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4000 - Advisory Opinions

Whether an Employee Stock Ownership Plan ("ESOP") Which Owns Bank Stock Is an Affiliate Under § 23A of the Federal Reserve Act

FDIC 91-33 April 23, 1991 Gerald J. Gervino, Senior Attorney

In your letter of April 19, 1991, you enclose a copy of an inquiry you had earlier sent to our regional office and ask about the application of § 23A of the Federal Reserve Act, 12 U.S.C. § 371c ("§ 23A''), to an employee stock ownership plan ("ESOP''), which owns approximately 9.29% of your client bank's ("bank") stock.

You intend to simplify the bank's ownership structure by eliminating the bank's holding company and substituting bank stock for holding company stock as the basic asset of the ESOP. We will answer your questions under the assumption that this intended transaction has been completed with no other relevant changes in the relationship of the parties.

Your modified questions precede each answer set forth below.

1. Is the ESOP an "affiliate" of the bank under § 23A?

§ 23A(b)(1) defines the term "affiliate'' to mean, among other things, any company that is controlled directly or indirectly, by a trust or otherwise, by or for the benefit of shareholders who beneficially or otherwise control, directly or indirectly, by trust or otherwise, the bank. § 23A(b)(3) deems shareholders in "control'' if they, directly or indirectly, own, control, or have the power to vote 25% or more of any class of voting securities of the bank or any other company.

Under the facts that you have presented, it would appear that the three ESOP trustees control the ESOP, both in their trustee capacity and through their power to vote 57.5% of the ESOP held stock. With the shareholdings of the immediate family of director no.3, the three trustees also, directly or indirectly, own or control 38.19% of the bank's stock.

Given the nexus of voting and ownership power among the trustee-shareholders of the ESOP and the bank, we feel that the trust has a business purpose for § 23A purposes. The arrangement does not seem purely for the purpose of employee investment, as would an investment trust. Under the circumstances, the ESOP appears to be a business trust for purposes of § 23A.

In view of the above, the ESOP appears to be an "affiliate" for purposes of § 23A.

2. Would interim financing by the bank be a covered transaction?

Yes. A loan by the bank to an affiliate is included in the list of covered transactions contained in § 23A(b)(7).

3. Would the bank's guarantee of a loan to the ESOP be a covered transaction?

Yes. For the same reason stated in the answer to question no. 2.

If we have not completely answered your inquiry or you have any further questions, please write or call us.

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