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4000 - Advisory Opinions
Transaction Will Not Result in Change in Bank
Control to Trigger Prior Notification Requirement of Change in Bank
Control Act
FDIC-86-33
October 24, 1986
Douglas H. Jones, Deputy General Counsel
Reference is made to your October 15, 1986 letter, which requests
our confirmation that the proposed transactions described in that
letter would not constitute or result in a change in "control" of
your client, ***, that would trigger the prior notification
requirements of the Change in Bank Control Act, 12 U.S.C. § 1817(j).
Based on your letter, the accompanying preliminary prospectus dated
October 3, 1986, and our October 15, 1986 meeting with *** and *** of
your firm, we understand the pertinent facts surrounding the
transactions to be as follows:
***, a financial services company, offers various consumer banking
services through its subsidiaries. Among its subsidiaries are: ***, a
***-chartered FDIC-insured national bank; ***, a ***-chartered
FDIC-insured bank; ***, an ***-chartered FDIC-insured bank;
and
{{4-28-89 p.4235}}***, a ***-chartered privately-insured
savings and loan association which has applied for conversion to a
state savings bank and for FDIC insurance. Your letter states, and we
assume for purposes of our analysis, that none of these subsidiaries is
a "bank" within the meaning of the Bank Holding Company Act, as
they either do not accept demand deposits or do not make commercial
loans.
*** is a subsidiary of ***, a publicly-held corporation. ***, once
the owner of 100% of the stock of ***, presently owns 99.1% of ***
outstanding shares of common stock, having recently sold the other
0.9% to ***, members of his family, and two business associates in a
private transaction. To our knowledge, there is no other class of
voting securities of *** currently outstanding.
*** and *** now intend to make a public offering of *** common
stock. Upon completion of the offering, *** shares will be outstanding,
of which the public will own approximately 79.4%, *** will own
approximately 20%, and ***, members of his family and business
associates will own approximately 0.6%. In addition, *** will be
granted options to purchase additional shares of *** common stock, upon
terms and conditions outlined in your letter. Even if *** should
exercise all the options, he would then own at most 7.1% of ***
outstanding common stock.
Upon completion of the public stock offering, *** will be elected
chairman of the board and chief executive officer of ***.
Your letter states that it is anticipated (and we assume for
purposes of our analysis) that, aside from *** 20% and the public's
79.4%, no single purchaser or group of purchasers acting together will
acquire 10% or more of *** outstanding common stock in the public
offering. Further, neither *** nor any persons acting in concert with
him have any present intention of purchasing any additional shares of
the common stock of ***.
As part of the contemplated transactions, the current directors of
*** will resign and a new board will be named. *** will designate two
members of the new board, and *** will have the right to nominate the
remaining eleven directors, subject to *** approval. *** expects to
select as his nominees prominent individuals from business, government
and other fields, each of whom is expected to exercise independent
judgment. Once the new board is constituted, any subsequent members of
the board will be nominated by a nominating committee of the board and
elected by the stockholders. In addition, *** various loans and credit
agreements (which are not expected to be amended as a result of the
public offering or *** appointment) required that a majority of ***
board of directors be "disinterested directors," a term that is
defined to exclude any past or present employee or officer of *** or
any of its affiliates (including, ***) or subsidiaries, any past or
present director of any affiliate, and any person whose financial
relationship with an affiliate might reasonably be expected to affect
his or her judgment as a director of *** (and any associate of any such
person).
After the offering, *** will be employed as chairman of the board
and chief executive officer of *** under a one-year employment
agreement. He will serve under the control of and at the pleasure of
the board.
The Change in Bank Control Act ("Act"), 12 U.S.C. § 1817(j),
provides: "No person, acting directly or indirectly or through or in
concert with one or more persons, shall acquire control of any insured
bank through a purchase, assignment, transfer, pledge, or other
disposition of voting stock of such insured bank unless the appropriate
Federal banking agency has been given sixty days' prior written notice
of such proposed acquisition . . . ." 12 U.S.C. § 1817(j)(1).
The Act defines "control'' to mean "the power, directly or
indirectly, to direct the management or policies of an insured bank or
to vote 25 per centum or more of any class of voting securities of an
insured bank." 12 U.S.C. § 1817(j)(8). In addition, the FDIC's
regulations that implement the Act (12 C.F.R. § 303.4) establish a
rebuttable presumption of "control'' whenever a person (or group of
persons acting together) acquires the power to vote 10% or more of a
class of voting securities of an insured bank, if either (1) the
institution has issued any class of securities subject to the
registration requirements of section 12 of the Securities Exchange Act
of 1934, or (2) immediately after the transaction, no other person will
own a greater proportion of that
{{4-28-89 p.4236}}class of voting securities. 12 C.F.R.
§ 303.4(a). Any other transaction that does not result in ownership
of, control of, or the power to vote at least 25% of a class of voting
securities will not be considered a change in "control" for
purposes of the Act. 12 C.R.F. § 303.4(a). Although the Act does not
apply to a transaction subject to section 3 of the Bank Holding Company
Act (see 12 U.S.C. § 1817(j)(16)), it does apply, in our
view, to a change in control of the parent company of an insured
"limited service" bank (i.e., a company that is not a
"bank holding company" as defined in section 2 of the Bank
Holding Company Act).
Based on the facts presented in your October 15 letter and
summarized herein, we conclude that, aside from ***, no person (or
group of persons acting together) will exceed the stock ownership
thresholds (25% or 10%) that are necessary to support a finding of
"control" within the meaning of the Act and its implementing
regulations. Following the public offering, no person or group of
persons acting together will own or have the power to vote 25% or more
of *** stock. The largest single stockholder will be ***, the present
control party, whose ownership interest in *** will have been reduced
from 99.1% to approximately 20%. No other person or group of persons
acting together is expected to own as much as 10%. Even if *** should,
at some time in the future, exercise all his stock options, he would
then own at most 7.1% of *** stock. *
Accordingly, we agree with your conclusion that the proposed
transactions described in your October 15 letter would not constitute
or result in a change in "control" of *** that would trigger the
prior notification requirements of the
Act.
* Your letter states that, in addition to the stock options granted
to ***, stock options will also be granted to certain employees
recruited by *** and to other key employees of ***. (Although your
letter does not so state, we assume that, prior to their exercise,
these stock options do not entitle their holders to any voting rights.)
Depending upon the extent to which these options may be exercised, it
is possible that at some time in the future the shares of *** stock
then owned by *** and those employees recruited by him may equal or
exceed 10% of the total outstanding shares. Should this occur, and
depending on other circumstances then existing, the presumption of
control established in 12 C.F.R. § 303.4(a) could conceivably be
raised. We express no opinion herein as to whether or not the exercise
of any or all of the stock options granted in connection with the
proposed transactions would trigger the prior notification requirements
of the Act. Go Back to Text
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