[Federal Register Volume 60, Number 226 (Friday, November 24, 1995)]
[Rules and Regulations]
[Pages 57919-57922]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-28587]
-----------------------------------------------------------------------
FARM CREDIT ADMINISTRATION
12 CFR Parts 615 and 620
RIN 3052-AB60
Funding and Fiscal Affairs, Loan Policies and Operations, and
Funding Operations; Disclosure to Shareholders; Director Elections
AGENCY: Farm Credit Administration.
ACTION: Final rule.
-----------------------------------------------------------------------
SUMMARY: The Farm Credit Administration (FCA), by the Farm Credit
Administration Board (Board), adopts amendments to the regulations
relating to the implementation of cooperative principles to allow
greater flexibility in the method by which directors of Farm Credit
System (System) associations and banks for cooperatives are elected,
consistent with cooperative principles. The amendments permit regional
election of directors.
EFFECTIVE DATE: The regulations shall become effective upon the
expiration of 30 days after publication during which either or both
houses of Congress are in session. Notice of the effective date will be
published in the Federal Register.
FOR FURTHER INFORMATION CONTACT: John J. Hays, Policy Analyst,
Regulation Development, Office of Examination, (703) 883-4498, TDD
(703) 883-4444; or Rebecca S. Orlich, Senior Attorney, Regulatory
Enforcement Division, Office of General Counsel, (703) 883-4020, TDD
(703) 883-4444.
SUPPLEMENTARY INFORMATION: On June 9, 1995, the FCA Board published
proposed amendments to its regulations governing the election of
directors. See 60 FR 30470 (June 9, 1995). The FCA received 9 comment
letters in response
[[Page 57920]]
to this proposal. A description of the existing and proposed
regulations, comments on major issues, and the FCA's response follow.
I. Existing Regulation and Proposed Regulation
The existing regulation was promulgated by the FCA in 1988 to
implement changes effected by the Agricultural Credit Act of 1987. It
provided for the at-large election of directors of associations and
banks for cooperatives (BCs) but permitted associations that, in 1988,
had bylaws providing for regional elections of directors to continue to
do so until January 1, 1993. These associations were districtwide
associations that had been formed in the 1980s through mergers of most
or all of the associations in a bank's district. In response to the
desire for regional representation expressed in the comments to the
existing regulations when they were proposed in 1988, the FCA placed no
restrictions on the institution's ability to provide for geographic
representation on the board by geographic designation of director
positions; the Agency also provided for cumulative voting unless
shareholders approved bylaws providing otherwise. However, the FCA
decided to prohibit regional voting because of Agency concerns
regarding director accountability and equitable voting power.
Subsequent to implementation of that regulation, and in response to
requests from institutions to permit regional election of directors,
the FCA reviewed its position and determined that its concerns could be
addressed in a less burdensome way that would permit regional
elections, consistent with cooperative principles.
The FCA proposed amendments to Sec. 615.5230(a)(1)(ii) to permit
the regional election of directors of associations and BCs subject to
the following conditions:
1. To ensure that a director can be held accountable by all
shareholders, institutions with bylaws providing for shareholder
removal of directors must provide that each director may be removed by
a majority vote of all voting shareholders and may not be removed by a
vote of only the shareholders in his or her region; and
2. The bylaws provide for the apportionment of the institution's
territory into voting regions with approximately equal numbers of
voting shareholders and ensure equitable representation from each
voting region through an annual evaluation by the institution's board
of directors.
The FCA also proposed a conforming amendment to Sec. 620.21(d)(1)
of the FCA regulations to require disclosures regarding regional voting
in the association's annual information statement.
II. Comments on Major Issues
Comments were received from the Farm Credit Council (FCC),
representing the interests of its membership except for one bank; a
Farm Credit Bank; five System associations; a law firm representing two
pairs of jointly managed System associations (four associations); and
one System association board member. The Farm Credit Bank stated its
belief that it was not appropriate for a bank to express a position on
the regulation of the internal affairs of associations. Two commenters
fully supported the proposal, one commenter objected to the proposal,
and others expressed varying degrees of support and/or criticism as
described below:
1. Shareholder approval of bylaw establishing regional elections.
An association objected to this requirement as being burdensome and
costly, and a responsibility for association boards. The FCC stated
that it strongly opposed this provision as being unnecessary, a matter
for the association board to decide, prohibitively expensive for some
associations, and a barrier to having regional elections before 1997.
2. ``Approximately equal number of voting shareholders'' in each
region. This issue was commented on by the FCC and five others. The FCC
asserted that, as a practical matter, this requirement would preclude
the drawing of regional boundaries along state, county, or other
political or geographic lines. The FCC asserted that it would likely
result in the elimination or curtailment of certain ``grass roots''
programs, because regions based on equal numbers of shareholders would
mean that some regions will be very large and the large size would make
travel to the local meetings difficult, if not impossible. The FCC
further stated that the number of shareholders per region should not be
the controlling factor, or even necessarily of greater weight than
other factors.
One association supported additional flexibility on this issue and
asked for ``board variance to the percent of stockholders located in
each region in order to achieve clear understanding of each regions'
boundaries.'' The law firm recommended that association boards be
permitted to draw boundaries along county or territorial lines
``consistent with standards provided in the bylaw to assure
`substantial parity' of voting control among shareholders across
regions but without requiring coupling of non-contiguous counties into
a single region.'' The comment does not suggest what the standard for
``substantial parity'' would or should be, other than that it must be
provided for in the bylaws. Another association stated that ``regions
with disproportionate numbers of stockholders can be equitably served
by differential numbers of director positions per region, resulting in
reasonably balanced representation of stockholders per director.'' An
association also suggested that ``approximately equal'' be defined to
mean a shareholder variance of 10 percent more or less than other
regions. Another association expressly supported the ``approximately
equal'' standard.
3. Annual evaluation to assure that regions remain approximately
equal. The FCC and three associations were critical of the annual
evaluation requirement. The FCC pointed out that, since many or most
associations elect directors on a staggered-term basis, the voting
region electing a particular director could change while he or she is
in office; it also said that an annual evaluation could result in
frequent changes in regional boundaries. The law firm made a similar
comment and stated that, ``[t]o the extent there is now any sense of
connection between a stockholder and a director from his or her region,
it would certainly be lost in this shuffle.'' One association stated
its belief that evaluations should be necessary only every 3 years. Two
associations expressly supported the proposed annual evaluation.
III. FCA's Response to Comments
On the issue of shareholder approval to determine the method of
electing their directors, the Board strongly believes that the right of
shareholders to vote for all of the directors who owe them fiduciary
duties should not be limited in any way without their consent. A
regional voting bylaw, if adopted with the approval of only directors
of the institution, could be viewed as serving primarily the interest
of furthering director position and influence and disenfranchising
shareholders. Shareholder ratification will serve to negate any such
inference and assure concurrence by the owners of the association as to
the benefits to be derived from the bylaw provision. The Board
recognizes that there are costs associated with any shareholder vote
but does not believe that the cost would be prohibitively expensive for
any institution, as was asserted by a commenter. Therefore, after
weighing
[[Page 57921]]
the costs and benefits, the Board adopts the shareholder approval
requirement as proposed.
In response to comments regarding the requirement to have an
``approximately equal'' number of voting shareholders per region, the
Board has carefully considered the arguments against such standard. The
Board has concluded that the equalization of the number of voters per
region ensures democratic control of an association. The Board is not
persuaded that ``approximately equal'' voting would reduce or curtail
grass-roots participation in institution business, particularly since
at present the directors are elected on an at-large basis.
However, in response to some of the comments received asserting
that precise equalization would be overly burdensome, the Board has
made several changes to this provision of the proposed regulations.
First, the final regulation retains the ``approximately equal''
standard but specifies that the standard is met if no region contains
more than 25 percent more voting shareholders than in any other region.
After implementation, the institution must periodically count the
number of voting shareholders in each region and, if the
``approximately equal'' standard is no longer being met, must adjust
the boundaries or adjust the ratio of borrowers to directors in order
to meet the standard. Second, the final regulation provides that the
evaluation of the number of voting shareholders and any resulting
adjustments must take place at least once every 3 years. This is a
relaxation of the proposed regulation's requirement for an evaluation
every year.
The Board is aware, as some commenters noted, that revisions of the
regional boundaries, in cases where board members serve staggered
terms, could be viewed as depriving some shareholders of representation
who may, after a boundary change, be in the region of a board member
for whom they did not have the opportunity to vote. Such a result would
appear to be unacceptable in a situation where a board member is
obligated to represent only the interests of shareholders from his or
her region. However, that is not the case here. Institution board
members have a fiduciary duty to represent the interests of all of the
shareholders in the institution's territory, even when they are elected
on a regional basis.1 An institution may, of course, choose to
elect all of its directors annually, or may decide not to have regional
voting.
\1\ Moreover, the combination of yearly boundary revisions and
directors with staggered terms may not be uncommon among
cooperatives. See, e.g., the model bylaw provision set forth in
Legal Phases of Farmer Cooperatives, Information 100, Farmer
Cooperative Service, U.S. Dept. of Agriculture (1976), at 572-73.
---------------------------------------------------------------------------
The Board has also made several clarifications to the proposed
regulations. Proposed Sec. 615.5230(a)(3)(ii) stated that, if there is
a bylaw providing for shareholder removal of directors, it must give
all voting shareholders the right to vote to remove a director and not
limit the right to the shareholders in the director's region. In the
Board's view, this language implied that the bylaws could deprive
shareholders of the right to remove directors. It was not the intention
of the Board to imply this, since stockholders have a common law right
to remove directors for cause.2 Therefore, to avoid any confusion
on this issue, the Board has revised the proposal to provide, in the
final regulations, that bylaws establishing regional voting must give
all voting shareholders the right to vote in any shareholder vote to
remove a director.
\2\ See Harry G. Henn & John R. Alexander, Laws of Corporations
Sec. 205 (1983). Common law also provides that the board of
directors may not remove a director for cause unless the bylaws so
state; it appears that the board of directors cannot remove a
director without cause. Id.
---------------------------------------------------------------------------
The Board has also added a clarifying amendment to
Sec. 620.21(d)(3). The existing regulation requires that, if an
association's annual meeting is held in more than one session, the
annual meeting information statement must contain a statement that
nominations from the floor must be made at the first session. The
clarifying amendment adds that, for associations that elect directors
by region, there must be a statement that nominations from the floor
for a director from a particular region must be made at the first
session in that region if stockholders do not vote solely by mail
ballot. If stockholders vote solely by mail ballot, the information
statement must state that nominations from the floor may be made at any
session of the annual meeting held in a region, unless the bylaws
provide otherwise.
No specific comments were received on regional elections for BC
directors or on the proposed conforming amendment to Sec. 620.21(d)(1),
the disclosure regulation. The disclosure provision is adopted as
proposed.
List of Subjects
12 CFR Part 615
Accounting, Agriculture, Banks, banking, Government securities,
Investments, Rural areas.
12 CFR Part 620
Accounting, Agriculture, Banks, banking, Reporting and recording
requirements, Rural areas.
For the reasons stated in the preamble, parts 615 and 620 of
chapter VI, title 12 of the Code of Federal Regulations are amended as
follows:
PART 615--FUNDING AND FISCAL AFFAIRS, LOAN POLICIES AND OPERATIONS,
AND FUNDING OPERATIONS
1. The authority citation for part 615 continues to read as
follows:
Authority: Secs. 1.5, 1.7, 1.10, 1.11, 1.12, 2.2, 2.3, 2.4, 2.5,
2.12, 3.1, 3.7, 3.11, 3.25, 4.3, 4.9, 4.14B, 4.25, 5.9, 5.17, 6.20,
6.26, 8.0, 8.4, 8.6, 8.7, 8.8, 8.10, 8.12 of the Farm Credit Act (12
U.S.C. 2013, 2015, 2018, 2019, 2020, 2073, 2074, 2075, 2076, 2093,
2122, 2128, 2132, 2146, 2154, 2160, 2202b, 2211, 2243, 2252, 2278b,
2278b-6, 2279aa, 2279aa-4, 2279aa-6, 2279aa-7, 2279aa-8, 2279aa-10,
2279aa-12); sec. 301(a) of Pub. L. 100-233, 101 Stat. 1568, 1608.
Subpart I--Issuance of Equities
2. Section 615.5230 is amended by adding a new paragraph
(a)(1)(iii) and revising paragraphs (a)(1)(ii) and (a)(3) to read as
follows:
Sec. 615.5230 Implementation of cooperative principles.
(a) * * *
(1) * * *
(i) * * *
(ii) Unless regional election of directors is provided for in the
bylaws pursuant to Sec. 615.5230(a)(3), be accorded the right to vote
in the election of each director (except for a director that is elected
by the other directors);
(iii) Unless regional election of directors is provided for in the
bylaws, or unless otherwise provided in the bylaws, be allowed to
cumulate such votes and distribute them among the candidates in the
shareholder's discretion.
(2) * * *
(3) Regional election of directors is permitted under the following
conditions:
(i) A bylaw establishing regional elections is approved by a
majority of voting shareholders, voting in person or by proxy, prior to
implementation;
(ii) The bylaw provides that all voting shareholders of the
institution, whether or not they reside in the director's region, have
the right to vote in any shareholder vote to remove each director;
(iii) There are an approximately equal number of voting
shareholders in each of the institution's voting regions. The
[[Page 57922]]
regions shall be deemed to have an approximately equal number of voting
shareholders if no region contains more than 25 percent more voting
shareholders than in any other region. At least once every 3 years, the
institution shall count the number of voting shareholders in each
region and, if the regions do not have an approximately equal number of
shareholders, shall adjust the regional boundaries to achieve such
result; and
(iv) An institution may provide for more than one director to
represent a region. In such case, for purposes of determining whether
the regions have an approximately equal number of voting shareholders,
the number of voting shareholders in the region with more than one
director shall be divided by the number of director positions
representing that region, and the resulting quotient shall be the
number that is compared to the number of voting shareholders in other
regions.
* * * * *
PART 620--DISCLOSURE TO SHAREHOLDERS
3. The authority citation for part 620 continues to read as
follows:
Authority: Secs. 5.17, 5.19, 8.11 of the Farm Credit Act (12
U.S.C. 2252, 2254, 2279aa-11); sec. 424 of Pub. L. 100-233, 101
Stat. 1568, 1656.
Subpart D--Association Annual Meeting Information Statement
4. Section 620.21 is amended by adding the words ``or elected''
after the word ``nominated'' in the first sentence of paragraph (d)(1);
and by revising paragraph (d)(3) to read as follows:
Sec. 620.21 Contents of the information statement and other
information to be furnished in connection with the annual meeting.
* * * * *
(d) * * *
* * * * *
(3) State that nominations shall be accepted from the floor.
(i) If directors are not elected by region, the following shall
apply:
(A) If the annual meeting is to be held in more than one session
and mail balloting will be conducted upon the conclusion of all
sessions, state that nominations from the floor may be made at any
session or, if the association's bylaws so provide, state that
nominations from the floor shall be accepted only at the first session.
(B) If shareholders will not vote solely by mail ballot upon
conclusion of all sessions, state that nominations from the floor may
be made only at the first session.
(ii) If directors are elected by region, the following shall apply:
(A) If more than one session of an annual meeting is held in a
region, and if mail balloting will be conducted at the end of all
sessions in a region, state that nominations from the floor may be made
at any session in the region or, if the association's bylaws so
provide, state that nominations from the floor shall be accepted only
at the first session held in the region.
(B) If shareholders will not vote solely by mail ballot upon
conclusion of all sessions in a region, state that nominations from the
floor may be made only at the first session held in the region.
* * * * *
Dated: November 17, 1995.
Floyd Fithian,
Secretary, Farm Credit Administration Board.
[FR Doc. 95-28587 Filed 11-22-95; 8:45 am]
BILLING CODE 6705-01-P
