Many Bank Holding Companies (BHCs) have shareholder agreements that limit voting rights, buy-sell, transfer of shares and other restrictive provisions. The creation and implementation of these agreements frequently occurred when BHCs could elect to be taxed as a subchapter S corporation (S Corp) in 1998. Many private BHCs held as C corporations may also contain such agreements, and banks not owned by a BHC could also have such agreements. An agreement involving the stock of a banking organization cannot be perpetual under the requirements of Regulation Y (Section 225.2(d)(1)). For such an agreement to avoid being considered a “company,” it must terminate within 25 years.

Although traditional corporate law allows certain agreements to last indefinitely and be continuous, an agreement that controls or owns the stock of a banking organization cannot be everlasting. Thus, to preclude the conversion to a “company,” the shareholder agreement must end within 25 years.

The regulations reflect that “a company includes any bank, corporation, general or limited partnership, association or similar organization, business trust, or any other trust unless, by its terms, it must terminate either within 25 years or within 21 years and 10 months after the death of individuals living on the effective date of the trust.” (Per 12 CFR 225.2(d)(1)). Note that testamentary trusts and qualified limited partnerships are exempt from this description.

If the BHC concludes that its shareholder agreement will terminate, it may also encounter other issues that should be concurrently evaluated. If a new agreement becomes necessary, some of the terms from the prior agreement may need to be updated. These agreement revisions could potentially impact stock voting rights, transferability and/or other terms and thus may dictate additional regulatory considerations, such as those found in the Change in Bank Control Act, 12 USC 1817(j).

Since many BHCs have agreements entered into in 1998 or shortly thereafter, now is the time to review these agreements to determine when they will terminate. If the agreements are near termination, BHCs should be considering their options. The position of the Federal Reserve Board is that these agreements must terminate and cannot be extended; however, a new agreement could be considered and entered.

For BHCs or banks with agreements that do not expressly terminate 25 years after their effective date, it’s important to discuss the regulatory requirements with legal counsel.