Adopted Amendments to 7 TAC §§15.9, 15.41, 15.104, 15.108 and 15.122

Title 7. Banking and Securities
Part 2. Texas Department of Banking
Chapter 15. Corporate Activities
Subchapter A. Fees and Other Provisions of General Applicability
7 TAC §15.9
Subchapter C. Bank Offices
7 TAC §15.41
Subchapter F. Applications for Merger, Conversion, and Purchase or Sale of Assets
7 TAC §§15.104, 15.108
Subchapter G. Charter Amendments and Certain Changes in Outstanding Stock
7 TAC §15.122

NOTE: This document was submitted to the Texas Register on the date indicated below. This is not the actual publication; the editorial staff of the Texas Register sometimes edits the submission. The Texas Department of Banking therefore does not guarantee the exact accuracy of this document.

Date: October 18, 2013

The Finance Commission of Texas (the commission), on behalf of the Texas Department of Banking (the department), adopts amendments to §15.9, concerning corporate filings, with changes to the proposed text as published in the August 30, 2013, issue of the Texas Register (38 TexReg 5622). Section §15.41, concerning written notice or application for change of home office; §15.104, concerning application for merger or share exchange; §15.108, concerning conversion of a financial institution into a state bank; and §15.122, concerning amendment of articles to effect a reverse stock split, are adopted without changes to the proposed text as published in the August 30, 2013, issue of the Texas Register (38 TexReg 5622).

Changes made to the proposed rules were made to correct inadvertent errors in new terms in §15.9(a)(2) and (4). The new term in §15.9(a)(2) is “certificate of amendment” rather than “certificate of formation.” Likewise, the new term in §15.9(a)(4) is “certificate of merger” rather than “certificate of formation.”

The laws regarding business organizations were significantly modernized and integrated into a cohesive regulatory structure through enactment of the Business Organizations Code several years ago. The need for uniform and comprehensive terminology that would apply to every type of business organization, including corporations, limited liability companies, limited partnerships, and others, led to the introduction of a number of new terms.

The 83rd Legislature recently enacted Senate Bill 804, effective June 14, 2013, which amended the Finance Code to update and conform language in certain provisions to synonymous terminology and phrasing used in the Business Organizations Code.

The amendments to 7 TAC Chapter 15 conform the terminology used in the rules to that used in the Finance Code and the Business Organizations Code. References to “articles of association” and “articles of incorporation” changed to “certificate of formation.” Similarly, references to “articles of merger” changed to “certificate of merger,” and “articles of amendment” changed to “certificate of amendment.”

In addition, references to repealed §32.101(d) of the Finance Code are corrected to reference §32.101(c).

The Department received no comments regarding the proposed amendments.

Subchapter A. Fees and Other Provisions of General Applicability

7 TAC §15.9

The amendments are adopted pursuant to Finance Code, §31.003, which authorizes the Finance Commission to adopt rules to accomplish the purposes of Subtitle A regarding banks.

§15.9.  Corporate Filings.

(a)  In accordance with the applicable provisions of the Finance Code, Title 3, Subtitle A or G, the following corporate forms regarding a state bank, along with the applicable filing fees, must be filed with the banking commissioner:

(1)  a certificate of correction as authorized by Texas Business Organizations Code (TBOC), §4.101;

(2)  certificate of amendment [formation] under the Finance Code, §32.101;

(3)  restated, or, amended and restated, certificate of formation under the Finance Code, §32.101, and TBOC §3.059 and §21.052;

(4)  certificate of merger [formation] under the Finance Code, §32.301 et seq, as supplemented by the TBOC §10.151;

(5)  certificate of exchange under TBOC, §10.151;

(6)  statement of event or fact pursuant to TBOC, §4.055;

(7)  establishment of a series of shares by the board of directors under the Finance Code, §32.102, as supplemented by TBOC, §21.155 and §21.156;

(8)  statement regarding a restriction on the transfer of shares under TBOC, §21.212; and

(9)  abandonment of a merger or interest exchange prior to its effective date under TBOC, §4.057.

(b)  For purposes of corporate filings with the banking commissioner under subsection (a) of this section, state banks may utilize a modified version of forms promulgated by the secretary of state if the banking commissioner or the finance commission has not promulgated an appropriate corporate form; however, the banking commissioner may require the submission of additional information. The modified corporate forms must:

(1)  specifically reference the applicable provisions of the Finance Code;

(2)  change references from “corporation” to “association”; and

(3)  change the references to “stated capital” and similar terms defined in the TBOC to an appropriate reference to terms defined in the Finance Code.

(c)  In accordance with the applicable provisions of the Finance Code and the TBOC, a state bank may file the following corporate forms with the secretary of state as instructed in the Finance Code or the TBOC:

(1)  name registrations under TBOC, §§5.151-5.155;

(2)  assumed name certificates under TBOC, §5.051;

(3)  a statement appointing an agent authorized to receive service of process under Finance Code, §201.103;

(4)  an amendment to a statement appointing an agent to receive service of process under Finance Code, §201.103; and

(5)  a cancellation of the appointment of an agent to receive service of process under Finance Code, §201.103.

(d)  The following corporate forms are inapplicable to state banks and are not required to be filed by a state bank with either the secretary of state or the banking commissioner:

(1)  changes of registered office or agent under TBOC, §5.202 or §5.203;

(2)  name reservations under TBOC, §5.101;

(3)  certificate of termination under TBOC, §11.101; and

(4)  certificate of reinstatement under TBOC, §11.202.

Subchapter C. Bank Offices

7 TAC §15.41

The amendments are adopted pursuant to Finance Code, §31.003, which authorizes the Finance Commission to adopt rules to accomplish the purposes of Subtitle A regarding banks.

§15.41. Written Notice or Application for Change of Home Office.

(a)  Relocation by notice. Unless an application under subsection (b) of this section is required, a state bank may change its home office to one of its previously established branches pursuant to the Finance Code, §32.202(b), by filing a written notice containing the information required by subsection (c) of this section, accompanied by the filing fee required by §15.2 of this title (relating to Filing Fees and Cost Deposits). A bank may relocate its home office immediately after the required notice and fee has been acknowledged in writing as complete and accepted for filing by the banking commissioner. An application under subsection (b) of this section is required if the proposed home office relocation:

(1)  will result in an abandonment of all or part of the community served by the bank’s present home office location; or

(2)  is anticipated to result in a reduction in banking services presently offered by the bank at its present home office location within the 18 month period after the effective date of the relocation.

(b)  Relocation by application.

(1)  A state bank relocating its home office must file an application setting forth the information required by subsection (c) of this section, accompanied by the required filing fee pursuant to §15.2 of this title if it is a relocation pursuant to:

(A)  the Finance Code, §32.202(b) and subsection (a) of this section does not apply; or

(B)  the Finance Code, §32.202(c).

(2)  An eligible bank may file an expedited application pursuant to §15.3 of this title (relating to Expedited Filings).

(3)  On or before the 15th day after initial submission of an application, the banking commissioner will issue the written notice required by §15.4(b) of this title (relating to Required Information and Abandoned Filings).

(4)  Except as otherwise provided in this section and to the extent applicable, the banking commissioner will evaluate an application under this subsection in light of the Finance Code, §32.202(d), and apply the criteria applicable to an application for a branch office under §15.42(e) of this title (relating to Establishment and Closing of a Branch Office).

(5)  An applicant under this subsection may not relocate its home office without the prior written approval of the banking commissioner.

(c)  Contents of notice or application. The notice filed under subsection (a) of this section or the application submitted under subsection (b) of this section must disclose:

(1)  the name of the bank requesting the home office relocation;

(2)  the street address of the bank’s home office before the requested home office relocation;

(3)  the street address of the bank’s proposed home office;

(4)  the effective date of the home office relocation under subsection (a) of this section, or the requested effective date for a proposed home office relocation under subsection (b) of this section;

(5)  a copy of the resolution adopted by the bank’s board of directors authorizing the proposed home office relocation;

(6)  a written statement signed by the principal executive officer of the bank or a majority of the bank’s board of directors stating whether or not the proposed home office relocation will result in an abandonment of all or part of the community served by the bank’s present home office location and, if so, an explanation of how the abandonment promotes the public convenience and advantage;

(7)  a written statement signed by the principal executive officer of the bank or a majority of the bank’s board of directors stating whether or not, within the 18 month period after the proposed effective date of the relocation, a reduction in banking services presently offered by the bank at its present home office location is anticipated and, if so, an explanation of:

(A)  the anticipated reduction in banking services; and

(B)  how:

(i)  the diminution in services is consistent with the original determination of public necessity for the establishment of the bank at its existing location; or

(ii)  the public convenience and advantage would be promoted by the home office relocation;

(8)  a description of any actual, proposed, or contemplated financial involvement in the home office relocation by an officer, director, manager, managing participant, or principal shareholder or participant of the state bank;

(9)  evidence that the bank has considered the applicability of federal law governing main office or branch closing or relocation, such as 12 United States Code, §1828(d)(1), and regulations and policy statements issued thereunder; and

(10)  other information as the banking commissioner may require.

(d)  Public notice.

(1)  Within 14 days prior to or 14 days after the initial submission of a written application under subsection (b) of this section, the applicant must publish notice of the submission, as required by §15.5 of this title (relating to Public Notice). Notice must be published in the community where the current home office of the bank is located and in the community of the proposed home office.

(2)  The notice must contain the content required by §15.5(b) of this title, the current home office address, and the proposed home office address.

(e)  Public comment and protest. For 14 days after publication of the notice or longer if the banking commissioner allows more time for good cause shown, the public may submit written comments or protests regarding an application under subsection (b) of this section. There is no fee or cost for submitting a comment, but persons commenting are not entitled to further notice of or participation in the proceedings. In the event of a properly filed protest, each protesting party has the rights and responsibilities of a protesting party to a branch application under §15.42 of this title.

(f)  Certificate of Formation. An amendment to the certificate of formation of the state bank is not required to effect a change in the location of its home office. However, if the certificate of formation is subsequently amended or restated, the resulting certificate of formation must include the bank’s current home office address.

Subchapter F. Applications for Merger, Conversion, and Purchase or Sale of Assets

7 TAC §15.104, §15.108

The amendments are adopted pursuant to Finance Code, §31.003, which authorizes the Finance Commission to adopt rules to accomplish the purposes of Subtitle A regarding banks.

§15.104. Application for Merger or Share Exchange.

(a)  Scope. This section governs an application for merger or share exchange pursuant to the Finance Code, §§32.301-32.303 and 32.008, or §203.001(b). This section does not apply to a merger, reorganization, or conversion of a state bank into another form of financial institution pursuant to the Finance Code, §32.501, governed by §15.107 of this title (relating to Notice of Merger, Reorganization, or Conversion of a State Bank into Another Form of Financial Institution).

(b)  Form of application. The applicant must submit a fully completed, verified application on a form prescribed by the banking commissioner and simultaneously tender the required filing fee pursuant to §15.2 of this title (relating to Filing Fees and Cost Deposits). The Interagency Bank Merger Act application may be used in lieu of the commissioner prescribed form if it is accompanied by the signature page and supplemental page of the commissioner prescribed form. The application must, except to the extent waived by the banking commissioner, include:

(1)  a summary of the proposed transaction;

(2)  a copy of all agreements related to the proposed transaction executed by an authorized representative of each party to the merger or share exchange;

(3)  certificate and plan of merger or share exchange in accordance with the Texas Business Organizations Code, which must include:

(A)  a current draft of the certificate of merger or share exchange, and additional copies equal to the number of surviving, new, or acquired entities, executed and acknowledged by an authorized officer for each party to the merger or share exchange;

(B)  the plan of merger or share exchange;

(C)  the restated certificate of formation of each resulting state bank;

(D)  the restated certificate of formation, or other constitutive documents, of each surviving entity other than the resulting state bank;

(E)  the certificate of formation, or other constitutive documents, of each new resulting entity;

(F)  if a party to a merger is an entity required to file documents with the Texas secretary of state before the transaction can be legally consummated, a provision in the certificate of merger conditioning the merger upon the approval of the banking commissioner, containing wording substantially as follows, as applicable: This merger will become effective upon the final approval and filing of the certificate of merger by the Secretary of State of Texas and with the Banking Commissioner of Texas which must be on or before ________ (date), which is the 90th day after the date of filing of the certificate of merger with the Secretary of State;

(4)  for each party to the merger or share exchange, a certified copy of those portions of the minutes of board meetings and shareholder or participant meetings at which action was taken regarding approval of the merger or share exchange, or a certificate of an officer verifying the action taken by the board of directors and the shareholders or participants approving the merger or share exchange, or an explanation of the basis for concluding that this action was not required;

(5)  for each resulting state bank, an assessment of its future prospects, proposed officers and directors, and proposed branches and other locations;

(6)  an assessment of the current regulatory and financial condition of each party to the transaction;

(7)  if a merger or share exchange will change the existing CRA delineated community of a resulting state bank, a copy of a map depicting the proposed delineated community of the resulting state bank;

(8)  a copy of current financial statements for each entity involved in the proposed transaction, accompanied by an affidavit of no material change dated no earlier than 30 days prior to the date of submission of the application;

(9)  a copy of the latest annual report for each financial institution and bank holding company involved in the proposed transaction;

(10)  a copy of that portion of the most recent watch list for each financial institution involved in the proposed transaction that identifies low-quality assets;

(11)  a description of the due diligence review conducted by or for a state bank that is a party to the transaction and a summary of findings;

(12)  a description of all material legal or administrative proceedings involving any party to the merger or share exchange;

(13)  an opinion of legal counsel that conforms with §15.109 of this title (relating to Opinion of Legal Counsel), concluding:

(A)  the merger or share exchange has been duly authorized by the board and shareholders or participants of each participating state bank in accordance with the Finance Code, §32.301, and the Texas Business Organizations Code;

(B)  the merger or share exchange will not cause or result in a material violation of the laws of this state relative to the organization and operation of state banks;

(C)  all deposit and other liabilities of every state bank that is a party to the merger or share exchange will be discharged or otherwise assumed or retained by a financial institution that is authorized by law to do so;

(D)  each surviving, new, or acquiring entity that is not a financial institution will not be engaged in the unauthorized business of banking, and each resulting state bank will not be engaged in a business other than banking or a business incidental to banking; and

(E)  all conditions with respect to the merger or share exchange that have been imposed by the banking commissioner have been satisfied or otherwise resolved or, to the best knowledge of legal counsel, no conditions have been imposed;

(14)  a copy of each filing or application regarding the proposed merger or share exchange required by another governmental authority, complete with all related attachments, exhibits, and correspondence;

(15)  a current pro forma balance sheet and income statement for each party to the transaction, with adjustments, reflecting the proposed merger or share exchange as of the most recent quarter ended immediately prior to the filing of the application;

(16)  a copy of the strategic plan that complies with the department’s Memorandum 1009, including projections of the balance sheet and income statement of each resulting state bank as of the quarter ending one year from the date of the pro forma financial statement required by paragraph (15) of this subsection;

(17)  an explanation of compliance with or nonapplicability of provisions of governing law relating to rights of dissenting shareholders or participants to the merger or share exchange;

(18)  a copy of all securities offering documents, proxy statements, or other disclosure materials delivered or to be delivered to shareholders or participants of a party concerning the merger or share exchange;

(19)  an explanation of the manner and basis of converting or exchanging any of the shares or other evidences of ownership of an entity that is a party to the merger or share exchange into shares, obligations, evidences of ownership, rights to purchase securities, or other securities of one or more of the surviving, acquiring, or new entities, into cash or other property, including shares, obligations, evidences of ownership, rights to purchase securities, or other securities of another person or entity, or into a combination of the foregoing;

(20)  for antitrust purposes, an analysis of the anticipated competitive effect of the proposed transaction in the affected markets and a statement of the basis of the analysis of the competitive effects, or alternatively, a copy of the analysis of competitive effects of the proposed transaction addressed in the companion federal regulatory agency application;

(21)  other information that the banking commissioner, in the exercise of discretion, considers necessary to make an informed decision to approve or deny the proposed merger or share exchange; and

(22)  in addition to all other requirements of this subsection, with respect to an interstate merger transaction:

(A)  any additional opinions and information the applicant, by contacting the department, determines the banking commissioner requires; and

(B)  information regarding applicable host state law and evidence of compliance with the law.

(c)  Applicant’s duty to disclose. The applicant must supply all material information necessary for the banking commissioner to make a fully informed decision on the application.

(d)  Public notice. Within 14 days prior to or 14 days after submission of the initial application, the applicant must publish notice in accordance with the requirements of §15.5 of this title (relating to Public Notice) in the specified communities where the home office of the applicant, the target entity, and the resulting bank are or will be located. With respect to an interstate merger transaction, the applicant must inform the department of the publication requirements in the host state for the banking commissioner to determine, pursuant to §15.5(e) of this title, whether those requirements satisfy the publication requirements of this subsection.

(e)  Approval by the banking commissioner and filings with a chartering agency.

(1)  The banking commissioner will approve a merger or share exchange only if the application indicates substantial compliance with all conditions of the Finance Code, §32.302(b) and §32.304.

(2)  If a party is required to file certificate of merger or exchange with its chartering agency after acceptance for filing pursuant to §15.4(b) of this title (relating to Required Information and Abandoned Filings), an applicant for merger or share exchange must file the original certificate of merger or exchange as certified by the chartering agency with the banking commissioner.

(3)  After approval of an application under this section, the banking commissioner will accept the certificate of merger or exchange previously filed with the chartering agency (if applicable), issue a certificate of merger or exchange, and perform the duties required by the Finance Code, §32.302(c). With respect to a transaction that requires filing with the Texas secretary of state, if the banking commissioner does not approve the certificate of merger or exchange on or before the 90th day after the filing of the certificate of merger or exchange with the Texas secretary of state, the applicant must refile the certificate of merger or exchange with both the Texas secretary of state and with the banking commissioner.

(4)  After issuance of the certificate of merger or exchange by the banking commissioner, the applicant must file a statement with the chartering authority, if applicable, certifying as to the date that each future event upon which the effectiveness of the merger was conditioned has been satisfied.

(5)  The date of issuance of the certificate of merger by the banking commissioner is the date of approval unless the merger agreement provides for a later effective date approved by the banking commissioner pursuant to the Finance Code, §32.302(d).

§15.108. Conversion of a Financial Institution into a State Bank.

(a)  Scope. This section governs the application for conversion of a financial institution into a state bank pursuant to the Finance Code, §32.502.

(b)  Form of application. The applicant must submit a fully completed, verified application on a form prescribed by the banking commissioner and simultaneously tender a filing fee in the amount required for the filing of an application for a new bank charter pursuant to §15.2 of this title (relating to Filing Fees and Cost Deposits). The application must, except to the extent waived by the banking commissioner, include:

(1)  a summary of the proposed transaction;

(2)  a statement explaining whether the proposed state bank will be in compliance with each standard detailed in the Finance Code, §32.502(b), certified by the principal executive officer of the applicant;

(3)  a copy of the plan of conversion executed by an authorized representative of the applicant;

(4)  certificate of conversion, including:

(A)  the plan of conversion;

(B)  the certificate of formation of the proposed state bank;

(C)  a provision conditioning the conversion upon the approval of the banking commissioner;

(5)  a certified copy of those portions of the minutes of board meetings and shareholder or participant meetings at which action was taken regarding approval of the conversion, or a certificate of an officer verifying the action taken by the board of directors and the shareholders or participants approving the conversion;

(6)  an assessment of the future prospects, proposed officers and directors, and proposed branches and other locations of the proposed state bank;

(7)  an assessment of the current regulatory and financial condition of the applicant;

(8)  if the conversion changes the existing CRA delineated community, a copy of a map depicting the proposed delineated community of the resulting state bank;

(9)  a copy of the latest annual report for the applicant and, if applicable, its holding company;

(10)  a copy of that portion of the most recent watch list for the applicant that identifies low-quality assets;

(11)  a description of all material legal or administrative proceedings involving the applicant or an officer, director, or principal shareholder of the applicant;

(12)  an opinion of legal counsel that conforms with §15.109 of this title (relating to Opinion of Legal Counsel), concluding:

(A)  the conversion of the applicant has been duly authorized by its board and shareholders in accordance with governing law, and the applicant has in all material respects complied with the procedures prescribed by the federal, state, or foreign laws governing the exit of the applicant from its current regulatory system;

(B)  the conversion will not cause or result in any material violation of the laws of this state concerning the organization and operation of state banks;

(C)  the proposed state bank will not be engaged in a business other than banking or a business incidental to banking; and

(D)  all conditions with respect to the conversion imposed by the banking commissioner have been satisfied or otherwise resolved or, to the best knowledge of legal counsel, no conditions have been imposed;

(13)  a copy of each filing regarding the proposed conversion that is required by another governmental authority, complete with all related attachments, exhibits and related correspondence;

(14)  a current pro forma balance sheet and income statement of the applicant, with adjustments, reflecting the proposed conversion as of the most recent quarter ended immediately prior to the filing of the application;

(15)  a copy of the applicant’s current strategic plan with a comparison to the strategic plan requirements contained in the department’s Memorandum 1009, including projections of the balance sheet and income statement of the resulting state bank as of the quarter ending one year from the date of the pro forma financial statement required by paragraph (14) of this subsection;

(16)  an explanation of compliance with or nonapplicability of the provisions of governing law relating to rights of dissenting shareholders to the conversion;

(17)  a copy of all securities offering documents, proxy statements, or other disclosure materials delivered or to be delivered to shareholders in connection with the proposed conversion;

(18)  an explanation of the manner and basis of converting any shares or other evidences of ownership of the applicant into shares, obligations, evidences of ownership, rights to purchase securities or other securities of the proposed state bank, into cash or other property, including shares, obligations, evidences of ownership, rights to purchase securities or other securities of another person or entity, or into any combination of these;

(19)  other information that the banking commissioner, in the exercise of discretion, considers necessary to make an informed decision to approve or deny the proposed conversion; and

(20)  in addition to all other requirements of this subsection, with respect to conversion of an out-of-state financial institution into a state bank:

(A)  any additional opinions and information the applicant, by contacting the department, determines the banking commissioner requires; and

(B)  information regarding applicable host state law and evidence of compliance with the law.

(c)  Applicant’s duty to disclose. The applicant must supply all material information necessary for the banking commissioner to make a fully informed decision on the application.

(d)  Public notice. Within 14 days prior to or 14 days after submission of an initial application under this section, the applicant must publish notice in accordance with §15.5 of this title (relating to Public Notice) in the specified communities where the home office of the applicant is located, and where the home office of the proposed state bank will be located, if different. With respect to a conversion of an out-of-state financial institution into a Texas state bank, the applicant must inform the department of the publication requirements in the host state for the banking commissioner to determine, pursuant to §15.5(e) of this title, whether those requirements satisfy the publication requirements of this subsection.

(e)  Approval by the banking commissioner. The banking commissioner will approve a conversion only if the application indicates substantial compliance with all conditions of the Finance Code, §32.502(b).

Subchapter G. Charter Amendments and Certain Changes in Outstanding Stock

7 TAC §15.122

The amendments are adopted pursuant to Finance Code, §31.003, which authorizes the Finance Commission to adopt rules to accomplish the purposes of Subtitle A regarding banks.

§15.122. Amendment of Certificate to Effect a Reverse Stock Split.

(a)  Definitions. When these words and terms are used in this section they will have these meanings, unless the context clearly indicates otherwise.

(1)  Affiliate--A person that directly or indirectly through one or more intermediaries controls, is controlled by, or is under common control with a state bank seeking to effect a reverse stock split. A person who is not an affiliate of the state bank at the commencement of its reverse stock split will not be considered an affiliate of the bank prior to the completion of the reverse stock split.

(2)  Appraisal report--A report, opinion (other than an opinion of counsel), or appraisal from an outside party which is materially related to the reverse stock split, including a report, opinion, or appraisal relating to the consideration or the fairness of the consideration to be offered to shareholders in connection with the reverse stock split or the fairness of the transaction to the state bank or to unaffiliated shareholders.

(3)  Reverse stock split--An amendment to the certificate of formation of a state bank that achieves a reduction in the number of issued shares of the bank by requiring exchange of all issued shares in a particular class for a proportionately smaller number of shares, generally with a proportionately increased par or stated value. The equity capital of the state bank remains substantially the same.

(4)  Share--A unit representing ownership of at least part of the proprietary interests of a state bank, whether or not divided or subdivided by means of classes, series, relative rights, or preferences; and includes a stock or similar security; or a security convertible, with or without consideration, into such a security, or carrying a warrant or right to subscribe to or purchase such a security; or such warrant or right; or another security determined by the banking commissioner to be an equity security pursuant to the Finance Code, §31.002(a)(9)(B).

(5)  Unaffiliated shareholder--A shareholder of a share subject to a reverse stock split who is not an affiliate of the state bank that issued the share.

(b)  Procedure. Pursuant to the Finance Code, §32.101, to effectuate a reverse stock split in compliance with this section, a state bank must:

(1)  obtain the approval of its shareholders as required by law; and

(2)  obtain the approval of the banking commissioner pursuant to subsection (d) of this section, by filing an application setting forth the information and documents required by subsection (c) of this section and the filing fee required by §15.2 of this title (relating to Filing Fees and Cost Deposits).

(c)  Application. A state bank proposing a reverse stock split transaction must file with the banking commissioner a written application seeking approval of the proposed amendment to its certificate of formation, stating the results of the vote of shareholders regarding the proposed reverse stock split and stating the percentage of shares of unaffiliated shareholders that were voted in favor of the proposed reverse stock split, or undertaking to supplement the application after conditional approval is obtained to provide shareholder approval information, setting forth or including as exhibits:

(1)  the original and one copy of the proposed amendment to the certificate of formation, to be processed in the manner required by the Finance Code, §32.101(c), and a description of the material terms of the proposed reverse stock split, including terms or arrangements relating to any shareholder of the state bank which are not identical to those relating to other shareholders of the same class;

(2)  any plan or proposal of the state bank, regarding activities or transactions which are to occur after the reverse stock split which relate to or would result in:

(A)  an extraordinary corporate transaction, such as a merger, reorganization, or liquidation, involving the state bank or any of its subsidiaries;

(B)  a sale or transfer of a material amount of assets of the state bank or any of its subsidiaries;

(C)  a change in the present board of directors or management of the state bank, including a plan or proposal to change the number or term of directors, to fill an existing vacancy on the board or to change a material term of the employment contract of an executive officer;

(D)  a material change in the present dividend rate or policy or indebtedness or capitalization of the state bank;

(E)  any other material change in the state bank’s corporate structure or business;

(3)  the corporate purpose or purposes of the state bank for the reverse stock split, and alternative means, if any, considered by the state bank to accomplish the purposes and the reasons for their rejection, and the reason for choosing the structure of a reverse stock split and for undertaking the transaction at this time;

(4)  a certified resolution of the board of directors of the state bank approving the proposed amendment to the certificate of formation, accompanied by a statement whether or not the board of directors of the state bank reasonably believes that the reverse stock split is fair or unfair to unaffiliated shareholders that:

(A)  identifies each director, if any, that dissented to or abstained from voting on the merits of the reverse stock split, and describes, if known to the state bank after making reasonable inquiry, the reasons for each dissent or abstention; and

(B)  states the number and percentage of disinterested directors that voted in favor of the proposed reverse stock split;

(5)  whether or not the state bank obtained an appraisal report and, if an appraisal report was obtained, a copy of the appraisal report. To the extent not addressed in the appraisal report, the state bank must disclose:

(A)  the identity, qualifications, and method of selection of the outside party that prepared the appraisal report, any material relationship between the outside party or its affiliates and the state bank or its affiliates which existed during the past two years or is mutually understood to be contemplated, and any compensation received or to be received as a result of the relationship;

(B)  a summary of the performance of the appraisal report, including the procedures followed, the findings and recommendations, the bases for and methods of arriving at the findings and recommendations, instructions received from the state bank, and any limitation imposed by the state bank on the scope of the investigation; and

(C)  whether the appraisal report will be made available for inspection and copying at the home office of the state bank during its regular business hours by any shareholder of the state bank or any shareholder’s representative who has been so designated in writing;

(6)  with respect to the class of shares to which the reverse stock split relates, the aggregate amount and percentage of shares beneficially owned by any pension, profit sharing, or similar plan of the state bank, and by each officer, director, principal shareholder, and subsidiary of the state bank;

(7)  with respect to any purchases of the shares made by the state bank since the commencement of the bank’s second full fiscal year preceding the date of the application, the amount of the shares purchased, the range of prices paid for the shares, and the average purchase price for each quarterly period of the bank during this period;

(8)  to the extent known to the state bank after reasonable inquiry, any transaction in the class of shares subject to the proposed reverse stock split that was effected during the past 60 days by the state bank or by an officer, director, principal shareholder, or subsidiary of the state bank, including the identity of the person who effected the transaction, the date of the transaction, the amount of shares involved, the price per share, and where and how the transaction was effected;

(9)  to the extent known to the state bank after reasonable inquiry, a description and/or a copy of any contract, arrangement, understanding, or relationship (whether or not legally enforceable) in connection with the reverse stock split between the state bank (or an officer, director, principal shareholder, or subsidiary of the state bank) and any person with respect to any shares of the state bank (including a contract, arrangement, understanding, or relationship concerning the transfer or the voting of these shares, joint ventures, loan, or option arrangements, puts or calls, guaranties of loans, guaranties against loss or the giving or withholding of proxies, consents, or authorizations), naming the persons with whom these contracts, arrangements, understandings, or relationships have been entered into and giving the material provisions thereof, including information for any of these shares that are pledged or otherwise subject to a contingency, the occurrence of which would give another person the power to direct the voting or disposition of these shares, except that disclosure of standard default and similar provisions contained in loan agreements need not be included;

(10)  to the extent known to the state bank after reasonable inquiry, whether or not any officer, director, principal shareholder, or subsidiary of the state bank has made a recommendation in support of or opposed to the reverse stock split and, if so, the reasons for the recommendation;

(11)  whether or not appraisal rights are being voluntarily accorded by the state bank to shareholders in connection with the reverse stock split and whether or not any provision has been or will be made to allow unaffiliated shareholders to obtain counsel or appraisal services at the voluntary expense of the state bank and, if so, a detailed description of these appraisal rights or counsel or appraisal services;

(12)  a reasonably itemized statement of all expenses incurred or estimated to be incurred in connection with the reverse stock split, including filing fees, legal, accounting, and appraisal fees, solicitation expenses, and printing costs, and disclosure of the person who has paid or will be responsible for paying such expenses;

(13)  the proxy statement furnished to shareholders of the state bank in connection with obtaining shareholder approval for the reverse stock split, or a draft of the proxy statement to be furnished to shareholders in the event approval of the banking commissioner is sought prior to a shareholder vote; and

(14)  such other information that the banking commissioner considers necessary to make an informed decision to approve or reject the proposed amendment effectuating a reverse stock split.

(d)  Standards for approval.

(1)  The banking commissioner will process the proposed reverse stock split in accordance with the Finance Code,  §32.101(c). The banking commissioner will require that the reverse stock split be for valid business purposes of the bank itself, viewed as an entity distinct from its affiliates, and be accomplished through fair dealing with and a fair price to unaffiliated shareholders. The banking commissioner may impose conditions on approval, including a condition that an independent appraisal report be obtained regarding the value of the unaffiliated shareholders’ shares, exclusive of any element of value arising from the accomplishment or expectation of the proposed transaction, and without minority discount. Share value determined by an independent and properly prepared appraisal report that is fully disclosed to bank shareholders or by the market price of publicly traded shares will be presumed to be a fair value unless extenuating circumstances to the contrary are specifically noted.

(2)  In the event approval of the banking commissioner is obtained prior to approval by shareholders, the state bank must file a statement with the banking commissioner certifying that any future event or condition upon which the approval of the transaction was conditioned has been satisfied and the date that each such condition was satisfied. Upon receipt of such statement, the banking commissioner will file the approved amendment to the certificate of formation in accordance with the Finance Code, §32.101(c).

(3)  An issuer’s purchase of its own shares is a transaction subject to the antifraud provisions of federal securities law, see 15 United States Code, §78j, 17 Code of Federal Regulations (CFR), §240.10b-5, and Spector v. L Q Motor Inns, Inc., 517 F.2d 278 (5th Cir. 1975), cert. denied, 423 U.S. 1055 (1976). Such a transaction is also subject to the antifraud provisions of state securities law, see Texas Civil Statutes, Article 581-33(B). Potential liability of the state bank to the selling shareholder can therefore arise if the state bank withholds or misrepresents material facts that the seller would have considered important in making the decision to sell. Consequently, a state bank must disclose to the shareholders in writing, prior to or simultaneously with the written notice of the shareholders meeting, all material information necessary to make an informed decision regarding the proposed reverse stock split. If the reverse stock split involves publicly traded shares and is subject to 15 CFR, §240.13e-3, the registration statement required by federal law is considered to satisfy this disclosure obligation. Approval of an application under this section by the banking commissioner does not constitute a determination that the bank has complied with applicable securities law.

(e)  Exemptions.

(1)  This section does not apply to a reverse stock split that:

(A)  will not result in fractional shares;

(B)  permits each shareholder to choose to cash in the resulting fractional share by selling it to the state bank or to round up to the next highest whole share by purchasing fractional interests, provided that:

(i)  the specified sale and purchase prices are equivalent and reasonable; and

(ii)  no fractional share resulting from the reverse stock split is less than 10% of a full share;

(C)  is adopted by means of a unanimous written consent of shareholders; or

(D)  the banking commissioner expressly exempts after written application as not within the purposes of this section.

(2)  An amendment to the certificate of formation that implements a reverse stock split exempt from this section is filed and processed in accordance with the Finance Code, §32.101.

(3)  The availability of an exemption from the requirements of this section does not relieve a state bank from its obligation to comply with applicable securities law.

Effective date: November 7, 2013, 38 TexReg 7687.