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4000 - Advisory Opinions
Would the acquisition of an option that is immediately exercisable
for a controlling interest in a bank constitute "control" for the
purposes of the Change in Bank Control Act
FDIC--03--02 June 13, 2003 Robert C. Fick, Counsel
Your letter to Mr. John F. Carter, Regional Director, dated
November 19, 2002 has been forwarded to me for response. This response
is based upon (i) the information provided in Mr. B's letter to
"A" dated September 26, 2002 which was an enclosure to your
letter and (ii) information provided telephonically to our Memphis
staff. In your correspondence you request the FDIC's determination
whether a change in control notice is required to be filed in the event
that Sue Brignac acquires an option on certain bank stock. The
circumstances are described below.
Mr. & Mrs. A own 100% of the stock of Holding Company X. X is a
bank holding company that owns approximately 61% of the stock of (the
"Bank"). Mr. & Mrs. A hold the X stock subject to a voting trust
agreement pursuant to which Mr. A has the right to vote all of the X
stock. Several years ago, X pledged its Bank stock to secure a loan
made by ("Bank Y") to X. The Bank Y loan went into default.
Thereafter, on November 1, 2001 Z Corporation ("Z") purchased the
loan from Bank Y, and entered into an extension and option agreement
with X. Z is 100% owned by Mrs. A. For one thousand dollars Z acquired
the exclusive right for a period of ten years to purchase from X
153,000 shares of Bank stock (approximately 51% of the outstanding
Bank stock) for the sum of four million dollars.
Thereafter, representatives of the Federal Reserve Bank of Atlanta
and the Federal Reserve Board (FRB) determined that Z's acquisition of
the option created the presumption of "control" of the Bank and
that the Brignacs had three alternatives; cancel the option, transfer
the option to Mrs. A individually, or file a bank holding company
application. In deciding which option to pursue the A's; asked if the
FDIC would require a change in control notice in the event that Z
transferred the option to Mrs. A. We indicated verbally that Mrs. A's
acquisition of the option would require a change in control notice, and
this letter confirms that advice.
Mr. & Mrs. A have controlled and directed the operations,
management, and policies of the Bank for a number of years. Until his
resignation in 2002, Mr. A was the Chairman of the Board, President,
and Chief Executive Officer of the Bank. After Mr. A resigned his
positions, Mr. A assumed the position of Executive Vice President and
continues to serve in that capacity as well as a Director and the
Secretary to the Board.
The Change in Bank Control Act 1
generally provides that no person, acting directly or indirectly, or
through or in concert with one or more other persons, shall acquire
control of an insured depository institution through a purchase,
assignment, transfer, pledge or other disposition of voting stock of
such insured depository institution without first giving the
appropriate federal banking agency 60 days prior written notice and the
agency has not disapproved the notice within that time period.
"Control" is defined to mean "the power, directly or
indirectly, to direct the management or policies of an insured
depository institution, or to vote 25 per centum or more of any class
of voting securities of an insured depository
institution." 2
The FDIC presumes that a person or group of persons acting in concert
that owns, controls, or holds with power to vote 10% or more of any
class of voting shares of an institution has the power to direct the
management or policies of the institution if either no other person
will own, control or hold the power to vote a greater percentage of
that class of voting shares after the transaction or the shares are
registered under section 12 of the Securities Exchange Act of
1934. 3
{{12-31-03 p.4984.75}}
In 1982 Legal Division staff issued an opinion that concluded that
"a simple option with no present rights to control the stock in any
way other than having the mere right to purchase has not been
considered by the FDIC staff to cause a change in control for purposes
of the Act." 4
We note that based upon current regulations, staff of the Office of the
Comptroller of the Currency (OCC) and the Federal Reserve Board (FRB)
apparently would reach a different conclusion in similar circumstances.
Legal staff of the OCC believe that immediately exercisable options for
a controlling interest in a bank would constitute control of the
institution. This position is based upon an OCC regulation which
defines "voting securities" for purposes of the Change in Bank
Control Act to include "[s]ecurities, other instruments, or
similar interests that are immediately convertible, at the option of
the owner or holder thereof, into voting
securities." 5
Legal staff at the Federal Reserve Board concur in that position.
Furthermore, the FRB's Regulation Y provides for a rebbutable
presumption of control in any Control Proceedings as follows: "[a]
company that owns, controls, or holds securities that are immediately
convertible, at the option of the holder or owner, into voting
securities of a bank or other company, controls the voting
securities." 6
Notwithstanding the FDIC's earlier advisory opinion, and in view of
the positions of the other federal banking agencies, we believe that
the issue should be reexamined. In determining whether the acquisition
of an option that is immediately exercisable for a controlling interest
in a bank would constitute "control" for purposes of the Change
in Bank Control Act, it is important to focus on the power such an
option conveys. Initially, it is fair to say that the acquisition of an
option to purchase the stock of a bank indicates a substantial interest
in actually acquiring for stock. Further, an option that is immediately
exercisable would mean that it is available for exercise at whatever
point in time that the holder desires during the option period. If the
exercise of the option would result in the option-holder owning a
substantial amount of the bank's stock (i.e., an amount that would at
least create a presumption of control under
12 C.F.R.
§ 303.82(b)(2)), a bank's management might reasonably
believe that the option-holder would have the ability to affect the
terms and conditions of their employment or even cause them to be
replaced. Consequently, if an individual holds such an option, it is
reasonable to conclude that management will be subject to some special
influence based solely upon that individual's ownership of the option.
Therefore, the mere holding of such an option would likely give the
option-holder control over the bank's management.
In view of the fact that a holder of an immediately exercisable
option for a controlling interest in a bank would likely be able to
influence a bank's management, we conclude that the acquisition of
such an option constitutes the acquisition of control of the bank. The
circumstances are made more compelling in this case than in others by
the fact that Mrs. A is currently the Bank's Executive Vice President,
a Director, and Secretary to the Board of Directors. The acquisition by
Mrs. A of the option to acquire 51% of the Bank stock, coupled with
her positions as a director and executive officer of the Bank compels
the conclusion that she would have control of the Bank. It may be
argued that Mrs. A is already in control because she already owns with
her husband 100% of WSB which in turn owns approximately 61% of the
Bank. However, by virtue of the voting trust agreement her husband
holds the power to vote all of the WSB stock. The acquisition of the
option to acquire 51% of the Bank's stock would, of course, be in
Mrs. A's name solely. As a result, her ownership interest would change
from an indirect, community property interest subject to a voting trust
agreement to a sole and direct interest. In the past when one member of
a control group acquired a controlling interest in his/her sole
capacity, the FDIC has taken the position that a change in control
notice is required even though the control group was exempt from filing
a notice 7
or had met the requirements of the Change in Bank Control Act. As a
result, the fact that Mrs. A and her husband together and previously
been approved for control of X (and indirectly for the Bank) does not
relieve her of the obligation to file a change in control notice.
Consequently, prior to acquiring the option to purchase approximately
51% of the Bank stock, Mrs. A would have to comply with
the
{{12-31-03 p.4984.76}}Change in Bank Control Act,
including filing with the FDIC the required notice and obtaining the
FDIC's approval.
Please let me know if you have any further questions in this
regard.
1Section 7(j) of the Federal Deposit Insurance At (the "FDI
Act"), 12 U.S.C.
§ 1817(j). Go Back to Text
2Section 7(j)(8)(b) of the FDI Act, 12 U.S.C.
§ 1817(j)(8)(b). Go Back to Text
3See 12 C.F.R.
§ 303.82(b)(2). Go Back to Text
4FDIC Law, REGULATIONS, AND RELATED ACTS,
Advisory Opinion 82--16,
(August 13, 1982). Go Back to Text
512 C.F.R. § 5.5(d)(6)(ii). Go Back to Text
612 C.F.R.
§ 225.31(d). Go Back to Text
7See FDIC, Law Regulations, and Related
Acts, Advisory Opinion
81--13, May 22, 1981. Go Back to Text
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