December 1, 1997
Dear [ ]:
Your letter of November 3, 1997 to Deputy and Counsel Rogers, which concerns Section 143-b of the Banking Law, has been referred to me for reply. Specifically, the Employee Stock Ownership Plan ("ESOP") of [ ] Bancorp. ("Company") is seeking to acquire between 10% and 25% of the Company's outstanding shares and you ask whether such an acquisition would have to be preceded by a control application under Section 143-b. The ESOP currently holds approximately 9% of the outstanding shares of the Company. Most of those shares have been allocated to employees and are voted in accordance with the instructions of such employees. The unallocated shares in the ESOP are voted by the ESOP trustees in a manner which reflects the proportions in which the allocated shares are voted except when the fiduciary duties of the trustees require a different vote.
The Banking Department has adopted the position that allocated shares held by an ESOP do not lead to a control situation for which an application under Section 143-b would be required. In such case, the "pass- through" voting feature effectively removes the possibility of control by the ESOP trustees. In the case of unallocated shares held by an ESOP, the issue of control would not arise if those shares were voted in proportion to the allocated shares in all cases. However, as you note in your letter, fiduciary duties may require ESOP trustees to vote unallocated shares in a different fashion. Consequently, if at any time in the future, the ESOP contemplates acquiring additional stock of the Company which would lead to a situation in which it would hold, on an unallocated basis, more than 10% of the stock of the Company, it would be required to first be approved as a control party under Section 143-b. Without such an approval, a vote by the trustees which is not in accordance with the vote proportion of the allocated shares would be an action in contravention of the provisions of Section 143-b. In other words, to avail themselves of the right to vote shares in a manner consistent with fiduciary duties at a time at which they hold, on an unallocated basis, more than 10% of the shares of the Company, the trustees of the ESOP must be approved as a control party prior to the time such right may have to be exercised.
Finally, I note that it appears from the content of your letter that you are under the impression that the direct or indirect acquisition of 25% of the shares of a bank is relevant to the determination of "control", as such term is utilized in Section 143-b. Under New York law, the relevant figure is 10%.
I trust that this letter is responsive to your inquiry.
Very truly yours,