Gunster – Banking Advisory, January 2009
On January 14, 2009, the United States Departmentof the Treasury (“Treasury”) released the term sheet (“Term Sheet”) and answers to frequently asked questions (“Answers”) for financial institutions that are S corporations requesting assistance under the Treasury’s Capital Purchase Program (“CPP”).
S corporations are corporations that make an election to be taxed under Subchapter S of Chapter 1 of the Internal Revenue Code. S corporations are generally not subject to corporate income tax, but their shareholders must account for their share of the S corporation’s income. To preserve their status, S corporations can only have one class of equity, and their equity can only be held by natural persons. Therefore, Treasury cannot own preferred stock in S corporations without upsetting their status.
The CPP provides that a second class of stock, such as preferred stock, must be issued to Treasury inorder to obtain assistance under the CPP. Therefore, in order to allow S corporations to benefit from the CPP, Treasury had to structure an economically equivalent security that meets regulatory capital requirements and is sensitive to the restrictions applicable to S corporations. Consequently,Treasury designed the Term Sheet to provide that S corporations may issue subordinated debentures(“Debt”) to Treasury instead of stock.
According to the Term Sheet, however, the Debt must be expressly subordinated to claims of depositors and other debt obligations due to creditors, unless such obligations are explicitly made pari passu or subordinated to the Debt. Furthermore,the Debt must have an aggregate principal amount that is equal to, but not less than, 1% of the S corporation’s risk-weighted assets and not more than the lesser of: (i) $25 million and (ii) 3% of the S corporation’s risk-weighted assets.
The Debt will count as Tier 1 capital for holding companies and Tier 2 capital for stand-alone banks.
The deadline for S Corporations to apply for the CPP is 5:00pm eastern time on February 13, 2009.
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Should you wish to receive further information concerning matters discussed in this Banking Advisory, please contact Clemente Vazquez-Bello,Esq. at (305) 376-6082, Andres A. Fernandez, Esq.at (305) 376-6097 or Marina Olman, Esq. at (305)376-6069 or at [email protected],[email protected] or [email protected] Banking Advisory is for general information only. It is not legal advice, and legal counsel should be contacted before any action is taken which might be influenced by this Banking Advisory.
