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4000 - Advisory Opinions

Application of Depository Institution Management Interlocks Act to Change in Bank Control Notice


December 28, 1980

Pamela E. F. Lecren, Attorney

The Philadelphia Regional Office is currently reviewing a change in bank control notice filed by *** pertaining to ***. In processing the notice the Regional Office identified a potential problem under the Depository Institution Management Interlocks Act (12 U.S.C. 3201 et seq., "Interlocks Act") that arose out of the particular circumstances of the proposed transaction. The facts are as follows. *** is currently president and director of ***. *** has total assets in excess of $20 million and is located in the *** Standard Metropolitan Statistical Area ("SMSA"). *** proposes to acquire 45.875% of the total outstanding shares in *** has total assets in excess of $20 million and is located in the same SMSA as ***. The President and five directors of *** will continue to hold 4,000 shares in *** after *** stock acquisition or 50% of the total outstanding shares. The remaining 4.125% of the stock will be dispersed among a number of other persons.

The Interlocks Act and section 348.3(b) of FDIC's regulations implementing the Interlocks Act prohibit two banks that are located in the same SMSA from sharing management officials when either institution has total assets in excess of $20 million. The term "management official" is defined by the Interlocks Act to include directors, officers and employees with management responsibilities and persons who have representatives or nominees serving in such capacities. It would be unlawful for *** to serve *** as a director or officer or employee with management responsibilities while he continues to serve *** as president and director. In addition, a prohibited interlock would result if *** had a representative or nominee serving *** as a management official. In short, the Interlocks Act presumes an anti-competitive result in situations where a person who is an active management official of one financial institution is represented at another competing financial institution by a person who has the ability to affect and is privy to management decisions of the latter.

Section 348.2(k) defines the term "representative or nominee" as follows:

(k) "Representative or nominee" means a person who serves as a management official and has an express or implied obligation to act on behalf of another person with respect to management responsibilities. Whether a person is a "representative or nominee" depends upon the facts in individual cases. The appropriate Federal supervisory agency or agencies will determine, after giving the affected persons the opportunity to respond whether a person is a "representative or nominee". Certain relationships (including family, employment, and agency relationships), or the ability and exercise of ability by a shareholder of a depository organization to elect a director, may be evidence of such an express or implied obligation. For the purposes of this subsection, person shall include only natural persons.

Instances such as this, where a person who is a director and president of bank A is acquiring 45.875% of the stock in a competing institution, bank B, we would find it difficult to make a determination other than that any director put into office by the person in question would be his or her representative or nominee. We feel it is safe to presume that the nearly 46% shareholder will nominate and elect to the board at least one or more directors of his or her choice. Any person with such a substantial interest in the bank can hardly avoid taking an active interest in the management of the bank and selecting directors who will serve his or her interests. Those interests are likely to include reduction or elimination of competition between *** and ***. We do not find it material to our determination that a group of persons (said by the Regional Office to act in concert) control a larger block of stock than *** would control. It is not necessary that an individual control a bank before anyone elected to office as a result of the exercise of his or her voting rights will be considered his or her representative or nominee.

There would be no interlock problem, however, if *** were to place voting control of the stock he seeks to acquire with an independent proxy holder who is given an undirected proxy. So as not to constitute a change in control under section 7(j), it is necessary that the proxy be revocable and be given on a one time basis for each successive stockholders' meeting. If the proxy holder is not a management official of a competing financial institution nor is acting at the direction of, or under any express or implied obligation to *** then the directors so elected would not be *** representatives or nominees.

*** should be contacted by the Regional Office and informed of the substance of this opinion. He should be given an opportunity to respond to our finding on the representative or nominee question and the possibility of placing control in an independent proxy holder explored with him. Of course, the problem could be alternatively resolved if *** were to sever his relationship with ***.

In the absence of such a proxy arrangement or termination of relationship with *** we would be forced to consider the interplay of the change in bank control statute and the Interlocks Act. We do not feel that the FDIC may fail to disapprove a change in bank control notice which would unavoidably create a violation of federal law. We are further of the opinion that section 7(j)(7)(D) of the FDI Act could be relied upon to disapprove a change in bank control notice which inextricably presents a violation of the Interlocks Act. Section 7(j)(7)(D) indicates that the appropriate Federal banking agency may disapprove any proposed acquisition if "the competence, experience, or integrity of any acquiring person or of any of the proposed management personnel indicates that it would not be in the best interests of the depositors of the bank, or in the interest of the public to permit such person to control the bank". Arguably, an individual whose acquisition and exercise of voting rights connected with stock ownership would result in a management official interlock in violation of federal law can be said to be legally incompetent to acquire control under the change in bank control statute. This construction of the interplay of the two statutes seems all the more reasonable considering that the Interlocks Act is designed to promote competition among banks thereby benefiting consumers of banking services.

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