Irving Bank Corp. v. Board of Governors of Federal Reserve System

• Citation: 845 F.2d 1035
• Decision Date: 18 April 1988
• Docket Number: No. 88-1176,88-1176
• Parties: IRVING BANK CORPORATION, Petitioner, v. BOARD OF GOVERNORS OF the FEDERAL RESERVE SYSTEM, Respondent, Bank of New York Company, Inc., Intervenor.
• Court: United States Courts of Appeals. United States Court of Appeals (District of Columbia)

Page 1035

845 F.2d 1035

269 U.S.App.D.C. 290

IRVING BANK CORPORATION, Petitioner, v. BOARD OF GOVERNORS OF the FEDERAL RESERVE SYSTEM, Respondent Bank of New York Company, Inc., Intervenor.

No. 88-1176.

United States Court of Appeals District of Columbia Circuit.

Argued April 14, 1988.

Decided April 18, 1988.

Kenneth Berlin and Eloise L. Morgan, with whom Michael H. Byowitz, New York City, was on the brief for petitioner.

Richard M. Ashton, Associate Gen. Counsel, Bd. of Governors of the Federal Reserve System, with whom John R. Bolton, Asst. Atty. Gen., and Robert D. McGillicuddy, Atty., Bd. of Governors of the Federal Reserve System, Washington, D.C., were on the brief for respondent.

John L. Warden, with whom Richard J. Urowsky, Washington, D.C., was on the brief for intervenor, The Bank of New York Co., Inc.

Before WALD, Chief Judge, and ROBINSON and STARR, Circuit Judges.

Opinion PER CURIAM.

PER CURIAM:

This appeal involves the legality of the Board of Governors of the Federal Reserve

System's conditional approval of The Bank of New York Company, Inc.'s (BNY) application first to acquire, then to merge with, Irving Bank Corporation (Irving). See Joint Appendix (J.A.) at 1-60 (Board Order). Because we decide that substantial evidence supports the Board's determination that the acquisition complies with the Bank Holding Company Act of 1956, as amended, 12 U.S.C. Sec. 1841 et seq., we uphold the Board Order.

I. BACKGROUND AND STANDING

A. Facts

On September 23, 1987, respondent-BNY, a bank holding company, approached petitioner-Irving with a merger proposal. Irving refused, ¹ and on September 25, 1987, BNY made a direct offer to purchase all of Irving's voting shares. A Registration Statement to this effect, subsequently twice amended, was filed with the Securities and Exchange Commission.

Over Irving's opposition, the New York State Banking Board unanimously approved BNY's state application for approval of the acquisition. On October 2, 1987, BNY sent a similar application to the Board of Governors of the Federal Reserve System (Board), pursuant to sections 3 and 4 of the Bank Holding Company Act (BHCA or the Act). 12 U.S.C. Secs. 1842, 1843. The application to the Board was revised on November 4, 1987. Lengthy investigations and administrative proceedings followed, and on February 25, 1988, the Board unanimously approved BNY's offer for Irving's voting shares and, alternatively, for a smaller percentage stock purchase as precursor to a proxy contest for control of Irving's Board of Directors.

The Board's thorough opinion dealt specifically with the objections raised by Irving, and explicitly conditioned approval on BNY's meeting several financial conditions. The Board began by noting that the hostile nature of the proposed acquisition is of no particular relevance to its permissibility under the Act. The Board acknowledged, however, the significant adverse effects that could result from a prolonged fight, and therefore stated that it would grant BNY only one extension (for good cause) of the normal period allotted for the consummation of an approved transaction.

On the merits, the Board determined that the acquisition would have no adverse effects on competition. The Board found that the relevant market for antitrust purposes is commercial banking in the New York metropolitan and mid-Hudson geographic markets, areas in which both BNY's and Irving's subsidiary banks primarily compete. The combination of BNY and Irving would result in the fifth largest commercial banking organization in the New York metropolitan area, occupying approximately 6.9% of the market. In the mid-Hudson market the combined entity would become the largest commercial banking organization, with a 16.5% market share. The Board found that in the general commercial banking market, the transaction clearly poses no antitrust problems. Irving does not contest this determination.

The Board rejected Irving's specific argument that the relevant markets for antitrust purposes include two small, discrete services. These services, known as Government Securities Clearance (GSC) and American Depository Receipts (ADR), are offered by very few banks, two of which are Irving and BNY. Irving contended that, after the merger, these lines of commerce would be enormously concentrated, raising insurmountable antitrust concerns. In the Board's view, however, under the Supreme Court's traditional approach to defining lines of commerce in commercial banking cases, the relevant market is the cluster of services normally provided by banks. This view holds that the wide array of services offered by commercial Viewed in this manner, the Board concluded that GSC and ADR services form a part of the cluster of services traditionally offered by banks. These services are performed only by commercial banks, and consist mainly of a combination of functions--such as custodial, trust, fund transfer, and credit services--commonly performed by banks. Thus, under governing Supreme Court precedent, the Board concluded that the relevant line of commerce for antitrust purposes is commercial banking, and that within this market BNY's proposed acquisition would have no adverse effect on competition.

banks form one market--commercial banking. The Board held that under this approach, it is insignificant that particular services may be offered by a limited number of banks; instead, what is significant is the cluster of services that constitutes traditional banking functions. Under the contrary view, every individual service offered by banks, from specialized credit to fund transfers, could form its own line of commerce for antitrust purposes. Underlying the Board's analysis is the idea that the cluster of bank services is an economically distinct product apart from the individual services involved.

Alternatively, the Board found that even if the relevant lines of commerce were the specialized GSC and ADR services, the transaction nonetheless would pass muster. The Board reached this conclusion notwithstanding the dramatic concentration in these "markets" resulting from a combination of BNY and Irving. In the Board's view, the anticompetitive difficulties posed by high market concentrations would be mitigated by possibilities of new entrants, customers' countervailing market power, and the availability of substitute products. ² The Antitrust Division of the Department of Justice approved without comment the merger proposal.

The Board also considered the financial factors involved in the acquisition. After emphasizing that "capital adequacy is an especially important factor in the analysis of bank holding company expansion proposals," J.A. at 26, the Board determined that, subject to meeting several financial conditions, BNY's capital position is sufficiently strong to warrant approval of the application.

BNY committed to achieve certain tangible common equity to assets ratios, namely 3.5% at the consummation of the merger, and 4.1% within one year of the transaction. The Board held that these ratios must be met as a condition of financial soundness; but the Board added the further condition that the amount expended on the cash portion of BNY's exchange offer ($264 million, to be raised through liquidation of $220 million in securities and issuance of $44 million of short-term debt) must likewise be replaced. BNY was thus required to support at least 60% of the cash outlay through the issuance of new equity capital, either common or noncumulative perpetual preferred stock, by the time of the transaction's consummation; the remaining 40% must be replaced in a similar fashion within six months of consummation of the transaction. Moreover, the 3.5% and 4.1% tangible common equity to assets ratios must be calculated without reference to the newly issued equity capital.

With these financial conditions, which would ensure the relatively prompt replacement of capital depleted in the transaction, the Board determined that the bank would enjoy a capital position within a short period fully in compliance with Board guidelines.

Indeed, BNY's capital position in the wake of the acquisition would be better than the average of the nation's twenty largest banking organizations.

Irving objected to several aspects of the financial data relied on by the Board. Primarily, Irving contended that BNY's figures insufficiently discounted the value of Irving's nonperforming loans, principally to lesser developed countries. BNY proposed to write down to current market value certain loans it plans to sell within one year, but relied on its view of generally accepted accounting principles to leave intact the book value of Irving's remaining loans. Irving contended that this accounting treatment was incorrect, resulting in significantly overstated tangible assets (as opposed to intangible assets such as goodwill), and a corresponding understatement in the amount of capital needed to fulfill BNY's commitment to meet tangible equity to assets ratios.

The Board declined to resolve this dispute. Instead, the Board "assumed" BNY's accounting conventions in evaluating the financial soundness of the transactions. Specifically, the Board determined that it was unnecessary to decide which party was correct as to the appropriate accounting principles, because the financial conditions imposed on BNY explicitly took account of "asset quality and the uncertainties that are naturally raised" in this sort of large acquisition. J.A. at 32. Thus, the Board concluded that, subject to the financial conditions imposed, "the financial resources of BNY and the banks and companies involved are consistent with approval of the proposal." Id.

The Board also dealt with several asserted legal impediments to the acquisition. First, New York state corporation law precludes a shareholder who acquires more than 20% of a corporation's stock without the board of directors' approval from effecting a subsequent...