On January 30, 2020, the Federal Reserve Board voted to finalize its April 2019 proposed rule to clarify and simplify the standards under which the Federal Reserve Board determines that one company controls a banking organization or another company. Our post on the April 2019 proposal may be accessed here. The final rule will be effective April 1, 2020.

Under the US Bank Holding Company Act, one company is considered to have control over a bank or other company if:

(A) the company directly or indirectly or acting through one or more other persons owns, controls, or has power to vote 25% or more of any class of voting securities of the bank or the other company;

(B) the company controls in any manner the election of a majority of the directors or trustees of the bank or the other company; or

(C) the Federal Reserve Board determines, after notice and opportunity for hearing, that the company directly or indirectly exercises a controlling influence over the management or policies of the bank or company.

At the other end of the spectrum, there is a presumption that any company that directly or indirectly owns, controls, or has power to vote less than 5% of any class of voting securities of a given bank or company does not have control over that bank or company.

The first two indicia of control – 25% or more of any class of voting securities and controlling the election of a majority of the directors – are objective determinations of control. The third test is a subjective determination by the Federal Reserve Board that one company directly or indirectly exercises a “controlling influence” over the management or policies of a second company. When the first company owns between between 5% and 25% of any class of voting securities of a second company, the Federal Reserve Board must review all the facts and circumstances on a case-by-case basis in order to make a control determination.

Over the years, Federal Reserve Board staff have developed some general standards that are used to evaluate such “in-between” transactions, but these standards were not set forth in a formally promulgated regulation. This regulation is meant to do just that.

The final rule looks essentially the same as the proposal, with some revisions. For example, some definitions are revised and the required analysis of the amount of aggregate revenues or expenses relating to the business relationships between the first and second company now need only be done with respect to the first company’s business relationships with the second company. The principal focus of interest may continue to remain on the rebuttable presumptions of control that would arise at the following levels of direct or indirect ownership or control of the outstanding securities of any class of voting shares by one company of another company:

Ownership or control by the first company of 5% or more of the outstanding securities of any class of voting shares of the second company, combined with any of the following factors:

• (i) Director representatives of the first company or any of its subsidiaries comprise 25% or more of the directors of the second company or any of its subsidiaries, or (ii) the director representatives of the first company or any of its subsidiaries are able to make or block the making of major operational or policy decisions of the second company or any of its subsidiaries (a “director representative” is any individual that represents the interests of the first company through serving on the board of directors of the second company);
• Two or more employees or directors of the first company or any of its subsidiaries serve as senior management officials of the second company or any of its subsidiaries;
• An employee or director of the first company or any of its subsidiaries serves as the chief executive officer or in a similar capacity of the second company or any of its subsidiaries;
• The first company or any of its subsidiaries enters into transactions or has business relationships with the second company or any of its subsidiaries that generate in the aggregate 10% or more of the total annual consolidated revenues or expenses of the second company; or
• The first company or any of its subsidiaries has any limiting contractual right with respect to the second company or any of its subsidiaries, unless (i) such limiting contractual right is part of an agreement to merge with or make a controlling investment in the second company that is reasonably expected to close within one year, and (ii) such limiting contractual right is designed to ensure that the second company continues to operate in the ordinary course until the merger or investment is consummated, or such limiting contractual right requires the second company to take an action necessary for the merger or investment to be consummated.

Ownership or control by the first company of 10% or more of the outstanding securities of any class of voting shares of the second company, combined with any of the following factors:

• The first company or any of its subsidiaries propose a number of director representatives to the board of directors of the second company or any of its subsidiaries, in opposition to the nominees proposed by the management or board of directors of the second company or any of its subsidiaries that, together with any director representatives of the first company or any of its subsidiaries serving on the board of directors of the second company or any of its subsidiaries, would comprise 25% or more of the board of directors of the second company or any of its subsidiaries;
• Director representatives of the first company and its subsidiaries comprise more than 25% of any board committee of the second company or any of its subsidiaries that can take actions that bind the second company or any of its subsidiaries; or
• The first company or any of its subsidiaries enters into transactions or has business relationships with the second company or any of its subsidiaries that (i) are not on market terms; or (ii) generate in the aggregate 5% or more of the total consolidated annual revenues or expenses of the second company.

Finally, ownership or control by the first company of 15% or more of the outstanding securities of any class of voting shares of the second company, combined with any of the following factors:

• A director representative of the first company or of any of its subsidiaries serves as the chair of the board of directors of the second company or any of its subsidiaries;
• One or more employees or directors of the first company or any of its subsidiaries serves as a senior management official of the second company or any of its subsidiaries; or
• The first company or any of its subsidiaries enters into transactions or has business relationships with the second company or any of its subsidiaries that generate in the aggregate 2% or more of the total annual consolidated revenues or expenses of the second company.

Additional rebuttable presumptions of control include the first company (i) entering into any agreement, understanding, or management contract (other than to serve as investment adviser) with the second company, under which the first company directs or exercises significant influence or discretion over the general management, overall operations, or core business or policy decisions of the second company, (ii) controlling one third or more of the total equity of the second company or (iii) consolidating the second company on its financial statements prepared under US generally accepted accounting principles.

Also proposed is a rebuttable presumption of non-control by the first company of the second company if the first company owns less than 10% of the outstanding securities of each class of voting securities of the second company and otherwise does not meet any of the rebuttable presumptions of control contained in the final regulation.

There is a Federal Reserve Board staff memorandum that discusses the comments made to the proposed rule and the changes being made in the final rule, and contains a chart summarizing the rebuttable presumptions of control.

Similar changes also have been made to the regulations for savings and loan holding companies, which control thrift institutions such as savings banks and savings and loan associations.