Hinshaw & Culbertson LLP MEMORANDUM. U.S. Treasury Department Announces TARP Capital Purchase Program for Non-public Companies

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Susanna Lloyd
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1 Hinshaw & Culbertson LLP MEMORANDUM TO: FROM: Hinshaw Clients and Friends Tim Sullivan Brian Goins Michael D. Morehead DATE: November 18, 2008 RE: U.S. Treasury Department Announces TARP Capital Purchase Program for Non-public Companies On October 14, 2008, the United States Department of the Treasury (DOT) announced a voluntary Capital Purchase Program (CPP) as part of the Troubled Asset Relief Program (TARP). Under the CPP, the DOT will purchase up to $250 billion of preferred shares and warrants convertible into common stock from banks and bank holding companies. The program as announced was only available to public companies. (I.e., companies whose shares are traded on a national securities exchange and who are required to file reports (10-K, 10-Q, etc.) with the SEC. On November 17, 2008, the DOT released a summary term sheet for non-public companies that desire to participate in the CPP. This term sheet does not apply to S corporations or mutual organizations. Applications must be submitted by December 8, Institutions should consult with their primary bank regulator before filing an application. Non-public companies that previously filed an application should check with their primary bank regulator to see if they need to refile their application. Following below is an analysis of the CPP s provisions. Eligible Participants: The following non-public entities may participate in this portion of the CPP: A top-tier bank holding company or top-tier savings and loan holding company that engages solely or predominately in activities permissible for financial holding companies under relevant law; A stand alone U.S. bank or U.S. savings association organized in a stock form; or A U.S. bank or U.S. savings association that is controlled by a savings and loan holding company that is not publicly traded and does not engage solely or predominately in activities that are permitted for financial holding companies under relevant law.

2 The DOT will determine the eligibility and allocation for entities desiring to participate in the CPP after consultation with the appropriate Federal banking agency. S corporations and mutuals are not eligible to participate in this portion of the Program. They are still being considered by the DOT. Preferred Shares Size of Investment: One to three percent of the entity s risk weighted assets. Security: DOT will acquire senior preferred stock which will be pari passu with existing preferred shares other than preferred shares which by their terms rank junior to any existing preferred shares. The DOT will also receive warrants to acquire preferred stock (the warrant preferred). Dividends: Dividends are cumulative on preferred shares issued by holding companies. Dividends on preferred shares issued by entities that are not part of a holding company structure are noncumulative. Dividend Rate: Five percent per annum for the first five years, then nine percent per annum thereafter. Redemption: Preferred shares may not be redeemed for three years; thereafter, they may be redeemed at 100% of issue price plus any accrued or unpaid dividends. They may be redeemed earlier if the company sells common stock or qualifying perpetual preferred shares for cash with a value equal to 25% of the price paid by the DOT for the company s preferred shares. Early redemptions are limited to the amount so raised. All redemptions must be approved by the primary federal bank regulator. Dividends on Common Stock: Subject to certain exceptions, for as long as any preferred shares are outstanding, no dividends may be declared or paid on junior preferred shares, preferred shares ranking pari passu with the preferred, or common shares (other than in the case of pari passu preferred shares, dividends on a pro rata basis with the preferred), nor may the company repurchase or redeem any junior preferred shares, preferred shares ranking pari passu with the preferred or common shares, unless (i) in the case of cumulative preferred, all accrued and unpaid dividends for all past dividend periods on the preferred have been fully paid or (ii) in the case of non-cumulative preferred, the full dividend for the latest completed dividend period has been declared and paid in full. The DOT s consent must be obtained for any increase in common dividends until the third anniversary of the purchase of the preferred shares. Thereafter and prior to the tenth anniversary, the DOT s consent is required for any increase in aggregate common dividends greater than 3% per annum. In addition, no increase in common dividends may be made as a result of any dividend paid in common shares, any stock split or similar transaction. These restrictions no longer apply if the preferred and warrant preferred are redeemed or the DOT has transferred all of the preferred and warrant preferred to third parties. 2

3 After the tenth anniversary, the company will be prohibited from paying common dividends or repurchasing any equity securities or trust preferred securities until all preferred shares held by the DOT are redeemed or the DOT has transferred all of the securities to third parties. Repurchases: The DOT s consent is required for any repurchases of equity securities or trust preferred securities (other than (i) repurchases of the preferred and (ii) repurchases of junior preferred shares or common shares in connection with any benefit plan in the ordinary course of business consistent with past practice) until the tenth anniversary unless prior thereto the preferred and the warrant preferred are redeemed in whole or the DOT has transferred all of the preferred and the warrant preferred to third parties. See also Dividends on Common Stock above. Voting Rights: The preferred will be non-voting, other than class voting rights on (i) any authorization or issuance of shares ranking senior to the preferred, (ii) any amendment to the rights of the holders of the preferred, or (iii) any merger, exchange or similar transaction which would adversely affect the rights of the holders of the preferred. If dividends are not paid for six quarters, the preferred holders will be able to elect two directors who will serve until all dividends have been paid in full on the cumulative preferred and have been paid for four consecutive quarters on the non-cumulative preferred. Transferability: The DOT and its transferees may not effect any transfer of the preferred shares which would require the company to become subject to the periodic reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of If the company otherwise becomes subject to such reporting requirements, it must file a shelf registration statement covering the preferred shares as promptly as practicable and take all action required to cause such shelf registration statement to be declared effective as soon as possible. In addition, the UST and its transferees shall have piggyback registration rights with respect to the preferred shares. Executive Compensation: Senior Executive Officers (as defined below) will have to modify or terminate all executive arrangements and agreements (including golden parachutes and benefit plans) to the extent necessary to be in compliance of Section 111 of the Emergency Economic Stabilization Act (EESA) and any guidance or regulations issued by the DOT on or prior to the date of the investment. As a condition to participation in the CPP, the company and its Senior Executive Officers must agree to the following provisions: (i) the company must ensure that incentive compensation for Senior Executive Officers does not encourage unnecessary and excessive risks that would threaten the value of the company; (ii) the Senior Executive Officers will be subject to a clawback with respect to incentive compensation paid to a Senior Executive Officer based on statements of earnings, gains or other criteria that are later proven to be materially inaccurate; (iii) the company will be prohibited from making any golden parachute payment to a Senior Executive Officer; and (iv) the company will not be able to deduct executive compensation in excess of $500,000 for each Senior Executive Officer. For purposes of EESA, the Senior Executive Officers include the CEO, CFO and the three next most highly paid officers. 3

4 As an additional condition to participation in the CPP, the company and its Senior Executive Officers are required to grant to the DOT waivers releasing the DOT from any claims that the company and its Senior Executive Officers may otherwise have as a result of the issuance of any regulations which modify the terms of benefit plans, arrangements and agreements to eliminate any provisions that would not be in compliance with the executive compensation and corporate governance requirements of Section 111 of EESA and any applicable guidance or regulations issued by the DOT. Related Party Transactions: For as long as the DOT holds any preferred shares, the company and its subsidiaries may not enter into transactions with related persons (as defined in Item 404 under the SEC s Regulation S-K - directors and executive officers and their family members and related businesses) unless (i) such transactions are on terms no less favorable to the company and its subsidiaries than 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. Warrants The DOT will receive warrants to purchase additional preferred stock equal to 5% of its preferred share investment, with an exercise price of $0.01 per share. The UST intends to immediately exercise the warrants. The warrants have a 10-year life. Warrant Preferred: The warrant preferred shall have the same rights, preferences, privileges, voting rights and other terms as the preferred sold to the DOT (and as described above), except that the warrant preferred will pay dividends at a rate of 9% per annum and the warrant preferred may not be redeemed until all the preferred has been redeemed. Transferability: The DOT will not effect any transfer of the warrants or the underlying warrant preferred which would require the company to become subject to the periodic reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of If the company otherwise becomes subject to such reporting requirements, it must file a shelf registration statement covering the warrants and the warrant preferred as promptly as practicable and take all action required to cause such shelf registration statement to be declared effective as soon as possible. In addition, the DOT and its transferees will have piggyback registration rights for the warrants and the warrant preferred. For further information, please contact Tim Sullivan ( ; tsullivan@hinshawlaw.com), Brian Goins ( ; bgoins@hinshawlaw.com) or Michael Morehead ( ; mmorehead@hinshawlaw.com) or your regular Hinshaw attorney. 4

5 This alert has been prepared by Hinshaw & Culbertson LLP to provide information on recent legal developments of interest to our readers. It is not intended to provide legal advice for a specific situation or to create an attorney-client relationship. 5

GMAC LLC Preferred Membership Interests. Summary of Preferred Terms GMAC LLC ( GMAC )

I Automotive Industry Financing Program GMAC LLC Preferred Membership Interests Summary of Preferred Terms Issuer: Initial Holder: GMAC LLC ( GMAC ) United States Department of the Treasury (the UST ).