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4000 - Advisory Opinions

Whether an Insured Bank May Acquire or Retain a Majority Interest in a Subsidiary at Any Tier


September 26, 1994

Sandra Comenetz, Counsel

This responds to your July 19, 1994 letter to Pamela LeCren concerning the applicability of 12 CFR Part 362 to certain proposed life insurance agency activities in Ohio that Corporation X wishes to engage in under state law through a subsidiary of its insured state bank subsidiary, BANK ABC "BANK".


You seek confirmation that an insured state bank may acquire or retain a majority interest in a subsidiary at any tier, i.e., that the exemption from the general prohibition on impermissible equity investments in 12 CFR § 362.3(a), found in 12 CFR § 362.3(b)(1) ("An insured state bank is not prohibited from acquiring or retaining a majority interest in a subsidiary."), applies both to companies directly controlled and companies indirectly controlled by an insured state bank.

You also seek confirmation that Bank would have a basis for engaging in life insurance activity, through an indirectly owned subsidiary, whether or not the proposed ownership structure meets the FDIC test for majority ownership and control, on the grounds that it would be investing in the stock of a corporation which engaged in activities which are not "as principal" under 12 CFR § 362.4(c)(3)(iv)(D).


You contend that the proposed ownership structure would meet FDIC criteria for majority ownership and control by Bank of an indirectly owned life insurance agency subsidiary. You state that the ownership structure is designed to meet Ohio insurance law requirements that all of the voting shares of a corporate life insurance agency be beneficially owned by natural persons who are residents of the state of Ohio. See Ohio Rev. Code Ann. Sec. 3905.18(C).

You describe the proposed structure as follows. Bank would establish a wholly owned subsidiary, SUB A, which, in turn, would own all shares of nonvoting stock of Life Agency. An employee of SUB A the ("Controlled Shareholder") would own the sole share of Life Agency voting stock, but, under a "close corporation agreement" with SUB A, would have none of the indicia of ownership of such share, except the technical right to vote the share. The Controlled Shareholder could only vote the share in the manner and for the purposes determined by Corporation X, Bank, and SUB A. All other indicia of ownership, including the right to receive any dividends (other than purely nominal dividend rights held by the Controlled Shareholder as may be required by applicable state law), profits, other income or other distributions, would instead reside exclusively in SUB A, Bank's wholly owned subsidiary. Operationally, Huntington Life would be controlled by its parent SUB A, by Bank as parent of SUB A, and by corporate levels above Bank.


Exemption from Prohibition on Impermissible Equity Investments

Because "subsidiary" is defined broadly to mean "any company directly or indirectly controlled by an insured state bank," 12 CFR § 362.2(v), our view is that an insured state bank may acquire or retain a majority interest in a subsidiary of any tier. The question becomes: is Life Agency a "subsidiary" of Bank in which Bank holds a majority interest?

Majority Interest

Part 362 does not define majority interest. The Preamble to Part 362 states that "[m]ajority ownership for the [majority owned subsidiary] exception is understood to mean ownership of greater than 50% of the outstanding voting stock of the subsidiary." Preamble to Final Rule, 12 CFR Part 362, 57 Fed. Reg. 53223, column 2 (emphasis added). Using this definition, and assuming that your use of the words "wholly owned subsidiary" to describe SUB A means that Bank would own all of the voting shares of SUB A, we conclude that Bank, through Sub A, would have a majority ownership of Life Agency because SUB A's Controlled Shareholder would own only nominally the sole voting share of Life Agency, and the other indicia of ownership would be in SUB A.

On the other hand, if "majority interest" is not synonymous with majority ownership, and means instead, a greater than 50% "equity investment", nothing in Part 362 requires that the majority interest be in voting stock. See 12 CFR § 362.2(k) and (1) (An equity investment is, inter alia, "any equity security.'' An equity security is, inter alia, "any stock.") Because there is no requirement in the regulation that an equity security have voting rights; and, given that, as a result of the close corporation agreement, only Bank has any "interest" in Life Agency, we conclude that Bank, through SUB A, would have a majority interest in Life Agency.

Direct or Indirect Control

In Part 362, "control" means:

the power to vote, directly or indirectly, 25 per centum or more of any class of voting stock of a company, the ability to control in any manner the election of a majority of a company's directors or trustees, or the ability to exercise a controlling influence over the management and policies of a company.

12 CFR § 362.2(b).

Taking at face value your representations about the proposed structure, and the control Bank exercises over the sole shareholder of Life Agency's voting stock, we conclude that Life Agency is a company that is directly or indirectly controlled by Bank. Having determined that Bank has a majority interest in Life Agency, we conclude that Life Agency is a majority owned subsidiary of Bank, and the exemption in 12 CFR § 363.3(b)(1) is applicable. Because the activities in which Life Agency would engage are not "as principal", as that term is defined in Part 362, the FDIC's prior consent to those activities is not required.

Thank you for writing to the FDIC.

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