(a) Preliminary
determination of control.
(1) The Board in its sole discretion may
issue a preliminary determination of control under the procedures
set forth in this section in any case in which the Board determines,
based on consideration of the facts and circumstances presented, that
a first company has the power to exercise a controlling influence
over the management or policies of a second company.
(2) If the Board makes a preliminary determination
of control under this section, the Board shall send notice to the
first company containing a statement of the facts upon which the preliminary
determination is based.
4-050.9
(b) Response to preliminary determination of control.
(1) Within 30 calendar days after issuance
by the Board of a preliminary determination of control or such longer
period permitted by the Board in its discretion, the first company against
whom the preliminary determination has been made shall:
(i) Consent to the preliminary determination
of control and either:
(A) Submit for the Board’s approval a specific plan for the prompt
termination of the control relationship; or
(B) File an application or notice under this
part, as applicable; or
(ii) Contest the preliminary determination
by filing a response, setting forth the facts and circumstances in
support of its position that no control exists, and, if desired, requesting
a hearing or other proceeding.
(2) If the first company fails to respond
to the preliminary determination of control within 30 days or such
longer period permitted by the Board in its discretion, the first
company will be deemed to have waived its right to present additional
information to the Board or to request a hearing or other proceeding
regarding the preliminary determination of control.
4-051
(c) Hearing and final determination.
(1) The Board shall order a hearing
or other appropriate proceeding upon the petition of a first company
that contests a preliminary determination of control if the Board
finds that material facts are in dispute. The Board may, in its discretion,
order a hearing or other appropriate proceeding without a petition
for such a proceeding by the first company.
(2) At a hearing or other proceeding, any
applicable presumptions established under this subpart shall be considered
in accordance with the Federal Rules of Evidence and the Board’s Rules
of Practice for Formal Hearings (12 CFR part 263).
(3) After considering the submissions of
the first company and other evidence, including the record of any
hearing or other proceeding, the Board will issue a final order determining
whether the first company has the power to exercise a controlling
influence over the management or policies of the second company. If
a controlling influence is found, the Board may direct the first company
to terminate the control relationship or to file an application or
notice for the Board’s approval to retain the control relationship.
(d) Submission of evidence.
(1) In connection with
contesting a preliminary determination of control under paragraph
(b)(1)(ii) of this section, a first company may submit to the Board
evidence or any other relevant information related to its control
of a second company.
(2) Evidence
or other relevant information submitted to the Board pursuant to paragraph
(d)(1) of this section must be in writing and may include a description
of all current and proposed relationships between the first company
and the second company, including relationships of the type that are
identified under any of the rebuttable presumptions in sections 225.32
and 225.33 of this part, copies of any formal agreements related to
such relationships, and a discussion regarding why the Board should
not determine the first company to control the second company.
(e) Definitions. For
purposes of this subpart:
(1) Board of directors means the board of directors of a company
or a set of individuals exercising similar functions at a company.
(2) Director representative means any individual that represents the interests of a first company
through service on the board of directors of a second company. For
purposes of this paragraph (e)(2), examples of persons who are directors
of a second company and generally would be considered director representatives
of a first company include:
(i) A current officer, employee, or
director of the first company;
(ii) An individual who was an officer, employee, or director of the
first company within the prior two years; and
(iii) An individual who was nominated
or proposed to be a director of the second company by the first company.
(iv) A director representative
does not include a nonvoting observer.
(3) First company means the company
whose potential control of a second company is the subject of determination
by the Board under this subpart.
(4) Investment adviser means a company that:
(i) Is registered as an investment
adviser with the Securities and Exchange Commission under the Investment
Advisers Act of 1940 (15 U.S.C. 80b-1 et seq .);
(ii) Is registered as a commodity trading
advisor with the Commodity Futures Trading Commission under the Commodity
Exchange Act (7 U.S.C. 1 et seq.);
(iii) Is a foreign equivalent of an
investment adviser or commodity trading advisor, as described in paragraph
(e)(4)(i) or (ii) of this section; or
(iv) Engages in any of the activities
set forth in section 225.28(b)(6)(i) through (iv) of this part.
(5) Limiting contractual
right means a contractual right of the first company that would
allow the first company to restrict significantly, directly or indirectly,
the discretion of the second company, including its senior management
officials and directors, over operational and policy decisions of
the second company.
(i) Examples of limiting contractual rights may include, but are
not limited to, a right that allows the first company to restrict
or to exert significant influence over decisions related to:
(A) Activities in which the second company
may engage, including a prohibition on entering into new lines of
business, making substantial changes to or discontinuing existing
lines of business, or entering into a contractual arrangement with
a third party that imposes significant financial obligations on the
second company;
(B) How the second
company directs the proceeds of the first company’s investment;
(C) Hiring, firing, or compensating one
or more senior management officials of the second company, or modifying
the second company’s policies or budget concerning the salary, compensation,
employment, or benefits plan for its employees;
(D) The second company’s ability to merge
or consolidate, or its ability to acquire, sell, lease, transfer,
spin-off, recapitalize, liquidate, dissolve, or dispose of subsidiaries
or assets;
(E) The second company’s
ability to make investments or expenditures;
(F) The second company achieving or maintaining
a financial target or limit, including, for example, a debt-to-equity
ratio, a fixed charges ratio, a net worth requirement, a liquidity
target, a working capital target, or a classified assets or nonperforming
loans limit;
(G) The second company’s
payment of dividends on any class of securities, redemption of senior
instruments, or voluntary prepayment of indebtedness;
(H) The second company’s ability to authorize
or issue additional junior equity or debt securities, or amend the
terms of any equity or debt securities issued by the second company;
(I) The second company’s ability to engage
in a public offering or to list or de-list securities on an exchange,
other than a right that allows the securities of the first company
to have the same status as other securities of the same class;
(J) The second company’s ability to amend
its articles of incorporation or by-laws, other than in a way that
is solely defensive for the first company;
(K) The removal or selection of any independent
accountant, auditor, investment adviser, or investment banker employed
by the second company; or
(L) The second
company’s ability to significantly alter accounting methods and policies,
or its regulatory, tax, or liability status (e.g., converting from
a stock corporation to a limited liability company); and
(ii) A limiting contractual right
does not include a contractual right that would not allow the first
company to significantly restrict, directly or indirectly, the discretion of the
second company over operational and policy decisions of the second
company. Examples of contractual rights that are not limiting contractual
rights may include:
(A) A right that allows the first company
to restrict or to exert significant influence over decisions relating
to the second company’s ability to issue securities senior to securities
owned by the first company;
(B) A requirement
that the first company receive financial reports or other information
of the type ordinarily available to common stockholders;
(C) A requirement that the second company
maintain its corporate existence;
(D)
A requirement that the second company consult with the first company
on a reasonable periodic basis;
(E)
A requirement that the second company provide notices of the occurrence
of material events affecting the second company;
(F) A requirement that the second company
comply with applicable statutory and regulatory requirements;
(G) A market standard requirement that the
first company receive similar contractual rights as those held by
other investors in the second company;
(H) A requirement that the first company be able to purchase additional
securities issued by the second company in order to maintain the first
company’s percentage ownership in the second company;
(I) A requirement that the second company
ensure that any security holder who intends to sell its securities
of the second company provide other security holders of the second
company or the second company itself the opportunity to purchase the
securities before the securities can be sold to a third party; or
(J) A requirement that the second company
take reasonable steps to ensure the preservation of tax status or
tax benefits, such as status of the second company as a Subchapter
S corporation or the protection of the value of net operating loss
carry-forwards.
(6) Second company means the company
whose potential control by a first company is the subject of determination
by the Board under this subpart.
(7) Senior management official means any person who participates
or has the authority to participate (other than in the capacity as
a director) in major policymaking functions of a company.
(f) Reservation of authority. Nothing
in this subpart shall limit the authority of the Board to take any
supervisory or enforcement action otherwise permitted by law, including
an action to address unsafe or unsound practices or conditions, or
violations of law.
