United States Court of Appeals 

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued April 23, 2009 Decided July 7, 2009 

No. 08-1259 

JOSEPH STILWELL, ET AL., 

PETITIONERS

v. 

OFFICE OF THRIFT SUPERVISION, 

RESPONDENT

On Petition for Review of an Order 

of the Office of Thrift Supervision 

Paul M. Smith argued the cause and filed the briefs for 

petitioners. 

Christopher A. Sterbenz, Trial Attorney, U.S. Department 

of the Treasury, argued the cause for respondent. With him 

on the brief were Dirk S. Roberts, Deputy Chief Counsel, and 

Elizabeth R. Helke, Special Counsel. 

Gregory Taylor was on the brief for amicus curiae

American Bankers Association in support of respondent. 

Before: GINSBURG, HENDERSON, and KAVANAUGH, 

Circuit Judges. 
2 

Opinion for the Court filed by Circuit Judge

KAVANAUGH. 

KAVANAUGH, Circuit Judge: A new Office of Thrift 

Supervision regulation allows subsidiaries of mutual holding 

companies to limit their minority shareholders to 10% of the 

subsidiary’s total minority stock. The idea is to prevent 

activist minority investors from taking advantage of voting 

rules that require a majority of the minority shareholders to 

approve management stock benefit plans. OTS was 

concerned that large minority stockholders would leverage 

their voting power so as to unduly interfere in certain areas of 

corporate governance – for example, by pressuring the 

institution to engage in stock repurchases or sale of the 

institution. The rule is thus akin to an anti-takeover device. 

Joseph Stilwell is a private investor who has previously 

acquired more than 10% of minority stock in some 

subsidiaries of mutual holding companies – and who wants to 

do so again. He challenges the new OTS rule as arbitrary and 

capricious under the Administrative Procedure Act. Applying 

the deferential arbitrary and capricious test, we conclude that 

the OTS rule is reasonable and reasonably explained. OTS 

struck a permissible balance between the goals of deterring 

management’s self-dealing and preventing abusive short-term 

investment strategies. We find no legal basis to upset that 

policy choice, and we therefore must deny the petition. 

I 

The Home Owners’ Loan Act of 1933 authorizes the 

Federal Government to issue charters to mutual savings 

associations. 12 U.S.C. § 1464(a). Under the federal charter, 

those associations are owned and governed by their members, 
3 

who have the right to vote on “all questions requiring action 

by the members” and the right to receive an “equal 

distribution of assets, pro rata to the value of their accounts” 

in the event the association is liquidated, dissolved, or wound 

up. 12 C.F.R. § 544.1. This ownership structure differs from 

that of a stock bank, shares of which are bought and sold by 

members of the public at large. 

One drawback to the mutual association structure is its 

inability to raise capital by offering ownership stakes to the 

public in the form of stock. Federal law does, however, 

permit mutual savings associations to raise outside capital if 

they first convert themselves to a mutual holding company 

(MHC) structure. See 12 U.S.C. § 1467a(o); 12 C.F.R. Pt. 

575. Two new entities emerge from such a conversion – an 

MHC owned entirely by the mutual association’s original set 

of member-owners, and a subsidiary company in stock form 

owned by the MHC. In some cases, the MHC structure may 

also include the creation of a “mid-tier” holding company 

controlled by the MHC and owning all of the stock of the 

reorganizing mutual association. See 12 C.F.R. §§ 575.2(q), 

575.14(a). 

To raise capital, the MHC may sell a minority stake of 

the subsidiary to the general public in a stock offering. See 12 

U.S.C. § 1467a(o)(8)(B); 12 C.F.R. § 575.8(a)(2). In so 

doing, it raises capital while retaining a majority stake in – 

and hence control of – the subsidiary. In addition to allowing 

mutual associations to generate outside capital, this MHC 

structure allows directors, officers, and employees of the 

mutual association to receive compensation in the form of 

stock in the subsidiary. 

 

Congress created the Office of Thrift Supervision as an 

agency in the Department of the Treasury to regulate mutual 
4 

associations, including the process by which those 

associations can convert to the MHC structure. See 12 U.S.C. 

§ 1467a(o)(3). OTS regulations set forth the basic charter 

form for the MHCs (and any mid-tier holding companies) 

along with their subsidiaries. The regulations also include 

several “optional” pre-approved charter provisions that MHC 

subsidiaries may choose to adopt. See 12 C.F.R. §§ 575.9(a)-

(c), 575.14(c). 

OTS rules also govern the process by which MHC 

subsidiaries may create stock benefit plans for the benefit of 

their directors, officers, and employees. See generally id.

§§ 563b.500, 575.8. To prevent management’s self-dealing, 

OTS has required that those benefit plans be approved by a 

majority vote of the minority shareholders in the MHC 

subsidiary. Id. § 575.8(c). In recent years, however, OTS has 

become concerned that minority shareholders (including 

Joseph Stilwell, the petitioner in this case) may be using their 

leverage in voting on those plans to take advantage of the 

results of the stock offering – for example, by demanding that 

management repurchase its stock or sell the institution. See 

OTS Br. at 41-44; Optional Charter Provisions in Mutual 

Holding Company Structures, 72 Fed. Reg. 35,205, 35,206 

(June 27, 2007) (notice of proposed rulemaking). 

To address this problem, OTS adopted a new rule 

following notice to and comment from the interested public. 

See Optional Charter Provisions in Mutual Holding Company 

Structures, 73 Fed. Reg. 39,216 (July 9, 2008) (final rule). 

The rule creates an optional provision that MHC subsidiaries 

may include in their respective charters. Under the optional 

provision, MHC subsidiaries may prohibit any person or 

entity from acquiring, or offering to acquire, more than 10% 

of the MHC subsidiary’s total minority stock within five years 
5 

after the minority stock issuance. 12 C.F.R. §§ 575.9(c), 

575.14(c)(3).*

 

Shortly after OTS’s adoption of the rule, petitioner 

Joseph Stilwell and a few affiliated companies filed the 

present petition for review. Stilwell is a private investor who 

regularly buys minority stakes in subsidiaries created by 

mutual holding companies. During the rulemaking process, 

Stilwell opposed the proposed rule on the grounds that it 

 *

 The full text of the optional provision for MHC subsidiaries 

reads as follows: 

Beneficial Ownership Limitation. No person may directly or 

indirectly offer to acquire or acquire the beneficial ownership 

of more than 10 percent of the outstanding stock of any class 

of voting stock of the association held by persons other than 

the association’s mutual holding company. This limitation 

expires on [insert date within five years of minority stock 

issuance] and does not apply to a transaction in which an 

underwriter purchases stock in connection with a public 

offering, or the purchase of stock by an employee stock 

ownership plan or other tax-qualified employee stock benefit 

plan that is exempt from the approval requirements under § 

574.3(c)(1)(vii) of the Office’s regulations. 

In the event a person acquires stock in violation of this section, 

all stock beneficially owned by such person in excess of 10 

percent of the stock held by stockholders other than the mutual 

holding company shall be considered “excess shares” and shall 

not be counted as stock entitled to vote and shall not be voted 

by any person or counted as voting stock in connection with 

any matters submitted to the stockholders for a vote. 

12 C.F.R. § 575.9(c). The optional charter provision available to 

subsidiaries of mid-tier MHCs is virtually identical. Id. § 

575.14(c)(3). 
6 

would inappropriately favor the interests of MHC 

management, disenfranchise minority shareholders, and 

undermine sound corporate governance. Letter from Spencer 

L. Schneider, Counsel to Stilwell, to OTS Chief Counsel 

(Aug. 24, 2007); Letter from Spencer L. Schneider, Counsel 

to Stilwell, to OTS Chief Counsel (Nov. 20, 2007). He makes 

substantially the same claims in his petition for review to this 

Court, and he argues that the rule is arbitrary and capricious 

under the APA. 

II 

 Before proceeding to Stilwell’s challenge to the rule on 

its merits, we first consider whether his claim is justiciable. 

OTS argues that Stilwell lacks standing because the rule has 

not caused him an injury; it also contends that Stilwell’s 

petition is not ripe. We disagree on both counts. 

A 

 To demonstrate standing under Article III of the 

Constitution, Stilwell must show an injury in fact caused by 

the defendant and redressable by judicial relief. See Lujan v. 

Defenders of Wildlife, 504 U.S. 555, 560-61 (1992); Pub. 

Citizen v. Nat’l Highway Traffic Safety Admin., 489 F.3d 

1279, 1289 (D.C. Cir. 2007). The regulation at issue here 

directly regulates mutual holding company (MHC) 

subsidiaries, not investors. As an investor, Stilwell therefore 

has a more difficult burden to demonstrate standing; he has to 

show a “substantial probability” of injury as a result of the 

rule. St. John’s United Church of Christ v. FAA, 520 F.3d 

460, 462 (D.C. Cir. 2008) (internal quotation marks omitted). 

In light of Stilwell’s past practice and future investment 

plans, he has demonstrated such a substantial probability. 
7 

There is plainly a high – indeed, a near-certain – probability 

that at least some MHC subsidiaries selling minority stock to 

the public will adopt the optional provision limiting the size 

of any individual’s minority stake. OTS proposed and 

ultimately adopted this new approach for this precise reason: 

to help solve the perceived problems posed by activists like 

Stilwell investing in MHC subsidiaries. See generally

Optional Charter Provisions in Mutual Holding Company 

Structures, 72 Fed. Reg. 35,205, 35,206 (June 27, 2007) 

(notice of proposed rulemaking); OTS Br. at 44. Comments 

on the rule – including from representatives of prominent 

bankers’ trade associations – supported the rule on the same 

grounds. See, e.g., Letter from Patricia A. Milon, Chief Legal 

Officer, America’s Cmty. Bankers, to OTS Chief Counsel 

(Aug. 27, 2007); Letter from Christopher M. Paridon, Counsel 

to Am. Bankers Ass’n, to OTS Chief Counsel (Aug. 27, 

2007); Letter from Christopher Cole, Regulatory Counsel, 

Independent Cmty. Bankers of Am., to OTS Chief Counsel 

(Aug. 27, 2007). Indeed, amicus curiae American Bankers 

Association notes that “the outcome of this case will have a 

very real impact upon the ability of mutual associations to 

defend themselves.” American Bankers Ass’n Br. at 3. There 

is no doubt, moreover, that a MHC subsidiary’s adoption of 

the optional charter provision will harm Stilwell’s economic 

interests: He has previously obtained, and wants to continue 

to obtain, more than 10% of the minority stock of certain 

MHC subsidiaries. We agree with Stilwell, therefore, that “it 

is more than a little ironic that OTS would suggest Petitioners 

lack standing and then, later in the same brief, label Petitioner 

Stilwell as a prime example [of] one of the activist MHC 

shareholders who supposedly have created the very problem 

the Rule was intended to address.” Stilwell Reply Br. at 7. 

Under the OTS rule, it is substantially probable that 

MHC subsidiaries will adopt charter provisions that will cause 
8 

Stilwell economic harm; he therefore has standing to 

challenge the rule as a violation of the APA. See Clinton v. 

City of New York, 524 U.S. 417, 432-33 (1998) (finding 

standing based on probable economic injury caused by 

government action changing market conditions); St. John’s, 

520 F.3d at 462 (“substantial probability” of injury needed for 

injury-in-fact); Sabre, Inc. v. Dep’t of Transp., 429 F.3d 1113, 

1119 (D.C. Cir. 2005) (finding standing where it was 

“reasonably certain that [petitioner’s] business decisions will 

be affected”). Put more generally, when an agency adopts a 

rule with the purpose and substantially probable effect of 

economically helping regulated Party A and hindering Party 

B, Party B ordinarily will have standing to challenge the rule. 

So it is here. 

B 

 Stilwell’s challenge is also ripe. The OTS rule is 

concededly a final rule, and there is a substantial probability 

that MHC subsidiaries will adopt the optional charter 

provision it makes available. This, in turn, will harm 

Stilwell’s investment prospects. Because Stilwell is 

challenging the validity of the OTS rule itself – and not the 

charter provision’s subsequent adoption by any particular 

mutual association – there is no persuasive reason to postpone 

consideration of his challenge. See Sabre, 429 F.3d at 1119-

21. For ripeness purposes, this case is no different from the 

myriad cases in which we entertain challenges to an agency’s 

final rule. We therefore turn to the merits. 

III 

 On the merits, Stilwell advances two main reasons that 

the OTS rule is arbitrary and capricious under the APA. 

Stilwell does not argue that the rule violates any particular 
9 

statutory provision. Therefore, this is a State Farm case, not a 

Chevron case. See Motor Vehicle Mfrs. Ass’n v. State Farm, 

463 U.S. 29 (1983); Chevron USA, Inc. v. Natural Res. Def. 

Council, 467 U.S. 837 (1984). Under State Farm, we must 

uphold OTS’s rule so long as it is reasonable and reasonably 

explained. See State Farm, 463 U.S. at 43. Applying this 

deferential standard, we reject Stilwell’s arguments. 

First, Stilwell contends that OTS failed to present any 

substantial empirical evidence justifying the new regulation. 

In essence, Stilwell claims that the new regulation is a 

solution in search of a problem. Although Stilwell has made a 

forceful submission, this claim is ultimately resolved by the 

deferential nature of arbitrary and capricious review of agency 

rules. See Bowman Transp., Inc. v. Ark.-Best Freight Sys., 

Inc., 419 U.S. 281, 285-86 (1974). The APA imposes no 

general obligation on agencies to produce empirical evidence. 

Rather, an agency has to justify its rule with a reasoned 

explanation. Moreover, agencies can, of course, adopt 

prophylactic rules to prevent potential problems before they 

arise. An agency need not suffer the flood before building the 

levee. 

Here, OTS thoroughly explained its concern that minority 

shareholders could use and were using their leverage to “take 

unfair advantage” of the proceeds resulting from the stock 

offering. See Optional Charter Provisions in Mutual Holding 

Company Structures, 72 Fed. Reg. 35,205, 35,206 (June 27, 

2007) (notice of proposed rulemaking). OTS based its 

proposed rule on its long experience of supervising mutual 

savings associations; its view found support in various 

comments submitted in response to the proposed rule. 

Optional Charter Provisions in Mutual Holding Company 

Structures, 73 Fed. Reg. 39,216, 39,217 (July 9, 2008) (final 

rule). We see no basis, at least under the deferential arbitrary 
10 

and capricious test, for overruling OTS’s considered judgment 

of the need for this regulation. See Consumer Elecs. Ass’n v. 

FCC, 347 F.3d 291, 300 (D.C. Cir. 2003). 

Second, Stilwell argues that the new rule will exacerbate 

the problem of allowing management to give itself generous 

stock plans. Stilwell argues, in particular, that the new rule 

makes it too difficult for minority shareholders to prevent the 

majority from doing so. Although Stilwell is correct that the 

rule will make it harder for some minority shareholders to 

prevent MHC subsidiaries from adopting stock compensation 

plans, that alone does not establish that the rule is arbitrary 

and capricious. As OTS explained, the optional charter 

provision does not affect the separate OTS regulation – 

readopted shortly before this rule – requiring that a majority 

of minority shareholders approve stock benefit plans. See 

Optional Charter Provisions, 73 Fed. Reg. at 39,218-19; 12 

C.F.R. § 575.8(c). Because that voting requirement remains 

in place, minority shareholders as a class continue to have the 

power to vote down stock benefit plans. 

Perhaps more to the point, OTS has discretion under this 

statutory scheme to balance the power of majority and 

minority shareholders in order to achieve its multiple 

regulatory objectives. Those objectives include both

preventing majority shareholders from granting themselves 

overly generous stock packages and preventing minority 

shareholders from taking advantage of their veto power over 

such packages, to the harm of the institution. One can 

certainly quibble with the balance struck by OTS. But we 

find no basis under the arbitrary and capricious test for 

overturning its assessment.

 Relatedly, Stilwell claims that the rule eliminates the 

right of minority shareholders to solicit proxies in excess of 
11 

10% of the minority shares, thereby unduly weakening them. 

But the premise of this argument is inaccurate. As OTS 

explained in the preamble to the rule, the treatment of such 

proxies as “beneficial ownership” for the purposes of the 10% 

limit is by no means automatic. Rather, the treatment depends 

on whether the proxies are held in circumstances that “give 

rise to a . . . control determination” under OTS’s separate 

control regulations. Optional Charter Provisions, 73 Fed. 

Reg. at 39,219; see also 12 C.F.R. §§ 574.4(a)-(b). In the 

absence of such a control determination, a minority 

shareholder therefore would typically be able to solicit and 

vote proxies in excess of 10% of the minority shares without 

violating the rule. OTS Br. at 53. In short, OTS’s approach 

to this issue does not rise to the level of arbitrary and 

capricious behavior for the purposes of the APA. 

* * * 

 We deny the petition for review. 

So ordered.