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6000 - Bank Holding Company Act
§ 225.132 Acquisition of assets.
(a) From time to time questions have arisen as to whether and under
what circumstances a bank holding company engaged in nonbank
activities, directly or indirectly through a subsidiary, pursuant to
section 4(c)(8) of the Bank Holding Company Act of 1956, as amended
(12 U.S.C. 1843(c)(8)), may
acquire the assets and employees of another company, without first
obtaining Board approval pursuant to section 4(c)(8) and the Board's
Regulation Y (12 CFR
225.4(b)).
(b) In determining whether Board approval is required in connection
with the acquisition of assets, it is necessary to determine (a)
whether the acquisition is made in the ordinary course of
business{1}
{1 Section 225.4(c)(3) of the Board's Regulation Y (12 CFR
225.4(c)(3)) generally prohibits a bank holding company or its
subsidiary engaged in activities pursuant to authority of section
4(c)(8) of the Act from being a party to any merger "or acquisition
of assets other than in the ordinary course of business" without
prior Board approval.}
or (b) whether it constitutes the acquisition, in whole or in
part,
{{2-28-06 p.6110.28-L-23}}of a going
concern.{2}
{2 In accordance with the provisions of section 4(c)(8) of the
Act and § 225.4(b) of Regulation Y, the acquisition of a going
concern requires prior Board approval.}
(c) The following examples illustrate transactions where prior
Board approval will generally be required:
(1) The transaction involves the acquisition of all or
substantially all of the assets of a company, or a subsidiary,
division, department or office thereof.
(2) The transaction involves the acquisition of less than
"substantially all" of the assets of a company, or a subsidiary,
division, department or office thereof, the operations of which are
being terminated or substantially discontinued by the seller, but such
asset acquisition is significant in relation to the size of the same
line of nonbank activity of the holding company (e.g., consumer
finance, mortgage banking, data processing). For purposes of this
interpretation, an acquisition would generally be presumed to
be significant if the book value of the nonbank assets being
acquired exceeds 50 percent of the book value of the nonbank assets of
the holding company or nonbank subsidiary comprising the same line of
activity.
(3) The transaction involves the acquisition of assets for resale
and the sale of such assets is not a normal business activity of the
acquiring holding company.
(4) The transaction involves the acquisition of the assets of a
company, or a subsidiary, division, department or office thereof, and a
major purpose of the transaction is to hire some of the seller's
principal employees who are expert, skilled and experienced in the
business of the company being acquired.
(d) In some cases it may be difficult, due to the wide variety of
circumstances involving possible acquisition of assets, to determine
whether such acquisitions require prior Board approval. Bank holding
companies are encouraged to contact their local Reserve bank for
guidance where doubt exists as to whether such an acquisition is in the
ordinary course of business or an acquisition, in whole or in part, of
a going concern.
[Codified to 12 C.F.R. § 225.132]
[Source: 39 Fed. Reg. 35128, September 30, 1974; 57 Fed. Reg.
28779, June 29, 1992]
§ 225.133 Computation of amount invested in foreign
corporations under general consent procedures.
For text of this interpretation, see § 211.111 of this subchapter.
[Codified to 12 C.F.R. § 225.133]
[Source: 40 Fed. Reg. 43199, September 19, 1975, effective
September 12, 1975]
§ 225.134 Escrow arrangements involving bank stock resulting in
a violation of the bank holding company act.
(a) In connection with a recent application to become a bank
holding company, the Board considered a situation in which shares of a
bank were acquired and then placed in escrow by the applicant prior to
the Board's approval of the application. The facts indicated that the
applicant company had incurred debt for the purpose of acquiring bank
shares and immediately after the purchase the shares were transferred
to an unaffiliated escrow agent with instructions to retain possession
of the shares pending Board action on the company's application to
become a bank holding company. The escrow agreement provided that, if
the applicant were approved by the Board, the escrow agent was to
return the shares to the applicant company; and, if the application
were denied, the escrow agent was to deliver the shares to the
applicant company's shareholders upon their assumption of debt
originally incurred by the applicant in the acquisition of the bank
shares. In addition, the escrow agreement provided that, while the
shares were held in escrow, the applicant could not exercise voting or
any other ownership rights with respect to those shares.
(b) On the basis of the above facts, the Board concluded that the
company had violated the prior approval provisions of section 3 of the
Bank Holding Company Act ("Act") at the time that it made the
initial acquisition of bank shares and that, for purposes of the Act,
the company continued to control those shares in violation of the Act.
In view of these
{{2-28-06 p.6110.28-L-24}}findings,
individuals and bank holding companies should not enter into escrow
arrangements of the type described herein, or any similar arrangement,
without securing the prior approval of the Board, since such action
could constitute a violation of the Act.
(c) While the above represents the Board's conclusion with respect
to the particular escrow arrangement involved in the proposal
presented, the Board does not believe that the use of an escrow
arrangement would always result in a violation of the Act. For example,
it appears that a transaction whereby bank shares are placed in escrow
pending Board action on an application would not involve a violation of
the Act so long as title to such shares remains with the seller during
the pendency of the application; there are no other indicia that the
applicant controls the shares held in escrow; and, in the event of a
Board denial of the application, the escrow agreement provides that the
shares would be returned to the seller.
[Codified to 12 C.F.R. § 225.134]
[Source: 41 Fed. Reg. 9859, March 8, 1976; 41 Fed. Reg. 12009,
March 23, 1976]
NOTE
Escrow arrangements involving bank stock resulting in a violation of
the Bank Holding Company Act. On February 26, 1976, the Board of
Governors of the Federal Reserve System issued an interpretation (12
C.F.R. Part 250--Miscellaneous Interpretations) finding that the manner
in which a company structured an escrow arrangement involving bank
stock resulted in a violation of the Bank Holding Company Act:
Escrow arrangements involving bank stock resulting in a
violation of the Bank Holding Company Act. In connection
with a recent application to become a bank holding company, the
Board considered a situation in which shares of a bank were acquired
and then placed in escrow by the applicant prior to the Board's
approval of the application. The facts indicated that the applicant
company had incurred debt for the purpose of acquiring bank shares
and immediately after the purchase the shares were transferred to an
unaffiliated escrow agent with instructions to retain possession of
the shares pending Board action on the company's application to become
a bank holding company. The escrow agreement provided that, if the
application were approved by the Board, the escrow agent was to
return the shares to the applicant company; and, if the application
were denied, the escrow agent was to deliver the shares to the
applicant company's shareholders upon their assumption of debt
originally incurred by the applicant in the acquisition of the bank
shares. In addition, the escrow agree-ment
provided that, while the shares were held in escrow, the applicant
could not exercise voting or any other ownership rights with respect to
those shares.
On the basis of the above facts, the Board concluded that the
company had violated the prior approval provisions of section 3 of the
Bank Holding Company Act ("Act") at the time that it made the
initial acquisition of bank shares and that, for purposes of the Act,
the company continued to control those shares in violation of the Act.
In view of these findings individuals and bank holding companies should
not enter into escrow arrangements of the type described herein, or any
similar arrangement, without securing the prior approval of the Board,
since such action could constitute a violation of the Act.
While the above represents the Board's conclusion with respect to
the particular escrow arrangement involved in the proposal presented,
the Board does not believe that the use of an escrow arrangement would
always result in a violation of the Act. For example, it appears that a
transaction whereby bank shares are placed in escrow pending Board
action on an application would not involve a violation of the Act so
long as title to such shares remains with the seller during the
pendency of the application; there are no other indicia that the
applicant controls the shares held in escrow; and, in the event of a
Board denial of the application, the escrow agreement provides that the
shares would be returned to the seller.
{{6-28-06 p.6110.28-L-25}}
§ 225.136 Utilization of Foreign Subsidiaries to
Sell Long-Term Debt Obligations in Foreign Markets and To Transfer the
Proceeds to Their United States Parent(s) for Domestic Purposes.
For text of this interpretation, see § 211.112 of this subchapter.
[Codified to 12 C.F.R. § 225.136]
[Source: 42 Fed. Reg. 752, January 4,
1977]
§ 225.137 Acquisitions of shares pursuant to section 4(c)(6) of
the Bank Holding Company Act.
(a) The Board has received a request for an interpretation of
section 4(c)(6) of the Bank
Holding Company Act ("Act"){1}
{1 Section 4(c)(6) of the Act provides an exemption from the
Act's prohibitions on ownership of shares in nonbanking companies for
"shares of any company which do not include more than 5 per centum
of the outstanding voting shares of such company."}
in connection with a proposal under which a number of bank holding
companies would purchase interests in an insurance company to be formed
for the purpose of underwriting or reinsuring credit life and credit
accident and health insurance sold in connection with extensions of
credit by the stockholder bank holding companies and their affiliates.
(b) Each participating holding company would own no more than 5
percent of the outstanding voting shares of the company. However, the
investment of each holding company would be represented by a separate
class of voting security, so that each stockholder would own 100
percent of its respective class. The participating companies would
execute a formal "Agreement Among Stockholders" under which each
would agree to use its best efforts at all times to direct or recommend
to customers and clients the placement of their life, accident and
health insurance directly or indirectly with the company. Such
credit-related insurance placed with the company would be identified in
the records of the company as having been originated by the respective
stockholder. A separate capital account would be maintained for each
stockholder consisting of the original capital contribution increased
or decreased from time to time by the net profit or loss resulting from
the insurance business attributable to each stockholder. Thus, each
stockholder would receive a return on its investment based upon the
claims experience and profitability of the insurance business that it
had itself generated. Dividends declared by the board of directors of
the company would be payable to each stockholder only out of the earned
surplus reflected in the respective stockholder's capital account.
(c) It has been requested that the Board issue an interpretation
that section 4(c)(6) of the Act provides an exemption under which
participating bank holding companies may acquire such interests in the
company without prior approval of the Board.
(d) On the basis of a careful review of the documents submitted, in
light of the purposes and provisions of the Act, the Board has
concluded that section 4(c)(6) of the Act is inapplicable to this
proposal and that a bank holding company must obtain the approval of
the Board before participating in such a proposal in the manner
described. The Board's conclusion is based upon the following
considerations:
(1) Section 2(a)(2)(A) of the Act provides that a company is
deemed to have control over a second company if it owns or controls
"25 per centum or more of any class of voting securities" of the
second company. In the case presented, the stock interest of each
participant would be evidenced by a different class of stock and each
would, accordingly, own 100 percent of a class of voting securities of
the company. Thus, each of the stockholders would be deemed to
"control" the company and prior Board approval would be required
for each stockholder's acquisition of stock in the
company.
{{2-28-06 p.6110.28-L-26}}
The Board believes that this application of
section 2(a)(2)(A) of the Act
is particularly appropriate on the facts presented here. The company
is, in practical effect, a conglomeration of separate business ventures
each owned 100 percent by a stockholder the value of whose economic
interest in the company is determined by reference to the profits and
losses attributable to its respective class of stock. Furthermore, it
is the Board's opinion that this application of section 2(a)(2)(A) is
not inconsistent with section 4(c)(6). Even assuming that section
4(c)(6) is intended to refer to all outstanding voting shares, and not
merely the outstanding shares of a particular class of securities,
section 4(c)(6) must be viewed as permitting ownership of 5 percent of
a company's voting stock only when that ownership does not constitute
"control" as otherwise defined in the Act. For example, it is
entirely possible that a company could exercise a controlling influence
over the management and policies of a second company, and thus
"control" that company under the Act's definitions, even though
it held less than 5 percent of the voting stock of the second company.
To view section 4(c)(6) as an unqualified exemption for holdings of
less than 5 percent would thus create a serious gap in the coverage of
the Act.
(2) The Board believes that section 4(c)(6) should properly be
interpreted as creating an exemption from the general prohibitions in
section 4 on ownership of stock in nonbank companies only for passive
investments amounting to not more than 5 percent of a company's
outstanding stock; and that the exemption was not intended to allow a
group of holding companies, through concerted action, to engage in an
activity as entrepreneurs. Section 4 of the Act, of course, prohibits
not only owning stock in nonbank companies, but engaging in activities
other than banking or those activities permitted by the Board under
section 4(c)(8) as being closely related to banking. Thus, if a holding
company may be deemed to be engaging in an activity through the medium
of a company in which it owns less than 5 percent of the voting stock
it may nevertheless require Board approval, despite the section 4(c)(6)
exemption.
(e) To accept the argument that section 4(c)(6) is an unqualified
grant of permission to a bank holding company to own 5 percent of the
shares of any nonbanking company, irrespective of the nature or extent
of the holding company's participation in the affairs of the nonbanking
company would, in the Board's view, create the potential for serious
and widespread evasion of the Act's controls over nonbanking
activities. Such a construction would allow a group of 20 bank holding
companies--or even a single bank holding company and one more nonbank
companies--to engage in entrepreneurial joint ventures in businesses
prohibited to bank holding companies, a result the Board believes to be
contrary to the intent of Congress.
(f) In this proposal, each of the participating stockholders must
be viewed as engaging in the business of insurance underwriting. Each
stockholder would agree to channel to the company the insurance
business it generates, and the value of the interest of each
stockholder would be determined by reference to the profitability of
the business generated by that stockholder itself. There is no sharing
or pooling among stockholders of underwriting risks assumed by the
company, and profit or loss from investments is allocated on the basis
of each bank holding company's allocable underwriting profit or loss.
The interest of each stockholder is thus clearly that of an
entrepreneur rather than that of an investor.
(g) Accordingly, on the basis of the factual situation before the
Board, and for the reasons summarized above, the Board has concluded
that section 4(c)(6) of the Act cannot be interpreted to exempt the
ownership of 5 percent of the voting stock of a company under the
circumstances described, and that a bank holding company wishing to
become a stockholder in a company under this proposal would be required
to obtain the Board's approval to do so.
[Codified to 12 C.F.R. § 225.137]
[Source: 42 Fed. Reg. 1263, January 6, 1977, effective
December 22, 1976, as amended at 42 Fed. Reg. 2951, January 14,
1977]
{{2-28-06 p.6110.28-L-27}}
§ 225.138 Statement of policy concerning divestitures by bank
holding companies.
(a) From time to time the Board of Governors receives
requests from companies subject to the Bank Holding Company Act, or
other laws administered by the Board, to extend time periods specified
either by statute or by Board order for the divestiture of assets held
or activities engaged in by such companies. Such divestiture
requirements may arise in a number of ways. For example, divestiture
may be ordered by the Board in connection with an acquisition found to
have been made in violation of law. In other cases the divestiture may
be pursuant to a statutory requirement imposed at the time an amendment
to the Act was adopted, or it may be required as a result of a
foreclosure upon collateral held by the company or a bank subsidiary in
connection with a debt previously contracted in good faith. Certain
divestiture periods may be extended in the discretion of the Board, but
in other cases the Board may be without statutory authority, or may
have only limited authority, to extend a specified divestiture period.
(b) In the past, divestitures have taken many different forms, and
the Board has followed a variety of procedures in enforcing divestiture
requirements. Because divestitures may occur under widely disparate
factual circumstances, and because such forced dispositions may have
the potential for causing a serious adverse economic impact upon the
divesting company, the Board believes it is important to maintain a
large measure of flexibility in dealing with divestitures. For these
reasons, there can be no fixed rule as to the type of divestiture that
will be appropriate in all situations. For example, where divestiture
has been ordered to terminate a control relationship created or
maintained in violation of the Act, it may be necessary to impose
conditions that will assure that the unlawful relationship has been
fully terminated and that it will not arise in the future. In other
circumstances, however, less stringent conditions may be appropriate.
(1) Avoidance of Delays in Divestitures. Where a
specific time period has been fixed for accomplishing divestiture, the
affected company should endeavor and should be encouraged to complete
the divestiture as early as possible during the specific period. There
will generally be substantial advantages to divesting companies in
taking steps to plan for and accomplish divestitures well before the
end of the divestiture period. For example, delays may impair the
ability of the company to realize full value for the divested assets,
for as the end of the divestiture period approaches the "forced
sale" aspect of the divestiture may lead potential buyers to
withhold firm offers and to bargain for lower prices. In addition,
because some prospective purchasers may themselves require regulatory
approval to acquire the divested property, delay by the divesting
company may--by leaving insufficient time to obtain such
approvals--have the effect of narrowing the range of prospective
purchases. Thus, delay in planning for divestiture may increase the
likelihood that the company will seek an extension of the time for
divestiture if difficulty is encountered in securing a purchaser, and
in certain situations, of course, the Board may be without statutory
authority to grant extensions.
(2) Submission and Approval of Divestiture
Plans. When a divestiture requirement is imposed, the company
affected should generally be asked to submit a divestiture plan
promptly for review and approval by the Reserve Bank or the Board. Such
a requirement may be imposed pursuant to the Board's authority under
section 5(b) of the Bank
Holding Company Act to issue such orders as may be necessary to enable
the Board to administer and carry out the purposes of the Act and
prevent evasions thereof. A divestiture plan should be as specific as
possible, and should indicate the manner in which divestiture will be
accomplished--for example, by a bulk sale of the assets to a third
party, by "spinoff" or distribution of shares to the shareholders
of the divesting company, or by termination of prohibited activities.
In addition, the plan should specify the steps the company expects to
take in effecting the divestiture and assuring its completeness, and
should indicate the time schedule for taking such steps. In appropriate
circumstances, the divestiture plan should make provision for assuring
that "controlling influence" relationships, such as management or
financial interlocks, will not continue to exist.
(3) Periodic Progress Reports. A company subject to
divestiture requirement should generally be required to submit regular
periodic reports detailing the steps it has
{{2-28-06 p.6110.28-L-28}}taken to
effect divestiture. Such a requirement may be imposed pursuant to the
Board's authority under section 5(b) of the Bank Holding Company Act,
referred to above, as well as its authority under section 5(c) of the
Act to require reports for the purpose of keeping the Board informed as
to whether the Act and Board regulations and orders thereunder are
being complied with. Reports should set forth in detail such matters as
the identities of potential buyers who have been approached by the
company, the dates of discussions with potential buyers and the
identities of the individuals involved in such discussions, the terms
of any offers received, and the reasons for rejecting any offers. In
addition, the reports should indicate whether the company has employed
brokers, investment bankers or others to assist in the divestiture, or
its reasons for not doing so, and should describe other efforts by the
company to seek out possible purchasers. The purpose of requiring such
reports is to insure that substantial and good faith efforts are being
made by the company to satisfy its divestiture obligations. The
frequency of such reports may vary depending upon the nature of the
divestiture and the period specified for divestiture. However, such
reports should generally not be required less frequently than every
three months, and may in appropriate cases be required on a monthly or
even more frequent basis. Progress reports as well as divestiture plans
should be afforded confidential treatment.
(4) Extensions of Divestiture Periods. Certain
divestiture periods--such such as the December 31, 1980 deadline for
divestitures required by the 1970 Amendments to the Bank Holding
Company Act--are not extendable. In such cases it is imperative that
divestiture be accomplished in a timely manner. In certain other cases,
the Board may have discretion to extend a statutorily prescribed
divestiture period within specified limits. For example, under
section 4(c)(2) of the Act the
Board may extend for three one-year periods the two-year period in
which a bank subsidiary of a holding company is otherwise required to
divest shares acquired in satisfaction of a debt previously contracted
in good faith. In such cases, however, when the permissible extensions
expire the Board no longer has discretion to grant further extensions.
In still other cases, where a divestiture period is prescribed by the
Board, in the exercise of its regulatory judgment, the Board may have
broader discretion to grant extensions. Where extensions of specified
divestiture periods are permitted by law, extensions should not be
granted except under compelling circumstances. Neither unfavorable
market conditions, nor the possibility that the company may incur some
loss, should alone be viewed as constituting such
circumstances--particularly if the company has failed to take earlier
steps to accomplish a divestiture under more favorable circumstances.
Normally, a request for an extension will not be considered unless the
company has established that it has made substantial and continued good
faith efforts to accomplish the divestiture within the prescribed
period. Furthermore, requests for extensions of divestiture periods
must be made sufficiently in advance of the expiration of the
prescribed period both to enable the Board to consider the request in
an orderly manner and to enable the company to effect a timely
divestiture in the event the request for extension is denied. Companies
subject to divestiture requirements should be aware that a failure to
accomplish a divestiture within the prescribed period may in and of
itself be viewed as a separate violation of the Act.
(5) Use of Trustees. In appropriate cases a company
subject to a divestiture requirement may be required to place the
assets subject to divestiture with an independent trustee under
instructions to accomplish a sale by a specified date, by public
auction if necessary. Such a trustee may be given the responsibility
for exercising the voting rights with respect to shares being divested.
The use of such a trustee may be particularly appropriate where the
divestiture is intended to terminate a control relationship established
or maintained in violation of law, or where the divesting company has
demonstrated an inability or unwillingness to take timely steps to
effect a divestiture.
(6) Presumptions of Control. Bank holding companies
contemplating a divestiture should be mindful of
section 2(g)(3) of the Bank
Holding Company Act, which creates a presumption of continued control
over the transferred assets where the transferee is indebted to the
transferor, or where certain interlocks exist, as well as
§ 225.2 of
Regula-
{{2-28-06 p.6110.28-L-29}}tion Y, which
sets forth certain additional control presumptions. Where one of these
presumptions has arisen with respect to divested assets, the
divestiture will not be considered as complete until the presumption
has been overcome. It should be understood that the inquiry into the
termination of control relationships is not limited by the statutory
and regulatory presumptions of control, and that the Board may conclude
that a control relationship still exists even though the presumptions
do not apply.
(7) Role of the Reserve Banks. The Reserve Banks have
a responsibility for supervising and enforcing divestitures.
Specifically, in coordination with Board staff they should review
divestiture plans to assure that proposed divestitures will result in
the termination of control relationships and will not create unsafe or
unsound conditions in any bank or bank holding company; they should
monitor periodic progress reports to assure that timely steps are being
taken to effect divestitures; and they should prompt companies to take
such steps when it appears that progress is not being made. Where
Reserve Banks have delegated authority to extend divestiture periods,
that authority should be exercised consistently with this policy
statement.
[Codified to 12 C.F.R. § 225.138]
[Source: 42 Fed. Reg. 10969, February 25,
1977]
§ 225.139 Presumption of continued control under section
2(g)(3) of the Bank Holding Company Act.
(a) Section 2(g)(3) of the
Bank Holding Company Act (the "Act") establishes a statutory
presumption that where certain specified relationships exist between a
transferor and transferee of shares, the transferor (if it is a bank
holding company, or a company that would be such but for the transfer)
continues to own or control indirectly the transferred
shares.{1}
{1 The presumption arises where the transferee "is indebted
to the transferor, or has one or more officers, directors, trustees, or
beneficiaries in common with or subject to control by the
transferor."}
This presumption arises by operation of law, as of the date of the
transfer, without the need for any order or determination by the Board.
Operation of the presumption may be terminated only by the issuance of
a Board determination, after opportunity for hearing, "that the
transferor is not in fact capable of controlling the
transferee."{2}
{2 The Board has delegated to its General Counsel the authority
to issue such determinations, 12
CFR 265.2(b)(1).}
(b) The purpose of section 2(g)(3) is to provide the Board an
opportunity to assess the effectiveness of divestitures in certain
situations in which there may be a risk that the divestiture will not
result in the complete termination of a control relationship. By
presuming control to continue as a matter of law, section 2(g)(3)
operates to allow the effectiveness of the divestiture to be
assessed before the divesting company is permitted to act on the
assumption that the divestiture is complete. Thus, for example, if a
holding company divests its banking interest under circumstances where
the presumption of continued control arises, the divesting company must
continue to consider itself bound by the Act until an appropriate order
is entered by the Board dispelling the presumption. Section 2(g)(3)
does not establish a substantive rule that invalidates transfers to
which it applies, and in a great many cases the Board has acted
favorably on applications to have the presumption dispelled. It merely
provides a procedural opportunity for Board consideration of the effect
of such transfers in advance of their being deemed effective.
Whether or not the statutory presumption arises, the substantive test
for assessing the effectiveness of a divestiture is the same--that is,
the Board must be assured that all control relationships between the
transferor and the transferred property have been terminated and will
not be reestablished.{3}
{3 It should be noted, however, that the Board will require
termination of any interlocking management relationships between the
divesting company and the transferee or the divested company as a
precondition of finding that a divestiture is complete. Similarly, the
retention of an economic interest in the divested company that would
create an incentive for the divesting company to attempt to influence
the management of the divested company will preclude a finding that the
divestiture is complete. (See the Board's Order in the matter of
"International Bank", 1977 Federal Reserve Bulletin 1106,
1113.)}
{{2-28-06 p.6110.28-L-30}}
(c) In the course of administering section 2(g)(3) the Board has
had several occasions to consider the scope of that section. In
addition, questions have been raised by and with the Board's staff as
to coverage of the section. Accordingly, the Board believes it would be
useful to set forth the following interpretations of section 2(g)(3):
(1) The terms "transferor" and "transferee," as used
in section 2(g)(3), include parents and subsidiaries of each. Thus, for
example, where a transferee is indebted to a subsidiary of the
transferor, or where a specified interlocking relationship exists
between the transferor or transferee and a subsidiary of the other (or
between subsidiaries of each), the presumption arises. Similarly, if a
parent of the transferee is indebted to a parent of the transferor, the
presumption arises. The presumption of continued control also arises
where an interlock or debt relationship is retained between the
divesting company and the company being divested, since the divested
company will be or may be viewed as a "subsidiary" of the
transferee or group of transferees.
(2) The terms "officers," "directors," and
"trustees," as used in section 2(g)(3), include persons
performing functions normally associated with such positions (including
general partners in a partnership and limited partners having a right
to participate in the management of the affairs of the partnership) as
well as persons holding such positions in an advisory or honorary
capacity. The presumption arises not only where the transferee or
transferred company has an officer, director or trustee "in common
with" the transferor, but where the transferee himself holds such a
position with the transferor.{4}
{4 It has been suggested that the words "in common with"
in section 2(g)(3) evidence an intent to make the presumption
applicable only were the transferee is a company having an
interlock with the transferor. Such an interpretation would, in the
Board's view, create an unwarranted gap in the coverage of section
2(g)(3). Furthermore, because the presumption clearly arises where the
transferee is an individual who is indebted to the transferor such an
interpretation would result in an illogical internal inconsistency in
the statute.}
It should be noted that where a transfer takes the form of a pro-rata
distribution, or "spinoff," of shares to a company's
shareholders, officers and directors of the transferor company are
likely to receive a portion of such shares. The presumption of
continued control would, of course, attach to any shares transferred to
officers and directors of the divesting company, whether by
"spinoff" or outright sale. However, the presumption will be of
legal significance--and will thus require an application under section
2(g)(3)--only where the total number of shares subject to the
presumption exceeds one of the applicable thresholds in the Act. For
example, where officers and directors of a one-bank holding company
receive in the aggregate 25 percent or more of the stock of a bank
subsidiary being divested by the holding company, the holding company
would be presumed to continue to control the "divested" bank. In
such a case it would be necessary for the divesting company to
demonstrate that it no longer controls either the divested bank or the
officer/director transferees. However, if officers and directors were
to receive in the aggregate less than 25 percent of the bank's stock
(and no other shares were subject to the presumption), section 2(g)(3)
would not have the legal effect of presuming continued control of the
bank.{5}
{5 Of course, the fact that section 2(g)(3) would not operate to
presume continued control would not necessarily mean that control had
in fact been terminated if control could be exercised through other
means.}
In the case of a divestiture of nonbank shares, an application under
section 2(g)(3) would be required whenever officers and directors of
the divesting company received in the aggregate more than 5 percent of
the shares of the company being divested.
(3) Although section 2(g)(3) refers to transfers of
"shares" it is not, in the Board's view, limited to disposition
of corporate stock. General or limited partnership interests, for
example, are included within the term "shares." Furthermore, the
transfer of all or substantially all of the assets of a company, or the
transfer of such a significant volume of assets that the transfer may
in effect constitute the disposition of a separate activity of the
company, is deemed by the Board to involve a transfer of "shares"
of that company.
(4) The term "indebtedness" giving rise to the presumption
of continued control under section 2(g)(3) of the Act is not limited to
debt incurred in connection with the transfer; it includes any debt
outstanding at the time of transfer from the transferee
to
{{2-28-06 p.6110.28-L-31}}the transferor or its
subsidiaries. However, the Board believes that not every kind of
indebtedness was within the contemplation of the Congress when section
2(g)(3) was adopted. Routine business credit of limited amounts and
loans for personal or household purposes are generally not the kinds of
indebtedness that, standing alone, support a presumption that the
creditor is able to control the debtor. Accordingly, the Board does not
regard the presumption of section 2(g)(3) as applicable to the
following categories of credit, provided the extensions of credit are
not secured by the transferred property and are made in the ordinary
course of business of the transferor (or its subsidiary) that is
regularly engaged in the business of extending credit: (i) consumer
credit extended for personal or household use to an individual
transferee; (ii) student loans made for the education of the individual
transferee or a spouse or child of the transferee; (iii) a home
mortgage loan made to an individual transferee for the purchase of a
residence for the individual's personal use and secured by the
residence; and (iv) loans made to companies (as defined in section 2(b)
of the Act) in an aggregate amount not exceeding ten per cent of the
total purchase price (or if not sold, the fair market value) of the
transferred property. The amounts and terms of the preceding categories
of credit should not differ substantially from similar credit extended
in comparable circumstances to others who are not transferees. It
should be understood that, while the statutory presumption in
situations involving these categories of credit may not apply, the
Board is not precluded in any case from examining the facts of a
particular transfer and finding that the divestiture of control was
ineffective based on the facts of record.
(d) Section 2(g)(3) provides that a Board determination that a
transferor is not in fact capable of controlling a transferee shall be
made after opportunity for hearing. It has been the Board's routine
practice since 1966 to publish notice in the Federal Register
of applications filed under section 2(g)(3) and to offer interested
parties an opportunity for a hearing. Virtually without exception no
comments have been submitted on such applications by parties other than
the applicant and, with the exception of one case in which the request
was later withdrawn, no hearings have been requested in such cases.
Because the Board believes that the hearing provision in section
2(g)(3) was intended as a protection for applicants who are seeking to
have the presumption overcome by a Board order, a hearing would not be
of use where an application is to be granted. In light of the
experience indicating that the publication of Federal Register
notice of such applications has not served a useful purpose, the
Board has decided to alter its procedures in such cases. In the future,
FEDERAL REGISTER notice of section 2(g)(3) applications will
be published only in cases in which the Board's General Counsel, acting
under delegated authority, has determined not to grant such an
application and has referred the matter to the Board for
decision.{6}
{6 It should be noted that in the event a third party should
take exception to a Board order under section 2(g)(3) finding that
control has been terminated, any rights such party might have would not
be prejudiced by the order. If such party brought facts to the Board's
attention indicating that control had not been terminated the Board
would have ample authority to revoke its order and take necessary
remedial action.
Orders issued under section 2(g)(3) are published in the FEDERAL
REGISTER and in the Federal Reserve "Bulletin."}
[Codified to 12 C.F.R. § 225.139]
[Source: 43 Fed. Reg. 6214, February 14, 1978; amended at 43 Fed.
Reg. 15321, April 12, 1978; 45 Fed. Reg. 8279, February 7, 1980; 45
Fed. Reg. 11125, February 20, 1980, effective February 7,
1980]
§ 225.140 Disposition of property acquired in satisfaction of
debts previously contracted.
(a) The Board recently considered the permissibility, under section
4 of the Bank Holding Company Act, of a subsidiary of a bank holding
company acquiring and holding assets acquired in satisfaction of a debt
previously contracted in good faith (a "dpc" acquisition). In the
situation presented, a lending subsidiary of a bank holding company
made a "dpc" acquisition of assets and transferred them to a
wholly-owned subsidiary of the bank holding company for the purpose of
effecting an orderly divestiture. The ques-
{{2-28-06 p.6110.28-L-32}}tion
presented was whether such "dpc" assets could be held
indefinitely by a bank holding company subsidiary as incidental to its
permissible lending activity.
(b) While the Board believes that "dpc" acquisitions may be
regarded as normal, necessary and incidental to the business of
lending, the Board does not believe that the holding of assets acquired
"dpc" without any time restrictions is appropriate from the
standpoint of prudent banking and in light of the prohibitions in
section 4 of the Act against engaging in nonbank activities. If a
nonbanking subsidiary of a bank holding company were permitted, either
directly or through a subsidiary, to hold "dpc" assets of
substantial amount over an extended period of time, the holding of such
property could result in an unsafe or unsound banking practice or in
the holding company engaging in an impermissible activity in connection
with the assets, rather than liquidating them.
(c) The Board notes that section
4(c)(2) of the Bank Holding Company Act provides an exemption
from the prohibitions of section 4 of the Act for bank holding company
subsidiaries to acquire shares "dpc" . It also
provides that such "dpc" shares may be held for a period of two
years, subject to the Board's authority to grant three one-year
extensions up to a maximum of five
years.{1}
{1 The Board notes that where the dpc shares or other similar
interests represent less than 5 percent of the total of such interests
outstanding, they may be retained on the basis of section 4(c)(6), even
if originally acquired dpc.}
Viewed in light of the Congressional policy evidenced by section
4(c)(2), the Board believes that a lending subsidiary of a bank holding
company or the holding company itself, should be permitted, as an
incident to permissible lending activities, to make acquisitions of
"dpc" assets. Consistent with the principles
underlying the provisions of section 4(c)(2) of the Act and as a matter
of prudent banking practice, such assets may be held for no longer than
five years from the date of acquisition. Within the divestiture period
it is expected that the company will make good faith efforts to dispose
of "dpc" shares or assets at the earliest practicable date. While
no specific authorization is necessary to hold such assets for the
five-year period, after two years from the date of acquisition of such
assets, the holding company should report annually on its efforts to
accomplish divestiture to its Reserve Bank. The Reserve Bank will
monitor the efforts of the company to effect an orderly divestiture,
and may order divestiture before the end of the five-year period if
supervisory concerns warrant such action.
(d) The Board recognizes that there are instances where a company
may encounter particular difficulty in attempting to effect an orderly
divestiture of "dpc" real estate holdings within the divestiture
period, notwithstanding its persistent good faith efforts to dispose of
such property. In the Depository Institutions Deregulation and Monetary
Control Act of 1980, (Pub. L. 96-221) Congress, recognizing that real
estate possesses unusual characteristics, amended the National Banking
Act to permit national banks to hold real estate for five years and for
an additional five-year period subject to certain conditions.
Consistent with the policy underlying the recent Congressional
enactment, and as a matter of supervisory policy, a bank holding
company may be permitted to hold real estate acquired "dpc"
beyond the initial five-year period provided that the value of the real
estate on the books of the company has been written down to fair market
value, the carrying costs are not significant in relation to the
overall financial position of the company, and the company has made
good faith efforts to effect divestiture. Companies holding real estate
for this extended period are expected to make active efforts to dispose
of it, and should keep the Reserve Bank advised on a regular basis
concerning their ongoing efforts. Fair market value should be derived
from appraisals, comparable sales or some other reasonable method. In
any case, "dpc" real estate would not be permitted to be held
beyond 10 years from the date of its acquisition.
(e) With respect to the transfer by a subsidiary of other
"dpc" shares or assets to another company in the holding company
system, including a section 4(c)(1)(D) liquidating subsidiary, or to
the holding company itself, such transfers would not alter the original
divestiture period applicable to such shares or assets at the time of
their acquisition. Moreover, to ensure that assets are not carried at
inflated values for extended periods of time, the Board expects, in the
case of all such intracompany transfers, that the shares
or
{{2-28-06 p.6110.28-L-33}}assets will be transferred at
a value no greater than the fair market value at the time of transfer
and that the transfer will be made in a normal arms-length transaction.
(f) With regard to "dpc" assets acquired by a banking
subsidiary of a holding company, so long as the assets continue to be
held by the bank itself, the Board will regard them as being solely
within the regulatory authority of the primary supervisor of the bank.
[Codified to 12 C.F.R. § 225.140]
[Source: 45 Fed. Reg. 49905, July 28, 1980, effective July 22,
1980]
§ 225.141 Operations subsidiaries of a bank holding company.
In orders approving the retention by a bank holding company of a
4(c)(8) subsidiary, the Board has stated that it would permit, without
any specific regulatory approval, the formation of a wholly-owned
subsidiary of an approved 4(c)(8) company to engage in activities that
such a company could itself engage in directly through a division or
department. (Northwestern Financial Corporation, 65 Federal
Reserve Bulletin 566 (1979).) Section 4(a)(2) of the Act provides
generally that a bank holding company may engage directly in the
business of managing and controlling banks and permissible nonbank
activities, and in furnishing services directly to its subsidiaries.
Even though section 4 of the Act generally prohibits the acquisition of
shares of nonbanking organizations, the Board does not believe that
such prohibition should apply to the formation by a holding company of
a wholly-owned subsidiary to engage in activities that it could engage
in directly. Accordingly, as a general matter, the Board will permit
without any regulatory approval a bank holding company to form a
wholly-owned subsidiary to perform servicing activities for
subsidiaries that the holding company itself could perform directly or
through a department or a division under
section 4(a)(2) of the Act. The
Board believes that permitting this type of subsidiary is not
inconsistent with the nonbanking prohibitions of section 4 of the Act,
and is consistent with the authority in
section 4(c)(1)(C) of the Act,
which permits a bank holding company, without regulatory approval, to
form a subsidiary to perform services for its banking
subsidiaries. The Board notes, however, that a servicing
subsidiary established by a bank holding company in reliance on this
interpretation will be an affiliate of the subsidiary bank of the
holding company for the purposes of the lending restrictions of section
23A of the Federal Reserve Act. (12 U.S.C. 371c)
The Board has issued this interpretation pursuant to its statutory
authority under sections 4(a)(2) and 5(b) of the Bank Holding Company
Act, 12 U.S.C. 1843(a)(2) and
1844(b).
[Codified to 12 C.F.R. § 225.141]
[Source: 45 Fed. Reg. 54326, August 15, 1980, effective August 11,
1980]
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