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Emerging Issues

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Per NCUA Regulations effective January 1, 2011 (Section 708b.106), “merger related financial arrangements” are now subject to regulatory scrutiny and disclosure. The regulation provides that when the merging credit union is a federal credit union, the members must be given advance written notice (i.e., Notice of the Special Meeting) to vote on the merger proposal, which must now contain a detailed description of any merger related financial arrangement. The description must include the name and title of each individual recipient and an explanation of the financial impact of each element of the merger-related financial arrangement, including direct salary increases and any indirect compensation, such as any bonus, deferred compensation or other financial reward. Words such as “indirect” and “other financial reward” should be carefully considered (see below). Other key terms are:
  • Merger-related financial arrangement means: “A material increase in compensation (including indirect compensation, for example, bonuses, deferred compensation, or other financial rewards) or benefits that any board member or senior management official of a merging credit union may receive in connection with a merger transaction. For purposes of [the] definition, a material increase is an increase that exceeds the greater of 15 percent or $ 10,000.”
  • Senior management official means: “the chief executive officer (who may hold the title of president or treasurer/manager), any assistant chief executive officer, and the chief financial officer.” [emphasis added.]
Issues and Recommendations: State Regulators: While the regulation applies only to merging federal credit unions, our experience is that the state regulatorwill want to know which board member or senior management official of a merging state chartered credit union will receive a material increase in compensation or other benefit. Moreover, the state regulator may require (and has required) disclosure similar to that outlined above. Merger Application: Before submitting any merger proposal/application to a regulator, the credit unions involved should:
  • Prepare a detailed analysis of all existing compensation and benefits that each credit union board member and/or senior official currently receives and compare it to what such person will be receiving post-merger. One time payments triggered by the merger should be identified and analyzed as well.
  • Keep in mind that the regulators will take a broad view of what constitutes a “merger related financial arrangement,” and terms such as “indirect” and “other financial reward” give them the ability to do so. Accordingly, we suggest a conservative approach; disclose in the merger application (to the regulators), all possible payments that may fall within the regulation. If you believe some (or all) of them should fall outside of the regulation (requiring disclosure to members), make your best argument to the regulators in that regard.
Other Related Issues: Consider other less than obvious compensation related items, for example, recurring reimbursable expenses, as well as travel and education expenses (particularly for board members). Special attention needs to be paid to deferred compensation plans (substantial risk of forfeiture and similar provisions) in a merger transaction. Other agreements and arrangements that will be terminated post merger should also be considered. Overall, the merging credit unions need to be mindful of the public (members?) perception that such transactions often involve the “fat payment.” Our experience is that even when disclosure is required by the regulators, the merging credit unions have good reasons to support the proposed payment. In such a situation, the parties may be well advised to seek outside public relations assistance to provide effective context and communications.