The West Virginia Legislature enacted a new law aimed at streamlining business combinations by creating an avenue that permits West Virginia companies to acquire another entity using stock as consideration without the burden and expense of registering the stock issued in the transaction. Stock-for-stock transactions have historically been attractive because they allow the acquiring company to preserve its cash. They also allow the shareholders of the target company to defer capital gains until they choose to sell their shares and to participate in the future growth and success of the combined entity. The new law should make stock-for-stock transactions even more appealing because the burden and expense associated with the registration of the securities to be issued in the transactions will be significantly reduced.

During its 2025 session, the West Virginia Legislature passed House Bill 2889 (the “Bill”), which authorizes the State Commissioner of Securities (the “Commissioner”) to consider and conduct a fairness hearing upon any plan of reorganization, recapitalization or refinancing of a corporation or limited liability company organized under the laws of West Virginia or having its principal place of business within the state of West Virginia when the plan contains a proposal to issue securities in exchange for outstanding securities, claims or property interests.

Prior to the passage of the Bill, such a transaction would have required the filing of a registration statement with the Securities and Exchange Commission (SEC) to register the securities being exchanged in the transaction pursuant to the Securities Act of 1933 (the “Securities Act”). The registration process is time-consuming and expensive. However, the adoption of a state fairness hearing procedure allows West Virginia corporations and limited liability companies, including bank holding companies, to rely on the exemption under Section 3(a)(10) of the Securities Act. The exemption provides that securities exchanged by an issuer are exempt from the SEC’s registration requirements where such exchange involves predominantly the exchange of securities and not cash and the exchange has been approved by a governmental entity following a fairness hearing. Thus, companies may use the fairness hearing process authorized by the Bill to avoid the burden and expense of registering securities being issued in the transaction with the SEC.

This new fairness hearing process is important for mergers involving West Virginia companies where the issuance of stock is the predominant consideration in the transaction because it allows the acquiring company to avoid registration of its securities with the SEC. The consequences of filing a registration statement with the SEC are potentially significant for non-publicly traded companies. After filing a registration statement, the acquiring company becomes a public company and is subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which requires the filing of annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. These SEC filing requirements can only be terminated or suspended if the securities of the acquiring company are held by less than 1,200 persons for banks and bank holding companies or 2,000 persons for other entities.

Moreover, approval of a securities exchange following a fairness hearing held by the Commissioner exempts the securities from registration at the state level in West Virginia. With respect to states other than West Virginia, the SEC has released guidance indicating that securities exempt from registration pursuant to Section 3(a)(10) are still subject to state securities law registration requirements (blue-sky laws). While many state laws include automatic registration exemptions for stock-for-stock transactions deemed to be fair by a government entity following a fairness hearing, such exemptions are not universal and require case-by-case analysis to ensure compliance with applicable state blue-sky laws. 

The Bill was retroactively effective beginning April 10, 2025. On May 2, 2025, the Commissioner issued Order No. 0008 (the “Order”), setting forth the application requirements and the procedures for the requisite fairness hearing. Among other things, the applicant must provide an audited balance sheet and income statement for the most recent fiscal year with respect to a merger and a pro forma balance sheet and income statement showing the effect of the transaction on the target company shareholders. Although an independent valuation or fairness opinion is not required to be obtained in the transaction, if one is obtained, it must be provided to the Commissioner as part of the application process. 

After filing the application, the Commissioner will notify the applicant of the date, hour and place for the fairness hearing, which must be held within 30 days of filing the application. The applicant must send notice of the hearing to all shareholders of the target company who will receive securities in connection with the transaction not less than 10 days prior to the hearing. Within 10 business days after the hearing, the Commissioner, or his designee, must issue an order determining whether or not the terms and conditions of the transaction are fair to the shareholders participating in the transaction. The applicant is responsible for all costs associated with the fairness hearing, including court reporter fees and costs and transcript costs. The application filing fees are $500, payable to the West Virginia State Auditor. 

Although the Bill will provide a less expensive and more expeditious means for the execution of bank acquisitions in West Virginia, the new process is not without risk. Shareholders and other third parties have the right to attend and participate in the hearing and may oppose a determination of fairness. Neither the Bill nor the Order defines how a transaction is determined to be “fair” to the shareholders, and the Commissioner has indicated that no regulations addressing this issue are being considered at this time. In the short term, parties desiring to take advantage of the new process should strongly consider obtaining a third-party fairness opinion that the transaction is fair from a financial point of view. If adverse comments are received, and the acquirer believes there is a possibility that the Commissioner may not find the transaction to be fair, the acquirer may withdraw the application to avoid a determination that the transaction is not fair. 

The West Virginia Bankers Association and the Community Bankers of West Virginia, with the assistance of the Bowles Rice government relations team, were instrumental in the drafting, lobbying and passage of the Bill. Members of the Bowles Rice banking team are ready to assist West Virginia banks and bank holding companies that want to take advantage of the fairness hearing process in transactions that predominantly involve the issuance of stock and not cash.