|Legal Opinion Summary|
|Topic:||Stock: Does a “gift” of voting stock to trade credit borrowers satisfy the statutory requirement that borrowers acquire voting stock in an association as a condition of receiving a loan? |
An association asked whether a “gift” of voting stock to trade credit borrowers would satisfy the requirement that borrowers acquire voting stock in the association as a condition of receiving a loan. The association proposed “giving” borrowers the statutory minimum amount of voting stock at the time a loan is made and retiring the stock (and retaining the proceeds) upon loan repayment. OGC previously concluded that a 0% interest loan made to a borrower to purchase voting stock of the association complied with the Act. However, OGC concluded that the current proposal, i.e. a “gift” of voting stock that would revert to the association, would violate the Farm Credit Act (Act) because a borrower would have no investment “at risk.”
Section 4.3A of the Act (12 U.S.C. § 2154a) requires only that borrowers “acquire” a specified minimum amount of voting stock. The legislative history of section 4.3A (added to the Act in 1987) plainly states that the Act’s minimum stock purchase requirement was to ensure that borrowers had some investment “at risk,” which would encourage greater participation in System affairs. The economic reality of the association’s proposal is that a borrower is not making any investment in the association, holds nothing of monetary value, and has no risk of any economic loss. Unlike a 0% loan situation, there is no possibility that a borrower will become legally obligated to pay money for the stock under the proposal; therefore, the proposal does not satisfy the “at risk” requirement of section 4.3A of the Act.
(February 28, 2000)