Pre-Filing Make Sense in M&A Deals

Want smoother sailing for your merger or acquisition? Then make sure your bank goes through a pre-filing review to get regulatory feedback on the application, the Federal Reserve suggests in its latest report on banking applications.

“Processing delays can be avoided by using the pre-filing process, which provides applicants the opportunity to work with Federal Reserve staff to receive critical feedback on potential issues related to acquisitions or other proposals before filing a formal application,” the report notes.

The Fed made clear in 2012 guidance that community banks could shorten the M&A review period by going through an optional pre-approval screening.  The Fed said its staff will respond to all pre-filing requests within 60 days.

Among items that the Fed can review are “draft transactional and structural documents such as shareholder agreements, purchase agreements, voting agreements, side letters, offering documents, partnership agreements, or qualified family partnership agreements. In addition, pre-filings may include questions regarding the type of filing required, if any; the individuals or entities that would need to join a filing; and whether an entity would be considered to be a “company” or have “control” under the Bank Holding Company Act or the Home Owners’ Loan Act,” its guidance notes.

The Fed reported M&A proposals have accounted for about 15 to 20 percent of total approved proposals over the past four years. Before approving such deals, the Fed says it considers “the applicant’s current and pro forma financial condition and future prospects, managerial resources, consumer compliance record and performance under the CRA and the Bank Secrecy Act/anti-money-laundering compliance programs, public benefits, and the competitive and financial stability effects of the proposal,” as well as ownership changes and Fed policy questions.

Community banks with assets between $1 billion and $10 billion saw a sharp increase in the number of bank mergers, with 82 deals approved in 2014 compared with 44 in 2013, the Fed reported. The Fed said it approved 131 M&A deals for smaller community banks (assets of less than $1 billion) in 2014 compared with 128 in 2013.

On average, the larger community bank M&A deals took 68 days to go through the final approval process, while the smaller deals took 52 days.  The statistics also reveal that adverse public comments about a bank application will significantly lengthen the time it takes for approval; those proposals with negative public input took on average 206 days for approval, while those without took on average about 60 days.

The Fed revealed that 52 proposals were withdrawn in the second half of 2014, 17 after consultation with staff. While the official feedback won’t resolve every issue with a bank application – or guarantee approval – banking experts say there are many reasons why the pre-filing process is a smart move. Here are some guidelines:

Be sure that your board understands how an M&A deal will affect your regulatory capital going forward. Be ready to demonstrate the impact to regulators in the pre-approval review, not only on your own bank, but on the combined entity going forward, recommends Invictus Consulting Group Chairman Kamal Mustafa.

Position your acquisition as a solution to a problem, Mustafa advises.  That will help focus the conversations in the pre-filing stage, and show why the transaction is necessary for the bank’s strategic objectives.  Tailor your final application to address regulatory concerns uncovered in the pre-approval process.

Have a pre-announcement regulatory strategy.  Balance the risks of meeting with regulators too early in the process when you might not have answers to all their questions with the potential costs and delays that could happen if you start the conversation too late, advises the law firm of Skadden Arps in “Managing Regulatory Risk in Bank M&A”.

Getting an accurate read on how regulators will react to your deal is crucial, advises the law firm of Wachtell, Lipton, Rosen & Katz .  “Potential acquirers should expect greater pre-signing consultation with regulators and should expect to be required to provide more rigorous and refined information than in the past.”  Be prepared to present detailed pro forma information and business plans, the law firm suggests.

Regulators expect to be part of the conversation early, advises the law firm of Sullivan & Cromwell LLP.  The firm advises its clients to “engage in a proactive and regular dialogue with their bank regulators regarding strategic acquisition plans and the viability of such plans, regardless of whether they have any specific acquisition targets in mind.” When there is a specific target, the bank should vet the plan “well in advance of any proposed transaction announcement” with as much key information as possible.   <