4000 - Advisory Opinions
Transaction Will Not Result in Change in Bank Control to Trigger Prior Notification Requirement of Change in Bank Control Act
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 ***, 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 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