EMERGENCY ECONOMIC STABILIZATION ACT OF 2008 POSITIONING REAL ESTATE AND LENDING PRACTITIONERS TO RESPOND TO THE EMERGENCY ECONOMIC STABILIZATION ACT OF 2008 (CURRENT UPDATE) INITIAL IMPLEMENTATION OF THE EMERGENCY ECONOMIC STABILIZATION ACT OF 2008 THROUGH THE TARP CAPITAL PURCHASE PROGRAM Presented by Sandra G. Porter, Shareholder at Carlton Fields, P.A. and Supervisory Council Member for the Real Estate Financing Group of the ABA Real Property Trust & Estate Law Section On October 14, 2008, the U.S. Treasury (the “Treasury”) For more than a century, Carlton announced the establishment of the TARP Capital Fields, an AmLaw 200 law firm, has Purchase Program (the “Program”) under the authority of been recognized as one of the most the Emergency Economic Stabilization Act of 2008 (the trusted, skilled, and effective law firms “Act”). The Program is designed to increase market in the U.S. Our lawyers and stability through the purchase by the Treasury of equity government consultants are regarded stakes in banks and thrifts to encourage the banks and as highly skilled professionals who get the job done through diligence and thrifts to provide credit to the U.S. economy. unparalleled commitment to the highest standards of client service. It is AUTHORITY a reputation we earn every single day, one case and one transaction at a The Act provides that the Secretary of the Treasury (the time. “Secretary”) may purchase “any…financial instrument that the Secretary, after consultation with [the Chairman of the If you have questions, please contact: ------------------------------------------------- Federal Reserve], determines the purchase of which is Sandra G. Porter necessary to promote financial market stability….” The Shareholder | 813.229.4232 Treasury has stated that it is under this authority that it is sporter@carltonfields.com establishing the Program. Prepared with the assistance of: GENERAL OVERVIEW Jason W. Brant Associate | 561.650.0338 jbrant@carltonfields.com The Program makes $250 billion available to U.S. banks, savings associations, and certain bank and savings and Matthew S. Ellish loan holding companies only engaged in financial Associate | 305.539.7365 activities. The $250 billion, which is part of the $700 mellish@carltonfields.com billion available through the Act, will be used by the Treasury to purchase senior preferred stock (the “Senior Charles M. Harrell Associate | 404.815.2717 Preferred”) that will qualify as Tier 1. Capital Eligible charrell@carltonfields.com entities have until November 14, 2008 to seek participation. All of the Senior Preferred purchased in the Angela M. Ligouri Program will be subject to a standard set of terms. Nine Associate | 404.815.2719 of the largest U.S. financial institutions have already aligouri@carltonfields.com indicated to the Treasury their intentions to participate. Gregory G. Schlich Associate | 404.815.2713 TERMS gschlich@carltonfields.com The Senior Preferred shall be non-voting except for votes With special thanks to: on matters which may adversely affect the rights of the Edgel C. Lester, Jr. shares. The Senior Preferred will rank above common Shareholder | 813.229.4231 shares and will be equal, in rights, to the Participating elester@carltonfields.com Jay A. Steinman Shareholder | 305.539.7219 jsteinman@carltonfields.com OCTOBER 2008 1 www.carltonfields.com
EMERGENCY ECONOMIC STABILIZATION ACT OF 2008 Institution’s highest level of preferred stock. The minimum subscription amount for an institution participating in the Program (a “Participating Institution”) is 1% of risk-weighted assets and the maximum subscription amount is the lesser of 3% of risk-weighted assets and $25 billion. The Senior Preferred will pay cumulative dividends at a rate of 5% per annum for the first five years and 9% per annum thereafter. If, however, the Senior Preferred is issued by banks that are not subsidiaries of holding companies the dividends will be non-cumulative. While the Senior Preferred is outstanding and unless the Treasury has been paid all dividends due and accrued, if applicable, then the Participating Institution cannot declare dividends for or repurchase or redeem the shares of holders of junior interests. All redemptions of issued Senior Preferred must be at 100% of its issued price. After three years, the Participating Institution may redeem the Senior Preferred with very few restrictions. Also, after three years, the Senior Preferred is callable at par. Further, each Participating Institution, through its participation in the Program has agreed to comply with certain terms of the Act. Each Participating Institution must grant warrants to purchase common stock to the Treasury and also must comply with certain executive compensation guidelines. ACCOMPANYING WARRANTS The warrants will provide the Treasury with the right to purchase common stock in the Participating Institution. The term is ten years and the warrants are immediately exercisable, in whole or in part. The Treasury will agree not to exercise the requisite voting power upon the exercise of the warrants. The warrants will have a market price, in the aggregate, equal to 15% of the Senior Preferred. The initial exercise price is the market price for the common stock on the date of the Senior Preferred investment; this price is calculated on a 20-trading day trailing average (the “Initial Exercise Price”). If the Participating Institution does not have the authorization to issue the underlying shares, the terms of the warrants require the Participating Institution to take the steps necessary to get such authority. If such authority is not obtained, the terms provide for a reduction of the Initial Exercise Price over time. If the Participating Institution is unable to obtain the required authorization or is no longer listed on a U.S. securities exchange or association, the Treasury will have the option to exchange the warrants for senior debt or another equivalent instrument. ACCOMPANYING EXECUTIVE COMPENSATION RESTRICTIONS While the Treasury holds the Senior Preferred, each Participating Institution must adopt, maintain and agree to continue to be bound by the Treasury’s executive compensation and corporate governance standards provided for in the Act as well as all regulations or guidance released by the Secretary to further the provisions and principles of the corporate governance and executive compensation sections of the Act. A Participating Institution and OCTOBER 2008 2
EMERGENCY ECONOMIC STABILIZATION ACT OF 2008 its senior executive officers must also provide the Treasury with a waiver releasing the Treasury from any and all claims that the senior executive officers may have as a result of the issuance of any such regulations or guidance by the Treasury. ISSUES TO WATCH MOVING FORWARD • What impact will the implementation of the Program have on the momentum of the other facets of the Act that the Treasury is actively pursuing, such as the mortgage- backed securities purchase program, the whole loan purchase program and the insurance program? • In announcing the implementation of the Program, the Treasury stressed that it would continue to emphasize its efforts to preserve homeownership. In what facet, if any, of the Program or the Treasury’s overall implementation of the EESA will we truly see homeownership preservation stressed? Will the public demand that Congress take direct action regarding homeownership preservation if the public does not see a direct act by the Treasury soon? • Given the public’s thirst for corporate governance oversight and executive compensation restrictions, how far will the Treasury go in its guidelines and regulations regarding these requirements? The Program did not take the huge step of providing specifics regarding these requirements and the Treasury has said that it is still formulating such requirements. • What portion of the $250 billion will be committed to these initial nine Participating Institutions? It has already been reported that they could consume over $120 billion of the available $250 billion. • Will all institutions wishing to participate have the opportunity to participate? The Treasury has announced that they foresee a wide array of Participating Institutions. Treasury has announced that it will provide assistance to those institutions for which the assistance will provide the greatest help in stabilizing our markets. What specifics will the Treasury use in applying this principle? OCTOBER 2008 3
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