Distressed Bank M&A – The 363 Sale

April 29, 2013 at 3:10 pm Leave a comment

For financially distressed bank holding companies that own a subsidiary bank worthy of recapitalization, court-approved sales conducted pursuant to Section 363 of the United States Bankruptcy Code (“Section 363”) can be an efficient tool to sell and recapitalize the subsidiary bank. 

 The global advantages of a Section 363 sale include speed, transfer of assets free and clear of encumbrances and interests, transfer of restricted contracts and avoidance of exposure to claims under fraudulent transfer laws. For a bank holding company, the Section 363 sale allows the bank holding company board of directors to (i) obtain comfort as to the fairness of the purchase price for the subsidiary bank due to court approval of the Section 363 sale and (ii) avoid receivership and the liability associated with the failure of the subsidiary bank. For an acquiring entity, a Section 363 sale eliminates the negative implications associated with a bank being placed in receivership and allows the acquiring entity to purchase the subsidiary bank free and clear of any outstanding claims and obligations against the bank holding company. Some potential purchasers may prefer an acquisition effected under Section 363 instead of a direct investment in, merger with or acquisition of the subsidiary bank from a bank holding company.

 The benefits of a Section 363 sale were demonstrated with the recent acquisition of Mile High Banks, a Colorado state chartered bank (the “Bank”), by Strategic Growth Bancorp Inc. (“SGB”) from the Bank’s parent company, Big Sandy Holding Company (“Big Sandy”).  Prior to consummation of the acquisition, Big Sandy was in distressed financial condition and had been unable to consummate a traditional recapitalization transaction in part due to the capital structure of Big Sandy and the anticipated difficulty in obtaining approval from all of its shareholders, creditors and trust preferred securities holders. Likewise, the Bank was subject to FDIC supervisory actions, including, but not limited to, a prompt corrective action directive issued to the Bank in late 2011, notifying the Bank that it was “significantly undercapitalized” and requiring immediate action on the part of the Bank.

 In September 2012, Big Sandy entered into a definitive agreement with SGB for the purchase of the Bank and then filed for chapter 11 bankruptcy protection in the District of Colorado, proposing to sell the stock of the Bank through a Section 363 court-approved sale. SGB acted as the “stalking horse” and filed its regulatory applications immediately following the Big Sandy bankruptcy filing. 

 The bankruptcy court approved Big Sandy’s proposed sale procedures and in November 2012, SGB was declared the winning bidder. Among other things, SGB’s winning bid included a $5.5 million payment to Big Sandy, an allocation between the Bank and Big Sandy of a deferred tax asset belonging to the Bank and a capital contribution of $90 million to the Bank. The Federal Reserve and the Colorado Division of Banking approved SGB’s application shortly thereafter. By undertaking a Section 363 sale, Big Sandy was able to successfully sell and recapitalize the Bank when traditional recapitalization structures were not readily available.

 The Section 363 sale process, including the negotiation and execution of a definitive agreement and structuring a fair sale process, is highly integrated and requires expertise in mergers and acquisitions, bankruptcy, tax and bank regulatory law. If you have any questions regarding this summary, contact any of Stinson’s Banking and Financial Services attorneys.

Entry filed under: Uncategorized.

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