United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued April 23, 2009 Decided July 7, 2009
No. 08-1259
JOSEPH STILWELL, ET AL.,
PETITIONERS
v.
OFFICE OF THRIFT SUPERVISION,
RESPONDENT
On Petition for Review of an Order
of the Office of Thrift Supervision
Paul M. Smith argued the cause and filed the briefs for
petitioners.
Christopher A. Sterbenz, Trial Attorney, U.S. Department
of the Treasury, argued the cause for respondent. With him
on the brief were Dirk S. Roberts, Deputy Chief Counsel, and
Elizabeth R. Helke, Special Counsel.
Gregory Taylor was on the brief for amicus curiae
American Bankers Association in support of respondent.
Before: GINSBURG, HENDERSON, and KAVANAUGH,
Circuit Judges.
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Opinion for the Court filed by Circuit Judge
KAVANAUGH.
KAVANAUGH, Circuit Judge: 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.
I
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,
3
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
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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
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after the minority stock issuance. 12 C.F.R. §§ 575.9(c),
575.14(c)(3).*
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
*
The full text of the optional provision for MHC subsidiaries
reads as follows:
Beneficial Ownership Limitation. No person may directly or
indirectly offer to acquire or acquire the beneficial ownership
of more than 10 percent of the outstanding stock of any class
of voting stock of the association held by persons other than
the association’s mutual holding company. This limitation
expires on [insert date within five years of minority stock
issuance] and does not apply to a transaction in which an
underwriter purchases stock in connection with a public
offering, or the purchase of stock by an employee stock
ownership plan or other tax-qualified employee stock benefit
plan that is exempt from the approval requirements under §
574.3(c)(1)(vii) of the Office’s regulations.
In the event a person acquires stock in violation of this section,
all stock beneficially owned by such person in excess of 10
percent of the stock held by stockholders other than the mutual
holding company shall be considered “excess shares” and shall
not be counted as stock entitled to vote and shall not be voted
by any person or counted as voting stock in connection with
any matters submitted to the stockholders for a vote.
12 C.F.R. § 575.9(c). The optional charter provision available to
subsidiaries of mid-tier MHCs is virtually identical. Id. §
575.14(c)(3).
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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 (Nov. 20, 2007). He makes
substantially the same claims in his petition for review to this
Court, and he argues that the rule is arbitrary and capricious
under the APA.
II
Before proceeding to Stilwell’s challenge to the rule on
its merits, we first consider whether his claim is justiciable.
OTS argues that Stilwell lacks standing because the rule has
not caused him an injury; it also contends that Stilwell’s
petition is not ripe. We disagree on both counts.
A
To demonstrate standing under Article III of the
Constitution, Stilwell must show an injury in fact caused by
the defendant and redressable by judicial relief. See Lujan v.
Defenders of Wildlife, 504 U.S. 555, 560-61 (1992); Pub.
Citizen v. Nat’l Highway Traffic Safety Admin., 489 F.3d
1279, 1289 (D.C. Cir. 2007). The regulation at issue here
directly regulates mutual holding company (MHC)
subsidiaries, not investors. As an investor, Stilwell therefore
has a more difficult burden to demonstrate standing; he has to
show a “substantial probability” of injury as a result of the
rule. St. John’s United Church of Christ v. FAA, 520 F.3d
460, 462 (D.C. Cir. 2008) (internal quotation marks omitted).
In light of Stilwell’s past practice and future investment
plans, he has demonstrated such a substantial probability.
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There is plainly a high – indeed, a near-certain – probability
that at least some MHC subsidiaries selling minority stock to
the public will adopt the optional provision limiting the size
of any individual’s minority stake. OTS proposed and
ultimately adopted this new approach for this precise reason:
to help solve the perceived problems posed by activists like
Stilwell investing in MHC subsidiaries. See generally
Optional Charter Provisions in Mutual Holding Company
Structures, 72 Fed. Reg. 35,205, 35,206 (June 27, 2007)
(notice of proposed rulemaking); OTS Br. at 44. Comments
on the rule – including from representatives of prominent
bankers’ trade associations – supported the rule on the same
grounds. See, e.g., Letter from Patricia A. Milon, Chief Legal
Officer, America’s Cmty. Bankers, to OTS Chief Counsel
(Aug. 27, 2007); Letter from Christopher M. Paridon, Counsel
to Am. Bankers Ass’n, to OTS Chief Counsel (Aug. 27,
2007); Letter from Christopher Cole, Regulatory Counsel,
Independent Cmty. Bankers of Am., to OTS Chief Counsel
(Aug. 27, 2007). Indeed, amicus curiae American Bankers
Association notes that “the outcome of this case will have a
very real impact upon the ability of mutual associations to
defend themselves.” American Bankers Ass’n Br. at 3. There
is no doubt, moreover, that a MHC subsidiary’s adoption of
the optional charter provision will harm Stilwell’s economic
interests: He has previously obtained, and wants to continue
to obtain, more than 10% of the minority stock of certain
MHC subsidiaries. We agree with Stilwell, therefore, that “it
is more than a little ironic that OTS would suggest Petitioners
lack standing and then, later in the same brief, label Petitioner
Stilwell as a prime example [of] one of the activist MHC
shareholders who supposedly have created the very problem
the Rule was intended to address.” Stilwell Reply Br. at 7.
Under the OTS rule, it is substantially probable that
MHC subsidiaries will adopt charter provisions that will cause
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Stilwell economic harm; he therefore has standing to
challenge the rule as a violation of the APA. See Clinton v.
City of New York, 524 U.S. 417, 432-33 (1998) (finding
standing based on probable economic injury caused by
government action changing market conditions); St. John’s,
520 F.3d at 462 (“substantial probability” of injury needed for
injury-in-fact); Sabre, Inc. v. Dep’t of Transp., 429 F.3d 1113,
1119 (D.C. Cir. 2005) (finding standing where it was
“reasonably certain that [petitioner’s] business decisions will
be affected”). Put more generally, when an agency adopts a
rule with the purpose and substantially probable effect of
economically helping regulated Party A and hindering Party
B, Party B ordinarily will have standing to challenge the rule.
So it is here.
B
Stilwell’s challenge is also ripe. The OTS rule is
concededly a final rule, and there is a substantial probability
that MHC subsidiaries will adopt the optional charter
provision it makes available. This, in turn, will harm
Stilwell’s investment prospects. Because Stilwell is
challenging the validity of the OTS rule itself – and not the
charter provision’s subsequent adoption by any particular
mutual association – there is no persuasive reason to postpone
consideration of his challenge. See Sabre, 429 F.3d at 1119-
21. For ripeness purposes, this case is no different from the
myriad cases in which we entertain challenges to an agency’s
final rule. We therefore turn to the merits.
III
On the merits, Stilwell advances two main reasons that
the OTS rule is arbitrary and capricious under the APA.
Stilwell does not argue that the rule violates any particular
9
statutory provision. Therefore, this is a State Farm case, not a
Chevron case. See Motor Vehicle Mfrs. Ass’n v. State Farm,
463 U.S. 29 (1983); Chevron USA, Inc. v. Natural Res. Def.
Council, 467 U.S. 837 (1984). Under State Farm, we must
uphold OTS’s rule so long as it is reasonable and reasonably
explained. See State Farm, 463 U.S. at 43. Applying this
deferential standard, we reject Stilwell’s arguments.
First, Stilwell contends that OTS failed to present any
substantial empirical evidence justifying the new regulation.
In essence, Stilwell claims that the new regulation is a
solution in search of a problem. Although Stilwell has made a
forceful submission, this claim is ultimately resolved by the
deferential nature of arbitrary and capricious review of agency
rules. See Bowman Transp., Inc. v. Ark.-Best Freight Sys.,
Inc., 419 U.S. 281, 285-86 (1974). The APA imposes no
general obligation on agencies to produce empirical evidence.
Rather, an agency has to justify its rule with a reasoned
explanation. Moreover, agencies can, of course, adopt
prophylactic rules to prevent potential problems before they
arise. An agency need not suffer the flood before building the
levee.
Here, OTS thoroughly explained its concern that minority
shareholders could use and were using their leverage to “take
unfair advantage” of the proceeds resulting from the stock
offering. See Optional Charter Provisions in Mutual Holding
Company Structures, 72 Fed. Reg. 35,205, 35,206 (June 27,
2007) (notice of proposed rulemaking). OTS based its
proposed rule on its long experience of supervising mutual
savings associations; its view found support in various
comments submitted in response to the proposed rule.
Optional Charter Provisions in Mutual Holding Company
Structures, 73 Fed. Reg. 39,216, 39,217 (July 9, 2008) (final
rule). We see no basis, at least under the deferential arbitrary
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and capricious test, for overruling OTS’s considered judgment
of the need for this regulation. See Consumer Elecs. Ass’n v.
FCC, 347 F.3d 291, 300 (D.C. Cir. 2003).
Second, Stilwell argues that the new rule will exacerbate
the problem of allowing management to give itself generous
stock plans. Stilwell argues, in particular, that the new rule
makes it too difficult for minority shareholders to prevent the
majority from doing so. Although Stilwell is correct that the
rule will make it harder for some minority shareholders to
prevent MHC subsidiaries from adopting stock compensation
plans, that alone does not establish that the rule is arbitrary
and capricious. As OTS explained, the optional charter
provision does not affect the separate OTS regulation –
readopted shortly before this rule – requiring that a majority
of minority shareholders approve stock benefit plans. See
Optional Charter Provisions, 73 Fed. Reg. at 39,218-19; 12
C.F.R. § 575.8(c). Because that voting requirement remains
in place, minority shareholders as a class continue to have the
power to vote down stock benefit plans.
Perhaps more to the point, OTS has discretion under this
statutory scheme to balance the power of majority and
minority shareholders in order to achieve its multiple
regulatory objectives. Those objectives include both
preventing majority shareholders from granting themselves
overly generous stock packages and preventing minority
shareholders from taking advantage of their veto power over
such packages, to the harm of the institution. One can
certainly quibble with the balance struck by OTS. But we
find no basis under the arbitrary and capricious test for
overturning its assessment.
Relatedly, Stilwell claims that the rule eliminates the
right of minority shareholders to solicit proxies in excess of
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10% of the minority shares, thereby unduly weakening them.
But the premise of this argument is inaccurate. As OTS
explained in the preamble to the rule, the treatment of such
proxies as “beneficial ownership” for the purposes of the 10%
limit is by no means automatic. Rather, the treatment depends
on whether the proxies are held in circumstances that “give
rise to a . . . control determination” under OTS’s separate
control regulations. Optional Charter Provisions, 73 Fed.
Reg. at 39,219; see also 12 C.F.R. §§ 574.4(a)-(b). In the
absence of such a control determination, a minority
shareholder therefore would typically be able to solicit and
vote proxies in excess of 10% of the minority shares without
violating the rule. OTS Br. at 53. In short, OTS’s approach
to this issue does not rise to the level of arbitrary and
capricious behavior for the purposes of the APA.
***
We deny the petition for review.
So ordered.