Investments In Bank Holding Companies And Media Companies – Corporate/Commercial Law
9 min readA limited partner (“Investor”) in a private equity
fund (“Fund”) will often enter into a letter agreement
(“Side Letter”) with the Fund that modifies the terms of
the Fund’s limited partnership agreement (“LPA”) as
they apply to the specific Investor. Through an LPA or a Side
Letter, a Fund may grant an Investor rights in connection with
certain investments made by the Fund that conflict with the
Investor’s internal investment policy restrictions. These
rights may allow an Investor to disapprove of or exclude itself
from Fund investments that the Investor is restricted from
participating in. A Fund may also protect its own investment
interests by negotiating for certain requirements or requests for
Investors to be included in its LPA or Side Letter provisions to
ensure compliance with applicable laws and regulations. Such LPA
and Side Letter provisions may impact an Investor’s capital
commitment and contribution obligations to a Fund and, thus, may
impact such Fund’s subscription credit facility
(“Facility”) with a lending institution
(“Lender”). Two common examples of potentially
problematic investments include (i) investments in banks and bank
holding companies and (ii) investments in media companies. This
Legal Update will touch upon some of the restrictions Investors and
Funds face relating to investments in banks, bank holding companies
and media companies; the effect these restrictions have on capital
commitments to a Fund and on a Facility; and, ultimately, why
Facility Lenders should carefully review LPA and Side Letter
provisions relating to these types of investments.
I. Investments in Bank Holding Companies
When a Fund or Investor invests in a bank or a bank holding
company, the interest in the entity will be viewed as either
controlling or non-controlling under the Bank Holding Company Act
of 1956 (“BHCA”).1
Concerns arise when any entity acquires direct or indirect control
of a bank through a bank holding company. If a Fund or Investor has
a controlling interest in a bank or a bank holding company, the
Fund or Investor itself (assuming not a natural person) may be
considered a bank holding company that is subject to regulation
under the BHCA as discussed below. Further, if an Investor’s
commitment to a Fund that is invested in a bank or a bank holding
company equals or exceeds a certain percentage of the aggregate
commitments of the Fund, even if the Investor itself is not
directly invested in such bank or bank holding company, the
Investor may indirectly have control over such entity and be
subject to the BHCA and its restrictions.
A bank holding company is defined as a company that has control
over a bank or over a company that is or becomes a bank holding
company.2 Under the BHCA and the
Board of Governors of the Federal Reserve System’s Regulation
Y, an entity is deemed to have control over a bank or a company
when either (i) it directly or indirectly owns, controls or has
power to vote 25 percent or more of any class of voting securities
of the bank or company; (ii) it controls the election of a majority
of the directors or trustees of the bank or company; or (iii) the
Board of Governors of the Federal Reserve System determines that
the company directly or indirectly exercises a controlling
influence over the management or policies of the bank or company.3 The third prong of the definition
typically requires an analysis of the particular facts and
circumstances related to the investment, including business
relationships, contractual powers, the number of directors and the
percentage of ownership of a class of voting securities.
Bank holding companies are subject to significant regulation
under the BHCA, including activities restrictions (e.g., only
engage in financial activities), consolidated supervision and
examination, reporting and an obligation to serve as a source of
strength to its bank subsidiaries. Investors and Funds seek to
avoid these restrictions and any other potential regulatory issues.
In connection with Funds investing in banks or bank holding
companies, one way Investors attempt to avoid BHCA regulation is by
structuring their investment in a manner to avoid controlling the
entities or limiting or restricting a Fund in its ability to invest
in banks and bank holding companies. One example of a limiting LPA
or Side Letter provision is an excuse right pursuant to which an
Investor may opt out of participating in and funding a capital call
relating to a Fund’s investment in a bank or bank holding
company. Additionally, if an Investor has sufficient bargaining
power in Side Letter negotiations with a Fund, its rights could
also include preventing the Fund from investing in a bank or bank
holding company altogether or requiring the Fund to gain the
Investor’s consent prior to investing in a bank or bank holding
company.
Funds also wish to avoid regulatory restrictions and issues
relating to Investors that are separately invested in banks and
bank holding companies and, as a result, subject to the BHCA. One
way Funds accomplish this is through Investor voting rights.
Through an LPA, a Fund may require that a portion of such
Investor’s voting interest in the Fund that exceeds a certain
percentage of the total interests of all Investors in such Fund
(usually 4.99 percent) be treated as non-voting interests. Also, a
Fund may require that such Investor partially withdraw from the
Fund to the extent necessary to maintain its investment at a level
below a threshold percentage of the Fund’s total capital
commitments.4
These rights may restrict access to the capital commitments of a
Fund and prevent a Fund from using all or part of an Investor’s
capital contributions to fund an investment in a bank or bank
holding company. Moreover, an Investor who is excused from funding
a capital call may not be obligated to fund the repayment of a
prior draw on a Facility used to acquire an investment in a bank or
a bank holding company. To avoid this, Facility credit agreements
will often exclude the capital commitments of such Investors from a
Facility’s borrowing base if the proceeds of the borrowing will
fund an excused investment. As a result, the Fund’s maximum
borrowing amount under a Facility is reduced.
II. Investments in Media Companies
Funds and Investors face similar hurdles when investing in media
companies. If a Fund or Investor is found to have sufficient
control of a media company, the Fund or Investor will be subject to
the US Federal Communications Commission’s (“FCC”)
local media cross-ownership rules.5
For a Fund that holds a controlling ownership interest in a media
company, an Investor may be found to hold an interest in the Fund
sufficiently large to fall under the scope of the FCC’s
regulations. This is the case even if such Investors are not
themselves directly invested in such company.
As used herein, a “media company” refers to an entity
that, directly or indirectly, owns, controls or operates, or has an
attributable interest in, a broadcast radio station, television
station and/or a daily newspaper within the same local market.
Investment in such media companies is subject to the local media
ownership or also known as local media cross-ownership restrictions
set forth in the United States Communications Act of 1934, as
amended (“Communications Act”) and in the FCC’s
regulations and policies.6 Under its
local media cross-ownership rules, the FCC limits the number of
media companies that a single entity may own or control in a local
market.7 The FCC’s media
attribution rules establish various criteria for determining if an
entity has an attributable interest and/or whether such interest
violates or would violate the Communications Act and the FCC’s
rules.8
Funds and Investors must consider carefully the regulations
associated with holding attributable interests in media companies
to ensure FCC compliance. One means to avoid implicating the local
media cross-ownership rules would be for a Fund or an Investor to
negotiate favorable LPA or Side Letter rights that would limit or
restrict the Fund or Investor’s exposure. Such rights may
include documenting restrictions or prohibitions on using capital
contributions for the purpose of investing in a media company or
making an investment that would result in attributing an interest
in a media company to a given Investor.
Another option would be to obtain an opinion from counsel that
the anticipated ownership interest in a media company would not be
attributed to an Investor by virtue of the Investor’s status as
an investor in the Fund. Additionally, documentation might also
include a representation by the general partner of a Fund
confirming that the Fund does not expect to invest in media
companies.
Furthermore, when a Fund is subject to the FCC’s local media
cross-ownership rules, the Fund may restrict an individual Investor
from being materially involved in the Fund’s media-related
activities to ensure that the FCC media ownership rules are not
attributed to the Investor. For example, the general partner could
restrict the Investor from acting as an employee of the Fund if the
Investor’s functions relate to the media enterprises of the
Fund.
For a Fund that is invested in media companies, the general
partner of the Fund may require an Investor also invested in other
media companies to provide certain information and assistance
necessary to allow the Fund to make any filing before and/or to
discuss with the FCC whether the Fund and its media companies are
in compliance with the FCC’s rules and regulations. In such
circumstances, such requirements are typically found in the
Fund’s LPA or the Investor’s Side Letter.
Finally, we note that rights that limit or restrict an
Investor’s exposure to investments in media companies may
diminish or eliminate the amount the Investor may contribute toward
a Fund’s investment in media company investment activities.
Such provisions would have an effect on the total capital
commitments of and contributions to a Fund, similar to the effect
of restrictions with respect to investments in banks and bank
holding companies.
III. Takeaways
Investments in banks, bank holding companies and media companies
are subject to regulations that determine whether a Fund or
Investor is deemed to have “control” over such entity, as
defined under the BHCA or the FCC’s local media cross-ownership
and attribution rules. The resulting regulatory burdens on an
individual Investor or a Fund may be mitigated by identifying and
negotiating certain separate rights through an LPA or Side Letter.
Such rights may affect an Investor’s capital commitment and
contribution obligations to a Fund and such Fund’s Facility.
Therefore, Facility Lenders should carefully review any BHCA and
FCC provisions in a Fund’s LPA and Side Letters and consider
the effect the provisions may have on the borrowing base under a
proposed or existing Facility.
Footnotes
1. Investments in banks may
require analysis under the Change in Bank Control Act, and
investments in federal savings associations and savings and loan
holding companies would require analysis under the Home Owners’
Loan Act. A discussion of these laws is beyond the scope of this
Legal Update.
2. 12 U.S. Code
§?1841(a)(1).
3. 12 U.S. Code
§?1841(a)(2); 12 C.F.R. Part 225.
4. Ownership of more than 33
percent of the total equity of an entity generally constitutes
control under the BHCA.
5. 47 CFR §
73.3555.
6. 47 CFR §
73.3555.
7. 47 CFR §
73.3555.
8. 47 C.F.R. 73.3555, Note
2.
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