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Delayed First Citizens-CIT deal faced antitrust claims in unsigned letter to Fed

An anonymous letter to federal regulators alleges multiple antitrust violations by First Citizens BancShares Inc., whose merger of equals with CIT Group Inc. has been pushed back several times in the past year. The letter was obtained by S&P Global Market Intelligence through a Freedom of Information Act request.

In a public comment letter to the Federal Reserve Board of Richmond dated Feb. 11, an anonymous writer who infers high-level, inside knowledge of CIT Group's operations alleged multiple violations of the law. The writer claimed First Citizens "has and continues to assert significant operational and decision-making influence over CIT's day-to-day operations."

CIT Group and the Federal Reserve declined to comment on the allegations. First Citizens issued a statement reiterating its previous disclosure that deal approval is presently at the Fed's governor level and that the bank has responded to all questions. A spokesperson for the Federal Reserve's FOIA office confirmed the letter was sent anonymously.

"If they're saying that the buyer here is influencing the daily operations or significant operational decisions of the target, it could be a violation of Hart-Scott-Rodino Antitrust Improvements Act," said Barbara Sicalides, a partner at Troutman Pepper Hamilton Sanders LLP who has advised companies on antitrust issues in M&A.

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The letter claims First Citizens violated the HSR Act by stopping the consolidation of existing CIT deposit platforms and halting ongoing technology projects intended to drive efficiency for CIT. Further, the letter claims that First Citizens' executive leadership team has "exerted significant influence" related to CIT's arrangement of assets that First Citizens "does not desire to maintain post-merger and attempted resolution of litigation and other contingent liabilities prior to merger, to which CIT's CEO willingly abides."

The letter also claims First Citizens is "ill prepared" to integrate the two companies and that the planned exit of the majority of CIT's leadership poses risk "given the vast and complex asset base of CIT, of which [First Citizens] has no experience in."

"This laissez-faire approach to integration will undoubtedly manifest itself in [matters requiring immediate attention] and potentially more significant enforcement action if left on its current path," the letter read.

It is "highly unusual" for allegations suggesting control issues to be made in an anonymous public comment letter, said John Gorman, a partner at Luse Gorman PC. Gorman's firm has represented banks in more than 150 deals since 2011.

The concerns relayed in the February 2021 letter may be the reason Fed approval is still outstanding more than one year after the banks struck their deal in October 2020, banking lawyers said. For the more than 2,000 deals announced across the banking industry since 2010, the median amount of time from announcement to completion is 140 days, according to data from S&P Global Market Intelligence.

"These are the kinds of issues that could hold up transactions," James Stevens, another partner at Troutman Pepper Hamilton Sanders LLP, said in an interview. "In an environment where there's at least anecdotally a thought that reviews are taking longer, any sort of bump in the road like this would be a cause for concern."

Exercising control

The HSR Act requires parties in a merger to notify the Federal Trade Commission and the U.S. Justice Department of their intentions to merge, and that notification triggers a review by those agencies to determine whether the proposed transaction could violate antitrust laws or regulations. The FTC and DOJ have 30 days to review the merger, during which the agencies may issue a second request for information if they feel the merger presents antitrust issues.

The law, passed in 1976, stipulates that parties involved in a deal must observe a waiting period before transferring ownership of assets. Concerns over control issues prior to regulatory approval could delay deal approval, especially considering the Fed "cracked down" on control issues about five years ago, Gorman said.

"If someone raises an issue of control that on their face are reasonable questions, the Fed's going to look into it. The law is you can't exercise control," Gorman said in an interview. "The Fed is sensitive to that."

Some restrictions around what activities the seller can engage in are normal, the lawyers said. All merger agreements have covenants in which the seller agrees not to fundamentally change their operations prior to deal close, both Gorman and Stevens said. Typical covenants can include restrictions on the seller issuing more stock or declaring dividends, according to Stevens.

But anything that exercises control on the seller's day-to-day operations is "going to get scrutiny from banking regulators," Stevens said.

"There's always this tension between controlling the target, which you can't do until you get approval, and having some reasonable constraints so that the nature of what you're acquiring isn't changing between signing and closing," Gorman said.