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4000 - Advisory Opinions
Limited Partnership Can Be an "Affiliate" of a Bank Through
Common Ownership or Control by One or More Limited Partners for
Purposes of Section 23A of the Federal Reserve Act
FDIC--93--24
May 11, 1993
Joseph A. Genova Jr., Regional Attorney
Your memorandum dated September 18, 1992, requesting a legal opinion
regarding the affiliate status of several companies to the [Bank] has
been referred to me for response. At the time I received this
assignment, I had other pending legal matters of a more pressing
nature. I discussed the urgency of this matter with Review Examiner Jim
Averitt. Together, we agreed that the inquiry did not need to be
addressed immediately. Nevertheless, I apologize for the delay in
responding to this inquiry.
Facts
Members of the [X] and [Y] families own 100 percent of [Holding
Co.], a multi-bank holding company. [Holding Co.] owns: 94.54
percent of the voting stock of [Bank]; over 80 percent of the voting
stock of [Bank A]; and over 80 percent of the voting stock of [Bank
B]. Additionally, members of the [X] and [Y] families have
substantial ownership interests in three other banks: [Bank C];
[Bank D]; and [Bank E]. The [X] and [Y] families also have
substantial ownership interests in numerous other business entities. At
the time of its most recent FDIC examination, [Bank] had made loans
to at least two of these other business entities. Other banks in which
the [X] and [Y] families have some degree of ownership interest
periodically make loans to these other business entities.
Since 1990, FDIC examination staff has suggested that some of these
other business entities should be considered affiliates of [Holding
Co.] and one or more of the banks in which the families have an
interest for purposes of section 23A of the Federal Reserve Act
("section 23A"), 12 U.S.C. 371c. During that same time, the [X]
and [Y] families have restructured their ownership interest in the
banks and in each of these business entities in an attempt to avoid
affiliate status of section 23A. Among other things, the [X] and
[Y] families have converted several of their business entities which
had been partnerships into limited partnerships. These restructurings
appear to be based on the theory that the general partners have
exclusive control over the business of limited partnerships.
As a result, the
{{8-16-93 p.4744}}families contend that the limited
partnerships are not affiliates of [Bank] because the limited
partners do not "control" the limited partnerships for purposes
of section 23A.
In the instant case, the conversion of partnerships into limited
partnerships occurred only after the FDIC alleged that several of these
partnerships were bank affiliates for purposes of section 23A. In each
case, several of the partners who are members of the [X] or [Y]
families apparently relinquished voluntarily their right to control the
business of the partnerships. In most cases, at least one member of the
[X] and [Y] families remained as a general partner of the resulting
limited partnerships. However, each family member appears to have
retained the very same percentage of ownership in the resulting limited
partnerships as each one had in the original partnerships.
Attached to your inquiry was a document, apparently prepared in
August of 1992 by FDIC examination staff, which details the various
business entities in which the [X] or [Y] families have some degree
of ownership interest. Several of these business entities are
structured as limited partnerships. Among other things, the document
indicates the percentage of each business entity which is owned by, or
which may be attributable to, four individuals who are members of the
[X] family and two individuals who are members of the [Y] family.
The document also indicates whether each is an officer or director of
the company. In the case of partnerships, the document also indicates
whether each is a limited or a general partner.
Also attached to your inquiry was a letter dated August 15, 1990,
from an attorney, [Z], which is addressed to [Mr. Y], in his
capacity as chairman of the board of [Bank E]. Mr. [Z]'s letter
indicates that it is in response to a request for an opinion as to the
definition of an "affiliate" for purposes of section 23A. A copy
of this letter was submitted to the FDIC as additional support for the
contention that the restructuring of the [X] and [Y] business
entities has avoided application of section 23A to those entities.
Applicable Portions of Section 23A
For purposes of section 23A, the term "company" includes,
among other things, corporations, partnerships, business trusts,
associations or similar organizations. The term "company" also
includes a bank. 12 U.S.C. 371c(b)(6).
For purposes of section 23A, the term "affiliate" with respect
to a bank includes any company "that is controlled directly or
indirectly, by a trust or otherwise, by or for the benefit of
shareholders who beneficially or otherwise control, directly or
indirectly, by trust or otherwise, the . . . bank or any company that
controls the . . . bank." 12 U.S.C. 371c(b)(C)(i).
For purposes of section 23A, a company or shareholder is deemed to
have "control" over another company if such company or
shareholder: (A) directly or indirectly, or acting through one or more
other persons, owns, controls or has the power to vote 25 percent or
more of any class of voting securities; or (B) controls in any manner
the election of a majority of the directors or trustees of the other
company. 1
12 U.S.C. 371c(b)(3)(A)(i) and (ii).
Preliminary Issues
Mr. [Z]'s letter questions the circumstances under which the
ownership interests of several shareholders may be aggregated to reach
the 25 percent threshold necessary to establish "control" under
item (A) above. In addition, your staff has asked two specific
questions as to whether certain ownership interests may be aggregated
to reach the 25 percent threshold. Because the answers to these
questions directly affect the determination of affiliate status, we
will discuss these questions first.
{{8-16-93 p.4745}}
Question #1 Can the ownership interests of several
shareholders be aggregated to reach the 25 percent threshold in the
absence of some finding that they are "acting together."
Mr. [Z]'s letter points out that Congress used the singular term
"shareholder" in 12 U.S.C. 371c(b)(3)(A)(i) ("section
23A(b)(3)(A)(i)") instead of the plural form. Based on this
observation, Mr. [Z] erroneously concludes that, for purposes of
section 23A, "there can be no control by shareholders of a company
unless they act together." However, 1 U.S.C. 1, among other things,
expressly states that "[i]n determining the meaning of any Act of
Congress, unless the context indicates otherwise--words importing the
singular include and apply to several persons, parties, or
things . . . ." Notably, nothing in section 23A(b)(3)(A)(i)
evidences an intent to limit the application of section 23A to those
cases in which a single shareholder owns 25 percent or more of a
company's voting securities.
Mr. [Z]'s letter also points out that, for purposes of Regulation
O of the Board of Governors of the Federal Reserve System
("Regulation O"), 12 C.F.R. Part 215, shares of multiple
shareholders may be aggregated to achieve control if such shareholders
are "acting through or in concert with one or more persons."
However, Regulation O is the implementing regulation for sections 22(g)
and 22(h) of the Federal Reserve Act, 12 U.S.C. 375a and 375b(7),
not for section 23A. Moreover, section 23A has its own
definition of "control," which differs substantively from the
definition in Regulation O.
An FDIC advisory opinion states that:
[A] bank and another company are affiliated for purposes of
section 23A . . . if the bank and the company have common
shareholders who own, in the aggregate, at least twenty-five percent of
the stock of each the bank and the company.
FDIC Advisory Opinion No. FDIC--92--3, reprinted in 1
Federal Deposit Insurance Corporation Law, Regulations and Related Acts
(FDIC) at 4607 (January 14, 1992). This advisory opinion went on to
say:
From 1933 until 1982, section 23A looked to the general
definition of "affiliate" as contained in section 2(b) of the
Banking Act of 1933 (12 U.S.C. 221a(b)). Clause two of that section
covers common control by shareholders of a bank and another company
without regard to any conspiracy or other joint action theory. Digest
of 1933 Bulletin 501, reprinted in Published Interpretations of the
Federal Reserve System Par. 4505. Although the definition of affiliate
subsequently changed to what is found at section 23A(b)(1)(C), the
change only lowered the percentage of ownership necessary for
affiliation.
The advisory opinion also cited language contained in a Federal
Reserve Board Staff Opinion dated February 5, 1990 ("FRB Staff
Opinion"), 1 Fed. Reserve Regulatory Serv. (FRB) at 3*452.2, as
further indication that conspiracy or joint action by shareholders was
not a necessary predicate for aggregation of the shareholder's
interests. The applicable portion of the Federal Reserve Board Staff
Opinion states as follows:
Under subparagraph (b)(1)(C)(i), any company that is
controlled by shareholders that control the member bank is an affiliate
of the member bank. The statutory definition does not require that a
familial, contractual, or other relationship exist between the
shareholders in order that the company be deemed an affiliate; the only
requirement is a commonality of ownership. Thus, any company that is
owned by any group of shareholders that controls 25 percent
of the voting shares of a bank is an affiliate of that bank for
purposes of section 23A, even if no other relationship exists between
the owners.
Question #2 Should shares of stock in a company owned by an
individual both directly and as custodian or trustee for others be
aggregated to determine total ownership or control of that company by
that individual?
Attached to your inquiry was a partial stock ownership list
for [Holding Co.] which shows that numerous shares of [Holding Co.]
stock are held by members of the [X] and [Y]
{{8-16-93 p.4746}}families as custodians for minor
children of the [X] and [Y] families under what appears to be
either the Uniform Gifts to Minors Act ("UGMA") or the Uniform
Transfers to Minors Act ("UTMA") as enacted in several states.
Additionally, several members of the [X] and [Y] families hold
shares of [Holding Co.] stock as trustee for various trusts.
An adult person may make a gift to a minor by transferring
securities or money to a custodian in the manner provided by the UGMA
or the UTMA. Such gifts are irrevocable and convey to the minor
indefeasible vested legal title to the security or money given subject,
however, to the broad managerial powers of a custodian. 38 Am. Jur. 2d
Gifts § 15 (1968). The custodian is given powers and
duties which are somewhat similar to those of a trustee. I W. F.
Fratcher, Scott on Trusts, § 16A (4th ed. 1987). Thus, we
believe that, for purposes of section 23A, gifts made under the UGMA
and/or the UTMA are analogous to and should be treated in the same
manner as trusts.
The February 5, 1990, FRB Staff Opinion referenced above also
considered whether, for purposes of section 23A, stock which is held in
trust should be aggregated with stock which the trustee holds in
his/her individual capacity, or should be aggregated with stock which
the beneficiary holds in his/her individual capacity. The applicable
portion of the FRB Staff Opinion states as follows:
A trustee who controls the shares of a company in a trust
must aggregate the shares that he or she controls as trustee with any
additional shares owned in his or her individual capacity. The
"control" and "affiliate" definitions of section 23A do not
distinguish between shares that are controlled by a trustee in a
fiduciary capacity and shares owned by the trustee in an individual
capacity. In fact, subparagraph (b)(1)(C)(i) specifically includes in
the definition of "affiliate" companies that are controlled
"directly or indirectly, by a trust or otherwise. . . ." Thus,
the shares that a trustee owns in a fiduciary capacity must be
aggregated with the shares the trustee controls as an individual to
determine if a company is an affiliate.
The opinion goes on to state that:
Similarly, the shares that a beneficiary owns through a trust
must be aggregated with the shares the beneficiary owns as an
individual to determine if the affiliate relationship exists between
the two entities, because "affiliate" includes companies that are
controlled "by or for the benefit of shareholders who beneficially
or otherwise control directly, or indirectly by trust or otherwise, the
member bank."
Federal Reserve Board Staff Opinion dated February 5, 1990, 1 Fed.
Reserve Regulatory Serv. (FRB) at 3*452.2.
The following examples show the operation of this FRB Staff Opinion:
EXAMPLE 1
T owns 100 percent of the voting stock of XYZ Bank and 10
percent of the voting stock of QRS, Inc. T is the sole trustee of a
trust created for the benefit of B ("Trust"). The assets owned by
the Trust include 15 percent of the voting stock of QRS, Inc. In his
capacity as trustee, T has the power to vote the stock owned by the
Trust. Because T, in his capacity as trustee, controls the right to
vote the stock owned by the Trust, the QRS, Inc. stock owned by the
Trust is aggregated with the QRS, Inc. stock which T owns. Therefore,
QRS, Inc. is an affiliate of XYZ Bank.
EXAMPLE 2
B owns 100 percent of the voting stock of ABC Bank and 10
percent of the voting stock of LMN, Inc. B is the sole beneficiary of a
trust of which T is trustee. The assets owned by the Trust include 15
percent of the voting stock of LMN, Inc. Because the Trust is "for
the benefit of" B, the LMN, Inc. stock owned by the Trust is
aggregated with the LMN, Inc. stock which B owns. Therefore, LMN, Inc.
is an affiliate of ABC Bank.
{{8-16-93 p.4747}}
Question #3 In limited partnerships, is control attributed to
only the general partner or also to the limited partners?
The real question posed by this inquiry is whether a limited
partnership would be an affiliate of a bank for purposes of section 23A
where one or more of the limited partners owns 25 percent or more of
the limited partnership and also owns or controls 25 percent or more of
a bank's voting stock. This appears to be a question of first
impression. There are currently no regulations or guidelines directly
on point and research has uncovered no interpretation. Absent
regulations, guidelines or interpretations to the contrary by the
Federal Reserve Board or a contrary interpretation by our Washington
Office, we will follow the interpretation expressed herein.
For the reasons set forth below, it is concluded that it is possible
for limited partners to exercise "control" over a limited
partnership for purposes of section 23A. Accordingly, a limited
partnership can be an "affiliate" of a bank through common
ownership by one or more of the limited partners. Under section 23A,
"control" may be exercised directly or indirectly. If neither
direct nor indirect control can be established, section 23A will not be
applicable. Whether one or more limited partners "control" a
limited partnership for purposes of section 23A can only be determined
by analyzing the facts in each particular case.
A. Direct "Control"
To determine the extent to which limited partners may have direct
control of a limited partnership for purposes of section 23A, the
statutes governing limited partnerships and the particular partnership
agreement in question must be analyzed.
Limited partnerships are governed by state law. In every state,
except Louisiana, the statute is either the original 1916 Uniform
Limited Partnership Act ("ULPA") or the 1976 Revised Uniform
Limited Partnership Act ("RULPA"), although with variations in
most cases. 59A Am. Jur. 2d Partnership § 1233 (1987).
Some states have adopted the 1985 amendments to the RULPA.
As expressed in both the ULPA and the RULPA, control over the
management of a limited partnership is vested in the general
partners. 2
The presumption created by this maxim is absolute, i.e., it
is not subject to rebuttal. In addition, both the ULPA and the RULPA
also create the presumption that limited partners do not have control
over the management of a limited partnership. Notably, however, the
presumption created respecting limited partners is not
absolute; it is subject to
rebuttal. 3
As noted above, section 23A contains an express definition of
"control." As defined in section 23A, "control" includes,
but is not limited to, the type of control which may be exercised by
general partners under the ULPA and the RULPA. Both the ULPA and the
RULPA permit limited partners to engage in certain "safe harbor"
activities which, for purposes of the ULPA and/or the RULPA, do not
constitute "control" over the business of
{{8-16-93 p.4748}}the
partnership. 4
However, such activities may evidence the limited partners'
"control" for purposes of section
23A. 5
The partnership agreement for a particular limited partnership may
limit the actions limited partners may exercise respecting the limited
partnership by expressly prohibiting them from engaging in some or all
of the "safe harbor" activities enumerated in the ULPA or the
RULPA. On the other hand, the partnership agreement may also expand the
actions the limited partners may exercise respecting the limited
partnership by allowing other activities which go beyond the scope of
the "safe harbor" activities expressed in the ULPA or the RULPA.
These acts may also provide sufficient evidence of "control" for
purposes of section 23A.
A. Indirect "Control"
As noted, direct ownership or control of a company is
not a requirement for purposes of section 23A. Section 23A is also
applicable where a company is indirectly owned or controlled.
The limited partnership has been described as a hybrid--it is
neither a partnership (as that term is usually defined) nor a
corporation, though it bears a strong resemblance to both. 59A Am. Jur.
2d Partnership § 1245 (1987). A limited partner is not, in
any true sense, either a partner or a principal in the business of the
partnership; rather, he is an investor. 59A Am. Jur. 2d
Partnership § 1307 (1987). The relationship between the
general and limited partner is a fiduciary one similar to that existing
between a corporate director and a
shareholder. 6
59A Am. Jur. 2d Partnership §§ 1240, 1307 (1987). The
principal-agent relationship which generally exists between members of
an ordinary partnership is not, per se, present between
general and limited partners. The duty which a general partner owes to
limited partners has also been likened to that owed by a trustee to
trust beneficiaries. 59A Am. Jur. 2d Partnership §§ 1307,
1333 (1987). A trustee is not necessarily subject to the control of the
beneficiaries with respect to property which he holds for their
benefit. If he is subject to their control, the trustee is also an
agent. 59A Am. Jur. 2d Partnership § 1307 (1987).
As previously indicated, for purposes of section 23A, the term
"affiliate" with respect to a bank includes any company "that
is controlled directly or indirectly, by trust or
otherwise, by or for the benefit of shareholders who
beneficially or otherwise control, directly or indirectly, by trust or
otherwise, the . . . bank or any company that controls the . . .
bank." [Emphasis added]. For purposes of section 23A, it is
immaterial whether one considers the relationship between a
general and a limited partner to be most similar to the relationship
which exists between: (A) a corporate director and a shareholder; or
(B) a trustee and a trust beneficiary; or (C) an agent and his
principal. The important consideration is that in each
{{8-16-93 p.4749}}of these relationships, including the
limited partnership, one party is under a fiduciary duty to
control a business and/or assets for the benefit of
another party.
Because general partner(s) are under a fiduciary duty to operate a
limited partnership for the benefit of the limited partner(s), it would
be unusual to have a situation where limited partners who own 25
percent or more of a limited partnership do not also have indirect
control. Nevertheless, the facts of a particular case may establish
that the general partner(s) is operating the limited partnership in
breach his fiduciary duty. In such cases, absent direct control by the
limited partners, section 23A would not apply.
Analysis
Your staff orally requested that we address whether the two business
entities, known as [Company] and [Partnership] are affiliates of
[Bank].
[Company] ____________________________________________
The documents which accompanied your inquiry indicate that ***
[X], *** [X], *** [X], and *** [X] and *** [Y], each own 20
percent of the voting stock of [Company] ("Company"). Further,
the documents indicate that, the same five individuals, respectively,
control 17.72 percent, 20.00 percent, 20.00 percent, 18.90 percent, and
20.00 percent of the voting stock of [Holding Co.]. We understand
that a large portion of the [Holding Co.] stock, and possibly some of
the Company stock, has been attributed to these individuals because
they control such stock in their capacity as trustee of a trust or as a
custodian under the UGMA or the UTMA. Each individual controls, both
directly and by attribution, less than 25 percent of both the Company
and [Holding Co.]. Thus, under subsection (b)(3)(A)(i) no one
individual is deemed to control both the Company and [Holding Co.].
However, where a commonality of ownership interest exists, the
interests of several shareholders are aggregated even though they are
not "acting together." After such aggregation, it is apparent
that 100 percent of the Company is controlled by shareholders who also
control 96.62 percent of [Holding Co.]. Therefore, the Company is an
affiliate of [Bank] for purposes of section 23A.
[Partnership] ____________________________________________
The documents which accompanied your inquiry indicate that the
ownership interests of [Partnership] ("Partnership") are
divided between *** [X] (23.94 percent), *** [X] (17.00 percent),
*** [X] (16.30 percent), *** [X] (10.50 percent), *** [Y] (7.20
percent), and *** [Y] (1.56 percent). The documents also indicate
that *** [X] is the sole general partner of the Partnership. Again,
it is possible that a portion of the ownership interests in the
Partnership have been attributed to these individuals because they
control these interests in their capacity as trustee of a trust or as a
custodian under the UGMA or the UTMA. In addition to the stock
ownership of [Holding Co.] which was detailed above, the accompanying
documents indicate that *** [Y] owns or controls 3.38 percent of
[Holding Co.]'s voting stock. Thus, 76.50 percent of the Partnership
is owned or attributable to five limited partners and one general
partner who also own or control 100 percent of [Holding Co.].
We have been informed that the Partnership is probably a
Kansas limited partnership, but this information has not been
confirmed. If this information is correct, the Kansas version of the
ULPA, Kan. Stat. Ann. §§ 56--101 to 56--151 (1983) would be
applicable to limited partnerships formed before January 1, 1984, and
the Kansas version of the RULPA, Kan. Stat. Ann. §§ 56--1a101 to
56--1a607 (Supp. 1992), would be applicable to the limited partnerships
formed on or after January 1, 1984. For limited partnerships formed on
or after January 1, 1984, Kan. Stat. Ann. § 56--1a203 (Supp. 1992)
permits limited partners to vote on a number of matters, including the
admission, removal, or retention of a general partner.
We have not been provided with a copy of the partnership agreement
for the Partnership. Thus, we do not know whether the partnership
agreement limits the powers the limited partners would have under Kan.
Stat. Ann. § 56--1a203 (Supp. 1992). If it does not limit their
power, the five limited partners own 60 percent of the Partnership and
would, therefore, have the power to control the election of a majority
of the general
{{8-16-93 p.4750}}partners. Further, if the partnership
agreement permits the limited partners to vote on certain
partnership matters as provided in Kan. Stat. Ann. § 56--1a202 (Supp.
1992), the limited partners may be in a position which is analogous to
a class of voting securities of a corporation. If their position is
analogous, the five limited partners control more than 25 percent of
that class of voting securities. Thus, a strong possibility exists that
the limited partners have direct control of the Partnership for
purposes of section 23A. If so, the Partnership is an affiliate of
[Bank] and [Holding Co.].
Further, even if the partnership agreement actually precludes direct
control by the limited partners, the Partnership may still be an
affiliate of [Holding Co.] and [Bank] as a result of the limited
partners indirect control. The general partner, *** [X], has a
fiduciary duty to operate the Partnership for the benefit of the
limited partners. To the extent that he operates the Partnership for
their benefit, the limited partners have indirect control of the
Partnership. To show that indirect control does not exist, the parties
would have to establish that *** [X] operates the Partnership in
breach of his fiduciary duty. As indicated above, such a situation
would be very unusual. Thus, a strong possibility exists that the
limited partners also have indirect control of the Partnership for
purposes of section 23A. If so, the Partnership is an affiliate of
[Bank] and [Holding Co.].
1There is another definition of control which requires a
Federal Reserve Board determination, but that definition has no
relevance here. Go Back to Text
2In Greenberg v. Board of Governors of the Federal
Reserve System, 968 F.2d 164, 170 (2nd Cir. 1992), one of the
issues presented was whether several limited partnerships were
affiliates of a bank for purposes of section 23A. The Greenbergs argued
that they did not "control" the limited partnerships because
their combined equity interests were less than 25 percent of each
limited partnership. The Board of Governors found that the Greenbergs
were the general partners of several limited partnerships. In light of
the special rights accorded general partnership interests concerning
management, capital contributions and distributions, the Board of
Governors concluded that the Greenbergs' interests in each limited
partnership should be treated as analogous to a separate class of
voting shares for purposes of applying the control test of 12 U.S.C.
§ 371c(b)(3)(A)(i). The Court agreed with the Board's
interpretation. Go Back to Text
3Both the ULPA and the RULPA recognize that a limited partner
can exercise an impermissible degree of "control" over
the business and management of a limited partnership. In such cases,
the ULPA and the RULPA provide that certain parties may petition the
appropriate court to declare that this limited partner has become a
de facto general partner. 59A Am. Jur. 2d Partnership
§ 1365 (1987). For purposes of section 23A, a de facto
general partner would have the same ability to exercise
"control" over a limited partnership that any other general
partner would have. Go Back to Text
4Under both the ULPA and the RULPA, a limited partner may
engage in certain specified activities with regard to a limited
partnership without becoming a de facto general partner.
See, 59A Am. Jur. 2d Partnership § 1369 (1987)
(copy appended). Among those activities are voting to amend the
partnership agreement and voting to admit or remove general partners
and/or limited partners. Go Back to Text
5For example, in limited partnerships where the limited
partners have the power to admit or remove general partners, any group
of limited partners who own a majority interest in the limited
partnership will be in a position which is analogous to that of
shareholders who control the election of a majority of the directors of
a corporation.
Further, under section 23A, a shareholder is "deemed to have
control" of a company if, among other things, he "has the power
to vote 25 percentum or more of any class of voting
securities." [Emphasis added]. Notably, corporations are
permitted to establish separate classes of voting securities which have
limited or restricted voting rights. 5 Fletcher Cyclopedia Corporations
§ 2026 (1987). Thus, where limited partners are permitted to
vote on certain partnership matters, the limited partners may be
in a position which is analogous to a class of voting securities of a
corporation. Go Back to Text
6Indeed, where a limited partnership has a cause of action
which the general partner refuses to act upon, the courts have
permitted limited partners to take action by instituting a legal
proceeding on behalf of the partnership which is similar to a
shareholder's derivative action instituted by a corporate shareholder.
59A Am. Jur. 2d Partnership § 1395--1401 (1987). Go Back to Text
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