New York Codes, Rules and Regulations
Title 3 - BANKING
Legal Interpretations
LI 1 - Banks and Trust Companies
Section LI 1.1 - Acceptance of warrants to purchase stock of corporate borrowers

A State bank requested confirmation that a proposed loan transaction in which X, a New York business corporation, would issue warrants to purchase its common stock to several banks for exercise over a five year period would not violate any regulation or policy of the New York State Banking Department. The bank stated that it would not exercise the warrants issued to it in the transaction but that it intended to retain the warrants for its own account. Its letter included the following discussion of New York law:

"Regarding the applicable provisions of the Banking Law, it is submitted that the power to acquire warrants by a New York banking corporation in the manner contemplated derives from Section 96-1, the general banking powers clause, as an 'incidental power * * * necessary to carry on the business of banking.' Acquisition of the warrants is not prohibited by Section 97 relating to acquisitions by banks of stock of any corporation, because warrants are not 'stock'. The bank will not exercise such warrants, and will thus never own stock in [X].

"Finally, the provisions of Section 108 of the Banking Law and Section 190.4 of the Penal Law regarding interest rates do not prohibit the proposed transaction. The warrants are in the nature of prepaid 'interest' as a 'charge * * * incidental to * * * making any such loan,' but their present value, together with the annual interest on the notes of 1/2% over the prime rate, will be substantially below the 25% usury ceiling applicable to corporate borrowers."

The bank was advised that the transaction as outlined did not violate any present regulation or policy of the department. The bank was further advised that the department agreed with its view of the applicable provisions of the New York Banking Law.

The department stated its intention, however, to examine carefully all significant credits involving the issuance of warrants to purchase the common stock of a borrower, because equity arrangements of this kind are frequently made with prospective borrowers of less than adequate credit standing. In this regard, the department noted with satisfaction the bank's express statement that the credit-worthiness of the borrower in the proposed transaction and its ability to repay the principal amount of the loan had been determined "without reference to any value of the warrants" to be issued.

DATED: November 13, 1969