Steve Wolosky, Andrew Freedman, and Ron Berenblat are partners at Olshan Frome Wolosky LLP. This post is based on their Olshan memorandum. Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here); Dancing with Activists by Lucian Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch (discussed on the Forum here); and Who Bleeds When the Wolves Bite? A Flesh-and-Blood Perspective on Hedge Fund Activism and Our Strange Corporate Governance System by Leo E. Strine, Jr. (discussed on the Forum here).
On April 23, 2019, the Federal Reserve Board (the “FRB”) invited public comment on a proposal to revise the FRB’s rules for determining whether an entity controls a bank or bank holding company (“banking organization”) for purposes of the Bank Holding Company Act of 1956, as amended (the “Act”). The proposal is intended to clarify, in particular, how the FRB decides whether an entity exercises a “controlling influence” over a banking organization. If an entity has a controlling influence and, thus, control over a banking organization, the entity generally becomes subject to regulation as a bank holding company under the Act. The FRB’s current framework for making control determinations is complex and, as the FRB acknowledges in its opening statements on the proposal, “difficult for the public to understand and apply with confidence.”
As a result of the current uncertainty surrounding whether an investment in and/or engagement with a banking organization would constitute control under the FRB’s current framework and the consequences of becoming subject to the burdens imposed by bank holding company regulation, our shareholder activist clients have generally shied away from campaigns at banking organizations. The prospect of being regulated as a bank holding company and subject to FRB examination and supervision just for seeking to catalyze positive change at a bank could be unnerving to an activist to say the least.