Many institutions are talking about the opportunity to convert VISA Class B shares into marketable Class A shares. If you’re new to a bank or credit union Board and weren’t aware that your institution even held VISA shares of any kind, don’t feel bad. These shares have been recorded at a value of zero for many years due to the restrictions on trading to which the Class B shares are subject.
Here’s a quick review of the history of these restricted Class B VISA shares, in laymen’s terms, that helps explain how we got here and what this all means now:
- The good old days … Before 2007, VISA operated as a cooperative entity jointly owned by institutions issuing VISA-branded cards. Under this structure, issuing institutions “owned” VISA and shared in the network’s operating results through periodic dividends.
- The long arm of the law. Throughout the 2000s, VISA and other plastic card networks were coming under increased scrutiny, and lawsuits regarding fee disclosures, monopolistic behavior, and other allegations started accumulating. In 2007, VISA opted to go public as part of a strategy to address the numerous lawsuits. As part of this arrangement, previously existing issuing financial institutions received Class B restricted shares. Basically, these shares were restricted until such time as the legal matters were resolved. The rate at which Class B shares would be converted to marketable Class A shares was to be determined based, primarily, on the ultimate cost to settle or resolve VISA’s legal matters. Class B shareholders’ liability for VISA’s legal matters was limited to the Class B shares. In other words, the maximum potential cost of these legal proceedings to Class B shareholders was that the Class B shares might ultimately be worthless. But Class B shareholders would not be liable for anything more than that.
- Hold the shares, but will they be worth anything? At that time, financial institution regulators issued specific guidance allowing institutions to hold the acquired Class B shares, even though financial institutions are not typically to hold equity securities like this. Because of the uncertainty surrounding the conversion ratio, as well as the fact that Class B shareholders generally had no cost basis in these shares, most institutions recorded these Class B shares at zero.
- Justice is slow. The lawsuits took significantly longer than anyone wanted to resolve. Over the years, a path to liquidate Class B shares was established, but such trades could only be conducted among previously existing Class B shareholders. A few market players attempted to accumulate Class B shares on speculation that they would be worth more than expected at some point in the future. Transparency was low.
- Meanwhile … VISA’s Class A shares increased in value from $11 a share in 2007 to over $250 a share more recently.
- A new plan. In 2023, VISA responded to increasing calls from Class B shareholders demanding a clearer path to converting and/or liquidating Class B shares. The plan to allow for a reduction of transfer restrictions on Class B shares was rolled out in Fall 2023 and approved by VISA shareholders on January 23, 2024. The conversion plan entails multiple steps, which are articulated in graphic form in VISA’s public filings as follows:
- Ahh … but there is a catch. Institutions considering the conversion of their Class B shares must sign a “makewhole” agreement. It is advisable to have your institution’s attorney review this agreement to make sure there is an understanding of what liabilities your institution may be subject to under the terms of this agreement. Remember, Class B shareholders’ liability for the legal matters was limited to the Class B shares. This makewhole agreement changes that for those who convert Class B share into another class of shares
- Booking the windfall. The conversion to Class B-1 and Class B-2 shares should generally not change the accounting – these share classes would still be recorded at zero. However, when Class C shares are acquired through this conversion process, they would be appropriately valued based on the fair value of the Class A shares to which these Class C shares can be converted. This creates a windfall income item to the financial institution’s income statement. Of course, any Class A shares ultimately acquired and held would be “marked-to-market” on an on-going basis
- Must you also book a liability? Critically, the potential liability related to the makewhole agreement will also have to be accounted for, which is likely to entail note disclosure in GAAP basis financial presentations but could result in financial liabilities on the balance sheet if circumstances change
- Regulators will weigh in – at some point. All the way back in 2007, (step 3 above) financial institution regulators allowed for banks and credit unions to hold Class B shares. As of this writing, we are not aware of a regulatory position regarding these new Class B-1, Class B-2, or Class C Shares. Keep your eyes open for regulatory guidance on this.
Shareholders must elect to participate in the first conversion tranche by May 3, 2024. But that doesn’t mean there won’t be more conversion opportunities at future dates. We’ll all learn something as this first wave is executed and the regulators weigh in on all of this.
If you need further guidance or have any questions on this topic, we are here to help. Please do not hesitate to reach out to myself at jpaille@bonadio.com, or any member of our Financial Services Team to discuss your specific situation.
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