Banking Interpretations

NYSBL 143-b

Memorandum

November 27, 1985

To: Examiner Zanko, Domestic Commercial Banks Division

From: M. Schussler

Re: [ ] Bank - ESOP

The ESOP being established by [ ] Bank calls for voting rights to the 20.8% shares of [ ] Holding Company to be held by the plan's trustees, who are selected by the holding company's board of directors. The trustees should be treated as the control parties who must submit B.L. §143-b applications. Such approvals, if given, should only be for those individuals acting in a fiduciary capacity in connection with the ESOP, and not to stock acquired in their own names. I spoke to [ ] on November 25th after he had spoken to you and he realizes that any applications could not be acted upon at the December Banking Board meeting. It appears that the plan will be modified to provide that no voting rights may be exercised until the Banking Board has approved the persons who will vote the shares, thereby enabling the plan to take effect before year-end but not run afoul of B.L. §143-b.

A policy issue raised by the [ ] ESOP that needs to be examined is the use of an ESOP as an anti-takeover device by the appointment of trustees who are not independent of bank management. My general antipathy toward measures that entrench management but provide no discernable benefit to the bank or stockholders extends to ESOPs in which the stock held for the benefit of employees is controlled by management. Such an ESOP merely concentrates more voting power in the hands of management, without those persons expending any of their own money to obtain that control. If a sufficiently large block of stock is involved, management becomes answerable to no one, this being accomplished with the corporation's money. This sort of inexpensive back-door acquisition of control is, I think, properly a matter concern for the Department. In addition, the Department can not simply ignore the fact that, unlike disinterested trustees, insiders acting as trustees may have divided loyalties that would impair their ability to fulfill their fiduciary duties toward the ESOP's beneficiaries.

M.S.