Directors’ Responsibilities in Credit Union Acquisitions of Banks

The National Credit Union Administration’s recent proposed rule on federally insured credit union combinations with banks and other non-credit unions would establish new corporate governance rules for these transactions if it is finalized.  

NCUA already has similar rules for mergers of a FICU with another credit union, for mergers of a FICU into a bank, and for conversion of a FICU to a mutual savings bank or to a privately insured credit union, but the agency has not previously established regulations applicable to credit unions acquiring non-credit unions.   

These combinations most commonly involve a credit union acquiring a bank or some of the bank’s branches through a purchase and assumption transaction where the credit union purchases the bank’s assets and assumes its liabilities in the functional equivalent of a merger.  

If finalized as proposed, the new NCUA rule would require directors of federally insured credit unions to vote on whether to go forward with a credit union’s proposed combination with a non-credit union, meaning that the decision to acquire a bank could not be made by the credit union’s management alone.  

Each board member who voted in favor of the transaction would also be required to sign a statement certifying that he or she understands the transaction and believes that it is in the best interests of the credit union’s current and potential members.  

Specifically, the directors’ certification would include:

1. A statement that each director who voted in favor of the transaction supports the federally insured CU’s proposed combination transaction with a non-credit union and believes that the proposed combination is in the best interests of the current and potential members of the credit union;
2. A statement that the credit union’s management team has adequately explained the transaction’s expected effect on the credit union’s net worth and balance sheet to the board member, including how the credit union determined the purchase price;
3. A description of the materials the credit union submitted to the NCUA regional director in connection with the proposed combination;
4. A statement that each director signing the certification had the opportunity to review all relevant facts about the transaction before voting on it; and
5. A statement that each director does not have a financial or personal interest in the transaction, either directly or through another legal entity.

In addition, federal credit unions would need to demonstrate that the depositors of the non-credit union are eligible to join the credit union and that they had consented to becoming credit union members.  

The preamble to the proposed rule contemplates a minimum percentage of the depositors of the non-credit union voting in favor of becoming credit union members in a manner similar to a FICU-to-FICU merger vote.  

For state-chartered federally insured CUs, the credit union’s state regulatory agency would need to provide a written statement to NCUA confirming that the depositors would be credit union members at the close of the transaction pursuant to state law.  

While director certification requirements and having bank depositors vote on whether or not to become credit union members are not required by current law, NCUA’s existing rule on federal credit union director fiduciary duties already establishes similar duties of care and loyalty for directors. State-chartered credit union directors’ fiduciary duties are largely similar to those of federal credit union directors but are based on state corporate law.  

Both federal and state-chartered credit union director fiduciary duties typically require directors to act in a reasonably prudent manner and understand the operations of the credit union and its business transactions. These duties also prohibit credit union directors from having conflicts of interest related to transactions that they approve.  

Corporate law typically also establishes a duty of fair dealing by a corporation’s board and management to its shareholders (who, in the credit union context, are the credit union’s member-owners) with respect to such major transactions as a merger, a liquidation or a charter conversion that is similar to the proposed requirement that each director certify that he or she believes that the combination is in the best interests of the members.  

Most lawyers would also recommend that a credit union’s board of directors vote on whether to approve a business combination, even if a board vote would not become an NCUA regulatory requirement, to make it clear that the highest authority in the credit union’s governance structure authorized the transaction.

Many of the substantive requirements of the proposed rule are already applicable to credit union directors, at least in theory. Clarifying directors’ fiduciary duties concerning combinations with non-credit unions should help increase directors’ awareness of their corporate governance responsibilities for these types of transactions.

In addition, increasing board scrutiny of credit unions’ acquisitions of non-credit unions may help reduce risk to the National Credit Union Share Insurance Fund by making it less likely that a credit union will acquire loans or investments from non-credit unions that turn out to be problem assets. NCUA’s proposal, if finalized, therefore has the potential to reduce risk and costs to the credit union system during the next economic downturn.

Michael S. Edwards is an attorney-at-law with extensive experience representing credit unions, community banks and credit union organizations in the United States and around the world on a wide range of regulatory, compliance and other legal matters. Now with his own law firm based in the Washington, D.C., area, Edwards previously served as SVP/advocacy and general counsel of the World Council of Credit Unions and was senior assistant general counsel in the regulatory advocacy section of the Credit Union National Association.