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4000 - Advisory Opinions

Reconsideration of Opinion on Affiliate Relationship


November 14, 1980

Pamela E. F. LeCren, Attorney


On September 6, 1979 the Legal Division rendered an opinion on whether or not *** and *** were affiliated by common ownership for the purposes of the Depository Institution Management Interlocks Act (12 U.S.C. 3201 et seq., "Interlocks Act") and FDIC's regulations implementing that Act (12 C.F.R. Part 348). We were of the opinion that the institutions were not affiliated inasmuch as § 348.2(b) of FDIC's regulations precluded recognition of an affiliation.

Section 202(3)(B) of the Interlocks Act defines two institutions as affiliates if more than 50 percent of the voting stock of both is beneficially owned by the same person or group of persons. That statutory definition is expanded by § 348.2(b) which states that:

. . . an affiliate relationship based on common ownership does not exist if the appropriate Federal supervisory agency or agencies determine . . . that the asserted affiliation appears to have been established in order to avoid the prohibitions of the Interlocks Act and does not represent a true commonality of interest between the depository organizations. In making this determination the agencies will consider among other things whether a person, . . . whose shares are necessary to constitute the group, owns a nominal percentage of the shares of one of the organizations and the percentage is substantially disproportionate with that person's ownership of shares of the other organization.

In applying § 348.2(b) to the facts, we made the following statements in our September 6, 1979 opinion.

[The Regional] Office has submitted to the Legal Division a list of persons who as a group own 82 percent of the stock of *** and 62 percent of the stock of *** is a necessary component of the group. Without his stock representation, the group's ownership in *** drops to 21.2 percent.

*** owns over 50 percent of the outstanding stock in *** but only 41 shares out of the 96,000 outstanding in *** ownership in *** is clearly nominal and is at the same time substantially disproportionate to his ownership in ***. *** land acquired the controlling interest in *** on March 8, 1979, two days prior to the effective date of [the Interlocks Act]. These facts taken together tend to show that the affiliation was established to avoid the prohibitions of [the Interlocks Act].

Review of the general pattern of stock ownership as represented by members of the group reveals that no significant *** stockholder owns stock in *** in more than a nominal amount. The individual holdings of these persons in both institutions are substantially disproportionate. The four persons who do own 1 percent or more of the stock in *** hold, with one exception, no more than a handful of shares in ***.

It is our opinion that no true commonality of interest exists between these two banks. The facts as presented show that in effect fifty percent of *** is owned by one group of persons and 50 percent of the stock of *** is owned by one person, ***. *** interest in *** is much too small to consider him to have sufficient interest in *** to warrant finding the group, including him, to have a common interest in both banks.

On May 19, 1980 counsel for *** requested that the Legal Division reconsider its earlier opinion. That request was transmitted by the Regional Office to Washington by letter dated July 24, 1980. (The delay in transmittal was occasioned by the need for additional information which was requested from counsel, said additional information not forthcoming until shortly prior to July 24th.) Having carefully reviewed the arguments and additional facts presented by counsel and regional counsel's assessment of same, it is our conclusion, as discussed below, that there is little or no basis upon which to alter our prior opinion.


Counsel's arguments primarily stress that *** and *** were found to be affiliates for the purposes of § 8 of the Clayton Act (15 U.S.C. § 19) both by the Office of the Comptroller of the Currency and the FDIC as early as 1977.1 The affiliation was based upon common ownership, i.e., the same group of persons held 82 percent of the stock in *** and 62 percent of the stock in ***. Of that stock, fifty-eight percent of the stock in *** was held by a voting trust. Various voting trust subscribers together held less than a majority of the shares of *** Other *** shareholders who also held *** stock, when added to the group of voting trust subscribers, brought the total common ownership in *** and *** to 82 and 62 percent respectively. Stock owned by *** was essential to the common ownership group. *** held 47 percent of the outstanding stock in ***. It should be noted that *** interest in *** consisted of only one share of stock. Thus, the affiliation that existed prior to *** acquisition of his current interest in *** was one that the Clayton Act recognized but at the same time was one that the Interlocks Act did not recognize.2

The Legal Division is of the opinion that pre-existing Clayton Act affiliations will be recognized so long as they continue in the same form. If any alteration of the stock pattern occurs such that the FDIC would have cause to reconsider the question of affiliation in light of the Interlocks Act, the affiliation will not be recognized if the elements contained in § 348.2(b) are met. The first of those elements is the appearance of acting to avoid the statute. In this case, *** acquired his present interest in *** on March 8, 1979 two days prior to the effective date of the Interlocks Act. Despite counsel's argument that *** did not act to avoid the Interlocks Act, the fact remains that he acquired a sufficient interest in *** to establish apparent common ownership. At the time *** acquired his interest in *** the prior common ownership between *** and *** no longer existed. *** had sold his one and only share of stock in *** on February 21, 1979 and by doing so removed himself from the common shareholder group. The pre-existing affiliation under the Clayton Act is therefore irrelevant to the question of whether or not there is currently an affiliation for the purposes of the Interlocks Act.

Counsel also argues that a true commonality of interest exists between *** and *** and that the FDIC improperly focused upon the holdings of *** in assessing whether or not such an interest existed. We do not find counsel's arguments persuasive. Section 348.2(b) contemplates the identification of a person or persons whose shares are necessary to establish the common ownership group and an assessment of the shares held thereby under the nominal/disproportionate test. If the shares held in one institution are nominal and at the same time disproportionate to those held in the other institution, the individual(s) will not be included in the common shareholder group. Not only did we find *** shares to be excludable under § 348.2(b) but we found that the stock ownership pattern in general revealed that many persons within the group truly had an interest in only one and not both institutions. In short, we see no reason to alter our assessment of the question of common interest.

You should note that our determination on affiliation does not affect the individuals who were serving both *** and *** prior to November 10, 1978, i.e., those persons who were accorded grandfather rights under the Interlocks Act. Loss of affiliation is not a "change in circumstances" that will result in early termination of grandfathered service. *** will not be able to continue to serve both banks (he joined the board of *** after the March stock acquisition) but the remaining directors will not be affected.

1 12 U.S.C. § 221(a) defines "affiliate'' for the purposes of the Clayton Act to include a bank "of which control is held directly or indirectly, through stock ownership or in any other manner, by the shareholders of a member bank who own or control either a majority of the shares of such bank or more than 50 per centum of the number of shares voted for the election of directors of such bank at the preceding election, or by trustees for the benefit of the shareholders of any such bank". Go back to Text

2 A Senate report accompanying an earlier version of the Interlocks Act (S. Rep. No. 95-323, 95th Cong. 1st Session 15 (1977)) stated that "by rule the [agencies] should prescribe the switching of several shares of stock between individuals to defeat the ban which would otherwise obtain on interlocking management or directors between . . . institutions which are not truly commonly owned." The purpose of § 348.2(b) was to block the creation of an affiliation by so-called common ownership when no true common interest existed, i.e., when the person or persons necessary to establish common ownership had no true interest in both organizations. Go back to Text

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