|
[Main Tabs]
[Table of Contents - 4000]
[Index]
[Previous Page]
[Next Page]
[Search]
4000 - Advisory Opinions
Violation of Depository Institution Management
Interlocks Act 1
FDIC-81-16
June 18, 1981
Barbara I. Gersten, Attorney
By memorandum dated June 10, 1981, you have requested that the Legal
Division render an opinion on whether acquisition of the *** (" ***
") by Mr. *** would result in a prohibited management interlock with
other banks located in the same SMSA in which *** has an interest. The
*** Regional Office has recommended denial of the proposed transaction
under the Change in Bank Control Act because it appears that the
acquisition of *** by *** would result in a violation of the Interlocks
Act.
*** proposes to acquire 9.79% of *** and six other persons plan to
acquire 44.05% for a total of 53.84%. The stock is to be placed in a
voting trust of which *** would act as sole trustee. In addition, ***
would serve as chairman of the board. *** other banking interests in
the *** standard metropolitan statistical area (SMSA) comprise two
one-bank holding companies and another
bank 2
, *** owns 30% of *** (the 100% owner of ***) and votes an additional
22% of the stock under a voting trust agreement. He owns 100% of ***
(the 85.6% owner of *** and 66% of
***. 3
*** and *** have assets in excess of $20 million, while *** has assets
of less than $20 million. *** is chairman of the foregoing holding
companies and banks, and also serves as president of *** and its
parent.
Part 348 of the FDIC's regulations provides, in pertinent part, that
a management official of a depository organization (a bank or bank
holding company, for purposes of the instant case) may not serve at the
same time as a management official of another depository organization
not affiliated with it, if offices of both are located in the same SMSA
and either has assets of $20 million or more. 12 C.F.R. § 348.3(b). A
"management official'' means an employee or officer with management
functions. 12 C.F.R. § 346.2(b). Part 348 defines the term
"affiliate'' with reference to Section 202 of the Interlocks Act,
which provides, in pertinent part, that depository organizations are
affiliates if more than
{{4-28-89 p.4081}}50% of the voting stock of one
corporatrion is beneficially owned in the aggregate by one or more
persons who also beneficially own in the aggregate more than 50% of
the other corporation. 12 U.S.C. § 3202(3)(B).
In the instant case, all the subject depository organizations are
located in the *** SMSA. While the asset size of *** is not known, two
of the other banks involved have assets in excess of $20 million. ***
qualifies as a management official, as he serves as chairman and
president of the various depository organizations. The key issue to be
resolved is whether the depository organizations are affiliated through
common beneficial ownership of more than 50%, which would permit
interlocks involving ***. *** owns more than the requisite amount of
stock in ***. (***), *** and *** (***
***) 4
*** will actually purchase less than 10% of the stock of ***, however,
he will have voting control of more than 50% of the stock.
The concept of beneficial ownership is not defined in the Interlocks
Act or Part 348, therefore guidance in defining the concept must be
sought from other statutes and regulations, such as those in the area
of Federal securities law. Rule 13d-3 (17 C.F.R. § 240.13d-3)
promulgated under the Securities Exchange Act of 1934, as amended (15
U.S.C. § 78), in pertinent part provides:
(a) For purposes of Section 13(d) and (g) of the Act a
beneficial owner of a security includes any person who, directly or
indirectly, through any contract, arrangement, understanding,
relationship, or otherwise has or shares:
(1) Voting power which includes the power to vote, or to
direct the voting of, such security . . .
5
Regulations promulgated by the FDIC pursuant to the Securities
Exchange Act of 1934 have similar provisions which include voting power
within the meaning of beneficial
ownership. 6
Section 13(d) of the 1934 Act requires certain public disclosures by
persons acquiring substantial blocks of a security registered under the
1934 Act. Within 10 days of acquiring a security that results in the
beneficial ownership or more than 5% of a class of security, certain
information as required by schedule 13D must be provided to the issuer,
the exchanges in which the security is traded, and to the Securities
and Exchange Commission. The purpose of § 13 is to alert the market
as to large and rapid accumulation of securities which might represent
a shift in corporate control. 7
The issue of whether voting control of more than 50% of the stock
of a bank would constitute beneficial ownership for purposes of the
Interlocks Act was considered by staff of the Federal Reserve Board
("FRB") in reviewing *** January 1980 application for *** to
become a holding company by acquiring ***, of which he owned more than
85% of the stock. 8
At that time, *** owned 20% of *** and as sole trustee of a voting
trust, had the power to vote an additional 33% of the bank's stock.
Relying on the definition of beneficial ownership found in the Federal
securities laws, the FRB determined that *** beneficially owned more
than 50% of the stock of ***. therefore the interlock would be allowed
because affiliation of the two depository organizations through common
beneficial ownership was found to
exist. 9
{{4-28-89 p.4082}}
The Legal Division is of the opinion that the concept of beneficial
ownership should be deemed to include voting rights for purposes of the
Interlocks Act. A narrow construction of the term to mean equitable
ownership only (as contrasted with holding legal title), would not
promote the purpose of the Interlocks Act. The purpose of the
Interlocks Act and Part 348 is to foster competition by prohibiting a
management official of a depository organization from also serving as a
management official of another depository organization if the two
organizations (1) are not affiliated and (2) are large or are located
in the same local area. 12 C.F.R. § 348.1(b). A broad definition of
beneficial ownership that includes voting rights appears consistent
with the notion of the power to create an affiliation in terms of
control. Acquisition of the power to vote more than 50% of the stock
of a depository organization could impact on competition, therefore
voting rights should be taken into consideration when defining
beneficial ownership for purposes of the Interlocks
Act. 10
To prevent an interlock in the *** case by narrowly construing
beneficial ownership as an equitable interest only would not promote
competition in the *** SMSA. If the *** transaction were consummated,
*** would control five banks (including the ***, should that
acquisition be approved) in the *** SMSA having a total of 1.3% of the
SMSA deposits as of December 30, 1980. The *** Regional Office has
determined that acquisition of *** by *** would not substantially
lessen competition or tend to create any form of
monopoly. 11
If there is no anticompetitive issue that would constitute a basis to
deny the proposed acquisition under the Change in Bank Control Act,
similarly, there would exist no reason to deny the acquisition under
the Interlocks Act, which would prohibit an interlock in order to
foster competition.
It is the opinion of the Legal Division that ***, as sole trustee of
more than 50% of the voting stock of ***, should be deemed to have
beneficial ownership of the stock that is subject to the trust. On this
basis, *** may be found to be the affiliate of the other depository
organizations in the *** SMSA in which *** beneficially owns more than
50% of the stock. The proposed acquisition of *** by *** would not,
therefore result in a prohibited interlock. The reverse, however, is
not necessarily true. That is, even if acquisition of control would not
result in an illegal interlock due to the affiliate exemption, we would
expect that the FDIC could still deny an acquisition under the Change
in Bank Control Act on competition grounds. It is clear that the
Interlocks Act cannot effectively be used as a tool to foster
competition in change of ownership situations because of the affiliate
exemption; however, the Change in Bank Control Act may be so
used.
1 The Depository Institution Management Interlocks Act
("Interlocks Act", 12 U.S.C. § 3201 et seq.) is
implemented by Part 348, "Management Official Interlocks" of the
FDIC's regulations (12 C.F.R. Part 348). Go Back to Text
2 *** is also currently seeking to acquire 70.51% of ***, the
100% owner of ***, and intends to serve as chairman of both the
holding company and the bank. Go Back to Text
3 The information on the ownership of *** (100%) and ***
(66%) by *** is derived from correspondence dated June 10, 1981 from
***, Regional Director, *** to ***, Director, Division of Bank
Supervision, on the notice of acquisition of control of *** (the "
*** "). An undated draft memorandum from *** to *** on the same
subject indicates, however, that *** owns 87% of *** and 63% of
***. Go Back to Text
4 See footnote 9 and accompanying text,
infra. Go Back to Text
5 See Financial General Bancshares, Inc. v. Lance,
CCH Fed.Securities Law Rptr., 1978 Transfer Binder, 96,403 (D.D.C.
1978) (pooling of voting power in order to effect management of
corporation indicative of beneficial ownership for purposes of § 13
of the Securities Exchange Act of 1934); Transcon Lines v. A.G.
Becker, Inc., 470 Fed. Supp. 356, 372 (S.D.N.Y.)1979). Go Back to Text
6 The relevant provisions of the FDIC's regulation are found at
12 C.F.R. § 335.4(h)(A). Go Back to Text
7 GAF Corp. v. Milstein, 453 F.2d 709, 717 (2d Cir.
1971), cert. denied 406 U.S. 910 (1972). Go Back to Text
8 Federal Reserve Board Legal Opinion *** to BMC Files dated
January 18, 1980, on the subject of the § 3(a)(1) application of ***
to become a bank holding company. Go Back to Text
9 The opposite position was taken by staff of the Federal
Reserve Bank of Chicago, which did not support a construction of
beneficial ownership that would include voting rights, and further,
indicated that the legal staff of the Board of Governors was in accord
with this position. Correspondence from Attorney *** FRB *** to ***,
dated September 17, 1980. In this regard, I contacted legal staff of
the Board of Governors on June 12, 1981. Attorney *** (a primary member
of the interagency task force on the Interlocks Act) indicated that FRB
staff in Washington did not subscribe to this opinion, and that the opinion issued in the *** application of January 18,
1980, was controlling on the subject of beneficial ownership. Go Back to Text
10 While the Interlocks Act has the stated purpose of fostering
competition, it does not reach the situation where the same person (who
is not a management official) acquires two banks in a SMSA. Go Back to Text
11 *** correspondence of June 10, 1981, at page 3. Go Back to Text
[Main Tabs]
[Table of Contents - 4000]
[Index]
[Previous Page]
[Next Page]
[Search]
|
