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Each depositor insured to at least $250,000 per insured bank

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4000 - Advisory Opinions

Determination of Principal Shareholder Status Under Regulation O: Relevance of Nonvoting Preferred Stock Convertible to Voting Common Stock at Option of Holder


October 12, 1990

Pamela E.F. LeCren, Counsel

The following is in response to your request for an opinion interpreting the term "principal shareholder" for the purposes of Federal Reserve Board Regulation (12 C.F.R. §215) which is made applicable to nonmember banks by section 18(j) of the Federal Deposit Insurance Act (12 U.S.C. §1828(j)).

Section 215.2(j) of Regulation O defines the term "principal shareholder" to mean any individual or company (other than an insured bank) that directly or indirectly, or acting through or in concert with one or more persons, owns, controls, or has the power to vote more than 10 percent of any class of voting securities of a bank or company. Specifically you have inquired as to whether or not the FDIC would take nonvoting preferred stock that is convertible to voting common stock at the option of the holder into consideration when determining whether or not a particular individual or company is a principal shareholder. (The preferred stock has no voting rights regardless of the circumstances.) Your letter expresses the opinion that the proper interpretation of the regulation should be that such nonvoting preferred should not be taken into consideration unless and until the holder exercises his/her option to convert the nonvoting preferred stock into voting common stock. If at that time the individual in question owns, controls, or has the power to vote more than 10 percent of the voting common, he/she should be considered to be a principal shareholder within the meaning of Regulation O.

We concur with your opinion. An individual who owns preferred stock that has no voting rights whatsoever does not have the "power" to vote stock. If the preferred stock may be converted to voting stock, it is not until such time as the conversion occurs that the owner has assumed the power to vote. Prior to the conversion, the preferred shareholder had only the power to assume in the future the right to vote.

We conclude upon applying this opinion to the facts set forth in your letter that your client, who owns more than 23 percent of the voting common stock of an insured nonmember bank as well as 10 percent of the convertible nonvoting preferred stock of the bank, will no longer be considered a principal shareholder of the bank if he reduces his ownership of the voting common stock to less than 10 percent of the total outstanding share of common. He need not divest any of his nonvoting preferred to no longer be considered a principal shareholder.

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