4000 - Advisory Opinions
"Beneficial Ownership" under Part 348--Irrevocable Directed Proxy
December 30, 1982
Pamela E. F. LeCren, Senior Attorney
Background and Statement of Question:
By memorandum of August 31, 1982, you forwarded to the Legal Division for review and comment a request by *** for an opinion concerning the issue of affiliation by common "beneficial" ownership under the Interlocks Act1 and Part 348 of FDIC's regulations. *** specifically requested an opinion on whether or not *** and *** would be affiliated by common beneficial ownership where the same individual who owns in excess of 50 percent of the stock of *** and who owns approximately 30 percent of the stock of ***, holds irrevocable proxies to vote the remaining 63 percent of *** stock.
The proxies in question have one-year terms and are renewable for additional one-year terms. The stated purpose of the shareholders' agreement and proxies incorporated therein by reference is to permit the proxyholder (***) to remain as a management official of *** while managing his controlling interest in *** by serving as a management official thereof. *** has full power to appoint a person or persons as his substitute proxyholder. The proxies direct *** to "vote such proxies for the election of each of the undersigned as directors" of *** and "otherwise in his best business judgment." *** is to serve as a management official of *** for the term of the agreement, said agreement to terminate prior to its stated one-year term if *** fails to serve as a director or other management official of ***.
The Interlocks Act and Part 348 provide that unaffiliated depository institutions may not share management officials if the institutions are located in the same community or SMSA or are of major asset size.2 The Interlocks Act defines institutions to be affiliates if, among other things, the same person or group of persons beneficially owns more than 50 percent of the stock of both institutions (12 U.S.C. § 3202(3)(b)). While neither the Interlocks Act nor Part 348 defines the term "beneficial ownership'', the Legal Division has on one or two occasions rendered an opinion dealing with the construction of the term. The latest of those opinions (June 18, 1981, Barbara Gersten), concerned a change in bank control involving ***, and relied upon the Securities and Exchange Act of 1934 definition of beneficial ownership3 to find that a trustee of a voting trust can be said to beneficially own the shares of which the trustee has voting control.
As stated in that opinion, voting control should be a relevant consideration in defining beneficial ownership as the "acquisition of the power to vote more than 50 percent of the stock of the depository organization could impact on competition." I would further amplify Ms. Gersten's June 1981 opinion by adding the following. The common ownership exception embodied in the Interlocks Act seems to recognize that where a person has a significant investment interest in two depository institutions and thereby the ability to control management and policies by voting a majority of the stock of both, that person, in an effort to protect the investment, is likely to vote the stock so as to inhibit or prevent the institutions from competing. Likewise, an individual with a significant investment interest in one institution and voting control over another is likely to utilize stock control in the second institution to inhibit or prevent competition so as to protect his or her investment in the former. When the overall purpose of the Interlocks Act to promote competition is considered, including voting control in defining beneficial ownership seems to be warranted.
Returning to consideration of the instant case, we would agree that as a general proposition an irrevocable proxy transfers voting control to the proxyholder. We are not, however, comfortable in finding that *** is in fact the beneficial owner of the stock based on his ability to vote the proxies. Our hesitancy results from the fact that the proxies are directed. *** may be casting the vote, but he has no ability to vote any director into office other than the individuals who are parties to the shareholder agreement. A shareholder's ability to affect a bank's policies is primarily limited to, or associated with, the shareholders' ability to select and put into office directors. The fact that *** has no choice regarding the selection and election of directors effectively means that he does not "control" the voting power of the stock.4 *** function as proxyholder could merely be considered mechanical or administrative. As the underlying investors (the parties to the agreement) have no investment interest in ***, one could expect that *** and *** would compete. The so-called control vested in *** does not change that fact. *** is bound by contract to vote persons into office who have no interest in downplaying competition between the two banks. *** does, however, have such an interest and his presence as a management official at both banks could serve to inhibit or prevent competition.
In sum we do not feel that the directed proxies transfer beneficial ownership to *** so as to establish an affiliation by common ownership between *** and ***. As our conclusion turns principally on the fact that the proxies are directed, we conclude that an affiliation would exist if the proxies were undirected.
Subsequent to the drafting of the body of this opinion, the Legal Division received an amended proxy from ***. The amended proxy differs from the original in that it is not directed. The language specifying that *** is to "vote such proxies for the election of each of the undersigned as directors of the bank" has been deleted. Based on the above, we conclude that the irrevocable proxy does confer beneficial ownership of the underlying stock in *** and he is thus the beneficial owner of more than 50% of the voting stock of both banks. The institutions are therefore, in our opinion affiliated for the purposes of the Interlocks Act.
1 Depository Institution Management Interlocks Act (12 U.S.C. § 3201 et seq., "Interlocks Act"). Go back to Text
2 See section 348.3. We are assuming for the purposes of this memorandum that ***, dual service would be unlawful under section 348.3 unless the two banks are affiliated. Go back to Text
3 Rule 13d-3 (17 C.F.R. § 240.13d-3) promulgated under the Securities and Exchange Act of 1934 ("34 Act'', 15 U.S.C. § 78) defines beneficial owner of a security for the purposes of sections 13(d) and (g) of the 34 Act to "include any person who, directly or indirectly, through contract, arrangement, understanding, relationship or otherwise has or shares: (1) voting power which includes the power to vote or to direct the voting of such security . . ." Go back to Text
4 Although *** is bound by contract to vote the stock in the best interest of the bank, as a practical matter, other than the election of directors only major events such as a sale of assets or mergers are put to shareholder vote. Therefore, *** is not in a position vis a vis his stock "control" to affect the competitive policies of the bank. Go back to Text