| STATE OF MICHIGAN
DEPARTMENT OF COMMERCE
FINANCIAL INSTITUTIONS BUREAU
In Re: Request by Michigan National Corporation for a declaratory
ruling whether Michigan Bank - Midwest may acquire the stock of Michigan
Bank - Mid-South for the purpose of a merger and simultaneous sale
of the merged bank.
Michigan National Corporation (MNC) proposes the following corporate
reorganization. MNC, the current owner of all the shares of both Michigan
Bank - Midwest (Midwest) and Michigan Bank - Mid-South (Mid-South),
will contribute Mid-South's stock to Midwest. The parent bank, Midwest,
and its subsidiary, Mid-South, will then merge and the resulting merged
bank will be sold to Premier Bancorporation. The entire transaction
is expected to occur virtually simultaneously.
MNC has indicated that if the transaction occurs in this form, the
merger will be a tax-free exchange under the Internal Revenue Code.
The Bureau approved an application to merge the two banks on January
20, 1988, and MNC has provided a copy of a letter from the Federal
Reserve Board dated August 17, 1988, stating that an application under
the Bank Holding Company Act for Midwest's acquisition of the Mid-South
stock will not be required.
Statute to be Applied
Section 151(15) of the Banking Code of 1969, as amended (Banking
Code), MCL 487.451(15); MSA 23.710(151):
"[A bank has] . . . the following additional corporate powers
. . .
(15) To conduct its business through subsidiaries, but a bank
shall not acquire or hold for its own account shares of a bank or
bank holding company, unless the shares are acquired as provided
in subdivision (18). The commissioner may promulgate such rules
as he or she deems necessary to effectuate this subdivision and
prevent evasions thereof. For the purpose of this subdivision, subsidiary
means a corporation of which at least 80% of the voting stock of
the corporation is owned by state and national banks located in
Section 159(1) of the Banking Code MCL 487.459(1); MSA 23.710(159):
"(1) An institution may not engage in any transaction with
respect to shares of the capital stock of any corporation unless specifically
authorized by this act."
May Sections 151(15) and 159(1) of the banking Code be interpreted
so as to permit Midwest to acquire the stock of Mid-South for the
purpose of a simultaneous merger of the two banks and sale of the
The emphasis of Section 151(15) is on a bank operating through subsidiaries,
and the prohibition from holding or the acquiring stock of another
bank for the bank's own account. MNC argues that at no time would
Midwest conduct business through Mid-South, nor would the stock be
held for more than an instant, nor would the stock of Mid-South be
held for purposes other than to facilitate the transaction.
The Bureau agrees that the policy behind Section 151(15) is both
to prohibit a bank from conducting its-business through another bank
and to prohibit a bank from acquiring the stock of another bank as
an investment, with the expectation of making a profit on that investment
through holding the stock for some time. Similarly, Section 159(1)
seems to be directed toward investment and brokerage activities.
In this case, neither of the above policies would be contravened.
Here Midwest's acquisition of Mid-South's stock, the merger, and the
sale of the merged bank will occur simultaneously. The substance of
the whole transaction is that two banks which are subsidiaries of
the same holding company will merge and the resulting bank will be
acquired by a bank holding company, a transaction clearly permitted
by the Banking Code. The particular form of the corporate reorganization,
whether the two banks merge as parent and subsidiary or as sister
subsidiaries of MNC, is of no particular concern for purposes of the
Banking Code. This position is in conformance with other situations
where the Bureau has considered the form versus the substance of a
transaction and has concluded that, when not clearly a violation of
policy, the substance of the transaction is the controlling issue
rather than the formal process used. Nevertheless, this particular
finding is necessarily limited to the instant factual situation.
Michigan Bank - Midwest's obtaining of all of the stock of Michigan
Bank - Mid-South through a stock contribution by the parent holding
company, merger of the two banks and sale of the merged bank does
not violate sections 151(15) or 159(1) of the Banking Code so long
as the following conditions are complied with:
Date: September 13, 1988
- The entire transaction occurs simultaneously so that Midwest will
at no time be conducting business through Mid-South nor holding
the stock of Mid-South for other than an instant.
- If the stock contribution, merger and sale do not occur simultaneously,
both Midwest and Mid-South will revert to their pre-transaction
status, that is, sister banks owned by the same bank holding company.
Eugene W. Kuthy, Commissioner
Financial Institutions Bureau