Legal Briefs: Take It To The Banks

Banks used to be verboten targets outside of a few firms that made it a specialty. The word “buyout” usually connotes a control-stake investment, and a control-stake investment in a bank holding company entails following a slew of rules and regulations that few firms wanted to go near.

But banks have collectively lost so much of their enterprise values, in part due to their exposure to the radioactive subprime mortgage market, that they suddenly look like great value plays. And buyout firms big and bigger—from Corsair Capital to TPG—have taken sizeable stakes in struggling banks.

How have they dealt with the morass of rules and regulations that apply when claiming more than a 25 percent interest in the holding company, or 10 percent of the voting rights? By taking care to come in under the ceiling, according to a recent client alert from law firm Goodwin Procter.

Many investors, for example, limit their stakes in banks to 9.9 percent control. TPG, for instance, in leading a $7 billion investment earlier this year in thrift Washington Mutual contributed just $2 billion itself, leaving it and its partners with less than 10 percent control each, according to Thomson Reuters Markets. Corsair Capital and its co-investors did the same with their bailout of Cleveland bank National City in April.

Investors can also bypass the 10 percent ceiling by officially “rebutting” the notion of control by declaring themselves to be passive investors before making the investment, according to Goodwin Procter.

Buyout firms also have another option, one employed by New York shop JLL Partners last year. The firm segregated a portion of its buyout fund to be a registered bank holding company before buying a regulated Texas bank. The firm’s activities outside the bank fund don’t have to follow the Fed regulations, as long as the bank fund and the other funds maintain separate economic interests, according to Goodwin Procter.