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4000 - Advisory Opinions


Applicability of Change in Bank Control Act to ESOP Transactions

FDIC--93--64

September 8, 1993

Sandra Comenetz, Senior Attorney

This responds to your letter of August 14, 1993 in which you request an opinion from the FDIC concerning the applicability of the Change in Bank Control Act ("CBCA") to a transaction involving your client, [COMPANY X], and [TRUST COMPANY "TC"] which [COMPANY X] controls. You had written to the FDIC about this matter on May 14, 1993, enclosing your letter to the Federal Reserve Board ("FRB") of April 21, 1993 concerning the same transaction. You memorialized previous discussions with the FDIC about the transaction in a November 3, 1992 letter to the FDIC. We assume the accuracy of and rely on the facts set forth in your correspondence to the FDIC and the FRB.

As a preliminary matter, you state in your August 14 letter that the FDIC had earlier decided to await the decision of the FRB and "then adopt a similar position". That is incorrect. What you were told was that if the FRB determined that the transaction was subject to the Bank Holding Company Act (BHCA), then the FDIC would not have jurisdiction over it. See, 12 U.S.C. § 1817 (j) (17) (A). The FRB having determined that the transaction would not cause TC to lose its exemption from the definition of "bank" under the BHCA, it falls to the FDIC to determine if the transaction requires notice under the CBCA.

As we understand them, the facts are as follows. The transaction will differ from the description in your November 3 letter in that the employee stock ownership plan ("ESOP") will buy twice as much newly issued non-voting convertible preferred shares as anticipated. There will be a new employee benefit plan trust ("Funding Trust") that will purchase the preferred shares, and distribute them to the ESOP and other stock option plans and stock purchase plans. The trustee of the Funding Trust will be a large, independent commercial bank which will not be the same bank that acts as the ESOP trustee or the ESOP co-fiduciary. It is expected that upon conversion the preferred shares would represent less than 10 percent of the total outstanding stock of [COMPANY X].

In addition, [COMPANY X] may transfer up to 200,000 shares of voting securities to the ESOP. These initially would be held by the ESOP as unallocated shares, and ultimately would become allocated shares. If all 200,000 shares were transferred, the total increase in the amount held by the ESOP would be less than one-half percentage point.

Although voting and non-voting shares will be held in the names of the ESOP and the Funding Trust, neither entity will have the power to vote such shares. Voting shares, including those that are converted, would not be voted as a block, but in accordance with voting instructions given by the ESOP participants to whom shares have been allocated. No single allocated shareholder holds, or, under the proposed transaction, will hold an amount of allocated shares that would create a presumption of control. No employees have agreed to vote, or are voting, in concert their respective allocated shares. Unallocated shares are voted on a pro rata basis in the same manner as the allocated shares, not as a block.

The purchase by the ESOP of non-voting convertible preferred stock would not give rise to a notice requirement under the CBCA. Until such time as the preferred shares are actually converted, they would not be treated as voting securities under the CBCA. If, upon conversion, the preferred shares represent less than 10 percent of the total outstanding stock of [COMPANY X] notice would not be required.

The transfer of up to 200,000 shares of voting stock to the ESOP in conjunction with the possible conversion of preferred shares would not give rise to a notice requirement assuming those shares are not voted as a block or by allocated shareholders acting in concert.

This conclusion is limited strictly to the facts and issues discussed. It should not be interpreted as an indication of our views on other issues arising from the proposed transaction or any other transaction.


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