Banking Interpretations

NYSBL 143-b


To: Examiner Callahan - DCBD

From: Rosanne Notaro – Legal Division

Date: November 20, 1998

Subject: [ ](the "Trust Company") /

Proposal to change ownership structure

The Trust Company submitted a description of its proposal to change its ownership structure and asked if any application, such as a control application pursuant to B.L. § 143-b, would be required. Despite the resulting change in ownership structure, it appears that actual control of the Trust Company would largely remain with the same parties for now. The proposal involves the formation of a partnership which will hold all of the Trust Company's shares, as described below.

Current Ownership Structure

The Trust Company's current ownership structure is that of a business corporation operating under the direction of a board of directors elected by shareholders who have invested in the company, and who are entitled to vote on the basis of one vote per share in the election of directors and on other major issues.

Since its formation, however, the Trust Company has behaved like a mutual company, i.e. a company controlled by its customers, not by independent investors. Most of its directors have been clients and beneficiaries of trusts of which the Trust Company is a trustee. Those who purchased stock when the Trust Company was formed in 1987 were primarily interested in meeting capital requirements imposed by law to enable the Trust Company to serve as trustee and ]financial and investment advisor for the family. They were not primarily interested in a financial return on the shares purchased. Today, 90% of the shares of the Trust Company are still owned by the Trust Company's clients, although there is no correlation between shares owned and assets under management. (Trust Company's submission, p.5).

The Proposal to Change Ownership Structure

The reason for the proposal is to create an ownership structure so that, on an ongoing basis, ownership of the Trust Company will be shared by all the families who are clients of the Trust Company in proportion to each family's assets under management at the Trust Company. For a few client families who own no shares and for a few family shareholders who are not clients, the change is significant. for most clients, who are current shareholders, the change is not great.

The objectives of the proposal are (1) to eliminate the pressure to generate an investment return to those shareholders who are not clients, and (2) to create a structure which can include new family clients on the same terms as existing family clients. The Trust Company states that there is increasing pressure to generate a greater financial return to shareholders than in the past. However, increasing the Trust Company's profits requires a level of fee income from clients (taxable to the Trust Company) high enough to provide the increased return to the shareholders (taxable again). The Trust Company believes that the best solution economically is for the Trust Company's clients to provide the required capital themselves, shared in proportion to their assets under management.

The Proposed Partnership Structure

The proposal is to create a partnership, known as [ ] [ ] will own all the outstanding shares of the Trust Company and nothing else. Individuals representing their family groups will be [ ] partners. [Note: the Trust Company's Family Groups are those identified in determining fees and commissions paid by clients to the Trust Company. As part of the fee determination process, each Family Group identifies those individuals who are clients of the Trust Company and members of that Family Group].

While the collective partnership interests of all the partners in the same Family Group must be proportionate to the Family Group's total assets under management at the Trust Company, the partnership interest of each individual partner need not be proportionate to that individual's assets under management at the Trust Company. In other words, each Family Group can decide which of its members is to be a partner of [ ] without regard to his or her assets under management.

[ ] partnership agreement will require that each Family Group contribute .3% of its assets under management at the Trust Company in cash or in Trust Company shares valued at net book value. If a client Family Group places additional assets under management at the Trust Company, it will contribute another .3% of such additional assets. Similarly, if some of a Family Group's assets are withdrawn, the Family Group will proportionately reduce its partnership interest and in effect receive back cash for the value of the reduction in its partnership interest. If a new Family Group becomes a client of the Trust Company, members representing the Family Group will become partners of [ ] and will contribute .3% of the total assets of the Family Group to be placed under management at the Trust Company.

Governance of the Trust Company

The Trust Company will continue to be supervised by its Board of Directors, as it is now. The Trust Company's Board of Directors will continue to nominate directors to be elected at the annual shareholder meeting. However, because [ ] will be the sole shareholder of the Trust Company, the annual shareholders meeting will become an annual meeting of the partners of [ ]

The Family Groups who have a member currently on the Trust Company's Board own 74% of the Trust Company's shares. Under the proposed structure, these same Family Groups would own 66% of [ ]. Historically, the shareholders of the Trust Company have elected the directors nominated by the Trust Company's Board. According to the Trust Company, under the proposed structure, it is still unlikely that votes for the Board's nominees will fall below 50%.

Analysis of Whether the Proposal Necessitates a Control Notice Under Banking Law § 143-b

Banking Law § 143-b provides that it is unlawful, except with the prior approval of the Banking Board, by a three-fifths vote of all the members thereof, for any company to acquire direct or indirect control of a bank. "Company" as used in § 143-b includes a group or association of individuals or a partnership. B.L. § 143-b also provides that the Superintendent, in his or her discretion, may determine whether the proposed ownership or control of a banking institution constitutes "control" for purposes of B.L. § 143-b.

At first glance, it appears that [ ], the new partnership which will own 100% of the shares of the Trust Company, will constitute a company newly in control of the Trust Company, thus necessitating a control application under § 143-b. However, in this situation, I believe that it is appropriate to look at the constituent parts of the partnership compared to the current controlling shareholders of the Trust Company to determine whether the proposed reorganization will result in a new entity controlling the Trust Company.

According to the Trust Company's submission, there are 210 shares outstanding, which are owned by 37 shareholders. The Trust Company gives the following breakdown:

Distribution of Shares Among the 24 Existing Family Groups

3... Family Groups own more than 35 shares each (>16% each), collectively 52%

4... Family Groups own 10 to 16 shares each (approx. 4% to 8% each), collectively 24%

9... Family Groups own 1 to 5 shares each (approx. .5% to 3% each), collectively 14%

8... Family Groups own no shares


* Non-clients own 21 shares or 10 %.

If we analyze the control parties of the Trust Company today, it appears that, at most, 3 Family Groups could be considered to be controlling parties (owning 10 % or more) under Banking Law § 143-b. There may in fact be no controlling persons or groups owning 10 % or more. For example, if several individuals own shares within a Family Group but no individual owns 10% or more, and if the Department has no reason to believe that such individuals act in concert when voting their shares, then perhaps there is no one person or group that constitutes a control party owning 10% or more. However, conservatively, it appears that, at most, there could be 3 separate controlling Family Groups.

The Department should have any control party or control groups listed as such in our files; technically, if there is a person or group controlling 10% or more, it already should have filed a § 143-b application. We would need information on individual share breakdowns to be certain whether there currently exist any control groups.

The Trust Company did not provide a breakdown of what the partnership interests in [ ] would be following reorganization. It is likely that the current largest shareholder Family Groups will have the largest partnership interests in [ ], but not necessarily so. As the Trust Company noted, because [ ] will technically be the only shareholder of the Trust Company, the annual shareholders meeting will become an annual partners meeting. It is not known exactly whether partners will have votes weighted in accordance with their family's partnership interests, but the purpose of the proposal appears to suggest this. If this is the case, then the families with the largest partnership interests will probably have the biggest voice in the partnership matters, and it is likely that these are the same families that currently have the largest shareholdings and thus are now controlling shareholders. In sum, the groups effectively which might constitute "control" parties under the old structure very likely might constitute the controlling parties under the new structure. I believe that it is logical to "look through" the partnership in this manner to see what persons or groups are actually controlling the partnership's actions.

In other words, I think that the Superintendent can make a determination under B.L. § 143-b that the partnership itself will not constitute a control party, and therefore will not have to file a § 143-b application, since it will just exist as a vehicle for ownership.

As to whether individual persons or groups might have to file applications as indirect "control" parties, however, the Trust Company will have to analyze and inform the Department what percentages of the partnership certain persons or groups will end up with following the reorganization, and the Trust Company also should describe whether such Family Groups or persons that hold partnership interests have a weighted vote in partnership matters (such that effectively a Family Group with a large amount of assets under management will have the equivalent of a 10% or more "vote"). Of course, depending on amounts of assets under management and total number of Family Groups, partnership interests will vary over time.

If the Department already has the 3 large Family Groups listed as control parties and these same large Family Groups will have the largest partnership interests, perhaps no further information will be necessary. But the Trust Company should provide the Department more detailed information on the breakdown of current share ownership and proposed future partnership interests so we can be sure of the actual control structure of the Trust Company.

Please call me if there are any questions.


Noted: S.A.K.