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Stilwell v. Office of Thrift Supervision

July 7, 2009


On Petition for Review of an Order of the Office of Thrift Supervision.

The opinion of the court was delivered by: Kavanaugh, Circuit Judge

Argued April 23, 2009

Before: GINSBURG, HENDERSON, and KAVANAUGH, Circuit Judges.

A new Office of Thrift Supervision regulation allows subsidiaries of mutual holding companies to limit their minority shareholders to 10% of the subsidiary's total minority stock. The idea is to prevent activist minority investors from taking advantage of voting rules that require a majority of the minority shareholders to approve management stock benefit plans. OTS was concerned that large minority stockholders would leverage their voting power so as to unduly interfere in certain areas of corporate governance -- for example, by pressuring the institution to engage in stock repurchases or sale of the institution. The rule is thus akin to an anti-takeover device.

Joseph Stilwell is a private investor who has previously acquired more than 10% of minority stock in some subsidiaries of mutual holding companies -- and who wants to do so again. He challenges the new OTS rule as arbitrary and capricious under the Administrative Procedure Act. Applying the deferential arbitrary and capricious test, we conclude that the OTS rule is reasonable and reasonably explained. OTS struck a permissible balance between the goals of deterring management's self-dealing and preventing abusive short-term investment strategies. We find no legal basis to upset that policy choice, and we therefore must deny the petition.


The Home Owners' Loan Act of 1933 authorizes the Federal Government to issue charters to mutual savings associations. 12 U.S.C. § 1464(a). Under the federal charter, those associations are owned and governed by their members, who have the right to vote on "all questions requiring action by the members" and the right to receive an "equal distribution of assets, pro rata to the value of their accounts" in the event the association is liquidated, dissolved, or wound up. 12 C.F.R. § 544.1. This ownership structure differs from that of a stock bank, shares of which are bought and sold by members of the public at large.

One drawback to the mutual association structure is its inability to raise capital by offering ownership stakes to the public in the form of stock. Federal law does, however, permit mutual savings associations to raise outside capital if they first convert themselves to a mutual holding company (MHC) structure. See 12 U.S.C. § 1467a(o); 12 C.F.R. Pt. 575. Two new entities emerge from such a conversion -- an MHC owned entirely by the mutual association's original set of member-owners, and a subsidiary company in stock form owned by the MHC. In some cases, the MHC structure may also include the creation of a "mid-tier" holding company controlled by the MHC and owning all of the stock of the reorganizing mutual association. See 12 C.F.R. §§ 575.2(q), 575.14(a).

To raise capital, the MHC may sell a minority stake of the subsidiary to the general public in a stock offering. See 12 U.S.C. § 1467a(o)(8)(B); 12 C.F.R. § 575.8(a)(2). In so doing, it raises capital while retaining a majority stake in -- and hence control of -- the subsidiary. In addition to allowing mutual associations to generate outside capital, this MHC structure allows directors, officers, and employees of the mutual association to receive compensation in the form of stock in the subsidiary.

Congress created the Office of Thrift Supervision as an agency in the Department of the Treasury to regulate mutual associations, including the process by which those associations can convert to the MHC structure. See 12 U.S.C. § 1467a(o)(3). OTS regulations set forth the basic charter form for the MHCs (and any mid-tier holding companies) along with their subsidiaries. The regulations also include several "optional" pre-approved charter provisions that MHC subsidiaries may choose to adopt. See 12 C.F.R. §§ 575.9(a)-(c), 575.14(c).

OTS rules also govern the process by which MHC subsidiaries may create stock benefit plans for the benefit of their directors, officers, and employees. See generally id. §§ 563b.500, 575.8. To prevent management's self-dealing, OTS has required that those benefit plans be approved by a majority vote of the minority shareholders in the MHC subsidiary. Id. § 575.8(c). In recent years, however, OTS has become concerned that minority shareholders (including Joseph Stilwell, the petitioner in this case) may be using their leverage in voting on those plans to take advantage of the results of the stock offering -- for example, by demanding that management repurchase its stock or sell the institution. See OTS Br. at 41-44;Optional Charter Provisions in Mutual Holding Company Structures, 72 Fed. Reg. 35,205, 35,206 (June 27, 2007) (notice of proposed rulemaking).

To address this problem, OTS adopted a new rule following notice to and comment from the interested public. See Optional Charter Provisions in Mutual Holding Company Structures, 73 Fed. Reg. 39,216 (July 9, 2008) (final rule). The rule creates an optional provision that MHC subsidiaries may include in their respective charters. Under the optional provision, MHC subsidiaries may prohibit any person or entity from acquiring, or offering to acquire, more than 10% of the MHC subsidiary's total minority stock within five years after the minority stock issuance. 12 C.F.R. §§ 575.9(c), 575.14(c)(3).*fn1

Shortly after OTS's adoption of the rule, petitioner Joseph Stilwell and a few affiliated companies filed the present petition for review. Stilwell is a private investor who regularly buys minority stakes in subsidiaries created by mutual holding companies. During the rulemaking process, Stilwell opposed the proposed rule on the grounds that it would inappropriately favor the interests of MHC management, disenfranchise minority shareholders, and undermine sound corporate governance. Letter from Spencer L. Schneider, Counsel to Stilwell, to OTS Chief Counsel (Aug. 24, 2007); Letter from Spencer L. Schneider, Counsel to Stilwell, to OTS Chief Counsel ...

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