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4000 - Advisory Opinions

Depository Institution Management Interlocks Act--Representative or Nominee


February 7, 1995

Mark A. Mellon, Senior Attorney

Your letter of January 23, 1995 to Vice Chairman Hove was referred to the Legal Division for response.

You state in your letter that you represent an insured state savings bank ("Savings Bank") which is wholly owned by a holding company ("Savings HC"). A mutual savings bank ("Mutual") is located in the same city as Savings Bank. The president of Mutual owns 9.9 percent of the stock of Savings HC. Two other individuals, one a director of Mutual, the other a director of Savings HC, own 19.2 percent and 8.6 percent respectively of Savings HC's stock. These three individuals have represented themselves as the three largest stockholders of Savings HC and the representatives of a majority of Savings HC's stockholders. You state that this group has demanded that the board of directors of Savings HC remove the current president of Savings Bank.

You state that Saving HC's board has refused to comply with this demand and that the president of Mutual has threatened to stage a "proxy battle" at the annual meeting of Savings HC's shareholders to elect new directors to the board of Savings HC who would then remove the president of Savings Bank. You ask whether such action would violate the Depository Institution Management Interlocks Act (the "Interlocks Act").

Section 203 of the Interlocks Act (12 U.S.C. § 3202) states that a management official of a depository institution or a depository holding company may not serve as a management official of any other depository institution or depository holding company not affiliated therewith if an office of one of the institutions or any depository institution that is an affiliate of such institutions is located within the same city as that in which an office of the other institution or any depository institution that is an affiliate of such other institution is located, or in any city contiguous or adjacent thereto. "Management official" is defined by the Interlocks Act to mean, among other things, a director or any person who has a representative or nominee serving in any such capacity. Section 202(4) of the Interlocks Act (12 U.S.C. § 3201(4)).

The FDIC regulation which implements the requirements of the Interlocks Act for insured nonmember banks is 12 C.F.R. Part 348, Management Official Interlocks. Section 348.2(k) defines a "representative or nominee" to mean 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 whether a person is a representative or nominee after giving the affected persons the opportunity to respond. 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. The FDIC has determined in the past that there is a representative relationship between a shareholder and a director when the shareholder has the ability, through ownership of a significantly high percentage of stock, to elect a director to serve his or her interests. This is especially true when the shareholder is an active officer or director of another bank.

By himself, the president of Mutual only owns 9.9 percent of the stock of Savings HC. In combination with the other two members of his group, however, they control more than a third of Savings HC's shares between them, 37.7 percent. A majority of the group's members are management officials at another institution, that is, the president of Mutual and the group member with the largest amount of stock who is a director of Mutual. The group has contended in the letter to Savings HC's shareholders which you enclosed with your letter, that they represent a majority (over 50 percent) of the outstanding stock of Savings HC. This suggests that the management officials of another depository institution may be able to direct sufficient votes to obtain a majority at the next shareholders' meeting. The Interlocks Act presumes an anti-competitive effect in situations where a person or persons who are active management officials of one financial institution are represented at another competing financial institution by a person with influence over the management decisions of the latter institution.

Although we are unable to make a determination on this issue based upon the facts which have been provided, the facts which are available suggest that a representative or nominee situation may possibly be involved if the three individuals together with the remaining shareholder or shareholders who comprise the plus 50 percent block place one or more directors in office. We would require additional information, however, in order to make the preliminary determination under section 348.2(k) which provides that affected persons shall be given the opportunity to respond to allegations that a person is their representative or nominee. For example, the identity of the remaining shareholder(s) in the block as well as their relationship, if any, to Messrs. "X" and "Y" and Ms. "Z" would be helpful. We are enclosing copies of several prior agency opinions in this area which should prove illustrative of the type of information which would be helpful to the agency.

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