Pub. 5 2010-2011

www.nebankers.org 16 Extraordinary Service for Extraordinary Members. In addition, as the PEF would be required to purchase the shares directly from the entity, the investment may have a dilutive effect if the new common stock is priced below book value. Such purchases also would need to be structured in a manner that complies with the requirements of the Securi- ties Exchange Act of 1933 and relevant state securities laws. Control Requirements To the extent a PEF acquires a “controlling interest” in a regulated financial institution, the investment will trigger regulatory review, including a safety and soundness assess- ment, a consideration of the management team of the PEF, and a review of the financial resources of the PEF. In ad- dition, to the extent a PEF obtains a “controlling interest,” the PEF may itself become a bank holding company subject to certain significant reporting requirements and activities limitations. As a bank holding company, the PEF also would be required to act as a “source of strength” to its regulated subsidiaries, meaning that it could be required to contribute additional capital in the future. As a result of these regulatory burdens, PEFs will normally require that their investment be structured as a non-controlling investment. Under existing guidelines issued under the Bank Holding Company Act of 1956 by the Federal Reserve Board, a PEF For more information, contact Adam Kirshenbaum or Jeff Makovicka at Husch Blackwell Sanders LLP at (402) 964-5000 or e-mail them at adam.kirshenbaum@huschblackwell. com or jeff.makovicka@huschblackwell.com, respectively. Both Kirshenbaum and Makovicka concentrate on banking matters, including expansion activities, securitizations, cross-border financing, ownership and change in control, restructurings, capital raises, corporate governance, and investments by and in financial institutions. Q Pro$ and Con$ would be deemed to havemade a non-controlling investment if it (a) acquires less than 25 percent of any class of voting securities of a bank holding company or less than 33 percent of the total equity of a bank holding company (so long as it does not hold more than 14.9 percent of the total voting shares of the bank holding company), (b) does not control in any manner the election of a majority of the directors of the bank holding company, and (c) does not directly or indi- rectly exercise a controlling influence over the management or policies of the bank holding company. Issues for Banks to Consider When considering whether an investment from a PEF is right for a particular financial institution, several issues should be addressed. A primary consideration should be whether the investment will qualify as Tier 1 capital. As discussed above, investments inTier 1 capital canbemore costly for the financial institutions than investments in other types of capital. Ac- cordingly, the financial institution must consider the type of capital that is needed and whether the cost of the investment in such capital is acceptable to the institution. Another primary consideration to be addressed prior to accepting private-equity investments is the type of PEF making the investment. As the PEF will become a significant part of the institution after the investment, the financial in- stitution should have a complete understanding of the PEF involved, the objectives of the PEF, and the role the PEF seeks to play within the organization. PEFs take numerous shapes and sizes, and it is important that the financial institution understand the PEF involved in order to confirm that the goals and objectives of the PEF match those of the financial institution in order to ensure a successful relationship. What All of This Means As the need for capital continues to increase and the avail- ability of traditional sources of capital continue to decrease, financial institutions will need to look at alternative funding sources. With the continued expansion of PEFs looking to make investments in financial institutions, banks and bank holding companies should not ignore the potential for this source of capital. If structured appropriately and in accor- dance with applicable regulatory limitations, private-equity investments in banking organizations might prove to be a workable and beneficial option for all involved. Z We take pride in our lending partnerships with more than 100 banks in our region. 3100 13th Ave. S., Fargo, N.D. | 800.450.8949 | STATEBANKS.COM MEMBER FDIC GENE UHER TOM ISHAUG HEIDI BYE Participation loans > Bank stock & ownership loans > Bank building financing > Business & personal loans > for bankers Call us for flexible underwriting, competitive rates and fast decisions! GARY KELLER