NEW YORK -- The state banking regulator has ruled that Republic New York Corp.'s hostile takeover offer for Green Point Savings Bank is "unlawful and improper," virtually dooming the deal.

Republic maintained Thursday that it would keep pursuing Green Point, the nation's largest mutual thrift, with $5.7 billion in assets.

Door Nearly Closed

But observers said the bid now faces extremely long odds. They added it is increasingly likely that the Brooklyn thrift's board of trustees will be able to go ahead with a plan to convert to stock ownership through an initial public offering that could raise $800 million or more.

New York State's superintendent of banks, Derrick D. Cephas, told Republic Wednesday evening that it had "no authority" to make a merger-conversion offer to Green Point's down positors after being turned down by the trustees.

In particular, he said, Republic's offer of a $100 million "special interest payment" to depositors -- later raised to $250 million -- is not allowable.

Such a deal would have been extremely lucrative to Republic, which would pay far less than Green Point's estimated market value of more than $800 million.

The regulator appeared to leave a door ajar that could let Republic influence depositors when they vote next month on the thrift's plan to convert to stock ownership.

In a detailed "interpretive statement" of the state's policy regarding conversions by mutuals, Mr. Cephas said:

"A depositor desiring to solicit proxies in connection with the Green Point plan of conversion may obtain financing or funding from Republic or from any other interested person so long as the source of such financing is disclosed, along with the fact that Republic is interested in the outcome of the vote."

He further said Green Point must comply within 48 hours after getting an authentic request from any depositor for a complete list of the institution's depositors.

But lawyers said that the wording leaves Republic with little hope of forcing takeover talks.

"If the superintendent created a loophole, it's for a mouse and not a multibillion-dollar bank," said Michael L. Ryan, a bank lawyer at Cleary, Gottlieb Steen and Hamilton. "And he has made it clear that Green Point does not have to deal with Republic now or in the future."

Pledge of Legality

Republic responded Thursday to the state regulator in a carefully worded statement:

"We have been advised by our de legal counsels that two outside legal counsels that our proposal and manner of approach, particularly given our responsibilities as a publicly traded company, are legal.

"We in no way intend to take any action with respect to a merger-conversion proposal for the Green Point that is not consistent with law and appropriate procedures."

The drama between Republic and Green Point broke into the open Nov. 5.

The commercial bank said it had no choice but to go public with its offer after Green Point's trustees repeatedly refused to discuss a takeover.

Republic had been trying since June to approach Green Point's trustees, but the board steadfastly maintained it would proceed with its own plan of conversion via a public offering of shares in GP Financial Corp., its proposed holding company.

Among other things, Republic said publicly it believed its proposed special interest payment would be approved by the New York State Banking Board.

That drew a sharp response from Mr. Cephas, who said the "highly publicized proposals to make a special payment to Green Point depositors were unlawful and improper under the circumstances."

He warned Republic to "take no further steps" that would lead the thrift's depositors to believe they could get such a cash payment without approval of the mutual's own trustees.

"The decision to commence a conversion to stock form resides in the sound discretion of a mutual savings bank's board of trustees and may not be coerced by third parties," the banking superintendent said.

Mr. Cephas said he would ask the state banking board at its Dec. 2 meeting to adopt "on an emergency basis" amendments tightening New York State's mutual conversion regulations. MAY 13 -- Green Point trustees adopt a plan to convert to stock ownership. JUNE 8 -- Jeffrey C. Keil, president of Republic, writes to trustees to discuss an acquisition. JUNE 11 -- The trustees decline his offer. AUG. 9 -- Thomas S. Johnson is hired as Green Point's chief executive. SEPT. 22 -- Republic reiterates offer to discuss an acquisition. OCT. 14 -- Mr. Johnson rejects Republic's proposal. NOV. 4 -- Mr. Keil writes again to Mr. Johnson, but Green Point refuses to accept the letter. NOV. 5 -- Republic goes public with its offer.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.