June 6, 1997

Re: _______ — Possible Acquisition of ________

Dear Mr. ________:

This is in response to your letters of October 8, 1996 and May 29, 1997. We apologize for our delay in getting back to you.

Your letters asked whether ________ would be required to obtain the approval of the Superintendent of Banks pursuant to Financial Code Sections 700, et seq., if it acquired up to 24.9% of the outstanding common stock of ________. In our view, such approval would be required if ________ acquired more than 10% but less than 25% of ________’s outstanding shares and thereby became the largest shareholder of ________. The commitments ________ made to the Federal Reserve Board (the “Board”) not to use its ownership of ________’s shares in order to exert control over ________ do not, in our view, obviate the need for approval under Financial Code Sections 700, et seq..

As we understand it, ________ applied to the Board for approval pursuant to Section 3(a)(3) of the Bank Holding Company Act (12 U.S.C. Section 1842(a)(3)) to acquire up to 24.9% of the voting shares of ________ through acquisition of shares which may become available in the market from time to time. The Board approved the application by order dated December 18, 1996. In connection with its application to the Board, ________ made various commitments to the effect that it would not use its ownership of ________’s stock to exert a controlling influence over management or policies of ________. Based primarily on these commitments, the Board found that for purposes of the Bank Holding Company Act, ________ would not acquire control of ________ on consummation of its proposal.

The same result would not necessarily obtain under Sections 700, et seq., of the Financial Code. Section 700(b) of the Financial Code defines “control” as follows:

“(b) ‘Control’ means possession, direct or indirect, of the power:

(1) To vote 25 percent or more of any class of the voting securities issued by a person; or

(2) To direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract (other than a commercial contract for goods or nonmanagement services), or otherwise; provided, however, that no individual shall be deemed to control a person solely on account of being a director, officer, or employee of such person.

For purposes of paragraph (2) of this subdivision, a person who, directly or indirectly, owns, controls, holds with the power to vote, or holds proxies representing, 10 percent or more of the then outstanding voting securities issued by another person is presumed to control such other person.

For purposes of this article, the superintendent may determine whether a person in fact controls another person.”

Under Section 700(b), it is the power to control rather than the intention to control that governs whether the approval requirements of Financial Code Section 701 apply. In accordance with the second paragraph of Paragraph (2) of Subdivision (b) of Section 700, a person who owns between 10% and 25% of any class of voting securities of a bank or other person is presumed to have the power to control the bank or person. Accordingly, ________’s acquisition of more than 10% and up to 24.9% of the common stock of ________ would trigger the presumption regardless of whether it has disclaimed, through its commitments to the Board, any intention to exercise the power.

However, the presumption may be rebutted. We generally consider the presumption rebutted with respect to a person who owns between 10% and 25% of the shares of a bank if that person is not the bank’s largest shareholder. As you point out in your letter of May 29, 1997, ________ owned 24.6% of the outstanding shares of ________ as of February 14, 1997. It therefore appears likely that ________ could acquire shares of ________ up to an amount approaching the amount approved by the Board without triggering the requirement of approval under Financial Code Section 701, provided ________ did not actually acquire control over ________.

On the other hand, if ________ should wish to acquire more shares of ________ than are held by ________’s largest shareholder, prior approval pursuant to Financial Code Section 701 would be required.

Thank you for your courtesy and cooperation in this matter. If you have any questions, please feel free to call me at (415) 263-8512.

Very truly yours,

Superintendent of Banks


Senior Counsel


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