Banking Interpretations

NYSBL 143-b


To: Deputy Conlon
From: Kathleen A. Scott, Legal Division
Date: March 24, 1997

Subject: [ ] – ESOP "Control" Issue

As you know, [ ] ("Bank") is undergoing a reorganization that will result in the Bank being owned by [ ] Bancorp Inc. [ ] In the reorganization, each outstanding share of the Bank's Common Stock, Series A Preferred Stock and Series B Preferred Stock will be converted into one share of [ ] Common Stock, Series A Preferred Stock and Series B Preferred Stock respectively.

Currently, the Bank's Series A Preferred Stock is owned by the Bank's Employee Stock Ownership Plan, and that stock will be converted to [ ]'s Series A Preferred Stock with the reorganization. As of March 6, 1997, the ESOP held Bank Series A Preferred Stock and Bank Common Stock representing 12.22% of the votes entitled to be cast generally in the election of directors for the Bank. The ESOP trustees do not have any discretionary voting rights with respect to any of the ESOP's shares as the ESOP merely passes through to employee participants the voting rights to all of the shares held by the ESOP. The employee to whom stock is allocated instructs the ESOP trustee how to vote the shares allocated to his or her account. Unallocated shares, and allocated shares for which no voting instructions were received, are, pursuant to the terms of the ESOP, to be voted proportionally based upon the voting instructions received on the allocated shares. Pass-through rights also apply with respect to tender or exchange offers made for the stock.

Control of a banking institution is presumed if any company owns, directly or indirectly, ten percent or more of the voting stock of such banking institution. Banking Law, §143-b. When the Bank's ESOP was established in 1989, the Banking Department permitted the ESOP to purchase from 10 to 24.9 percent of the Bank's Common stock and stated that section 143-b was inapplicable because the voting rights of the shares "pass through" to the employees. The Bank is seeking a determination by the Department that after the reorganization and the conversion of the ESOP's holdings of Bank stock to [ ] stock, that there will continue to be no control of the Bank by the ESOP because the voting rights on the stock are passed through to the employees.

Assuming that all the other factors stay the same (i.e., that the ESOP passes on the voting rights to the shares and thus does not have discretionary ability to vote ten percent or more of the [ ] stock), the mere fact that the ESOP will own [ ] stock instead of Bank stock should not change the determination that the Department made in 1989. Thus, it would appear that section 143-b is not implicated in the ESOP's ownership of more than ten percent of the voting stock of [ ]. I assume that the same limitations relating to the maximum amount of Common Stock ownership (24.9%) will remain in force.