Bylaws, Bank Conversions, and Mergers

Executive Summary

The NCUA approved a proposed rule to revise the procedures a Federal Credit Union (FCU) must follow to merge voluntarily with another credit union.  The rule would:

1.      Revise and clarify the contents and format of the member notice;

2.      Require merging FCUs to disclose all merger-related financial arrangements for covered persons;

3.      Increase the minimum member notice period;

4.      Provide procedures to allow reasonable member-to-member communications regarding the proposed merger; and

5.      Make conforming amendments regarding termination of insurance when the surviving credit union is not an FCU.

The definition of “merger-related financial arrangement” would include compensation arrangements with management and certain highly-compensated employees rather than just senior management officials or directors.

In Depth Analysis:

Disclosure of merger-related financial arrangements:

The proposal would make several changes to definitions to alter the scope and thresholds that would trigger disclosure by the merging FCU. 

  1. Covered Person:  Under the existing rule, merger-related financial arrangements that must be disclosed include only senior management and the board.  The proposed rule would provide a definition of “Covered Person” that requires disclosure for the chief executive officer (CEO) or manager (or a person acting in a similar capacity); the four most highly-compensated employees other than the CEO or Manager; and any member of the board of directors of the supervisory committee. 
  2. Merger-related financial arrangement:  This previous definition included only compensation that was considered a “material increase,” defined as an increase that exceeds the greater of 15 percent or $10,000.00.  Under the proposed rule, the monetary thresholds would be eliminated and substituted with the standard of “all increases in compensation or benefits that a covered person has received during the 24 months prior to the date of the approval of the merger plan by the boards of both credit unions.”  It would include all future compensation or benefits that would not be received but for the merger taking place, regardless of the amount.  NCUA would explicitly reserve the right to review any future compensation paid to a covered person of the merging FCU by the continuing credit union.

It should also be noted the proposed rule purports to expand the interpretation of “compensation” to include all compensation or benefits received in connection with a merger including early payout of pension benefits and increased insurance coverage. 

A certification of the disclosed merger-related financial arrangements would also need to be submitted to the NCUA (noted below in procedural changes).

NCUA Merger Approval Procedureal Changes:

A number of procedural changes would be adopted to the approval process by the NCUA:

  1. Record Date:  The rule clarifies that the Board would be permitted to set a record date for purposes of establishing an official date by which a shareholder must be an owner of the credit union to participate in the annual meeting or corporate election;
  2. Submission of Merger Proposal:  The proposed rule would require both the merging and continuing credit union to submit board minutes to the NCUA that reference the merger during the 24 months preceding the date of approval of the merger plans by the respective Boards; and
  3. Certification of Merger-Related Compensation:  The Boards of both credit unions would need to certify that there are no merger-related financial arrangements other than those disclosed to the members of the merging FCU in the member notices.

Approval of the Merger Proposal by Members:

The proposal makes several changes to the notice requirements and procedures governing the member vote: 

  1. Timing of Notice: The proposed rule would require notices to be mailed at least 45 days, but no more than 90 days, before the meeting to vote on the merger.
    CUNA Note:  That the current FCU Bylaws timelines for the notice of an annual meeting must be at least 30 days, but not more than 75 days before the annual meeting.  Notice for a Special Meetings require at least 7 days before the meeting, so the proposed rule notice timelines (at least 45 days but no more than 90 days) will not correlate or integrate well with these timelines;
  2. Content: The content of the member notice would be revised to provide additional information and clarity for members;
    CUNA Note: Of note in the disclosures is the definition of “an analysis of share values” and “explanation of any share adjustment” that are included in member notices.  The new rule would permit an FCU to include a short statement explaining its net worth level, subject to NCUA review, as part of its overall review of the merging disclosures.  While the proposed rule states that the NCUA is not requiring or encouraging share adjustments, it would require FCUs to provide a more detailed explanation of how much of the merging FCU's net worth will transfer to the continuing credit union and how much, if any, would be rebated to the members of the merging FCU through a share adjustment; and
  3. Member-to-Member Communication: The rule establishes procedures to allow for reasonable member-to-member communication in advance of a proposed merger.
    CUNA Note This provision is similar to the provision provided for member-to-member communications that exists when converting to a bank.  As part of the member notice, an FCU would be required to inform members that if they wish to provide opinions about the proposed merger to other members, they can submit their opinions in writing to the merging FCU within 30 calendar days of receipt of the notice and the FCU will forward those opinions to other members.  This provision may, in some instances, force a delay of the vote as the communication period may not be complete in time for the scheduled vote.

A few key features of the communications requirements:

  • The member notice would have to provide contact information at the merging FCU for communications;
  • Members would have to agree to reimburse the credit union for costs of transmitting the communication;
  • The merging FCU would need to ensure that members receive all appropriate communications from other members no later than 15 days before the member vote on the proposed merger;
  • The FCU may include a statement with the member-to-member communication notifying members that the communication represents the opinion of a member and does not reflect the views of management or directors; and
  • Regional Director review would be allowed for communications that are false or misleading with respect to any material fact.  An FCU would not be able to add additional information without approval of the regional director (or ONES director).

Comments are due to the NCUA by August 7, 2017

CUNA Detailed Summary Read summary here
Comment to CUNA Staff Provide feedback here
CUNA Comment Letter 08/07/2017
Agency/Entity National Credit Union Administration
Agency Comment Deadline 08/07/2017
CUNA Contact

Andy Price