United States: Getting Out From Under The TARP

Last Updated: April 6 2009
Article by Robert K. Morris

To date, hundreds of public financial institutions have obtained capital infusions from the U.S. Treasury through the issuance of preferred stock and accompanying warrants to Treasury pursuant to its Capital Purchase Plan. Treasury's investment was originally contemplated to be a long-term one; the preferred stock by its terms may not be redeemed for a period of three years from the date of its issuance, other than from proceeds of the institution's offerings of qualifying equity securities, if such proceeds are at least 25 percent of the aggregate liquidation amount of the preferred issued by the institution.

The American Recovery and Reinvestment Act ("ARRA"), enacted Feb. 17, 2009, imposed significant executive compensation and corporate governance requirements on institutions that have issued this preferred stock, with such requirements to apply for as long as the preferred stock remains outstanding. However, ARRA also included a provision, 12 U.S.C. §5221(g), which requires Treasury, subject to consultation with the appropriate federal banking agency, to permit a Troubled Assets Relief Plan ("TARP") recipient to repay any assistance previously provided under TARP to such financial institution (which includes these investments in preferred stock), without regard to whether the financial institution has replaced such funds from any other source or to any waiting period. The statute also provides that when such assistance has been repaid, Treasury shall liquidate the associated warrants at the current market price.

Many institutions originally applied to participate in Treasury's plan, not because they had a need for capital, but because the capital offered under the plan was priced attractively, and because such institutions felt a sense of public obligation to participate in the economic recovery program. In the case of some participants, it has been reported government pressure was brought to bear to encourage their participation. Subsequently, some of such institutions have felt their reputations adversely affected by the perception that they were beneficiaries of taxpayer largesse. In addition, some institutions have been surprised to find that their participation in the plan has now subjected them to new executive compensation and corporate governance requirements that did not exist when they originally decided to participate.

On March 31, four institutions publicly announced their repurchase of the preferred stock they previously issued to Treasury, the first such transactions which have occurred. Treasury has posted on its website a form of letter agreement to be utilized for public institutions desiring to make such repurchases. Any such repurchase transaction must be approved by the institution's federal regulators. The letter agreement, to be entered into between the institution and Treasury, specifies a repurchase price for the preferred equal to its face amount, plus accrued and unpaid dividends through the date of repurchase. The agreement does not require that all of the institution's outstanding preferred be repurchased; partial repurchases are permitted. It is not clear from the form of agreement whether Treasury will impose some minimum requirement for partial repurchases of an institution's preferred. The executive compensation and corporate governance requirements that are applicable under ARRA for so long as the institution's preferred stock is outstanding would continue in force after any partial repurchase of the preferred stock.

The mechanism for dealing with the accompanying warrant held by Treasury with the preferred is as follows. If only a portion of the institution's preferred is repurchased, the existing warrant remains outstanding unchanged. If all of the institution's preferred stock is repurchased, first, the institution agrees that the warrant held by Treasury is now immediately exercisable for the full number of subject shares. (The original warrant may not be exercised for more than one-half of the subject shares until the earlier of (a) the date on which the institution receives proceeds from offerings of qualified equity securities in at least the initial aggregate face amount of the preferred; or (b) Dec. 31, 2009.)

Second, the institution agrees that within 15 calendar days (after repurchase of the preferred), it will either deliver to Treasury a notice of its intent to repurchase the warrant in accordance with Section 4.9(b) of the institution's existing Securities Purchase Agreement with Treasury (the agreement under which the original investment was made), or it will deliver a new warrant in substantially the form of the existing warrant, but with the deletion of the current warrant provision that reduces the number of shares represented by the warrant by 50 percent if the institution completes one or more offerings of qualified equity securities prior to Dec. 31, 2009, generating proceeds of at least 100 percent of the aggregate initial liquidation amount of the preferred issued by the institution.

If a notice of intent to repurchase is delivered, the current provisions of Section 4.9(b) will operate to ascertain the market value of the warrant, which is the price at which the warrant will be repurchased. These provisions require the institution to accompany its notice with a determination of the institution's Board of Directors of the fair market value of the warrant. Fair market value means the fair market value as determined by the Board, acting in good faith in reliance on an opinion of a nationally recognized independent investment banking firm retained by the institution for this purpose, and certified in a resolution to Treasury. If Treasury does not agree with the Board of Directors' determination, it may object within 10 days. An authorized representative of Treasury and the chief executive officer of the company would then promptly meet to resolve the objection and agree upon the fair market value. If they are unable to agree during the 10-day period following delivery of Treasury's objection, either party may invoke a specified appraisal procedure by notification not later than the 30th day after delivery of Treasury's objection.

Under the appraisal procedure, each party would within 10 days after the procedure is invoked, deliver a notice to the other appointing an appraiser chosen by it. If within 30 days after appointment the two appraisers are unable to agree on fair market value, they would select a third appraiser. Each appraiser within 30 days thereafter would provide its appraisal, and an averaging process would then be conducted.

Under the letter agreement, if the institution determines to revoke its warrant repurchase notice, it is required to deliver a substitute warrant in substantially the form of the existing warrant (but excluding the provision for reduction of the number of warrant shares).

Treasury in the letter agreement provides notice of its intention to sell any substitute warrant delivered to it.

This article is presented for informational purposes only and is not intended to constitute legal advice.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions