Opinion ID: 547464
Heading Depth: 1
Heading Rank: 2

Heading: charter federal savings

Text: AND LOAN ASSOCIATION
25 Charter Federal Savings and Loan Association (Charter Federal) is a federally chartered mutual savings and loan association. Established in 1954, Charter Federal is headquartered in West Point, Georgia. It has branch offices in La Grange, Georgia and Valley, Alabama, and a loan processing office in Auburn, Alabama. 26 Like many savings and loan associations, Charter Federal has struggled to maintain its profitability. In 1985, Charter Federal sold its loan portfolio, which consisted of low-yielding, fixed-rate mortgages, at a loss of more than $5 million. 62 This loss greatly reduced Charter Federal's net worth. 63 As of September 30, 1988, Charter Federal had, according to GAAP, a negative net worth of almost $300,000.00. 64 However, Charter Federal was able to meet its regulatory capital requirements. 65 27 Charter Federal's most valuable asset is one million shares of preferred stock issued by the Federal Home Loan Mortgage Corporation, commonly referred to as Freddie Mac stock. 66 Charter Federal purchased this stock at an average price of approximately $20 per share; in accordance with GAAP, the stock is listed on Charter Federal's books at an asset value of slightly more than $20 million. The market value of this stock, however, is much greater than its cost basis. By December of 1988, Freddie Mac stock was trading at $48 per share. This created an unrealized gain of $28 million for Charter Federal which was not reflected on its balance sheet. 67 B. Proposed Conversion 28 On December 27, 1988, Charter Federal's board of directors applied for permission to convert Charter Federal from a mutual association owned by its members to a stock association owned by shareholders. 68 The directors planned for Charter Federal to undergo a voluntary conversion in accordance with the Bank Board's regulations. 69 Under the conversion plan, Charter Federal would issue, in a private offering, 90,000 shares of common stock with a par value of one dollar per share. 70 These shares were only to be offered to certain persons involved with Charter Federal (the insiders). 71 The aggregate price the insiders were to pay Charter Federal for their shares was $4.5 million, 72 or $50 per share. 29 In its conversion application, Charter Federal explained that it had been advised that neither a standard nor modified conversion would be feasible because public investors would not be interested in a public offering of Charter Federal stock. 73 Charter Federal thought that its proposed voluntary conversion would comply with the Bank Board's regulations. Relying on the opinion of its accountant, Charter Federal claimed to be GAAP insolvent. 74 The application also explained that after the voluntary conversion, Charter Federal would be a viable entity as required by the Bank Board. 75 Charter Federal would have the proper net worth to total liabilities ratio, 76 and the conversion would be in the best interests of Charter Federal, its members and the FSLIC. 77 30 The filing of Charter Federal's conversion application began a six-month dialogue between Charter Federal and the Bank Board. During this time, the Bank Board dispatched several letters to Charter Federal expressing the Bank Board's concerns about the propriety of the proposed conversion. The Bank Board questioned whether Charter Federal truly was insolvent, whether the proposed conversion would be in the best interests of all involved, and whether the insiders' notices of change-in-control should be approved. The Bank Board repeatedly opined that the Freddie Mac stock owned by Charter Federal made Charter Federal much more valuable than the conversion application led one to believe. The Bank Board expressed concern that the insiders would profit immensely from the proposed conversion by receiving the value of the Freddie Mac stock, while Charter Federal and its members would not. The Bank Board also was troubled about several of the insiders, wondering if they had the necessary financial capabilities and integrity to control Charter Federal. 31 Charter Federal attempted to allay the Bank Board's concerns by providing more information about the conversion, the insiders, and the resulting stock association, and by modifying its conversion plan. By June 30, 1989, the date of Charter Federal's fifth and final amendment to its application for voluntary conversion, Charter Federal's conversion plan had undergone several major changes, all of which revolved around the conversion shares. Instead of selling 90,000 shares of conversion stock, the amended plan of conversion called for the sale of 150,000 shares. These shares were to be offered at a purchase price of $50 per share, creating the potential for a capital infusion into Charter Federal of $7.5 million. The conversion plan, in its final form, did not limit the purchase of these shares to the insiders; Charter Federal's members would now be allowed to purchase common stock in the converted association. The insiders of the corporation 78 would be entitled to purchase 35% of the total conversion stock offered, i.e., 52,500 shares. John W. Johnson, Jr., president and chairman of Charter Federal's board of directors, and his son, Robert L. Johnson, director, vice president, and chief financial officer of Charter Federal, would each purchase 9.9% of the total conversion stock offered. In other words, they would each purchase 14,850 shares, at a cost of $742,500. Floyd H. Mann, R. Terry Taunton, Terrell E. Bishop, Jane W. Darden, William C. Gladden and William B. Hudson, would each purchase 2.5% of the total offering, i.e., 3,750 shares, for $187,500. Martha B. Jones and Bonnie Bonner each would purchase less than one percent of the conversion stock: Martha B. Jones would buy 200 shares for a cost of $10,000, and Bonnie Bonner would buy 100 shares, costing $5,000. 32 According to the final plan, Charter Federal's members would be able to subscribe for up to 65% of the total shares offered, i.e., 97,500 shares. No individual member, however, could purchase more than 7,500 shares, or 5% of the total offering. Moreover, each member wishing to participate in the offering had to buy at least 10 shares, for an aggregate price of $500.00. The purchase price had to be received in cash, and the offering was only to remain open for 20 calendar days. 33 If the amount of shares allotted for purchase by the members was oversubscribed, the number of shares each member would be eligible to purchase would be reduced on a pro rata basis. If the Charter Federal members did not subscribe for their full allotment of shares, Bonnie Bonner, an officer of Charter Federal, would be allowed to purchase 500 more shares. If unpurchased shares still remained, a Charter Federal employee stock ownership plan would be permitted to purchase up to 7,500 shares. The right to purchase any shares still unsold would be divided among the insiders. 79 34 In enacting its amendments, Charter Federal was obviously aware of the Bank Board's concern regarding the true value of the Freddie Mac stock. As discussed above, Charter Federal changed the conversion plan to allow members, not just insiders, to purchase conversion stock. Charter Federal also pledged that unrealized gains on the price of the Freddie Mac stock as of the actual date of conversion would not be included as income of Charter Federal for the purpose of calculating dividends. 35 Charter Federal's attempts to appease the Bank Board's concerns about the propriety of the proposed voluntary conversion were not successful. On August 5, 1989, the Bank Board issued a resolution, and a notice that this resolution was the Bank Board's final action in the matter, denying Charter Federal's application for voluntary conversion and disapproving the notices of change-in-control filed by the insiders along with the application. 80 The Bank Board found that Charter Federal, upon liquidation, would have net realizable equity; the conversion was not in the best interests of and presented the potential for injury to Charter Federal, its members and the FSLIC; Charter Federal and its management intentionally kept Charter Federal insolvent; and the financial condition and integrity of the insiders was such that their acquisition of control might jeopardize Charter Federal's stability and was not in the best interest of the association. The Bank Board resolved, therefore, that the proposed voluntary conversion of Charter Federal and the notices of change-in-control did not meet the qualification standards set forth in its regulations. 36 On September 11, 1989, Charter Federal and the insiders filed a petition for review in this court, asking us to review the Bank Board's denial of the conversion application and its disapproval of the change-in-control notices filed by the insiders. 81