Pub. 6 2015 Issue 2

summer 2015 13 West Virginia Banker voting securities. Control is also presumed where a person has the power to vote more than 10% of any class of voting securities and no other person has the power to vote a greater percentage. This analysis is particularly complicated when there are complex organizational structures. Consider this example: A director of a bank owns 5% of Hold- ing Corporation. The director is the sole board member of Holding Corporation. The board has not delegated any manage- ment responsibilities. Holding Corpora- tion owns 5% of the membership interests in Subsidiary LLC. Holding Corporation is the managing member of Subsidiary LLC. Holding Corporation has not del- egated any management responsibilities. Subsidiary LLC owns 30% of the member- ship interests in Borrower LLC. The other 70% of Borrower LLC is owned by Third Party LLC, an unaffiliated third party. Third Party LLC manages the day-to-day operations of Borrower LLC. A graphic representation is below. How do we apply Regulation O here? Some lenders would analyze the situation as follows: The director of the bank does not control Borrower LLC because the director only owns 0.75% of Borrower LLC -- 5% [di- rector ownership of Holding Corporation] of 5% [Holding Corporation ownership of Subsidiary LLC] of 30% [Subsidiary LLC ownership of Borrower LLC] of Borrower LLC. This analysis is incorrect. Rather than multiply the ownership percentages togeth- er, a bank must look at control at each level to determine if control flows through the hierarchy. And at each level the bank must apply the three tests to see if control can be established. Here is the correct analysis: The director controls Holding Corpora- tion. While the director does not own at least 25% of the voting securities, the director is the sole board member. And the board retains management responsibil- ity. That means the director has the power to exercise a controlling influence over the management or policies of Holding Corporation (test 3 above). In turn, Holding Corporation controls Subsidiary LLC. While Holding Corpo- ration does not own more than 25% of the voting securities of Subsidiary LLC, it is the managing member of Subsidiary LLC (and has the power to exercise a controlling influence over the management or policies of Subsidiary LLC under test 3 above). Finally, Subsidiary LLC controls Borrower LLC. Borrower LLC is managed by Third Party LLC, and Subsidiary LLC does not have the power to exercise a controlling influence over the management or policies of Borrower LLC (under test 3 above). But Subsidiary LLC does own more than 25% of the voting securities of Borrower LLC (under test 1 above). Accordingly, the director controls Holding Corporation, which controls Subsidiary LLC, which controls Borrower LLC. This means that the director controls Borrower LLC for purposes of Regulation O. The analysis involved in related party transac- tions under Regulation O demonstrates the technical nature of the regulation and the difficulty in compliance. Regulators increasingly are focusing on Regulation O violations. Accordingly, banks should be cautious in their application of the regulation, and should consult carefully with counsel to determine the regulation’s applicability particularly in complex, relat- ed party transactions. n Sandra Murphy, Amy Tawney and Daniel Cohn are attorneys in the Charleston office of Bowles Rice LLP. Should you require more information, please feel free to contact the authors directly. Ms. Murphy is a Bowles Rice partner and the leader of the firm’s Bank- ing and Financial Services team. She concentrates her practice in banking, commercial and financial services and securities law. She can be reached at (304) 347-1131 or by e-mail at smurphy@bowlesrice.com. Mr.Cohn isanassociatewhoconcen- trates his practice on bankruptcy and creditors' rights, commercial transac- tions and financial services. He can be reached at (304) 347-2101 or by e-mail at dcohn@bowlesrice.com. Ms. Tawney also is a Bowles Rice partner. She focuses her practice on banking law, mergers and acqui- sitions, securities law, and regulatory matters. She can be reached at (304) 347-1123 or by e-mail at atawney@bowlesrice.com. Director Subsidiary LLC Holding Corporation Borrower LLC 5% interest Sole Board Member 5% interest Managing Member No Management 30% interest Management Voting Securities KEY