WASHINGTON – Proponents of credit unions taking on mutual bank charters will sometimes make the point that mutual bank depositors have similar rights. For example, they elect directors and participate in a mutual organization and, if the organization converts to a stock issuing bank, they vote in that decision as well. But two panels of lawyers at the America's Community Bankers 2005 Government Affairs Conference indicate that the actual rights of mutual bank depositors are not as clear-cut as they would appear, and that frequently depositors stand opposed to their institutions' actions. Participants in two panels, entitled "What Corporate Documents Are Important," and "The Role of Activist Depositors" urged the assembled mutual bank executives to get their corporate governance paperwork in order and take other steps before facing "hostile" depositors, usually people who are trying to assert some sort of activity or interest in the institution, for example pressing for the election of certain board members or adopting certain policies. Paul Aguggia, partner in the firm of Muldoon, Murphy and Aggugia urged mutual banks to pay particular attention to their bylaws and charters, particularly in updating them. "If you haven't seen your charter since it was granted in 1940," Aggugia said, "get it out and look at it. What are your procedures for how meetings are conducted? How many depositors does it take to start a meeting?" Aguggia made the point that it was better to bring charters and bylaws up to date today than after "hostile" depositors had begun to take action. "Once there has been an action taken everything changes," Aguggia said. Aguggia and the other lawyers painted a view of being a mutual bank depositor which is sharply different from the pictures which the words bring to mind and which movie director Frank Capra depicted in movies like "It's a Wonderful Life" where neighbors are pictured leaving their money in a mutual bank despite hard times. Instead mutual banks of today have to face depositors who either try to keep the institutions from issuing stock or, sometimes, try to force institutions which have no interest in stock issuing to do so. "Sometimes their message is `why don't you want to do this, all I am trying to do is make you rich,'" said Michael Horn, a partner with the Newark, New Jersey law firm of McCarter and English. "And then it becomes `ok, I am going to make you rich no matter what you think'." In addition to updating their charters and bylaws, the lawyers suggested reviewing proxy procedures and even reviewing how the bank's voting is structured. It's axiomatic that mutual banks allow depositors to have one vote for every $1,000 on deposit, but in some instances where a mutual bank might want to forestall some depositor actions, a rule of one depositor, one vote, might be more useful, the lawyers said. Two things are at work in the area of depositor relations, according to the lawyers. First, there is very little case law or regulation at either the federal or state level to govern how mutual bank depositors interact legally with their institutions and, second, the notion of ownership among mutual depositors is very unclear. Doug Faucette, a partner with Lord, Bissell & Brook in Washington D.C. suggested that in this regard mutual depositors and credit union members are a lot alike. "No matter how much someone says that credit union members or mutual depositors own those institutions, it's just not so," Faucette said. "They are trying to make a political point because it sounds good, nothing more." Faucette, who was a credit union director in the 1970′s, argued that neither credit union members nor mutual depositors really own their institutions in the way that most people understand ownership. Both institutions have been chartered to serve communities and those charters effectively preclude, for example, the members of a healthy credit union or mutual bank from simply dissolving their institution and keeping the equity. In this regard, this means that both credit union members and mutual bank depositors should be considered participants or members rather than owners who control the day to day workings of the institution. "After all," he pointed out, "you or I could be the members of a country club and use it every day and not own it." -

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