Longest Time Period for Holding Stock
Question
First National Bankshares, Inc., a bank holding company, held substantially all of the voting stock of an equipment manufacturing corporation as collateral for a loan to the owner. On May 15 the borrower defaulted and on September 1, after proper notice was given, the bank foreclosed its security interest on the stock and exercised its rights to vote the stock at appropriate times. On December 31 the bank transferred the stock to a subsidiary corporation, FNB, Inc., to market the stock for sale more effectively. What is the longest time period that FNB, Inc., can possibly hold the stock?
Answers
Explanations
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A. B. C. D.B
The answer to this question is C. Up to two years from December 31.
Here's why:
The scenario describes a situation where a bank holding company, First National Bankshares, Inc. (FNBI), held the voting stock of an equipment manufacturing corporation as collateral for a loan to the owner. When the borrower defaulted on May 15, FNBI foreclosed its security interest on the stock and exercised its voting rights. On December 31, FNBI transferred the stock to a subsidiary corporation, FNB, Inc., for the purpose of marketing the stock for sale more effectively.
The relevant factor in determining how long FNB, Inc. can hold the stock is the rule regarding "bank holding company affiliation" under the Bank Holding Company Act (BHCA) and Regulation Y. The BHCA defines a bank holding company as any company that has control over a bank. "Control" is defined as owning 25% or more of a class of voting securities of a bank or having the power to direct the management or policies of a bank.
In this scenario, FNBI held "substantially all" of the voting stock of the equipment manufacturing corporation as collateral for a loan. If FNBI held 25% or more of the voting stock, it would have "control" over the corporation and, therefore, would be considered a bank holding company under the BHCA. This means that FNB, Inc. would also be considered a bank holding company because it is a subsidiary of FNBI.
Regulation Y imposes restrictions on bank holding companies regarding the types of activities they can engage in and the types of businesses they can own. Specifically, Section 225.28 of Regulation Y prohibits a bank holding company from owning or controlling voting shares of any company (other than a bank) for more than two years, unless the Federal Reserve Board grants an extension.
In this case, FNB, Inc. is a subsidiary of FNBI, which is a bank holding company. Therefore, FNB, Inc. is subject to the same restrictions as FNBI. Since FNBI exercised its voting rights on the stock after foreclosing on September 1, the clock started ticking on the two-year holding period from that date. Therefore, the longest time period that FNB, Inc. can hold the stock is up to two years from September 1.
However, on December 31, FNBI transferred the stock to FNB, Inc. for the purpose of marketing it for sale more effectively. This transfer did not reset the clock on the holding period, but it did change the starting point for the clock to begin ticking. Therefore, the longest time period that FNB, Inc. can hold the stock is up to two years from December 31, the date of the transfer.
Therefore, the correct answer is C. Up to two years from December 31.
