Key Takeaways
- Bank Holding Companies must carefully review shareholder agreements to avoid adverse regulatory consequences.
- Bank Holding Company’s shareholder agreements must terminate within 25 years.
Through the Small Business Job Protection Act of 1996, for the first time Bank Holding Companies (BHC) were allowed to elect S Corporation (S Corp) status. Now, because of specific regulatory requirements many subchapter S BHCs may have to update 25-year-old shareholder agreements.
Shareholder Agreements
It became common after 1997 when many BHCs were making the S Corp election to create shareholder agreements restricting stock transfers and voting rights. Types of agreements include voting trusts, buy-sell agreements, or other restrictive stock arrangements among shareholders.
For these agreements to not be considered a company by the Federal Reserve Bank, as defined in Regulation Y (Section 225.2(d)(1)), the trust or agreement must terminate within 25 years.
Bank Holding Companies with shareholder agreements should review documents carefully to avoid inadvertent termination of their shareholder agreement because of the 25-year expiration. Conversely, review is also critical to ensure that shareholder agreements do explicitly have a provision to terminate in 25 years.
Next Steps for Bank Holding Companies
Although Bank Holding Companies that made the S-Corp election when it became available 25 years ago are of immediate concern, it is common for privately held BHCs filing as C Corporations to have expiring (or expired) shareholder agreements, as well.
Regular review of all corporate shareholder agreements is important to avoid adverse regulatory consequences. Contact your legal counsel to assist with expiring (or expired) shareholder agreements or agreements that may not have a 25-year termination provision.
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