The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
Federal reserve Bank of Dallas DALLAS, T E X A S 75222 C ir c u l a r No. 78-21 F e b r u a r y 23, 1978 INTERPRETATION OF REGULATION Y P re s u m p tio n of C o n tin u ed Control of T r a n s f e r r e d A ss e ts a n d A ctiv ities TO ALL MEMBER BANKS, BANK HOLDING COMPANIES, AND OTHERS CONCERNED IN THE ELEVENTH FEDERAL RESERVE DISTRICT: In F e b r u a r y 1977, the B oard of G o v e rn o rs of the F ederal R e s e rv e System p u b lis h e d for comment a p r o p o s e d am en d m en t to its R eg u lation Y th a t would h a v e codified c e r ta i n r u l i n g s made by the Board u n d e r Section 2(g) (3) of th e Bank Holding Company Act, a n d would a lso h a ve e s ta b lis h e d c e r ta in re g u la to r y p re s u m p tio n s re la tin g to the c o n tin u e d c o n tro l by b a n k hold in g com p a n ies of s h a r e s o r a s s e t s d iv e s te d by such c o m p a n ies. T h e B oard h a s now d e te rm in e d to w ith d ra w the p r o p o s e d am end m ent a n d to is s u e instead an in te rp r e ta tio n of Section 2(g) (3) of the A ct. T h e in te rp r e ta tio n is e n c lo se d . If you h a v e a n y q u e s tio n s r e g a r d i n g th is i n te r p r e ta t io n , p le a s e c o n ta ct o u r Holding Company S u p e r v is io n D epartm en t, Ext. 6182. Additional c o p ie s of th e in te rp r e ta tio n of Regulation Y will be fu r n i s h e d upon r e q u e s t to th e S e c r e t a r y 's Office of th is B an k , Ext. 6267. S in c e re ly y o u r s , R o b ert H . Boykin F ir s t Vice P r e s id e n t E n c lo su re Banks and others are encouraged to use the following incoming W A T S numbers in contacting this Bank: 1 -8 00 -492 -440 3 (intrastate) and 1-800 -527 -497 0 (interstate). For calls placed locally, please use 651 plus the extension referred to above. This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM BANK HOLDING COMPANIES INTERPRETATION OF REGULATION Y SECTION 225.138 — PRESUMPTION OF CO N TIN U ED CONTROL U N D ER §2(g)(3) OF TH E BANK HO LD IN G COMPANY ACT Section 2(g) (3) of the Bank Holding Company Act (the “Act”) establishes a statutory presump tion that where certain specified relationships exist between a transferor and transferee of shares, the transferor (if it is a bank holding company, or a company that would be such but for the transfer) continues to own or control indirectly the trans ferred shares.1 This presumption arises by opera tion of law, as of the date of the transfer, without the need for any order or determination by the Board. Operation of the presumption may be terminated only by the issuance of a Board deter mination, after opportunity for hearing, “that the transferor is not in fact capable of controlling the transferee.”2 The purpose of section 2(g)(3) is to provide the Board an opportunity to assess the effectiveness of divestitures in certain situations in which there may be a risk that the divestiture will not result in the complete termination of a control relationship. By presuming control to continue as a matter of law, section 2(g) (3) operates to allow the effectiveness of the divestiture to be assessed before the divest ing company is permitted to act on the assumption that the divestiture is complete. Thus, for example, if a holding company divests its banking interests under circumstances where the presumption of continued control arises, the divesting company must continue to consider itself bound by the Act until an appropriate order is entered by the Board dispelling the presumption. Section 2(g) (3) does not establish a substantive rule that invalidates transfers to which it applies, and in a great many cases the Board has acted favorably on applica tions to have the presumption dispelled. It merely provides a procedural opportunity for Board con sideration of the effect of such transfers in advance of their being deemed effective. Whether or not the statutory presumption arises, the substantive test for assessing the effectiveness of a divestiture is the same — that is, the Board must be assured that all control relationships between the trans feror and the transferred property have been terminated and will not be reestablished.3 In the course of administering section 2(g) (3) the Board has had several occasions to consider the scope of that section. In addition, questions have been raised by and with the Board’s staff as to coverage of the section. Accordingly, the Board believes it would be useful to set forth the follow ing interpretations of section 2(g) (3): 1. The terms “transferor” and “transferee,” as used in section 2(g) (3), include parents and sub sidiaries of each. Thus, for example, where a trans feree is indebted to a subsidiary of the transferor,1 or where a specified interlocking relationship exists between the transferor or transferee and a subsidiary of the other (or between subsidiaries of each), the presumption arises. Similarly, if a parent of the transferee is indebted to a parent of the transferor, the presumption arises. The pre sumption of continued control also arises where an interlock or debt relationship is retained be tween the divesting company and the company being divested, since the divested company will be or may be viewed as a “subsidiary” of the transferee or group of transferees. ’The presumption arises where the transferee “is indebted to the transferor, or has one or more officers, directors, trustees, or beneficiaries in com mon with o r subject to control by the transferor.” "The Board has delegated to its G eneral Counsel the authority to issue such determinations. 12 C.F.R. §265.2 (b ) (1 ). 3It should be noted, however, that the Board will require termination of any interlocking management relationships between the divesting company and the transferee or the divested company as a precondition of finding that a divestiture is complete. Similarly, the retention of an economic interest in the divested company that would create an incentive for the divesting company to attempt to influence the management of the divested company will preclude a finding that the divestiture is complete. (See the Board’s O rder in the m atter of International Bank, 1977 Federal Reserve Bulletin 1106, 1113). ‘The indebtedness giving rise to the presumption is not limited to debt incurred in connection with the trans fer; it includes any debt running to the transferor or its subsidiaries. 2. The terms “officers,” “directors,” and “trust aggregate more than 5 percent of the shares of ees,” as used in section 2(g) (3), include persons the company being divested. performing functions normally associated with 3. Although section 2(g) (3) refers to transfers such positions (including general partners in a of “shares,” it is not, in the Board’s view, limited partnership and limited partners having a right to disposition of corporate stock. General or to participate in the management of the affairs of limited partnership interests, for example, are in the partnership) as well as persons holding such cluded within the term “shares.” Furthermore, the positions in an advisory or honorary capacity. The transfer of all or substantially all of the assets of presumption arises not only where the transferee a company, or the transfer of such a significant or transferred company has an officer, director, or volume of assets that the transfer may in effect trustee “in common with” the transferor, but constitute the disposition of a separate activity of where the transferee himself holds such a position the company, is deemed by the Board to involve with the transferor.3 a transfer of “shares” of that company. It should be noted that where a transfer takes the form of a pro-rata distribution, or “spinoff,” * * * * * of shares to a company’s shareholders, officers and directors of the transferor company are likely to Section 2(g) (3) provides that a Board deter receive a portion of such shares. The presumption mination that a transferor is not in fact capable of continued control would, of course, attach to of controlling a transferee shall be made after any shares transferred to officers and directors of opportunity for hearing. It has been the Board’s the divesting company, whether by “spinoff” or routine practice since 1966 to publish notice in outright sale. However, the presumption will be of the Federal Register of applications filed under legal significance — and will thus require an ap section 2(g) (3) and to offer interested parties an plication under section 2(g) (3) — only where the opportunity for a hearing. Virtually without ex total number of shares subject to the presumption ception no comments have been submitted on such exceeds one of the applicable thresholds in the applications by parties other than the applicant Act. For example, where officers and directors of and, with the exception of one case in which the a one-bank holding company receive in the aggre request was later withdrawn, no hearings have gate 25 percent or more of the stock of a bank been requested in such cases. Because the Board subsidiary being divested by the holding company, believes that the hearing provision in section the holding company would be presumed to con 2(g) (3) was intended as a protection for applicants tinue to control the “divested” bank. In such a who are seeking to have the presumption over case it would be necessary for the divesting com come by a Board order, a hearing would not be of pany to demonstrate that it no longer controls use where an application is to be granted. In light either the divested bank or the officer/director of the experience indicating that the publication of Federal Register notice of such applications has transferees. However, if officers and directors were to receive in the aggregate less than 25 percent of not served a useful purpose, the Board has decided the bank’s stock (and no other shares were subject to alter its procedures in such cases. In the future, to the presumption), section 2(g) (3) would not Federal Register notice of section 2(g) (3) applica tions will be published only in cases in which the have the legal effect of presuming continued con trol of the bank.6 In the case of a divestiture of Board’s General Counsel, acting under delegated nonbank shares, an application under section authority, has determined not to grant such an 2(g) (3) would be required whenever officers and application and has referred the matter to the Board for decision.’ directors of the divesting company received in the “It has been suggested that the words “in com mon with” in section 2 ( g ) ( 3 ) evidence an intent to make the presumption applicable only where the transferee is a company having an interlock with the transferor. Such an interpretation would, in the Board’s view, create an unwarranted gap in the coverage of section 2 ( g ) ( 3 ) . Furtherm ore, because the presumption clearly arises where the transferee is an individual who is indebted to the transferor such an interpretation would result in an illogical internal inconsistency in the statute. “O f course, the fact that section 2 ( g ) ( 3 ) would not operate to presume continued control would not necessarily mean that control h ad in fact been terminated if control could be exercised through other means. T t should be noted that in the event a third party should take exception to a Board order under section 2 ( g ) ( 3 ) finding that control has been terminated, any rights such party might have would not be prejudiced by the order. If such party brought facts to the Board’s attention indicating that control had not been terminated, the Board would have ample authority to revoke its order and take necessary remedial action. Orders issued under 2 (g ) (3 ) are published in the Federal Register and in the Federal Reserve Bulletin.