Financial Regulatory Relief Law Gives Little Relief for Bank Directors

On December 27, 2000, President Clinton signed into law the American Homeownership and Economic Opportunity Act of 2000. Most of the law addresses housing measures, but it also contains about 20 regulatory relief provisions. This summary will address only those provisions that, in our judgement, have a significant impact on directors.

Section 1205 amends 12 U.S.C. 71 by allowing Boards of Directors of national banks to have staggered boards, for terms not exceeding three years. The prior law required one year terms. The amendment also authorizes national banks to provide for staggering the terms of its directors by adopting bylaws to that effect.

Staggered boards are used primarily as an anti-takeover device, since any party that succeeds in acquiring control of a corporation without the cooperation of the board of directors will not obtain control of a three year staggered board until the second election of the board is held. Those national banks with holding companies will not need to utilize this new power.

Section 1233(a) amends 12 U.S.C. 72 by authorizing the Comptroller of the Currency to permit a minority of a board of directors of a national bank to consist of non-U.S. citizens. The prior law prohibited non-U.S. citizens to serve as directors of national banks. Holding companies of national banks are subject to state law as to the qualifications of directors. AABD is not aware of any state that prohibits or restricts service on the board of directors of a bank holding company based on citizenship.

Section 1204 authorizes national banks to reorganize so as to become a subsidiary of a bank holding company or of a company that will, upon consummation of such reorganization, become a bank holding company, without the necessity of forming a shell, or interim bank into which the existing national bank would merge. The reorganization is not limited to a pro-rata exchange of shares, and the consideration to be paid by the holding company may be cash or stock, or some combination. The reorganization must be approved by a vote of shareholders owning at least two-thirds of the capital stock outstanding, and is subject to dissenting and appraisal rights of shareholders.

AABD has advocated a broad regulatory relief bill that will relieve bank and savings institution directors from unwarranted and unfair personal liability. This new law does not touch on those issues. In addition, AABD has urged that legislation to reduce artificial and unnecessary restrictions on the discretion of national bank and savings institution directors be enacted. While the new law does provide national bank directors to adopt a staggered board provision and appoint or elect directors who are not U.S. citizens, much remains to be done. For example, bland preferred stock, which allows directors to determine the terms and conditions of the preferred stock at the time of issuance, is prohibited for national banks. National banks must detail the terms and conditions in their articles of association, rather than be given broad authority by provisions in the articles of association. In addition, many important changes in corporate matters, such as an increase of decrease in the capital stock of a national bank or dispensing with preemptive rights of shareholders to purchase stock of a national bank are subject to a two-thirds vote of shareholders. Virtually all state laws permit such changes with a simple majority vote.