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4000 - Advisory Opinions


Applicability of Regulation O to Loans to Related Interest of Bank Insider

FDIC-80-13

July 1, 1980

Rae Schupack, Regional Counsel

Re:   Request for Determination of Absence of Control Pursuant to 12 C.F.R. 215.2(b)(4).

Your February 5, 1980 letter to Mr. Burton Blasingame, Regional Director, was referred to me. In your letter you requested us to determine, under Regulation O, § 215.2(b)(4), that ***, president of the bank, does not control *** Corporation, a customer of the bank. The bank's loan to *** Corporation was cited in the bank's November 30, 1979 examination report as violating Regulation O because the corporation is presumed to be a related interest of *** and the loan was made without prior board approval.

By way of rebuttal of the presumption of control, you set forth the following facts:

1. *** is one of seven persons who own equally the stock of the corporation (approximately 14.3% each).

2. Each stockholder serves on the board of directors of the corporation.

3. *** is not and never has been an officer of the corporation and resides in a city different from that of the corporation's office.

4. *** shareholder, director and treasurer of the corporation, is responsible for the daily management of the business, and you believe that he is the person who controls the corporation in fact.

5. The corporation's loan at the bank is guaranteed by the three shareholders of the corporation who originally organized it. *** is not a member of this organization group.

In our subsequent conversations and correspondence, you submitted to me copies of the Articles of Incorporation, By-laws, and certain minutes of meetings of the board of directors of the corporation, and you related to me the following additional facts:

1. The 10-1-79 credit extension in question was a rewriting on a demand basis of two existing notes: the first made 6-23-78, renewed 6-23-79, and due 12-31-79; the second made 4-20-79, renewed 6-23-79, and due 12-31-79.

2. *** became a shareholder of the corporation on August 28, 1979 and agreed to purchase his shares approximately one month earlier. He personally had no direct part in making the credit decisions involving the corporation, and his equity contribution to the corporation was not tied to the loans in any manner.

3. No formal or informal understandings exist among the directors as to which directors, if any, shall be "active" or "passive" or which directors shall control the corporation's affairs.

It is the FDIC's position that, under circumstances such as these, the presumption of control has not been rebutted. Where equal shareholders (each owning more than ten percent of the stock of the corporation) are each a director as well, it is in our opinion very difficult to demonstrate that the control presumption should not be operative. In order to rebut the presumption it would be necessary to demonstrate that some individual other than the bank insider exercises actual control. There is nothing in the By-laws or Articles of Incorporation to identify such an individual. Nor is there any evidence of an agreement among several of the directors to vote in the same manner (i.e., to create a control block) or any voting pattern that would imply that one or more individuals exercise such a degree of influence over the others so that he or she (they) can be identified as a controlling influence. Even though *** (shareholder, director, and treasurer of the corporation) may be responsible for routine, day-to-day operations of the corporation and is authorized by the board of directors to execute certain leases on behalf of the corporation, he cannot be said to control the management or policies of the corporation to the exclusion of the remaining shareholders/directors as he is still responsible to the board.

Inasmuch as the Regulation O, § 215.2(b)(2) presumption of control has not been rebutted as to *** all loans to his related interest, the corporation, must comply with Regulation O, § 215.4 and are subject to prior approval by the bank's board of directors in accordance with the conditions specified in § 215.4(a). In our recent telephone discussion you told me that at its March 1980 meeting the bank's board of directors took certain action regarding the corporation's line of credit and that the bank's board and *** followed the requirements laid down in § 215.4(a); so long as *** owns over 10% of the stock of the Corporation, this should continue to be done in the future with respect to all credit extensions made by the bank to the corporation.

If you have any questions concerning this matter, please feel free to give me a call.


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