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4000 - Advisory Opinions
Principal Shareholder Status Under Regulation
O--Voting Trust Members
FDIC-79-9
October 17, 1979
Pamela E.F. LeCren, Attorney
Your letter to Charles M. Pickett, FDIC Regional Counsel, dated
September 10, 1979 has been forwarded to the Legal Division of the
Washington, D.C. office for reply. In your letter you request an
opinion on whether or not ***, a director of ***, is a principal
shareholder within the meaning of section 215.2(j) of Federal Reserve
Regulation O (12 C.F.R. Part 215) which implements Title I of the
Financial Institution Regulatory and Interest Rate Control Act of 1978.
If *** is a principal shareholder within the meaning of the regulation,
*** is limited in the amount of credit it can extend to him. In
addition, extensions of credit made to him may not be preferential and
they will generally be subject to prior approval by the bank's board of
directors. 1
According to your letter and the supporting documents forwarded to
this office, *** is one of sixty-five persons who holds stock in ***
that has been placed in a voting trust. The voting trust holds 51 per
cent of the bank's stock. Sole authority to vote the stock resides in
three trustees who act by majority vote. If a trustee position becomes
vacant, the remaining trustees select, by majority vote, a successor
from among the members of the trust. The members of the trust have no
control over the bank stock other than the right to sell the stock. The
purchaser takes title (beneficial) subject to the terms of the voting
trust.
Section 215.2(j) of the regulation defines a principal shareholder
as an individual or company that directly or indirectly, acting through
or in concert with one or more persons, owns, controls, or has the
power to vote more than 10 per cent of the stock of a bank. It is the
opinion of the Legal Division of the FDIC that because of their power
to vote the stock, the trustees of a voting trust are principal
shareholders under section 215.2(j) assuming of course that the trust
holds more than 10 per cent of the stock of the bank.
The members of a voting trust may or may not be principal
shareholders. If a member is in a position to control the selection of
the trustees (or the manner in which the trustees vote) that member
will be a principal shareholder. 2
If, for example, the members elect the trustees and each has one vote
per share of their stock contribution, any member whose stock
contribution to the trust is 10 per cent or more of the total and who
is the largest contributor is presumed to be in a position to control
the selection of trustees. The presumption of control is rebuttable.
Any member who contributes 25 per cent or more of the total is
conclusively presumed to control the selection of the trustees. A
member who is the beneficial owner of more than 10 per cent of the
stock held by the trust and who is the largest contributor will
not be considered a principal shareholder where the member
has no control over the trustees, no power to terminate the trust, and
cannot remove or add trustees. 3
In consideration of the foregoing, we are of the opinion that *** is
not in a position to control the selection of the trustees nor to
control the manner in which the trustees vote. His stock contribution
is less than 5 per cent of the total held by the voting trust. The
original three trustees no longer serve and the successor trustees were
not selected by vote of the membership or in any way in which the
membership would have control over their selection. *** is not in a
position to control how the trustees vote the
stock. 4
{{4-28-89 p.4027}}
Because of the above, we do not find *** to be a 10 per cent
shareholder of *** by virtue of his membership in a voting trust that
holds more than 10 per cent of the stock of the bank. He is therefore
not subject to the lending restrictions of Regulation
O.
1 As a director of the bank *** is already subject to the
nonpreferential lending restriction and the prior approval requirement
found in section 215.4(a) and (b) of the regulation. He is not,
however, subject to the lending limit restriction. Go Back to Text
2 In short that member controls the voting trust which itself
falls within the definition of principal shareholder, i.e.,
a company that has the power to vote more than 10 per cent of the
stock of a bank. Go Back to Text
3 The Legal Division has interpreted the term owners within the
meaning of Regulation O to reach only those persons who along with any
other incident of "ownership" (possession, enjoyment, etc.) have
the ability to control the property in question. Thus someone who
"owns" stock held in a trust where the trustee has full
control over the stock is not an "owner" for the purposes of
Regulation O. Go Back to Text
4 There is no reason to believe that *** is able to influence
the trustee vote because of any implied or expressed agreement. If,
however, evidence of such an agreement were present, the substance of
this opinion would change. Go Back to Text
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