Source: https://www.mass.gov/letter-ruling/letter-ruling-87-11-stock-savings-bank-conversion-to-wholly-owned-subsidiary-of-bank
Timestamp: 2018-04-22 06:35:14
Document Index: 756562528

Matched Legal Cases: ['§368', '§ 3', '§ 368', '§ 351', '§ 1032', '§ 358', '§ 1223', '§ 362', '§ 1223', '§ 1504', '§ 1501', '§ 302', '§ 1', '§ 32', '§ 38', '§ 302']

Letter Ruling 87-11: Stock Savings bank; Conversion to Wholly-Owned Subsidiary of Bank Holding Company | Mass.gov
Letter Ruling Letter Ruling 87-11: Stock Savings bank; Conversion to Wholly-Owned Subsidiary of Bank Holding Company
You have requested a ruling on the transfer of the stock of ("Bank"), a state-chartered, stockholder-owned savings bank, to newly-formed ("Holding"), a state-chartered bank holding company. The facts set out in your request are as follows.
The Bank was originally organized as a mutual savings bank under the laws of the Commonwealth of Massachusetts on February 24, 1885. In 1986, the Bank converted from a mutual savings bank to a stock savings bank under a plan approved by the Commissioner of Banks. The Internal Revenue Service issued a letter to the Bank, dated August 28, 1986, ruling that the conversion constituted a tax-free reorganization pursuant to Internal Revenue Code ("Code") §368(a)(1)(F).
Currently, the authorized capital stock of the Bank consists of: (1) 20,000,000 shares of common stock, par value $1.00 per share ("Bank Common Stock"), of which 4,600,000 shares are issued and outstanding, 311,666 shares are reserved for issuance under the Bank's Stock Purchase Plan, and 460,000 shares are reserved for issuance under the Bank's Stock Option Plan; and (2) 5,000,000 shares of preferred stock, none of which is issued and outstanding. The outstanding shares of Bank Common Stock are publicly and widely held. None of the shareholders is a 5% owner.
Holding is a corporation organized by the officers of the Bank under the laws of the Commonwealth of Massachusetts to effect the proposed stock transfer and to engage in business as a bank holding company. Holding will own all of the stock of the Bank upon completion of the transfer to Holding by the shareholders of their Bank Common Stock pursuant to the plan described below.
To encourage the growth and expansion of the Bank, raise additional capital, provide flexibility in future operations and acquisitions, permit diversification of activities, and allow the Bank to engage in businesses which it cannot currently develop because of regulatory restrictions, the Bank's Board of Directors has agreed to present to the Bank's shareholders a plan ("Plan") by which the Bank will become a wholly-owned subsidiary of Holding. The Bank's shareholders must approve the conversion of the Bank into a subsidiary of Holding by an affirmative vote for the Plan of two-thirds of the total number of shares of outstanding Bank Common Stock. The Commissioner of Banks must approve the conversion as well.
When the Plan is executed, the authorized capital stock of Holding will consist of 20,000,000 shares of common stock, par value $1.00 per share ("Holding Common Stock"), and 5,000,000 shares of preferred stock, par value $1.00 per share, none of which will be issued and outstanding. Under the Plan, the Bank shareholders will automatically transfer their Bank Common Stock to Holding. Holding will automatically, without any further action on its part or on the part of the shareholders, acquire and become the owner for all purposes of all issued and outstanding shares of Bank Common Stock. Holding will be entitled to have the Bank issue it a certificate or certificates representing these shares of Bank Common Stock, to receive dividends, and to exercise all rights of an owner. The shareholders will automatically, without any further action on their part or on the part of Holding, cease to own these shares and will instead become owners of one share of Holding Common Stock for each share of Bank Common Stock previously held by them. As shareholders of Holding, they will have full and exclusive power to vote their shares of Holding Common Stock, to receive dividends, and to exercise all rights of an owner.
Any shareholders who dissent to the Plan and who comply with the applicable provisions of Massachusetts law will receive from the Bank payment of the fair market value of their shares of Bank Common Stock, determined in accordance with principles of Massachusetts law, upon their surrender of the certificates that previously represented shares of Bank Common Stock. Certificates so obtained by the Bank will be canceled.
When this automatic exchange of Bank Common Stock for Holding Common Stock occurs, all previously issued and outstanding certificates representing shares of Bank Common Stock (the "Old Certificates") will automatically cease to represent shares of Bank Common Stock or any interest therein; each Old Certificate will instead represent the ownership of an equal number of shares of Holding Common Stock. No more than thirty days after the automatic transfer, holders of the old Certificates (other than those as to which dissenters' appraisal rights have been effected) will surrender his or her old Certificates to a designated transfer agent and receive in exchange a new certificate for an equal number of shares of Holding Common Stock. Until surrendered, each old Certificate will be deemed, for all corporate purposes, to evidence the ownership of the number of shares of Holding Common Stock which the holder would be entitled to receive upon its surrender. Holding, however, may withhold any or all dividends declared on such shares until the holder surrenders his or her old Certificates for new certificates of Holding Common Stock. Holding will then deliver any withheld dividends (without interest and less any taxes that may have been imposed, paid or, by law, withheld) to the stockholder to whom new certificates are issued.
In addition to approval of the Plan by the Bank shareholders and the Commissioner of Banks, other conditions precedent to the transfer will be: the approval by the Board of Governors of the Federal Reserve System, acting pursuant to § 3(a)(1) of the Bank Holding Company Act of 1956, as amended, of Holding's application of Form F.R. 4-1 to become a bank holding company and the elapsing of thirty days after such approval; and the registration or qualification for issuance of the shares of Holding to the extent required under the Securities Act of 1933, as amended, and all applicable state securities laws.
Following the transfer, voting rights in the Bank will rest exclusively in its sole shareholder, Holding. Voting rights in Holding will rest exclusively in the holders of its common stock.
By voting in favor of the Plan and by consummating the transfer contemplated by the Plan, Holding will have approved its adoption of the existing 1986 Incentive Stock option Plan of the Bank as Holding's stock option plan and the Bank's Employee Stock Purchase Plan as Holding's employee stock purchase plan. Holding will also-have agreed to issue Holding Common Stock in lieu of Bank Common Stock pursuant to options currently outstanding under the Bank's Stock option Plan and rights currently outstanding under the Bank's Employee Stock Purchase Plan. Any such outstanding option or right will thereafter be exercisable only for a number of shares of Holding Common Stock equal to the number of shares of Bank Common Stock that were available under the option or right immediately prior to the transfer; no change in the option price or the exercise price of the right, or any other term or condition of the option or right will be allowed. Holding and the Bank will make appropriate amendments to the existing Stock Option Plan to reflect its adoption as Holding's Stock Option Plan and to reflect recent changes of the applicable law under the federal Tax Reform Act of 1986.
Taking into account any issuance of additional shares of Holding stock, any issuance of Holding stock for services, the exercise of any rights, warrants or subscriptions with respect to Holding stock, a public offering of Holding stock, and the sale, exchange, transfer by gift, or other disposition of any Holding stock to be received in the exchange, the Bank shareholders will be in "control" of Holding within the meaning of Code § 368(c).
The transfer will not interrupt the business of the Bank, which will continue as usual. (The Federal Reserve Board may condition its approval of Holding's application to become a bank holding company upon the elimination by the Bank of its Savings Bank Life Insurance activities, but the elimination of these activities would not significantly affect the Bank's business.) All loans of the Bank will remain unchanged and will retain the same characteristics after the transfer. The Bank will continue its membership in, and its deposit accounts will continue to be insured up to the legal maximum by, the Federal Deposit Insurance Corporation. It will remain subject to the regulatory authority of the Commissioner of Banks.
The Bank represents the federal tax consequences of the Plan to be as follows:
(a) The shareholders will recognize no gain or loss upon the exchange of their Bank Common Stock solely for Holding Common Stock. Code § 351(a).
(b) Holding will recognize no gain or loss upon the receipt of Bank Common Stock solely in exchange for Holding Common Stock. Code § 1032(a).
(c) The basis of the Holding Common Stock that each shareholder receives will be the same as the basis of the Bank Common Stock surrendered in exchange for it. Code § 358(a)(1).
(d) The holding period of the Holding Common Stock that each shareholder receives will include the period during which the shareholder held the Bank Common Stock exchanged for it, provided that the shareholder held the Bank Common Stock as a capital asset on the date of the exchange. Code § 1223(l).
(e) The basis of the shares of Bank Common Stock that Holding receives will be the same as the basis of that stock in the hands of the shareholders immediately prior to the exchange. Code § 362(a).
(f) The holding period of the Bank Common Stock that Holding receives will include the period during which the shareholder held the stock. Code § 1223(2).
(g) The Bank and Holding will be considered members of an affiliated group" within the meaning of Code § 1504(a)(1), and thus, assuming that they elect to file consolidated returns under Code § 1501, dividend distributions paid by the Bank to Holding will not be included in computing the taxable income of Holding.
(h) Where a dissenting shareholder receives cash, the cash will be treated as a distribution in redemption of stock subject to the provisions and limitations of Code § 302.
Accordingly, the Massachusetts tax consequences are as follows:
(1) The Bank will continue to be subject to and pay its excise under G.L. c. 63, §§ 1, 2 and 7. Holding will be subject to either the excise imposed under G.L. c. 63, § 32, or the excise imposed under G.L. c. 63, § 38B(b), if Holding is classified as a security corporation pursuant to that section.
(2) Bank shareholders will realize no gain or loss upon the exchange of their Bank Common Stock solely for Holding Common Stock.
(3) Holding will recognize no gain or loss upon its receipt of Bank Common Stock solely in exchange for Holding Common Stock.
(4) The basis of the Holding Common Stock that each Bank shareholder receives will be the same as the basis of the Bank Common Stock surrendered in exchange for it.
(5) The holding period of the Holding Common Stock that each Bank shareholder receives will include the period during which the shareholder held the Bank Common Stock exchanged for it, provided that the shareholder held the Bank Common Stock as a capital asset on the date of the exchange.
(6) The basis of the shares of Bank Common Stock that Holding receives will be the same as the basis of that stock in. the hands of the Bank shareholders immediately prior to the exchange.
(7) The holding period of the Bank Common Stock that Holding receives will include the period during which the Bank shareholders held the stock.
(8) Where a dissenting Bank shareholder receives cash in exchange for his or her Bank Common Stock, the cash will be treated as received by the Shareholder in redemption of his or her Bank Common Stock subject to the provisions and limitations of Code § 302.
LR 87-11