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Legal Opinion Summary
Topic:Voting Rights: Can a limited liability company owned by several cooperatives vote its participation certificates in a bank for cooperatives’ vote on approval of a proposed merger?
ID Number:99-05
Issue Date:03/02/1999


A bank for cooperatives (BC) asked whether a limited liability company (LLC) owned by several cooperatives could vote participation certificates in a vote on approval of a proposed merger with another Farm Credit System bank. OGC concluded that a noncooperative legal entity like an LLC that holds participation certificates was not a “stockholder” entitled to vote on the merger of a BC under Title VII of the Farm Credit Act (Act).

Title III of the Act, concerning BCs, generally treats “stock” and “participation certificates” as distinct instruments. Section 3.3 of the Act (12 U.S.C. 2124) clearly distinguishes between stock with voting rights and participation certificates. Section 3.3(c) states that: “[v]oting stock may be issued or transferred to and held only by . . . cooperative associations eligible to borrow from the banks” (emphasis added), and section 3.3(f) states that “[p]articipation certificates may be issued to parties to whom voting stock may not be issued.” Because the LLC in question was not governed by cooperative principles, it was not a “cooperative association” authorized to hold stock, and the BC issued it only nonvoting participation certificates when it became a borrower. Provisions of Title III of the Act other than section 3.3 also distinguish between “stock” with voting rights and “participation certificates.” Part 619 of FCA regulations defines “participation certificates” as “[e]vidence of investment in a bank or association to which all the rights and obligations of stock attach with the exception of the right to vote in the affairs of the institution” (emphasis added). OGC noted that, although section 4.3A of the Act (12 U.S.C. 2154a) provides a special definition of “stock” for capital adequacy purposes, the general distinction between participation certificates and stock with voting rights remains clear in other provisions of section 4.3A. See Act 4.3A(c)(1)(E)(i) and 4.3A(f)(1).

(March 2, 1999)