78-1

78-1

July 6, 1978

Dear M ________:

This is in response to your letter of March 22, 1978, in which you requested an interpretation of Financial Code Section 3514.

It is our opinion that Section 3514 requires that the majority of the shares of the capital stock of a corporation organized pursuant to Article I (commencing with Section 3500), Chapter 19, Division I of the Financial Code (an “international banking corporation”) be owned by citizens of the United States or by corporations, the controlling interest in which is held by citizens of the United States. The test is not the number of layers of ownership, but whether ultimate ownership of the international banking corporation is held by United States citizens.

It is true that there is little helpful California authority on this question. However, Article I, Chapter 19, Division I of the Financial Code was modeled after the Edge Act (Section 25(a) of the Federal Reserve Act). It is, in fact, almost a copy; there are few differences between the two statutes. It is therefore proper to consider the legislative history and historical background of the federal statute in ascertaining the purpose and intent of the state statute.

The purpose of the Edge Act was to provide regulatory legislation which would enable domestic corporations to carry on financial operations abroad. Congress anticipated that the operations would stimulate foreign demand for United States exports by making available from the private sector long-term loans to foreign purchasers of American goods.

These loans would provide capital for the purchasers on commercially reasonable terms, enabling them to import otherwise too expensive American exports. (H.R. No. 408, 66th Congress, First Session, Page 2). Further, American-held foreign debt would turn the United States into a creditor nation. (Ibid. Page 4. See also Congressional Record, Volume 59, Page 622.) That Congress intended primary benefit to accrue to the United States and its citizens is underscored by the regulations under the Edge Act, where certain powers are allowed Edge Act corporations “so long as their credit and other activities are in the interest of the United States.” (Federal Reserve Board Regulation K, Section 211.1(b)).

If Edge Act corporations or international banking corporations would be controlled by foreign persons, the benefits and profits would be shifted to the foreign persons and nations, and away from the United States economy and its citizens, a result exactly opposite the one intended. It is therefore our opinion that Section 3514 requires that a majority of the ultimate ownership interest of an international banking corporation be held by citizens of the United States.

In answer to your second question, it is our opinion that Section 3514 of the Financial Code requires that where the ownership interest of the international banking corporation is held by another corporation, the controlling interest of the latter corporation must be owned by citizens of the United States and the corporation must also be chartered under the laws of the United States or a state of the United States. Were the statute to be interpreted to require either that the corporation be chartered under the laws of the United States or of a state of the United States or that the controlling interest of the corporation be owned by citizens of the United States, but not both, the effect would be to allow foreign ownership of the corporation, which violates the intent of the statute, as discussed above, or to allow a foreign corporation to own the international banking corporation. The second alternative would also result in shifting the benefits and profits to foreign persons and nations in violation of the statutory intent. The statute therefore requires that the controlling corporation both be owned by citizens of the United States and be chartered under the laws of the United States.

You have also asked whether we would apply Section 3514 in a situation where the international banking corporation is chartered under the laws of another state and is transacting business in California under the provisions of Section 3532. We are presently reviewing this question and hope to respond in the near future.

If we can be of further assistance, please do not hesitate to contact us.

Very truly yours,

CARL J. SCHMITT
Superintendent of Banks

By

MARGARET MARTINSEN
Counsel

Attachments

March 22, 1978

Carl J. Schmitt
Superintendent of Banks
State Banking Department
235 Montgomery Street
San Francisco, CA 94104

Dear Carl:

As you requested when we met, I am writing to you regarding Section 3514 of the California Financial Code, which may have the effect of preventing ________ (the “Bank”) from forming a California-incorporated “agreement” corporation. The Bank is a bank chartered under New York law and is wholly owned (except for directors’ qualifying shares) by ________, also a New York corporation. Bancorp in turn has as its shareholders six separate European banks.

Section 3514 provides as follows:

“A majority of the shares of the capital stock of any corporation shall at all times be held and owned by citizens of the United States, by corporations the controlling interest in which is owned by citizens of the United States, chartered under the laws of the United States or of a state of the United States, or by firms or companies, the controlling interest in which is owned by citizens of the United States.”

This section is ambiguous in two respects. As we found no helpful California authority, we would appreciate the assistance of you and your staff in resolving those ambiguities.

First, it is unclear through how many layers of ownership the second clause (“by corporations the controlling interest in which . . .”) would reach. Literally, that clause refers only to the immediate and not the ultimate owner. In this case, there would seem to be little policy reason for going beyond a literal reading since the two intermediate owners were not interposed merely as a sham to evade the prohibition of Section 3514. Both the Bank and Bancorp exist for independent business reasons. Moreover, both those entities are subject to regulation by federal and New York banking authorities to a significant degree. A primary reason for the adoption of Section 3514 (or rather its predecessor from the Edge Act) would seem to be the concern that agreement (or Edge Act) corporations not be controlled by individuals or entities over which local authorities had no jurisdiction or regulatory authority. In this case, that concern should not exist.

Second, it was also unclear whether the phrase “chartered in the United States” in that same second clause is intended as an alternative or an additional condition. The concern of insuring appropriate United States regulation would support the former interpretation. Such regulation would exist even if only one of the conditions (U.S. residency of the owners or of the corporate entity) were true.

Should the Bank not be able to form a California “agreement” corporation, Section 3533 of the Financial Code allows an agreement corporation incorporated in another state to qualify to do business here. It would, however, be preferable to form a California corporation and we therefore would appreciate your consideration of these two questions.

Very truly yours,