September 13, 1988

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.

Facts

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 Michigan."

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."

Question

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 merged bank?

Discussion

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.

Conclusion

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:

1. 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.

    

2. 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.