Banking Interpretations

March 5, 2003

Memorandum

To: Timothy Pang
Mortgage Banking Division

From: Alvin A. Narin
Legal Division

Subject:  [                                 ] – Change of Control

You have requested an opinion from the Legal Division as to whether certain transactions described in a letter from counsel for [                                    ] (“Partnership”) and [                                             ] “Licensee”), a licensed mortgage banker, constituted a change in control of Licensee necessitating the filing of a change in control application pursuant to Section 594-b(4) of the Banking Law.

Partnership is a Delaware limited partnership that owns 100 percent of the capital stock of Licensee, which is a Florida corporation located in Jacksonville, Florida.  Prior to being wholly owned by Partnership, Licensee had been a wholly owned subsidiary of [                                    ] (“Company”).  In an October 7, 1998 letter, Licensee informed the Department that on September 30, 1998, all the existing stock of Company was exchanged for partnership interests in Partnership.[1]  Since there was no change in the control parties or management of the Licensee or its parent as a result of the exchange of stock for Partnership units, the transaction was merely a corporate reorganization that did not constitute a change in control.

On October 27, 2000, [                 ] (“Venture Capital”), a venture capital and investment firm located in New York, acquired approximately 11 percent of Partnership’s outstanding units.  In connection with this purchase, Venture Capital received the ability to designate one member of the Board of Directors of the General Partner, which is a Delaware corporation, but that designee is neither chairman nor a member of the executive committee.

Partnership and Licensee assert that Venture Capital was not required to file a change in control application with the Department pursuant to Banking Law §594-b(4) in connection with its purchase of said Partnership units (“Units”) since it does not control Partnership.  That contention is based on the following: (i) the Units do not constitute voting stock; and (ii) Venture Capital, acting alone or in concert, does not possess the power to direct or cause to direct the direction of the management and policies of the Partnership.

According to the letter, the Units are not equivalent to voting stock as described in Banking Law §594-b since the Units do not provide Venture Capital with the right to participate in the management of the business.  Limited partners, such as Venture Capital, have only the right to remove the General Partner by majority vote but do not have the right to vote for directors of the General Partner. Accordingly, it is claimed that this is a significantly narrower set of voting rights than normally provided by statute to shareholders.  Limited Partners also do not have the right to: (1) vote on the management of Partnership or Licensee; (2) vote regarding the conduct of the operations of Partnership or Licensee; (3) vote on any proposed acquisition or disposition of assets by Partnership or Licensee; or (4) vote for the issuance of additional units.  Further, under Delaware law, units of a limited partnership constitute a passive investment that limits limited partners to retaining limited liability for the partnership.  In order to maintain this limited liability, the limited partner must not participate in the control of the business.[2]

With respect to whether Venture Capital has effective control based on its ownership of more than 10 percent of Partnership, the letter sets forth a “totality of circumstances” analysis as to why such control does not exist.  Essentially, Partnership and Licensee argue that the number of Units that Venture Capital holds does not comprise a sufficient ownership percentage to enable it to exert a controlling influence over Partnership and/or Licensee.

With respect to whether Venture Capital has effective control based on its ownership of more than 10 percent of Partnership, the letter sets forth a “totality of circumstances” analysis as to why such control does not exist.  Essentially, Partnership and Licensee argue that the number of Units that Venture Capital holds does not comprise a sufficient ownership percentage to enable it to exert a controlling influence over Partnership and/or Licensee.

The Board of Directors of the Partnership currently has eight members, including Venture Capital’s designee to the Board.  Other than this representation on the Board, Venture Capital has no other input into the management of the business or the Board and therefore, Venture Capital does not have any ability to control or direct the management of the General Partner, Partnership or Licensee.

Accordingly, the Licensee submits that the presumption of control set forth in Banking Law §594-b has been rebutted.

Banking Law §594-b(1) states that it is unlawful except with the prior approval of the superintendent for any action to be taken by a mortgage banker that results in the change in control of the business.  Prior to any such change in control, the party seeking to acquire control of the business must submit a written application to the superintendent and pay the investigation fee. 

Under Banking Law §594-b(4), control is defined to be “the possession, directly or indirectly, of the power to direct or cause the direction of management and the policies of the licensee or registrant whether through ownership of voting stock of such licensee or registrant, the ownership of the voting stock of any person which possesses such power or otherwise.  Control shall be presumed to exist if any person, directly or indirectly, owns, controls or holds with power to vote ten percentum or more of the voting stock of any licensee or registrant or of any person which owns, controls or holds with power to vote ten percentum or more of the voting stock of any licensee or registrant, but no person shall be deemed to control a licensee solely by reason of being an officer or a director of such licensee, registrant or person.”

Thus, under Banking Law §594-b(4), a presumption of control would be presumed to exist were ten percent or more of the voting shares of Licensee to be held -- directly or indirectly -- by Venture Capital.  In this instance, Venture Capital holds 11 per cent of the Units of Partnership, which in turn owns 100 percent of the capital stock of Licensee.  However, although the Units would be viewed as the equivalent of shares for the purpose of our analysis under Banking law §594-b(4), in view of the extremely limited voting rights outlined above, the Units would not be considered the equivalent of voting shares.  Thus, the ownership of over 10 percent of the Units would not trigger a presumption of control pursuant to Banking Law §594-b(4).

In assessing whether control “otherwise” exists in this situation, due to the limited rights that flow from the units of Partnership to the limited partners, it is clear that Venture Capital lacks the ability to control, directly or indirectly, the management of Partnership and/or Licensee as required by Banking Law §594-b.  Further, Delaware laws require that Venture Capital’s interest remain “passive” and the limited partners lack the authority to take an active role in the management of Partnership and/or Licensee.  Therefore, Venture Capital is not viewed as controlling Partnership, or indirectly, Licensee.

Based on the foregoing, Venture Capital was not required to file a change of control application pursuant to Banking Law §594-b at the time it acquired more than 10 percent of the outstanding units in Partnership.

Noted:

S.A.K.

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