board of governors of the 

federal reserve system seal 

BOARD OF GOVERNORS 

of THE 

FEDERAL RESERVE SYSTEM 

WASHINGTON , D. C. 20551 

Scott O. Alvarez general counsel 

August 24, 2005 

Dear Mr. 

This is in response to the request by 

for Board staff's views regarding 

whether investors in voting preferred shares ("Preferred Shares") to be 

issued by ( )Holding, Inc. (" Holding"), currently an indirect 

wholly owned subsidiary of ( ) would be deemed to control ( ) 

Holding for purposes of the Bank olding Company Act ("BHC Act"). 

( ) proposes that ( )Holding would control several 

sunsidiaries, including ( ) a domestic company that intends 

to convert to an 

agreement corporation under section 25 of the Federal Reserve Act 

(12 U.S.C. section 601). ( ) has also requested staff's views regarding 

whether an investment in the Preferred Shares would be deemed an 

investment in the stock of an agreement corporation under section 25A of 

the Federal Reserve Act (12 U.S.C. section 618). 

Factual Background 

We understand that (redacted) proposal has severaL components. In 

summary (redacted) intends to deconsolidate certain domestic and foreign 

subsidiaries from its consolidateD tax group for federal income tax purposes. 

( ) currently holds four of the subsidiaries it intends to deconsolidate 

( ) through an Edge corporation, subsidiary of 

( ) Holding ( ) 

proposes to dissolve the Edge corporation, to 

convert ( ) to an agreemenT corporation, and to transfer the 

three foreign subsidiaries to ( ) after it has become an 

agreement corporation. 
You have stated that would be able to deconsolidate the 

subsidiaries for federal income tax purposes if one or more third-party 

investors were to acquire more than 20 percent of the voting stock of 

Holding. To effect the deconsolidation, intends to sell 

deferred Shares Holding to three investors (the "Preferred 

Shareholders"): 

You have indicated that would each 

purchase of the Preferred Shares (representing 1.6 percent of 

Holding's total equity and 9.55 percent of the total voting power of 

Holding's shareholders) and would purchase 

of the Preferred Shares (representing 0.8 percent of 

Holding's total equity and 4.9 percent of the total voting power of 

Holding's shareholders) 

Under the proposal, the holders of the common shares and Preferred 

Shares of Holding would vote together as a single class in most 

instances, Accordingly, the holder of the common stock would 

be entitled to cast. 76 percent of the vote, and the Preferred. Shareholders 

collectively would be entitled to cast 24 percent of the vote, at a meeting of 

the shareholders of Holding. Holding would not be able 

to take the following actions, however, without the consent of at least 

85 percent of the Preferred Shares voting as a separate class: (i) amend any 

provision of its certificate of incorporation if such action could significantly 

and adversely affect the rights or preferences of the Preferred Shareholders; 

(it) liquidate or windup its affairs; (in) create or issue any shares of capital 

stock (other than common stock); or (iv) redeem or make any payment on 

common stock or any security junior to the Preferred. Shares if a Special 

Event (defined below) has occurred. 

In addition, the proposal contemplates that the board of directors of 

Holding would consist of eleven members. The Preferred Shares 

Purchase Agreements would provide that each of the Preferred Shareholders 

is entitled to have one director serve on the board. 

Under the Preferred. Shares Purchase Agree.ments Holding 

also would make several covenants to the Preferred Shareholders, including 

(i) to provide the Preferred Shareholders with certain financial information; 

(ii) not to pay a dividend or redeem any equity security (other than the 

Preferred Shares) except for payments not exceeding $1.00 million in the 

aggregate in any year; (iii) not to engage in "banking" or take any action that 
5 

would cause Holding to be required to meet regulatory capital 

requirements; and (iv) to notify the Preferred Shareholders if 

Holding intends to engage in any activities other than certain specified 

activities and operations ("Expected Activities"). The Expected Activities 

would include engaging in certain leasing and lending businesses; not 

having more than 30 employees; not incurring material amounts of 

additional indebtedness other than certain anticipated liabilities; and not 

merging or consolidating with another party. 

Furthermore, the Preferred Shares may be redeemed in the following 

three circumstances: (i) the Preferred Shares are mandatorily redeemable by 

Holding on May 31, 2020;(ii) the Preferred Shares are redeemable 

in whole at the option of Holding at any time; and (iii) the 

Preferred Shares are redeemable in whole at the option of each Preferred 

Shareholder following the occurrence of a Special Event. A Special Event 

generally includes failure by Holding to pay a dividend on the 

Preferred Shares, failure by Holding to meet certain minimum, 

financial ratios, breach by Holding of a material covenant in the 

transaction documents, decline in 's external credit rating, 

and notification that Holding intends to deviate from the Expected 

Activities. Except in two limited circumstances, Holding would 

not be required to pay a redemption penalty.footnot e 1 

BHC Act Control Analysis 

For purposes of the BHC Act, a company has control over another 

company if the company (i) directly or indirectly or acting through one or 

more other persons owns, controls, or has power to vote 25 percent or more 

of any class of voting securities of the other company, (ii) controls in any 

manner the election of a majority of the directors of the other company; or 

footnote 1 wou.ld have to pay a redemption penalty only in the event of an 

optional redemption after a change in control and an optional 

redemption associated with a refinancing of the Prcfcncd Shares by 

at a lower dividend rate. Staff has considered the amount and other terms of 

the redemption penalty and notes in particular that the requirement to pay 

the penalty expires after three years 
4 

(iii) directly or indirectly exercises a controlling influence over the 

management or policies of the other companyfootnot e 2 The Board's Regulation Y 

also sets forth a set of rebuttable presumptions of control.footnot e 3 

Under the proposal, the Preferred Shareholders would only be deemed 

to control Holding for purposes of the BHC Act if the Board were 

to find the Preferred Shareholders exercised acontrolling influence over the 

management or policies of Holding. The Preferred Shareholders 

would not own, control, or hold with power to vote more than 25 percent of 

a class of voting securities of, or control the election of a majority of the 

directors of, Holding. footnote 4 In addition, the Preferred Shareholders 

would not trigger any of the rebuttable presumptions of control in 

Regulation Y. 

The Board has previously expressed its view that covenants by an 

issuer to an equity investor that substantially limit the discretion of the 

issuer's management over major policies and decisions, such as restrictions 

on entering into new activities without the investor's approval, suggest 

control by the investor over the management and policies of the issuer. footnote 5 The 

Board has also indicated, however, that restrictive covenants may be 

consistent with a non-control finding if they are combined with other 

provisions that mitigate the investor's control over the issuer, such as 

provisions that (i.) preserve the ability of the issuer's management to conduct 

business or (ii) enable the issuer to redeem the investor's equity interest 

without penalty to ensure that restrictive covenants that may become 

inhibiting can be avoided by the issuer. footnote 6 

footnote 212 U.S.C.section1841(a)(2); 12 C.F.R, 225.2(e). 

footnote 3See 12 C.F.R. 225.31(d). 

footnote 4As noted above, the common shares and Preferred. Shares of 

Holding would vote together with few exceptions. The class voting rights 

associated with the Preferred Shares appear to be limited solely to the types 

of class voting rights customarily provided by statute with regard to matters 

that would significantly and adversely affect the rights or preferences of the 

Preferred Shares. See 12 C.F.R. 225.2(q). 

footnote 5

 See 12 C.F.R. 225.143(c)(4). 

footnote 6

 See 12 C.F.R. 225.143(d)(1) and (2). 
5 

To address concerns that the Preferred Shareholders, inividually or 

collectively, might have the ability to exercise a controlling influence over 

Holding, has made the following arguments. First, 

has emphasized that the most restrictive of the proposed 

limitations on Holding (namely, the limitation on Expected 

Activities) is not in the form of a covenant. Rather, the limitation is in the 

form of a trigger event for a right of redemption by the Preferred 

Shareholders. has argued that a redemption right in favor of the 

Preferred Shareholders would give the Preferred Shareholders a controlling 

influence over Holding only if the potential loss of capital to 

Holding from the redemption would be sufficiently detrimental that 

Holding would in fact cede control over its policies or management 

to the Preferred Shareholders in order to preserve capital. In this regard, 

asserts that the threat of withdrawal of capital by one or more of 

the Preferred Shareholders in connection with a. change in 

Holding's activities is inconsequential because (i) does not intend 

and would have no need to engage in any activities through 

Holding other than the Expected Activities; (ii) the level of investment by 

the Preferred Shareholders in Holding is small (approximately 

4 percent of Holding's total equity); and (iii) the optional 

redemption right of the Preferred Shareholders is without a redemption 

penalty. 

also contends that the influence of the Preferred. 

Shareholders in this case would be limited because of s 

maintenance of 76 percent of the voting power at Holding and over 

70 percent representation on the board of directors of Holding. In 

addition, would have both the legal ability to effect a redemption 

of the Preferred Shareholders at any time without penalty and an actual 

ability to effect a redemption of the Preferred Shareholders at any time 

(because, as part of the proposal, must maintain a minimum ratio 

of net liquid assets to the aggregate redemption price of the Preferred 

Shares). 

In view of all the facts of record in this case - including the small 

relative size of each Preferred Shareholder's investment, the presence of a 

significantly larger Holding shareholder, and the ability of 

Holding to redeem the Preferred Shares at any time without a redemption 

penalty - staff would not at this time recommend that the Board find that the 

proposed investment would allow the Preferred Shareholders, individually or 

collectively, to exercise a, controlling influence over the management or 
policies of Holding (or, indirectly, for purposes 

of the BHC Act. 

Edge Act InvestmentLimit: Analysis 

Section 25A of the Federal Reserve Act limits a member bank's 

investments in the stock of Edge and agreement corporations to no more 

than 10 percent of such bank's capital and. surplus (or 20 percent of capital 

and surplus if the Board determines such additional investment would not be 

unsafe or unsound). As noted above, also has requested staff's 

views on whether, assuming no Preferred Shareholder is viewed as 

controlling Holding, such Preferred. Shareholder's investment in 

Holding would be applied against the investor's investment limit 

under that section. 

Staff has generally advised member banks that investments in a 

holding company parent of an Edge or agreement corporation are deemed to 

be investments in the stock of the subsidiary Edge or agreement corporation 

on a proportionate basis. In those previous cases, the sole or primary 

function of the holding company was to hold the shares of an Edge or 

agreement corporation. In. this case, however, would 

represent only 18 percent of Holding's consolidated assets and 

none of the Preferred Shareholders would acquire more than 10 percent of 

any class of voting shares of Holding. In addition, none of the 

proceeds of issuance of the Preferred Shares would be invested by 

Holding in footnote 7 and intends to run off 

's assets. footnote 8 In view of all the facts of record in this case, staff would 

not recommend that the Board count the investment in Holding by 

a Preferred Shareholder toward the investment limit of the investor for 

member bank investments in Edge and agreement corporations. 

footnote 7 The proceeds of the Preferred Shares would be used to capitalize 

Holding's other subsidiaries. 

footnote 8

 You have stated that no new leases would be acquired by . 

You have also asserted that the Preferred Shareholders have indicated that 

their decision to invest in Holding was based on their interest in the 

business of Holding's other subsidiaries and not on the operations 

of 
In reaching the opinions set forth in this letter, staff has relied on all 

the facts of record, including all the representations and commitments made 

by or on behalf of whether noted m this letter or otherwise 

contained in s correspond.ence with the Board). Any change in 

the terms or circumstances of the proposed transactions may result in a 

different decision. In this regard, you should advise Board staff before 

making any material modification to the proposal. 

To address the possibility of a controlling influence developing in the 

future, the Board retains the authority to review the investment and 

relationships regularly to determine whether, under all the facts and, 

circumstances, any of the Preferred Shareholders has acquired a controlling 

influence over Holding for purposes of the BHC Act. 

Sincerely, 

Scott G. Alvarez signature 

cc: