New Louisiana Law Helps Bank Holding Companies Obligated to Repurchase Their Shares Protect Their Capital

Louisiana Governor Edwards recently signed into law Act 261, which could help bank holding companies organized under Louisiana law.

Section 1435 of the Louisiana Business Corporation Act (the “LBCA”) provides that if a corporation, including a bank holding company organized under the LBCA, engages in oppression of a shareholder, the shareholder may withdraw from the corporation and require the corporation to buy all of the shareholder’s shares at fair value. 

What constitutes oppression of a shareholder?

Section 1435 of the LBCA provides that “a corporation engages in oppression of a shareholder if the corporation’s distribution, compensation, governance and other practices, considered as a whole over an appropriate period of time, are plainly incompatible with a genuine effort on the part of the corporation to deal fairly and in good faith with the shareholder.”

What happens if a shareholder demonstrates oppression by a corporation?

If a shareholder can demonstrate oppression, the corporation is obligated to purchase the shareholder’s shares at their fair value. Fair value means the value of a corporation’s shares using customary valuation concepts without any discounts for lack of marketability or minority status.

Why is Act No. 261 important?

If a shareholder of a bank holding company successfully proves oppression under the LBCA, the bank holding company is obligated to purchase the shareholder’s shares at fair value. Any repurchase by the bank holding company of its shares under the LBCA is likely to negatively impact the regulatory capital of the bank holding company and its subsidiary bank. It also might create regulatory issues for the bank holding company and its subsidiary bank.

Act 261 is designed to protect the bank holding company in this situation. It provides that any obligation of a bank holding company under Section 1435 of the LBCA to repurchase its shares from an oppressed shareholder shall not cause the bank holding company or its subsidiary bank to cease to be sufficiently capitalized under applicable federal and state laws and regulations or otherwise jeopardize the safety and soundness of the bank holding company and its subsidiaries.

Act 261, in conjunction with Sections 1435 and 1436 of the LBCA, which provide that a corporation’s obligations to purchase its shares from a shareholder alleging oppression are subject to limitations in any applicable federal and state statutes and regulations, may benefit bank holding companies negotiating with shareholders alleging oppression.

Please contact Mark Fullmer or any member of Phelps’ Community Bank team if you have questions or need compliance advice and guidance.