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4000 - Advisory Opinions


Principal Shareholder Status Under Regulation O--Voting Trust Members

FDIC-79-9

October 17, 1979

Pamela E.F. LeCren, Attorney

Your letter to Charles M. Pickett, FDIC Regional Counsel, dated September 10, 1979 has been forwarded to the Legal Division of the Washington, D.C. office for reply. In your letter you request an opinion on whether or not ***, a director of ***, is a principal shareholder within the meaning of section 215.2(j) of Federal Reserve Regulation O (12 C.F.R. Part 215) which implements Title I of the Financial Institution Regulatory and Interest Rate Control Act of 1978. If *** is a principal shareholder within the meaning of the regulation, *** is limited in the amount of credit it can extend to him. In addition, extensions of credit made to him may not be preferential and they will generally be subject to prior approval by the bank's board of directors.1

According to your letter and the supporting documents forwarded to this office, *** is one of sixty-five persons who holds stock in *** that has been placed in a voting trust. The voting trust holds 51 per cent of the bank's stock. Sole authority to vote the stock resides in three trustees who act by majority vote. If a trustee position becomes vacant, the remaining trustees select, by majority vote, a successor from among the members of the trust. The members of the trust have no control over the bank stock other than the right to sell the stock. The purchaser takes title (beneficial) subject to the terms of the voting trust.

Section 215.2(j) of the regulation defines a principal shareholder as an individual or company that directly or indirectly, acting through or in concert with one or more persons, owns, controls, or has the power to vote more than 10 per cent of the stock of a bank. It is the opinion of the Legal Division of the FDIC that because of their power to vote the stock, the trustees of a voting trust are principal shareholders under section 215.2(j) assuming of course that the trust holds more than 10 per cent of the stock of the bank.

The members of a voting trust may or may not be principal shareholders. If a member is in a position to control the selection of the trustees (or the manner in which the trustees vote) that member will be a principal shareholder.2 If, for example, the members elect the trustees and each has one vote per share of their stock contribution, any member whose stock contribution to the trust is 10 per cent or more of the total and who is the largest contributor is presumed to be in a position to control the selection of trustees. The presumption of control is rebuttable. Any member who contributes 25 per cent or more of the total is conclusively presumed to control the selection of the trustees. A member who is the beneficial owner of more than 10 per cent of the stock held by the trust and who is the largest contributor will not be considered a principal shareholder where the member has no control over the trustees, no power to terminate the trust, and cannot remove or add trustees.3

In consideration of the foregoing, we are of the opinion that *** is not in a position to control the selection of the trustees nor to control the manner in which the trustees vote. His stock contribution is less than 5 per cent of the total held by the voting trust. The original three trustees no longer serve and the successor trustees were not selected by vote of the membership or in any way in which the membership would have control over their selection. *** is not in a position to control how the trustees vote the stock.4

Because of the above, we do not find *** to be a 10 per cent shareholder of *** by virtue of his membership in a voting trust that holds more than 10 per cent of the stock of the bank. He is therefore not subject to the lending restrictions of Regulation O.

1 As a director of the bank *** is already subject to the nonpreferential lending restriction and the prior approval requirement found in section 215.4(a) and (b) of the regulation. He is not, however, subject to the lending limit restriction. Go back to Text

2 In short that member controls the voting trust which itself falls within the definition of principal shareholder, i.e., a company that has the power to vote more than 10 per cent of the stock of a bank. Go back to Text

3 The Legal Division has interpreted the term owners within the meaning of Regulation O to reach only those persons who along with any other incident of "ownership" (possession, enjoyment, etc.) have the ability to control the property in question. Thus someone who "owns" stock held in a trust where the trustee has full control over the stock is not an "owner" for the purposes of Regulation O. Go back to Text

4 There is no reason to believe that *** is able to influence the trustee vote because of any implied or expressed agreement. If, however, evidence of such an agreement were present, the substance of this opinion would change. Go back to Text


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