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| ## Comptroller of the Currency                                        |
|                                                                       |
| > Administrator of National Banks                                     |
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Washington, DC 20219

##### Corporate Decision #2002-08

May 15, 2002 **June 2002**

J. David Stanford, Esq.

P.O. Box 1145

80 South Main

Salado, Texas 76571

Subject: Application to Conduct a Share Exchange by First National Bank
of Midland, Midland, Texas.; Control No. 2002-SW-12-0015

Dear Mr. Stanford:

This is to inform you that on May 14, 2002 the Office of the Comptroller
of the Currency (OCC) approved your proposal to undertake an ownership
restructuring of the Bank pursuant to the provisions of 12 U.S.C. §
215a-2[^1] and 12 C.F.R § 7.2000. In this restructuring, the Bank is
effecting a share exchange to become a subsidiary of a holding company.
The share exchange offers most shareholders holding company stock for
their bank shares. It, however, provides out-of-state residents cash for
their bank shares so that the holding company may avoid costs associated
with registering its stock under the Securities Act of 1933.

**I. Facts**

The Bank is reorganizing into a subsidiary of a de novo bank holding
company through a share exchange. The Bank will exchange one share of
its holding company's stock for each share of Bank stock of Texas
residents. The Bank will pay \$2.75 in cash for each share of Bank stock
of six non-Texas residents. Bank counsel represents that the cash price
for minority shareholders is fair because it exceeds the Bank's per
share book value of approximately \$ 2.00.[^2] The Bank will cash out
the minority to take advantage of the intrastate offering exemption from
registration under section 3 of the Securities Act of 1933 and avoid the
costs associated with registration. No shareholders voted against the
transaction at the shareholder meeting held April 16, 2002.

## 

## II. Discussion

A national bank may use a share exchange to effect a reorganization or
to form a de novo holding company under section 215a-2. Section 215a-2
requires the bank's reorganization plan to specify the manner of the
exchange, be approved by both the shareholders and the board of
directors, state the consideration to be paid for bank shares (e.g.,
cash, holding company securities, or a combination of both), and provide
dissenters' rights to all shareholders.

Under section 215a-2, a bank may pay shareholders different forms of
consideration in an exchange. The language of section 215a-2 and its
brief legislative history do not address or restrict the ability of
national banks to offer different types of consideration in a share
exchange. The legislative history explains that section 215a-2 amends
the National Bank Consolidation and Merger Act to prescribe "expedited
procedures" permitting a national bank to reorganize.[^3] In this case,
providing different types of consideration facilitates the share
exchange transaction and, therefore, is consistent with congressional
intent in enacting section 215a-2.

Courts have not yet considered whether section 215a-2 permits a national
bank to pay different forms of consideration in a share exchange. Case
law holding national banks may offer different consideration in other
types of reorganizations provides support for finding that differing
types of consideration may be paid in this case. The Court of Appeals
for the Eighth Circuit, in *NoDak Bancorporation v. Clarke,*[^4] held
that a national bank may use differing forms of consideration to cash
out minority shareholders in a freeze-out merger.[^5] The court found
that the transaction was not inconsistent with the National Bank Act, as
long as minority shareholders receive dissenters' rights.[^6] The court
reviewed the legislative history of the National Bank Act and found that
freeze-out mergers were consistent with Congress' intent to simplify and
encourage national bank consolidations.[^7] More recently, a district
court in the Tenth Circuit relied on *NoDak* to hold that a bank may
effect a freeze-out merger to consolidate with another bank and become a
wholly owned subsidiary of an existing bank holding company.[^8]

The Seventh Circuit, in *Bloomington Nat'l Bank v. Telfer,*[^9] reviewed
reverse stock splits, which also involve differing forms of
consideration. There, the court found that a proposed transaction
violated 12 U.S.C. §§ 83 and 214a-215a. The court held that a national
bank must have a legitimate corporate purpose to freeze-out some, but
not all shareholders and repurchase its stock without violating section
83. The court invalidated the transaction it was reviewing for the
bank's failure to articulate a legitimate business purpose and to
provide for dissenters' rights. The court, however, expressly limited
its opinion to the facts of the case, leaving open the possibility that
a national bank may effect a reverse stock split that has a legitimate
corporate purpose and that provides for dissenters' rights.[^10]

Consistent with this view, the OCC has found that a national bank may
undertake a reverse stock split to allow its existing holding company to
obtain 100 percent ownership (and freeze out minority shareholders)
where there exists a valid corporate purpose and the transaction
provides dissenters' rights.[^11] The OCC has interpreted section 83 of
the National Bank Act to permit a national bank to hold its own stock as
part of a reorganization where there exists a legitimate corporate
purpose for the transaction. Although section 83 generally prohibits a
national bank from purchasing its own stock, the OCC has opined that
this prohibition is not absolute. Rather, the primary purpose of section
83 is to prevent a national bank from impairing its capital and
endangering creditors in the event of insolvency, by purchasing and
holding its own stock.[^12]

The OCC has approved reverse stock splits after finding a legitimate
corporate purpose in a variety of contexts. For example, a legitimate
corporate purpose for a freeze-out exists where the transaction results
in reduced costs associated with meeting shareholder communication and
registration requirements under the Securities Exchange Act of
1934.[^13] Another legitimate business purpose is to freeze out minority
shareholders to meet the maximum number of shareholders necessary for a
bank to qualify as a Subchapter S corporation.[^14] The OCC has codified
these reasons as examples of legitimate business purposes in its
regulation confirming the ability of national banks to effect reverse
stock splits. [^15]

A share exchange can achieve exactly the same result as is already
available in freeze-out mergers and reverse stock splits. Permitting
national banks to use differing types of consideration in share
exchanges is consistent with the authority of national banks to use
different consideration in freeze-out mergers and reverse stock splits.
Case law has made clear the standards a national bank must meet to offer
different consideration in those transactions. A national bank share
exchange that includes dissenters' rights for all shareholders and has a
legitimate business purpose would meet the standards enunciated in
*NoDak* and *Bloomington*, as well as OCC conditional approvals and its
regulation on reverse stock splits.[^16]

## III. Conclusion

We approve the Bank's share exchange, based on our interpretation of the
National Bank Act, in light of congressional purpose and case law. We
believe that, in cases where a national bank meets the criteria in
section 215a-2,[^17] a national bank may offer different forms of
consideration to shareholders when it effects a share exchange, for the
same reasons applicable in freeze-out mergers and reverse stock splits.

Section 215a-2 does not restrict the ability of a national bank to offer
different types of consideration in share exchanges. Permitting banks to
provide different consideration is consistent with the language of the
statute, which merely lists the corporate formalities to observe in
effecting an exchange and the statute's purpose, to permit banks to
reorganize efficiently. Congress' intent in enacting section 215a-2 was
to provide expedited procedures for national banks effecting
reorganizations. Offering differing forms of consideration is consistent
with this legislative purpose when it permits banks to streamline the
process for effecting the reorganization and, for example, avoid the
costs of registering under securities law.

The Bank's share exchange meets the majority standard. It meets all
requirements in section 215a-2 and offers dissenters' rights to all
shareholders. The transaction's business purpose, to avoid costs
associated with registration of holding company shares under the
Securities Act, is virtually identical to that recognized in 12 C.F.R. §
7.2023(b)(2), to "reduce costs associated with shareholder
communications and meetings." The OCC has recognized a similar purpose
in a corporate approval, to reduce costs associated with shareholder
communications and registration requirements under the Securities
Exchange Act of 1934.[^18]

#### IV. Consummation of the Reorganization 

The OCC will issue a letter acknowledging consummation of the
reorganization when the OCC receives:

1\. An executed Plan of Reorganization.

2\. A certification that the transaction was approved by a majority of
the Bank's entire Board of Directors.

3\. A certification that shareholder approval was obtained, indicating
the percentage of

shares voted in favor.

4\. A certification that the transaction was approved by the Board of
Governors of the

Federal Reserve System.

If the reorganization is not consummated within one year from the
approval date, the approval shall automatically terminate unless the OCC
grants an extension of the time period. Please advise Brenda McNeese,
Senior Licensing Analyst, Southwestern District, within 10 days of the
effective date of the reorganization.

Please include the CAIS control number on all correspondence related to
this application.

This approval is granted based on a thorough review of all information
available, including commitments and representations made in the
application and the plan of exchange and those of the Bank's
representatives.

This approval, and the activities and communications by OCC employees in
connection with the filing, do not constitute a contract, express or
implied, or any other obligation binding upon the OCC, United States,
any agency or entity of the United States, or an officer or employee of
the United States, and do not affect the ability of the OCC to exercise
its supervisory, regulatory and examination authorities under applicable
laws and regulations. The foregoing may not be waived or modified by any
employee or agent of the OCC or the United States.

If you have any questions concerning this decision, please contact
Brenda McNeese, Senior Licensing Analyst, at 214-720-7052.

Sincerely,

**-signed-**

Julie L. Williams

First Senior Deputy Comptroller and Chief Counsel

[^1]: Section 1204 of the American Home Ownership and Economic
    Opportunity Act of 2000, 114 Stat. 2944, Pub. L. No. 106-569,
    106^th^ Cong. (2000), codified at 12 U.S.C. § 215a-2.

[^2]: The Bank in its proxy statement discloses that there have been 19
    recorded transactions in the Bank's stock since first quarter 2000,
    and all of those have occurred at a price of \$2.75 per share.

[^3]: Bill summary accompanying Pub. L. No. 105-569 (available at
    [http://thomas.loc.gov/cgi-bin/bdquery/D?d106:1:./temp/\~bdYeXJ:@@@L&summ2=m&\|/bss/d106query.html\|](http://thomas.loc.gov/cgi-bin/bdquery/D?d106:1:./temp/~bdYeXJ:@@@L&summ2=m&|/bss/d106query.html|)).
    *See also* Speech of the Hon. James A. Leach in the House of
    Representatives (Oct. 24, 2000), 147 Cong. Rec. E1924 (Oct. 25,
    2000).

[^4]: *NoDak Bancorporation v. Clarke*, 998 F.2d 1416, 1425 (8th Cir.
    1993) ("*NoDak*").

[^5]: *But cf. Lewis v. Clark\[e\]*, 911 F.2d 1558 (11th Cir. 1990),
    *reh'g denied*, 972 F.2d 1351 (1991) ("*Lewis*")(expressing the
    minority view that reverse stock splits are not permitted for
    national banks because the National Bank Act does not expressly
    provide for cash-outs of minority shareholders).

[^6]: 998 F.2d at 1422.

[^7]: *Id.*

[^8]: *Moody v. First National Bank, Sallisaw*, CV-00-306-5 (E.D. Ok.
    July 5, 2001).

[^9]: *Bloomington Nat'l Bank v. Telfer*, 916 F.2d 1305 (7th Cir. 1990)
    ("*Bloomington*").

[^10]: *Id*., 916 F.2d at 1308 n.4, 1309.

[^11]: *See* Interpretive Letter No. 786, *reprinted in* \[1997 Transfer
    Binder\] Fed.Banking Law. Rep. (CCH) ¶ 81-213 (June 9, 1997).

[^12]: Letter from Donald N. Lamson, Assistant Director, SCP (March 27,
    1992) (unpublished).

[^13]: Conditional Approval No. 329 (Sept. 21, 1999).

[^14]: Conditional Approval No. 344 (Dec. 16, 1999); Conditional
    Approval No. 342 (Dec. 3, 1999).

[^15]: *See* 12 C.F.R. § 7.2023.

[^16]: *See, e.g*., Interpretive Letter No. 786, *supra*; Conditional
    Approval Nos. 369, 342, 344, *all supra*. Although *Lewis* would not
    permit different forms of consideration in a reverse stock split,
    this is a minority view and does not impact our analysis in this
    case.

[^17]: The Bank's share exchange meets these requirements by specifying
    the manner of the exchange, obtaining shareholder and board
    approval, stating the consideration to be paid for shares, and
    providing dissenters' rights.

[^18]: *See* Conditional Approval No. 329, *supra*.