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4000 - Advisory Opinions
Whether an Insured Bank May Acquire or Retain a Majority Interest
in a Subsidiary at Any Tier
FDIC--94--45
September 26, 1994
Sandra Comenetz, Counsel
This responds to your July 19, 1994 letter to Pamela LeCren
concerning the applicability of 12 CFR Part 362 to certain proposed
life insurance agency activities in Ohio that
{{2-28-95 p.4898}}Corporation X wishes to engage in under
state law through a subsidiary of its insured state bank subsidiary,
BANK ABC "BANK".
ISSUES
You seek confirmation that an insured state bank may acquire or
retain a majority interest in a subsidiary at any tier, i.e.,
that the exemption from the general prohibition on impermissible
equity investments in 12 CFR
§ 362.3(a), found in 12 CFR § 362.3(b)(1) ("An insured
state bank is not prohibited from acquiring or retaining a majority
interest in a subsidiary."), applies both to companies directly
controlled and companies indirectly controlled by an insured state
bank.
You also seek confirmation that Bank would have a basis for engaging
in life insurance activity, through an indirectly owned subsidiary,
whether or not the proposed ownership structure meets the FDIC test for
majority ownership and control, on the grounds that it would be
investing in the stock of a corporation which engaged in activities
which are not "as principal" under
12 CFR
§ 362.4(c)(3)(iv)(D).
BACKGROUND
You contend that the proposed ownership structure would meet FDIC
criteria for majority ownership and control by Bank of an indirectly
owned life insurance agency subsidiary. You state that the ownership
structure is designed to meet Ohio insurance law requirements that all
of the voting shares of a corporate life insurance agency be
beneficially owned by natural persons who are residents of the state of
Ohio. See Ohio Rev. Code Ann. Sec. 3905.18(C).
You describe the proposed structure as follows. Bank would establish
a wholly owned subsidiary, SUB A, which, in turn, would own all shares
of nonvoting stock of Life Agency. An employee of SUB A the
("Controlled Shareholder") would own the sole share of Life
Agency voting stock, but, under a "close corporation agreement"
with SUB A, would have none of the indicia of ownership of such share,
except the technical right to vote the share. The Controlled
Shareholder could only vote the share in the manner and for the
purposes determined by Corporation X, Bank, and SUB A. All other
indicia of ownership, including the right to receive any dividends
(other than purely nominal dividend rights held by the Controlled
Shareholder as may be required by applicable state law), profits, other
income or other distributions, would instead reside exclusively in SUB
A, Bank's wholly owned subsidiary. Operationally, Huntington Life would
be controlled by its parent SUB A, by Bank as parent of SUB A, and by
corporate levels above Bank.
ANALYSIS
Exemption from Prohibition on Impermissible Equity Investments
Because "subsidiary" is defined broadly to mean "any
company directly or indirectly controlled by an insured state bank,"
12 CFR § 362.2(v), our
view is that an insured state bank may acquire or retain a majority
interest in a subsidiary of any tier. The question becomes: is Life
Agency a "subsidiary" of Bank in which Bank holds a majority
interest?
Majority Interest
Part 362 does not define majority interest. The Preamble
to Part 362 states that "[m]ajority ownership for the
[majority owned subsidiary] exception is understood to mean ownership
of greater than 50% of the outstanding voting stock of the
subsidiary." Preamble to Final Rule, 12 CFR Part 362, 57 Fed.
Reg. 53223, column 2 (emphasis added). Using this definition, and
assuming that your use of the words "wholly owned subsidiary" to
describe SUB A means that Bank would own all of the voting shares of
SUB A, we conclude that Bank, through Sub A, would have a majority
ownership of Life Agency because SUB A's Controlled Shareholder would
own only nominally the sole voting share of Life Agency, and the other
indicia of ownership would be in SUB A.
On the other hand, if "majority interest" is not synonymous
with majority ownership, and means instead, a greater than 50%
"equity investment", nothing in Part 362 requires
{{2-28-95 p.4899}}that the majority interest be in voting
stock. See 12 CFR § 362.2(k) and (1) (An equity investment
is, inter alia, "any equity security.'' An equity security is, inter
alia, "any stock.") Because there is no requirement in the
regulation that an equity security have voting rights; and, given that,
as a result of the close corporation agreement, only Bank has any
"interest" in Life Agency, we conclude that Bank, through SUB A,
would have a majority interest in Life Agency.
Direct or Indirect Control
In Part 362, "control" means:
the power to vote, directly or indirectly, 25 per centum or
more of any class of voting stock of a company, the ability to control
in any manner the election of a majority of a company's directors or
trustees, or the ability to exercise a controlling influence over the
management and policies of a company.
12 CFR § 362.2(b).
Taking at face value your representations about the proposed
structure, and the control Bank exercises over the sole shareholder of
Life Agency's voting stock, we conclude that Life Agency is a company
that is directly or indirectly controlled by Bank. Having determined
that Bank has a majority interest in Life Agency, we conclude that Life
Agency is a majority owned subsidiary of Bank, and the exemption in 12
CFR § 363.3(b)(1) is applicable. Because the activities in which Life
Agency would engage are not "as principal", as that term is
defined in Part 362, the FDIC's prior consent to those activities is
not required.
Thank you for writing to the
FDIC.
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