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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 Act1 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

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 notice7 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 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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