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4000 - Advisory Opinions
Application for Deposit Insurance
FDIC-87-4
March 26, 1987
J. William Via, Jr., Counsel
***
You have raised the question whether, for purposes of 12 C.F.R.
§ 337.4, the applicant would be an "affiliate'' of the investment
banking firm of *** (a partnership). The term "affiliate" means
"any company that directly or indirectly, through one or more
intermediaries, controls or is under common control with an insured
nonmember bank." The term "company" includes, among other
entities, a partnership, as well as a corporation (other than a bank).
See 12 C.F.R. § 337.4(a)(1),(2). Thus, if *** "controls" the
applicant, the affiliation contemplated by the regulation exists.
The term "control" means, for these purposes, "the power to
directly or indirectly vote 25 per centum or more of the voting stock
of a bank or company, the ability to control in any manner the election
of a majority of a bank's or company's directors or trustees, or the
ability to exercise a controlling influence over the management and
policies of a bank or company." 12 C.F.R. § 337.4(a)(4). It seems,
on the face of it, that *** is controlled by one ***, the senior
partner. A letter to Regional Director Lutz from ***, a general partner
in *** represents that, under the partnership agreement, ***
"exercises sole power [i.e., without the approval of
other partners] with respect to the management and policies of ***,
including setting the percentage interest of each partner and the right
to admit new partners and require certain partners to retire." ***,
then, as a matter of economic (and
{{4-28-89 p.4247}}psychological) reality, has enormous
leverage over *** partners and over those aspiring to be partners
(including present non-partner employees and former partners who may
wish to return. 2
*** will own 1700 shares of applicant's stock and control another 800
shares owned by his sister (who is a limited partner in ***). Thus, he
has a financial stake in the applicant (which will offer no loans, but
will invest its funds in securities).
According to the stockholder list that you furnished, *** will own
the entire 8000 shares of common stock (of 10,000 shares authorized)
that applicant will issue initially. The applicant will also issue
"Series A Convertible Preferred Stock", which has no voting
rights but is convertible at the option of the holder into common stock
(and is convertible without consent if sold in an offering to the
public); this preferred stock (7500 shares) is treated (because of the
leverage that goes with convertibility) as the equivalent of common
stock. Of these 15,500 combined shares of common stock and of
"Series A Convertible Preferred Stock", *** will own or control
11.41% and eleven other *** partners (or employees) will own 13.87%
making 25.28% for this group (which does not include the departing
***, who will own, respectively, 43.85% and 1.04%).
The applicant is authorized to have not more than 21 directors and
initially will have only nine, two of whom will be ***. Of the seven
other designated as directors, five are *** partners (or employees).
Section 337.4, it will be recalled, does not require actual control,
but only the "power" or "ability" to control, for an
affiliation to exist. The circumstances in this case, it seems to me,
provide a reasonable basis for the FDIC, in construing its own
regulation to conclude that *** will have the requisite control over
applicant to make them affiliates.
2 ***, applicant's principal shareholder and proposed chairman
and CEO, is a general partner in ***, a position that it is said he
will relinquish. ***, a minor shareholder in applicant and a proposed
officer (EVP) and director, will also terminate his association with
***. The third top officer proposed for applicant is also terminating a
relationship with an investment banking firm. Go Back to Text
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