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Legal Opinion Summary
Topic:Corporate Authority: Does a Farm Credit System bank have the authority to acquire an interest in an LLC because it is necessary to the operation of the bank’s business?
ID Number:98-04
Issue Date:07/27/1998

A Farm Credit System (FCS) bank operating under Title III of the Farm Credit Act (Act) asked whether it had authority to acquire an equity interest in a limited liability company that provides private placement services to the FCS bank’s customers (LLC). In an opinion strictly limited to its facts and the context of a de minimis investment by the FCS bank, OGC concluded that the FCS bank was authorized to acquire the interest.

The FCS bank developed a working relationship with an LLC to provide private placement services to the FCS bank’s customers. The LLC asked the FCS bank and four other banks using its services to buy a “Strategic Joint Venture Partner Unit Interest” (Unit). Each unit included an equity interest and a pro rata share of certain subordinated debt of the LLC. OGC concluded that the FCS bank’s action to ensure its continued beneficial relationship with the LLC appeared authorized under three alternative theories. First, the Unit could be viewed as a one-time refundable fee (rather than an investment) for the continued use of the LLC’s services that the FCS bank has incidental authority to pay under its general power to contract under (section 3.1(3) of the Act) (12 U.S.C. 2122(3)) because ensuring preferred treatment in arranging future LLC deals was necessary to the operation of the bank’s business. Second, the FCS bank could buy the Unit, a form of personal property, because its purchase was necessary and convenient to its business. See Act 3.1(5) (12 U.S.C. 2122(5)). Third, the FCS bank’s purchase of the Unit could be viewed as incidental to its lending power because it enabled the bank to promote its services to potential customers and prevent competing “full service” lenders from luring customers away. See Act 3.7 (12 U.S.C. 2128).

If the FCS bank believed it could provide assistance to its customers most economically through its special relationship with the LLC, it could acquire an entity (or interest in an entity), even if that entity provided services to others. Finally, OGC concluded that the FCS bank was not impermissibly lending to the LLC, because the Unit was a single capital contribution in which the equity interest and debt were intertwined, and subordinated debt is sometimes recharacterized as equity.

(July 27, 1998)