Loan to Company - Director is Shareholder

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Question:

One of our directors is a shareholder for a company that wants to acquire a loan from us. The director has a 15.4% stock ownership in the company wanting the loan. The director will not be a guarantor on the loan. Do we have to have board approval if we decide to do the loan for the company?

Answer:

You are going to have to determine whether or not the director has control of the company. If they do, then the company would be a related interest of the director and a loan to the company would be considered the same as if the loan was made directly to the director or if they guaranteed the loan. The fact that he holds 14.5% of the stock could mean he has presumptive control if several other conditions exist. Look to the Reg O definitions for assistance in this determination:

215.2(c)(1) Control of a company or bank means that a person directly or indirectly, or acting through or in concert with one or more persons:

(i) Owns, controls, or has the power to vote 25 percent or more of any class of voting securities of the company or bank;

(ii) Controls in any manner the election of a majority of the directors of the company or bank; or

(iii) Has the power to exercise a controlling influence over the management or policies of the company or bank.

(2) A person is presumed to have control, including the power to exercise a controlling influence over the management or policies, of a company or bank if:

(i) The person is:

(A) An executive officer or director of the company or bank; and

(B) Directly or indirectly owns, controls, or has the power to vote more than 10 percent of any class of voting securities of the company or bank; or

(ii)(A) The person directly or indirectly owns, controls, or has the power to vote more than 10 percent of any class of voting securities of the company or bank; and

(B) No other person owns, controls, or has the power to vote a greater percentage of that class of voting securities.

(3) An individual is not considered to have control, including the power to exercise a controlling influence over the management or policies, of a company or bank solely by virtue of the individual's position as an officer or director of the company or bank.

(4) A person may rebut a presumption established by paragraph (c)(2) of this section by submitting to the appropriate Federal banking agency (as defined in 12 U.S.C. 1813(q)) written materials that, in the agency's judgment, demonstrate an absence of control.

First published on BankersOnline.com 3/02/09