November 13, 2008

More on “Single Triggers” and TARP

Last week, I blogged about how some financial institutions participating in the Treasury’s TARP Capital Purchase Program might be changing their “double triggers” to single for their change of control arrangements. I clarified that blog right after it got pushed to those that have signed up for that feature (if you want to be added, just input your email address to the left of this blog or send me an email) that no bank has yet disclosed that it has taken such action (at least, as far as I know). Rather, I have been hearing that through the grapevine. So it’s hearsay at this point (a good thing because hopefully anyone thinking about it will now be enlightened).

I have also heard that some advisors are saying that (despite some apparently contradictory guidance in Q-11 of Treasury’s interim final rule release for participants in the CPP) that a move to pure “single triggers” is not required based on Q&A-16 in the IRS notice regarding the Section 162(m) and Section 280G provisions of the EESA and Section 302(e)(C)(i) of EESA itself.

In other words, some advisors are interpreting Q-11 to say that “double triggers” (or severance payments upon terminations after a change of control) may be prohibited parachute payments, even if the Treasury no longer holds any equity or debt in a company it once invested in. So some companies have been thinking that while they would have to ask executives to cut back on their “termination without cause” protection to comply with the Treasury’s program, they could modify their double trigger to make it a single trigger.

The thinking apparently is that if there is no requirement for a “termination of employment” in connection with the change of control payment, then it could never be a prohibited golden parachute. In response, tax lawyers and consultants have been pointing to Q&A-16 and Section 302(e)(C)(i) of EESA to say that a payment that is a parachute payment under the traditional 280G analysis – on account of a change of control without regard to the new Section 280G(e) – is not subject to the new prohibitions in 280G(e) and therefore not prohibited by the CPP. Clear as mud?

Even though Treasury might not particularly care if SEOs get prohibited parachute payments in connection with – and particularly, after – a change of control in which Treasury has been bought out (in the case of equity) or paid off (in the case of debt), I imagine investors certainly will care, as well as those in Congress who approved the $700 billion blank check to Treasury…

The Form 8-Ks: Those Not Participating in Treasury’s Capital Purchase Program

It is widely reported that all but $60 billion of the initial $350 billion allocated by Congress for Treasury to take equity stakes in banks is already spoken for – today is the deadline for applications. Yesterday, Treasury Secretary Paulson announced that the plan to buy distressed securities has been scrapped – and Treasury will instead focus on consumer lending and perhaps launch a second CPP to provide capital to companies that are not banks (see Paulson’s announcement). Thus, these notes from SIFMA’s “TARP Conference” that took place on Monday may already be outdated (here are Neel Kashkari’s official remarks from that Conference).

According to this recent survey by SIFMA and four other industry groups, 91% of respondent financial institutions said that a lack of clarity about the way TARP works made them less willing to participate in it. The banks cited the requirement to grant warrants to the Treasury, and uncertainty about investor perception about a bank’s participation in the TARP, among the factors affecting their willingness to participate. Personally, I think it’s the investor perception that may keep some banks from sticking their hand out – but I have seen media articles that report that numerous banks may participate. So I’d take this survey with a grain of salt until we see the final number of banks willing to take the government’s money (or even new “banks” like American Express).

In our “Credit Crunch” Practice Area, we have tweaked our list of the Form 8-Ks filed regarding the the CPP to break out those banks that have filed 8-Ks to disclose that they have decided not to participate in the CPP.

A New Phase of Credit Crisis Litigation

In his “D&O Diary” Blog, Kevin LaCroix discusses how the credit crisis recently entered a dark new phase that has already produced its own distinctive round of lawsuits. In comparison, see Kevin’s musings in a piece entitled “Are the Subprime Securities Lawsuits Faring Poorly?”

Poll: How Many Will Seek Capital Under TARP’s CPP?

Today is the deadline for financial institutions to apply for a capital infusion. Here is our poll guessing how many will seek it:

Online Surveys & Market Research

– Broc Romanek