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

Heading: The Types of Conversion

Text: 8 The Bank Board's regulations offer guidance to mutual associations interested in converting to stock associations. The regulations describe the characteristics of a Bank Board-approved conversion, including the roles of the association's board of directors and members, the method of sale of the converted institution's stock, and the procedure to be followed throughout the conversion process. The standard conversion, as is apparent from its name, is the most common. Many of the standard conversion regulations also apply to voluntary and modified conversions. 9 9 A standard conversion requires action by the association's board of directors as well as its members. The association's plan of conversion must be approved by at least two-thirds of the association's board of directors. 10 If approved, the association's members vote on the plan, which must be accepted by at least a majority of the total outstanding votes of the association members. 11 The Bank Board sets forth specific notice, proxy, and voting rules to ensure that the approval or disapproval of the association's members is fairly obtained. 12 10 The Bank Board also prescribes regulations concerning the sale of the converting association's stock. Each officer, director and account holder eligible to purchase stock in the converted association, plus each association voting member, must receive a certain number of subscription rights to purchase the association's stock. 13 The regulations restrict the amount of stock that may be purchased by one person or group of persons acting together, including the converting association's officers and directors. 14 11 The standard conversion regulations also dictate the price at which the converted association's stock must be sold. The total stock price must equal the association's pro forma market value, based on an independent appraisal. 15 The price per share, which must be uniform, should be between $5.00 and $50.00, and account holders should be permitted to draw from their accounts without penalty in order to pay this price. 16 The association may not lend money to any person or group of persons to purchase its stock. 17 Finally, the Bank Board's regulations provide that the sale of the converting association's stock should be conducted as quickly as possible and must be completed within 45 days. 18 Once the sale is complete, the Bank Board regulations limit repurchases of stock and payments of dividends by the converted association, and limit the ability of the association's officers and directors to resell their stock. 19 12 The Bank Board regulations specify the procedural requirements of the conversion application process. For example, the conversion must be completed within a certain amount of time, 20 the costs incurred by the converting association must be reasonable, 21 and the conversion plan must establish a liquidation account. 22 Several rules also discuss the actual filing and preparation of a conversion application. 23 13 Finally, the Bank Board has created a catch-all requirement: the conversion application may not contain any provision the Bank Board believes to be unfair or harmful to the converting association, its members, or the public interest. 24 This provision allows the Bank Board to act as a watchdog over the conversion process.
14 Many of the Bank Board's standard conversion regulations apply to voluntary and modified conversions. 25 However, the Bank Board has promulgated separate regulations for voluntary and modified conversions. These regulations explain when the converting association may deviate from the standard conversion rules, and provide substitute rules for the association to follow. 26 15 In a voluntary conversion, a majority of the converting association's board of directors must approve the conversion plan. 27 The converting association's members, however, have no right to approve or otherwise participate in the conversion process. 28 Therefore, the Bank Board must ensure that the plan is or would be in the association members' best interest. 16 Before the Bank Board will consider authorizing a voluntary conversion, two requirements must be met. First, the association's liabilities must exceed its assets according to generally accepted accounting principles (GAAP). 29 In other words, the association must be GAAP-insolvent. Second, the association must demonstrate that it would be a viable entity after the conversion. 30 To create a viable entity, the prospective acquirer of the association must infuse capital into the association sufficient to achieve a required ratio of net worth to total liability. 31 The acquirer must also convince the Bank Board that the conversion transaction taken as a whole is in the best interests of, and does not present the potential for injury to, the converting institution, its depositors and the FSLIC [Federal Savings and Loan Insurance Corporation]. 32 17 To obtain authorization for a voluntary conversion, the converting association must file a special application with the Bank Board. The filing of this application must comply with certain procedural requirements. 33 The conversion application itself must comply with numerous substantive requirements. It must contain: a plan of conversion describing the proposed purchasers of the converted association's stock, the sale of the stock, and the type of stock to be sold; opinions of independent attorneys and certified public accountants; a business plan for the converted association; an audited balance sheet and financial statements of the association; and a proposed charter and set of bylaws for the converted association. 34 The application also must include Change-In-Control Act notices for each proposed conversion stock purchaser. 35 If the converting association files a proper conversion application, is GAAP-insolvent, and has shown that it would be a viable entity after conversion, the Bank Board may authorize the association's voluntary conversion. 36
18 Modified conversions, like voluntary conversions, are available for mutual associations facing financial difficulty, and similarly require the approval of a majority of the association's board of directors, but not the approval of the association's members. 37 A mutual association may qualify for a modified conversion if it is unable to meet its regulatory capital requirement and if a standard conversion feasibly could not remedy this situation. 38 19 To obtain Bank Board authorization of a modified conversion, the association must submit a conversion application that complies with the procedural 39 and substantive 40 requirements set forth in the Bank Board's modified conversion regulations. The application must contain: a plan of conversion identifying the proposed purchasers of the conversion stock, the terms of the sale of stock, and the nature of the stock itself; opinions of independent counsel and certified public accountants; a proposed business plan, charter and by-laws for the converted association; all required filings; Change-In-Control Act notices for each proposed conversion stock purchaser 41 ; an audited balance sheet and financial statements; an independent appraisal to validate the association's conversion plan; and an estimate of the conversion expenses. 20 Even after receipt of a complete application, the Bank Board will authorize a modified conversion only if certain other conditions are met. The conversion stock must be sold at an aggregate price greater than the independently appraised, pro forma market value of the association. 42 This price includes a control premium paid by an acquirer of a controlling interest in the association. 43 An independent expert must convince the Bank Board that the capital infused into the association as a result of the modified conversion would enable the association to meet its regulatory capital requirement. 44 Finally, the Bank Board must be certain that the modified conversion would benefit the association, its members and the FSLIC. 45 If all of these prerequisites have been met, the Bank Board may authorize a modified conversion. 46