A c t, or o th e r laws a d m in is te re d b y the B o a rd , to e x tend tim e p e rio d s s p ec ifie d e it h e r by statute o r b y Board o r d e r for the d iv e s titu r e of assets held o r a c tiv itie s engaged in b y such com panies. Such d iv e s titu r e re q u ire m e n ts may a r is e in a n u m b e r of w a y s . F o r e x a m p le , d iv e s titu r e may be o r d e r e d by the Board in connection w ith an a c q u is itio n found to ha ve been made in v io la tio n of la w . In o th e r cases the d i v e s t i tu r e may be p u r s u a n t to a s ta tu to ry re q u ire m e n t imposed at the tim e an am endm ent to the Act was a d o p te d , o r it may be r e q u ir e d as a r e s u lt of a fo re c lo s u re upon c o lla te ral held by the com pany o r a b a n k s u b s id ia r y in connection w ith a d e b t p r e v io u s ly contracted in good fa ith . C e r ta in d iv e s t it u r e p e rio d s may be exten d e d in the d is c re tio n of the B o a rd , but in o th e r cases the B oard may be w ith o u t s ta tu to ry a u t h o r i t y , o r may ha ve on ly lim ited a u th o r it y , to e xten d a s p ec ifie d d iv e s t it u r e p e r io d . In the p a st, d iv e s titu r e s h a ve ta k e n many d iffe r e n t fo rm s , and the Board has fo l lowed a v a r ie t y of p ro c e d u re s in e n fo rc in g d iv e s titu r e re q u ire m e n ts . Because d iv e s titu r e s may occur u n d e r w id e ly d is p a ra te factual c irc u m s ta n c e s , and because such forced d is p o s i tions may have the potential fo r causing a serious a d v e rs e economic impact upon the d iv e s t ing c o m p an y , the B oard b e lie v e s it is im portant to m aintain a larg e m easure of f l e x i b i l i t y in d e a lin g w ith d iv e s t it u r e s . For these re a s o n s , th e re can be no fix e d ru le as to the ty p e of d iv e s t it u r e that w i l l be a p p r o p r ia t e in all s itu a tio n s . For e x a m p le , w h e re d iv e s titu r e has been o r d e r e d to te rm in a te a con trol r e la tio n s h ip crea te d o r m aintained in v io la tio n of the A c t, it may be ne ce s sa ry to impose conditions that w ill a s s u re that the u n la w fu l re la tio n s h ip has been f u l l y te rm in a te d and that it w ill not a r is e in the fu t u r e . In o th e r c irc u m s ta n c e s , h o w e v e r , less s tr in g e n t conditions may be a p p r o p r ia t e . 1. A v o id a n c e of D elays in D i v e s t i t u r e s . W here a spec ific tim e p e rio d has been fix e d fo r a ccom plishing d i v e s t i t u r e , the affected company should e n d e a v o r an d should be e n c o u ra g e d to complete the d iv e s titu r e as e a r l y as p o s sib le d u r i n g the specific p e r io d . T h e r e w ill g e n e r a lly be sub stan tial advantages to d iv e s tin g companies in ta k in g steps to plan fo r and accom plish d iv e s titu r e s w e ll b efore the end of the d iv e s titu r e p e r io d . For e x a m p le , d e la y s may im p a ir the a b ility of the com pany to r e a liz e full v a lu e for the d iv es te d a ssets, fo r as the end of the d iv e s t it u r e p e rio d approaches the "forced sale" aspect of the d iv e s t it u r e may lead potential b u y e r s to w ith h o ld firm offers and to b a r g a in for low er p r ic e s . In a d d itio n , because some p ro s p e c tiv e p u r c h a s e r s may them selves r e q u ir e r e g u la to ry a p p ro v a l to a c q u ir e the d iv e s te d p r o p e r t y , d e la y b y the d iv e s tin g company m a y — b y leaving in s u ffic ie n t tim e to obtain such a p p r o v a ls — have the effect of n a r r o w in g the ra n g e of p ro s p e c tiv e p u r c h a s e r s . T h u s , d e la y in p la n n in g fo r d iv e s titu r e may in c re a se the likelihood that the company w i l l seek an extension of the time fo r d iv e s titu r e if d iffic u lty is encount e re d in s e c u rin g a p u r c h a s e r , and in c e rta in s itu a tio n s , of c o u rs e , the Board may be w i t h out s ta tu to ry a u th o r ity to g r a n t e x te n s io n s . 2. S ubm ission and A p p r o v a l of D iv e s titu r e P l a n s . When a d iv e s titu r e re q u ire m e n t is im posed, the com pany affected should g e n e r a lly be ask e d to subm it a d iv e s titu r e plan - 2 p ro m p tly fo r r e v ie w and a p p ro v a l b y the R e s e rv e B a n k o r the B o a rd . Such a r e q u ire m e n t may be imposed p u r s u a n t to the B o a rd 's a u th o r ity u n d e r section 5 (b ) o f the B ank Holding Com pany A ct to issue such o r d e r s as may be n e c e s s a ry to enable the Board to a d m in is te r and c a r r y o ut th e p urposes of th e A ct and p r e v e n t evasions th e re o f. A d iv e s titu r e plan should be as specific as p o s s ib le , and should in dicate the m a n ner in w h ic h d iv e s titu r e w ill be acc o m p lish e d — fo r e x a m p le , b y a b u lk sale o f th e assets to a t h i r d p a r t y , b y "spinoff" o r d is tr ib u tio n of shares to the s h a re h o ld e rs of the d iv e s tin g c o m p an y , or b y te rm in atio n of p r o h ib ite d a c t iv itie s . In a d d itio n , the p lan should s p ec ify the steps the company expects to ta k e in effecting the d iv e s titu r e and a s s u rin g its co m pleteness, and should indicate the tim e schedule fo r ta k in g such s te ps. In a p p r o p r ia t e c irc u m s ta n c e s , th e d iv e s titu r e plan should m ake p r o v is io n for a s s u rin g th a t " c o n tro llin g in flu e n ce " re la tio n s h ip s , such as management o r fin a n c ia l in te r lo c k s , w i ll not continue to e x is t. 3. P e rio d ic P ro g re s s R e p o r t s . A com pany s u b jec t to a d i v e s t i t u r e re q u ire m e n t should g e n e r a lly be r e q u ir e d to s u b m it r e g u l a r p e r io d ic re p o rts d e ta ilin g the steps it has ta k en to effect d i v e s t i t u r e . Such a r e q u ire m e n t may be imposed p u r s u a n t to the B o ard's a u th o r ity u n d e r section 5 (b ) o f the B ank H o ld in g Com pany A c t , r e f e r r e d to a b o v e , as w e ll as its a u th o r ity u n d e r section 5 (c ) o f the A c t to r e q u i r e re p o rts for the p u rp o s e of keeping the Board inform ed as to w h e th e r th e A ct and Board re g u la tio n s and o r d e r s th e r e u n d e r a re bein g com plied w i t h . R eports should set forth in de ta il such m atters as the id e n tities of po tential b u y e r s who ha ve been a p proached b y the c o m p an y , th e dates of discussions w ith potential b u y e r s and the id e n tities of the in d iv id u a ls in v o lv e d in such d is c u s s io n s , the term s of a ny o ffers r e c e iv e d , and the reasons fo r re je c tin g a ny o ffe rs . In a d d itio n , the r e ports should in d ic a te w h e th e r th e company has em ployed b r o k e r s , in v es tm e n t b a n k e r s , or o thers to assist in the d i v e s t i t u r e , or its reasons for not d oing so, and should d e s c rib e o th e r efforts b y the com pany to seek out p o ssible p u r c h a s e r s . T h e p u rp o s e of r e q u ir in g such re p o rts is to in s u re that substantial and good faith efforts a re b e in g made b y the com pany to satis fy its d iv e s titu r e o b lig a tio n s . T h e fre q u e n c y of such re p o rts may v a r y d e p e n d ing upon the n a tu re of the d iv e s titu r e and the p e rio d s p ec ifie d for d iv e s t it u r e . H o w e v e r , such re p o rts should g e n e r a lly not be r e q u ir e d less fr e q u e n tly than e v e r y th r e e months, and may in a p p r o p r ia t e cases be r e q u ir e d on a m onthly o r eve n more fr e q u e n t b a s is . P ro g ress re p o rts as w e ll as d iv e s t it u r e plans should be a ffo rd e d c o n fid e n tia l tre a tm e n t. 4. Extensions of D iv e s titu r e P e r i o d s . C e r ta in d iv e s t it u r e p e r io d s — such as the Decem ber 31, 1980 d e a d lin e for d iv e s titu r e s r e q u i r e d b y the 1970 Am endm ents to the Bank H olding Com pany A c t — a r e not e x te n d a b le . In such cases it is im p e r a tiv e that d iv e s titu r e be accom plished in a tim e ly m a n n e r . In c e rta in o th e r cases, the Board may h a v e d is c re tio n to e xten d a s ta tu to r ily p r e s c r ib e d d iv e s titu r e p e rio d w it h in s p ec ifie d lim its . F or e x a m p le , u n d e r section 4 (c ) (2) o f the A ct the Board may e xten d fo r th re e o n e -y e a r p e rio d s the tw o y e a r p e rio d in w h ic h a b a n k s u b s id ia r y o f a h o ld in g company is o th e r w is e r e q u ir e d to d i vest shares a c q u ir e d in satisfaction of a d e b t p r e v io u s ly c ontracted in good fa ith . In such cases, h o w e v e r , w h e n the p e rm is s ib le extensions e x p ir e the B oard no lo n g e r has d is c r e tion to g r a n t f u r t h e r e x te n s io n s . In s till o th e r c ases, w h e re a d iv e s titu r e p e rio d is p r e s c rib e d by the B o a r d , in the e x e r c is e of its r e g u la to r y ju d g m e n t, the Board may have b r o a d e r d is c r e tio n to g r a n t e xte n s io n s . W here extensions of s p ec ifie d d iv e s titu r e p e rio d s a re p e rm itte d b y la w , e x te n sions should not be g ra n te d e x c e p t u n d e r co m p ellin g c irc u m s ta n c e s . N e ith e r u n fa v o ra b le m a rk e t c o n d itio n s , nor the p o s s ib ility that the company may in c u r some loss, should alone be v ie w e d as c o n stitu tin g such c irc u m s ta n c e s — p a r t i c u l a r l y if the com pany has fa iled to - 3 take e a r l i e r steps to accom plish a d iv e s t it u r e u n d e r more fa v o ra b le c irc u m s ta n c e s . N o r m a lly , a re q u es t fo r an e xtension w i l l not be c o n sid e re d unless the company has e stab lishe d th a t it has made su b stan tial and c o ntinued good faith efforts to accom plish the d i v e s t i t u r e w it h in the p r e s c r ib e d p e r io d . F u r th e r m o r e , requests fo r extensions of d iv e s titu r e p e rio d s must be made s u ffic ie n tly in adva nc e of th e e x p ir a tio n of the p r e s c r ib e d p e rio d both to e n able the B oard to c o n s id e r the re q u e s t in an o r d e r l y m a n n er and to e nable the com pany to effect a tim e ly d iv e s titu r e in the e v e n t the re q u e s t fo r exten s io n is d e n ie d . Com panies subject to d iv e s t it u r e re q u ire m e n ts should be a w a r e th a t a f a ilu r e to accom plish a d iv e s titu r e w ith in the p r e s c r ib e d p e rio d may in and of its e lf be v ie w e d as a sep a ra te v io la tion of the A c t. 5. Use of T r u s t e e s . In a p p r o p r ia t e cases a com pany s u bject to a d iv e s titu r e r e q u ir e m e n t may be r e q u ir e d to place the assets s u b jec t to d iv e s t it u r e w ith an in d e p e n d e n t tru s te e u n d e r in s tru c tio n s to accom plish a sale b y a s p ec ifie d d a te , b y p u b lic auction if ne c e s s a r y . Such a tru s te e may be g iv e n the r e s p o n s ib ilit y fo r e x e r c is in g the votin g r ig h ts w ith re sp e c t to shares b e in g d iv e s te d . T h e use of such a tru s te e may be p a r t i c u l a r l y a p p r o p r ia t e w h e r e the d i v e s t i t u r e is inten ded to te rm in a te a control re la tio n s h ip e s tab lis h ed or m a in tain e d in v io la tio n of la w , o r w h e re the d iv e s tin g company has d em onstrated an in a b ility o r u n w illin g n e s s to take tim e ly steps to effect a d iv e s t it u r e . 6. P resum ptions of C o n t r o l . B a nk h o ld in g companies contem p lating a d iv e s titu r e should be m indful of section 2 ( g ) (3) of the B a nk H o ld in g Com pany A c t, w h ic h creates a p r e s u m p tio n of c o ntinued control o v e r the tr a n s f e r r e d assets w h e re the tr a n s fe r e e is in deb ted to the t r a n s f e r o r , o r w h e re c e rta in in te rlo c k s e x i s t , as w e ll as section 2 2 5 .2 of R e g u la tio n Y , w h ic h sets forth c e rta in a d d itio n a l control p re s u m p tio n s . W here one of these p re su m p tio n s has a r is e n w ith re spe c t to d iv e s te d assets, the d iv e s t it u r e w i ll not be c o n sid e re d as complete u n til the p re s u m p tio n has been o v erc o m e . It should be understood that the in q u i r y into the te rm in a tio n of control re la tio n s h ip s is not lim ited b y the s ta tu to ry and r e g u la to r y p re su m p tio n s of c o n tr o l, an d that the B oard may conclude that a control re la tio n s h ip s till exists even though the pre sum ptio n s do not a p p ly . 7. Roie of the R e s e rv e B a n k s . T h e R e s e rv e Banks have a re s p o n s ib ility fo r s u p e r v is in g and e n fo rc in g d iv e s t it u r e s . S p e c ific a lly , in c oordinatio n w ith Board s ta ff they should r e v ie w d iv e s titu r e plans to a s s u re that proposed d iv e s titu r e s w ill r e s u lt in the te rm in atio n of control re la tio n s h ip s and w i l l not c rea te unsafe o r unsound conditions in a n y b a n k or b a n k h o ld ing company; th e y should m onitor p e rio d ic p ro g re s s re ports to a ss u re that tim e ly steps a r e b e in g ta k en to effect d iv e s titu r e s ; and th e y should p ro m p t companies to ta k e such steps w h e n it a p p ea rs th a t p ro g r e s s is not being made. W h e re R e s e rv e Banks h a v e d elegated a u th o r ity to e xten d d iv e s t it u r e p e r io d s , th a t a u th o r ity should be e x e rc is e d co n sis te n tly w ith this p o licy statem ent. February 15, 1977
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