FDIC Law, Regulations, Related Acts
4000 - Advisory Opinions
Voting Trusts and the Creation of Representative or Nominee Status under the Interlocks Act
December 9, 1981
Pamela E. F. LeCren, Attorney
On October 21, 1981, this office received a request for an opinion as to whether or not a potential violation of the Depository Institution Management Interlocks Act (12 U.S.C. § 3201 et seq., "Interlocks Act") may result if *** presently a director of *** Savings and Loan Association, *** becomes one of three trustees of a voting trust that will hold *** becomes one of three trustees of a voting trust that will hold 76.6% of the stock of *** , *** if a change in bank control is consummated. First State Bank is located in the same SMSA as the *** Savings and Loan Association.
The Legal Division has previously considered whether or not X, a management official of one institution, can be considered to have a "respresentative or nominee"1 serving as a management official at another institution (thus making X a management official of both institutions) where X owns a substantial amount of stock in the latter institution, i.e., will X by the exercise of his voting rights necessarily place into office as a director one or more persons who can be said to have an implied or express obligation to act on behalf of X. It was determined that representative or nominee status can arise depending upon the amount of stock in question.2
We have not considered whether or not the same determination is appropriate where a management official of one institution has control, along with two other trustees, of a voting trust holding 76.6% of the stock of a bank. In essence, the question is whether or not the individual under consideration has the ability to control a sufficient amount of stock so as to trigger the preliminary determination of representative or nominee status. The answer necessarily involves a review of the facts on a case-by-case basis. We can say that, in our opinion, where a voting trust is controlled by several trustees (a majority vote of which is necessary in order to vote the stock) and less than a majority of those trustees are management officials elsewhere, it is generally necessary to show that the trustees who are management officials elsewhere are able to direct sufficient votes to obtain a majority before we can preliminarily determine any director voted into office by the trust to be a representative or nominee of the trustee(s) who serve(s) elsewhere. There may be fact situations, however, which lead us to conclude that the trustees are so closely identified that persons placed in office by the trust are equally representatives or nominees of each of the trustees. To the extent that one trustee has a conflict, that trustee would be disqualified even if we could not conclusively find he or she to dominate the remaining trustees. Alternatively, the identity of the directors placed in office by the voting trust may result in a preliminary finding of representative or nominee status, i.e., if the trust would put into office someone with whom *** has a family, employment, or agency relationship that person could be considered his representative or nominee depending upon the facts even if he was not previously found to dominate the trustee group.
The facts as available to us are as follows: *** are trustees of a voting trust which controls 91.6% of the stock of *** a bank holding company with three banking subsidiaries. All three are shareholders and directors of the holding company. *** are directors and/or officers of each of the subsidiary banks.3 All three trustees have business relationships outside the *** holding company system. *** and *** are partners in several business ventures (primarily real estate and oil and gas ventures) and each owns stock in *** Life Insurance Company (33.3% and 25% respectively) which engages in credit life activities. *** is president of *** Insurance and *** is vice-president. *** is currently a director of ***. According to the proponents of the change of bank control, there would be no changes in the directors or other management at *** if the control change is consummated. *** had been a proposed director of *** but withdrew his name in a letter dated June 29, 1981 due to the conflict under the Interlocks Act. He apparently was one of the organizers of the bank.4 The voting trust expressly requires the voting trustees to take such part or action with respect to the management of the affairs of *** that may be deemed necessary and in the best interests of the bank. The most recent examination report of *** (one of *** three subsidiaries of which *** is a director and *** is chairman of the executive committee) indicated that it was the opinion of the reviewing examiner that *** was the dominant influence in the bank.
There is no indication that *** or *** have any connection with *** Savings and Loan Association either as investors or borrowers. We do not know what role if any the voting trust or its trustees will have in placing names in nomination for director at *** *** and *** do not appear to have used their relationship with *** or its subsidiaries to finance their business ventures, i.e., their financial statements do not list any indebtedness to those banks. We do not know whether or not the banks and the savings and loan with which the three are associated do business with the *** Insurance Company.
While the facts do not clearly require a finding one way or the other, we are prepared to preliminarily determine that should *** become a trustee of the *** voting trust, the directors put in office by the trust will be considered his representatives or nominees. Although we cannot clearly say that *** dominates *** and *** we feel compelled to find that the three trustees are so closely indentified that any person placed in office would be a representative or nominee of each trustee. Even if *** presence as a trustee would not necessarily result in placing his representative or nominee in office, if the trust would continue *** in office, we would find him to be a representative or nominee of *** based upon the facts as described above.
The Regional Office should communicate the substance of this opinion to *** and invite him to respond to our preliminary determination. (Section 348.2(k) requires that the individual be given the opportunity to respond before a final determination is made.) Upon receipt of any additional arguments or facts, the Legal Division will render a final determination.
1 Part 348 of FDIC's regulations implements the Interlocks Act.
Section 348.3(k) defines "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, 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. Footnote
The latter portion of the definition concerning the ability and exercise of ability by a shareholder to elect a director, is, in our opinion, relevant even though we are considering *** in his capacity as a trustee of a voting trust inasmuch as *** under that trust shall have the exclusive right (without the consent of the underlying shareholders) to exercise all of the rights and powers of the underlying shareholders. Go back to Text
2 The Legal Division made such a preliminary determination regarding a proposed change in bank control involving ***, where the president and director of another bank in the same SMSA sought to acquire 45.875% of the stock of ***. Go back to Text
3 The relationship of the three men with the holding company system and *** does not pose a problem under the Interlocks Act as the institutions are not located within the same SMSA or community. Additionally, under an interpretation of "beneficial ownership" (see memorandum to *** from Barbara Gersten dated June 18, 1981) the institutions are affiliates. Go back to Text
4 We think it is reasonable to conclude that *** is likely to use his position as a voting trustee to influence the policies of the bank. In short, his involvement with *** can be expected to continue even though the nature of his direct relationship has changed. Go back to Text