The Treasury has provided us with more detailed calculations for the Warrant Preferred Shares to be issued by private companies participating in the TARP Capital program. (As a reminder, the “warrants” for private companies are essentially warrants only in name, as the Treasury intends to exercise them immediately, causing additional shares of preferred stock, the Warrant Preferred Shares, to be outstanding immediately following the capital infusion.)
In order to calculate the number of Warrant Preferred Shares that are subject to the warrant (before net settlement), the following calculations need to be made:
- (Aggregate Purchase Price x 5%)/$1,000 = Number of Warrant Preferred Shares (following net settlement of the warrant).
- (Number of Warrant Preferred Shares x $0.01)/$1,000 = Net Settlement Amount
- Number of Warrant Preferred Shares + Net Settlement Amount = Number of Shares subject to Warrant.
These calculations result in the Treasury receiving the full 5% of their TARP Capital investment as Warrant Preferred Shares, and avoids any reduction as a result of the net exercise (and further emphasizes that the warrants are only warrants in name.)
As an example, if a private company had $200 million in total risk-weighted assets, and received a TARP Capital infusion of 2%, or $6 million, then the calculations would be as follows:
- Number of Warrant Preferred Shares = ($6 million x 5%)/$1,000 = 300
- Net Settlement Amount = (300 x $0.01)/$1,000 = 0.003
- Number of Shares subject to Warrant = 300 + 0.003 = 300.003
On the Warrant itself, the company should enter the fractional share amount calculated above, of 300.003. On the Certificate of Designations for the Warrant Preferred Shares, the company should round up the fractional amount to the nearest whole number, or 301. On the Certificate for the Warrant Preferred Shares, the company should enter the calculated number of Warrant Preferred Shares (net of settlement of the warrant), or 300 (and which should be a whole number).