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Banking Interpretations

NYSBL 142 and 143-b


April 9, 1992

To: Peter Edman Ray Bruce

From: M. Schussler

Re: Change in Bank Control/Bank Holding Company Approvals

The following comparison of the state and federal schemes is not exhaustive but does address the issues that led to the Department proposal to amend Banking Law §§142 and 143-b.

State Law

The Banking Law distinguishes between transactions that involve only a single bank and those involving more than one bank. The acquisition of a single bank is governed by the change in bank control provision (Banking Law §143-b); the acquisition of a second bank in New York or any acquisition involving a company that already owns two or more banks is governed by the bank holding company provision (Banking Law §142). In both cases, a "company" includes an individual, a corporation, a partnership or any other conceivable person or combination of persons (Banking Law §141(2)).

The prior approval of the Banking Board is required for any person to acquire control of a bank. "Control" exists whenever a person has "possession, directly or indirectly, of the power to direct or cause the direction of the management and policies" of a bank. Such power may arise from the ownership of voting stock or otherwise, and is presumed to exist if a person owns 10% or more of a bank's voting stock. This test is quite flexible. The presumption of control arising from 10% stock ownership is rebuttable. Conversely, a person may be found to be in control even if he owns less than 10% of a bank's stock. Significantly, once approval is given for someone to be a control person, even if only 10% of the stock is acquired, he need never return to the Banking Department to increase his stock ownership.

Prior Banking Board approval is also required for any company to become a "bank holding company", an event that occurs upon the acquisition, directly or indirectly, of more than 10% of the voting stock of each of two or more banks (Banking Law §141(3)). Prior approval is also required whenever a bank holding company seeks to acquire 5% or more of the stock of any additional bank. The 10% and 5% thresholds are the exclusive tests to determine whether Banking Board approval is required (there is no concept of exercising control through other means), and they are bright line tests not rebuttable presumptions. While Banking Board approval is required when those thresholds are reached, the acquisition by a bank holding company of additional stock in a banking institution, once it already holds at least 10% of its stock, is not subject to further approval (B.L.§142(2)(c)).

Under the state scheme, the Banking Department is almost certain to have only one opportunity to assess the character, fitness, financial strength, and other characteristics of a person who acquires a significant stake in a bank or bank holding company. In the case of investments in bank holding companies, we have to decide at the time a person crosses the 10% threshold whether he should be permitted to acquire absolute control. In fact, a person who is perfectly suitable as a passive, or even active but not totally dominant investor, may not be suitable as the sole owner of a company, yet the Banking Department can not make such distinctions in practice. If the ownership of only one bank is at issue the Department has greater flexibility, but that flexibility can only be exercised fully if we were to make the finding that an active investor who owns more than 10% of a bank's stock is not a control person, a finding that could not be made in most cases.

Federal Law

The comparable federal statutes, the Change in Bank Control Act ("CBC Act" [Title 12 USC §1817(j)]) and the Bank Holding Company Act ("BHC Act" [Title 12 USC §1841 et seq.)]) are subtler and more flexible. A "company", which under federal law does not include natural persons, becomes a bank holding company in one of several ways: (i) acquiring, directly or indirectly, 25% or more of the stock a bank holding company or a bank, (ii) in any manner controlling a majority of the board of directors, or (iii) "directly or indirectly exercis[ing] a controlling influence over the management or policies of the bank or company". Prior approval of the Federal Reserve Board is required before a company may become a bank holding company. In addition, a bank holding company must obtain prior FRB approval to acquire any additional banking subsidiary. No approval is needed for a bank holding company that already owns a majority of a bank's shares to acquire additional shares.

There is thus a bright line test at 25%, but a great deal of flexibility when lesser investments are at issue. There is a presumption of non-control where less than 5% of the shares of a bank or bank holding company are owned. Where ownership is between 5% and 25% things get interesting. The FRB can require that the owner of as little as 5% obtain approval to become a bank holding company. It is more likely, however, that only upon exceeding the 10% ownership level will the company be required to either obtain approval to become a bank holding company or take steps to demonstrate that it will not exercise a controlling influence. A standardized set of minimum representations, which are at times expanded upon, are used. These include agreements not to seek board representation, wage a proxy fight for control, seek to influence management, etc. If any of the representations can not be made, the investor must receive approval to become a bank holding company, even if that approval is limited to acquiring no more than 24% of the target's stock. I don't know if the FRB ever limits the amount of stock that may be acquired to a figure that is greater than 25%, but the authority exists.

The CBC Act is similar in some respects although it applies to both natural and artificial persons. Thus even though an individual can never be a bank holding company under federal law, he may have to obtain approval from the FRB (or the FDIC in the case of a non-member bank) before becoming a control person. As is the case under the BHC Act, ownership of 25% of a bank's voting securities constitutes control. Control also exists whenever a person has the "power, directly or indirectly, to direct the management or policies" of a bank. In practice, there is a presumption of control whenever a person wishes to acquire 10% or more a bank's voting securities and such a person must give the appropriate federal agency 60 days prior notice. The agency may block the acquisition within the 60 day period. Once a person has approval to acquire more than 10% but less than 25% of a bank's stock, no further approval is required to buy additional shares up to 25% unless required by the FRB. I believe the need to return to the FRB depends upon the nature of the original notice, i.e., whether it covers the acquisition of a particular percentage of shares or an indefinite amount up to 25%. [ ].

In many cases, both the BHC Act and the CBC Act come into play. Whenever a company, or an individual operating through a corporate shell, seeks to make a passive investment of more than 10% but less than 25% of the stock of a bank or bank holding company, it would file a change in bank control notice with the FRB accompanied by the requisite passivity commitments. The intended result would be a no objection ruling from the FRB on the change of control notice together with a determination that no bank holding company application would be required. The FRB can thus be satisfied that (i) no control will be exercised and (ii) before control could be exercised FRB approval would be required.

The net result of the federal law and regulations is that the FRB exercises a great deal of control over investors who acquire between 5% (in the case of the BHC Act) or 10% (in the case of the CBC Act) and 25% of a company's stock. Such investors may have to commit themselves to total passivity and in any event must obtain approvals to increase their ownership to more than 25% and perhaps even up to that amount. It is only once the 25% threshold is reached that they are certain to be free of further FRB approvals.

Proposed Legislation

The weakness in the state scheme is simply that the Department must make a critical decision, whether a company or individual should be permitted to exercise control over a bank or bank holding company, once for all time and, perhaps, prematurely. The recommended changes would enable the Department to assess applications using standards appropriate to the particular investment rather than, for example, having to treat a passive investment in 10% of a bank holding company's stock no differently from the acquisition of 100% of that company's stock.


Department of Financial Services


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