We will provide additional analysis over the next several days, but here are some highlights:
- The new Term Sheet applies to all non-public qualifying financial institutions, excluding S Corporations and mutual organizations. The Treasury has NOT clarified its prior statement regarding the definition of “publicly traded” companies to clarify whether such companies must be traded on a national securities exchange or whether being obligated to file periodic reports is sufficient to constitute a publicly traded company.
- Investment structures for S Corporations and mutual organizations are still “under consideration,” and the announced deadline does not apply to S Corporations or mutual organizations.
- The deadline for applications for private C Corporations is Monday, December 8, 2008.
- The terms of the Preferred Stock are economically the same as the terms for public companies: 5% dividend for five years, then increasing to 9%. However, the limitations on dividends and repurchases (including redemption of trust preferred) are generally extended until the tenth anniversary of the issuance of the preferred. Private C Corporations are also prohibited from paying any common dividends or repurchasing any common shares or trust preferred securities after the tenth anniversary, unless the Preferred Stock has been redeemed or transferred to a third party.
- The Preferred Stock is not subject to any contractual transfer restrictions, but the Treasury and its transferees will not effect any transfer that would require the company to become subject to the public company reporting requirements. If, however, the company otherwise goes public, the company must file a shelf registration statement for the Preferred Stock as promptly as practicable. In addition, the company must take all steps “as may be reasonably requested” to facilitate transfers.
- The executive compensation limits are the same as for public companies.
- The Treasury also requires that, for so long as the Treasury holds any equity securities, the company will not enter into any “related party” transactions unless such transactions (i) are on terms no less favorable to the company then could be obtained from an unaffiliated third party, and (ii) have been approved by the audit committee or comparable body of independent directors of the company. These requirements have effectively always applied to public companies but are now being extended to private companies (and may require private companies to have a committee of independent directors).
- The Warrant component of the TARP Capital Program has been significantly changed. As we understand the term sheet, the Treasury will receive shares of “Warrant Preferred” stock approximately equal to 5% of Preferred Stock issued above. Technically, the company will issue warrants to purchase the Warrant Preferred with an exercise price of $0.01 per share and a net exercise feature. However, the Term Sheet indicates that the Treasury intends to immediately exercise the warrants. The low exercise price will effectively result in the direct issuance of the Warrant Preferred shares. As an example, assume that a company had risk-weighted assets at September 30th of $200 million. The company is eligible to apply for an investment of 6,000 shares of Preferred Stock or $6 million (3% of their risk-weighted assets). In this example, the Treasury will also receive warrants to purchase 300 shares of Warrant Preferred or $300 thousand, with an exercise price of $0.01 per share. Upon net exercise, the Treasury will receive at least 299 shares of Warrant Preferred (with a total liquidation value of $299,000). (It is unclear at this point how the rounding will work on net exercise.)
- The Warrant Preferred will have the same terms as the Preferred Stock, except: (i) the Warrant Preferred will always pay dividends at 9% per annum, and (ii) the Warrant Preferred may not be redeemed until all of the Preferred Stock has been redeemed.
A marked version comparing the public company term sheet and the private company term sheet is available here.