Indiana Law Review


Senate Enrolled Act No. 1: A New Era of
Banking Expansion in Indiana

Susan Barnhizer Rivas*

David P. Lewis**

In its 1985 session, the Indiana General Assembly passed, and on

April 18, 1985, the Governor of Indiana signed into law. Senate Enrolled

Act No. 1 of 1985' (hereinafter the "Act") to reform Indiana banking

law. The adoption of this Act promises to usher Indiana banks and

bank holding companies into a new era of banking and bank expansion.

The Act was divided into five major sections, each offering new op-

portunities for Indiana banks: (1) bankers' banks, ^ (2) intra-county

branching,^ (3) cross-county branching,"* (4) multi-bank holding com-

panies,^ and (5) regional bank holding companies.^ In addition, it included

an unusual provision which permitted banks and bank holding companies

to choose whether or not to participate in bank expansion activities.

First, this Article will summarize those five provisions and the opt-

out portion of the Act and examine certain controversial issues related

to the Act that have arisen since its passage. Second, this Article will

examine the federal response to regional reciprocity. Finally, it will

conclude with a discussion of the reciprocity problems posed by the Act.

I. Analysis of the Indiana Act

A. Bankers' Banks

As a result of the Act, both state and national banks located in

Indiana can participate as shareholders in state chartered "bankers'

banks, "^ subject to the approval of the Indiana Department of Financial

Institutions (hereinafter the "DFI").^ A bankers' bank must be owned
exclusively by other banks^ and be organized solely for the purpose of

*Associate with the firm of Davies & Leagre—IndianapoHs. B.A., Purdue University,
1974; M.A., Purdue University, 1976; J.D., Indiana University School of Law—Indian-
apolis, 1984.

**Associate with the firm of Davies & Leagre—Indianapolis. B.A., Wabash College,
1981; J.D., Indiana University School of Law—Bloomington, 1984.

'Pub. L. No. 265, 1985 Ind. Acts 1.

4nd. Code § 28-1-1 l-4(e) (Supp. 1985).
'Id. § 28-2-13-19.

'Id. § 28-2-13-20.

'Id. §§ 28-2-14-10 to -13.

''Id. §§ 28-2-15-16 to -20, -26.

iND. Code § 28-1-1 l-4(e) (Supp. 1985).
Vf/. § 28-1-4-7.

'Id. § 28-1-1 l-4(e)(l).

115



116 INDIANA LAW REVIEW [Vol. 19:115

providing services to other banks and their officers, directors, and em-

ployees.'^^ The formation of these entities permits banks to engage in

collective operations, and thus affords small and medium-sized banks

economies of scale and provides an opportunity to render services in a

larger geographic area. By limiting each bank's investment in a bankers'
bank to no more than ten percent of the investing bank's capital and

surplus, and by limiting each bank's ownership to no more than five
percent of any class of voting securities of the bankers' bank, the Act

closely parallels limitations imposed upon national banks under federal

law."

B. Intra-County Branch Banking

The Act repealed Indiana's long-standing restrictive branching laws

for state banks, substituting new provisions governing intra-county

branching'- and authorizing, for the first time, branching across county

lines. '^ With written approval of the DFI,"^ and subject to the limitations

upon total deposits set forth below, a state bank is now allowed to
establish" or acquire, for each $200,000 of capital and surplus, a branch

bank anywhere in the county of its principal office.'^

Branches cannot be acquired, however, if, as a result of the ac-

quisition, the acquiring bank'^ and its Indiana affiliates'^ will hold a

percentage of total deposits in all Indiana banks larger than ten percent

prior to July 1, 1986; eleven percent after June 30, 1986 but prior to

July 1, 1987; and twelve percent after June 30, 1987. '^ The Act defines

"deposits" as the sum of total demand deposits and total time and

'''Id. § 28-l-ll-4(e)(2).

''Compare Ind. Code § 28-1-1 l-4(e) (Supp. 1985) with 12 U.S.C. § 24 (Supp. 1985).
'-IND. Code § 28-2-13-19 (Supp. 1985).
'^Id. § 28-2-13-20. See infra notes 22-42 and accompanying text.

"Before the DFI approves an application for an intra-county branch, "it shall

determine to its satifaction that (1) the public convenience and advantage will be served

and promoted by the establishment of a branch in the location of the proposed branch;

and (2) the applicant state bank has satisfied the capital and surplus requirment speci-

fied. . . ." Id. § 28-2-13-19(b).

'A branch established by means other than by acquisition is referred to as a "branch

de novo." The Indiana Code defines "branch de novo" as a branch established by the

opening of a new branch and includes, with some exceptions, a branch acquired from

another bank without acquiring substantially all of the assets of the other bank. Id. §
28-2-13-9.

"Id. § 28-2-13-19. This section contains virtually all of the operative intra-county

branching provisions.

".See id. § 28-2-13-2 for a definition of "acquiring bank."

".See id. § 28-2-13-3 for a definition of "affiliate," and § 28-2-13-16, which defines

"Indiana affiliate." Both provisions focus on the ownership of two separate banks by

the same bank holding company.

"Id. § 28-2-1 3- 19(d)-(e).



1986] BANKING 117

savings deposits of a particular bank as shown in its consolidated report

of condition as of December 31, 1984. ^^^ For purposes of applying the

deposit limitation, "deposits" are to be determined by reference to the

acquiring bank's most recently filed consolidated report of condition in

the possession of the appropriate regulatory agency.^'

C. Cross-County Branch Banking

The Act also authorizes limited cross-county branching by permitting

a state bank^^ and, by application of federal law,^^ a national bank to

establish branches either de novo^'* or by acquisition^^ in counties

contiguous^^ to the county of its principal office. ^^ The establishment of

cross-county branches is subject to several limitations, which will be

referred to as: (1) the "Percentage-of-Deposits Limitation" ;2*^ (2) the

"Five-Year Existence and Continuous Operation Limitation" ;2'^ (3) the

"Once-Per-Period Limitation" i^^ ^nd (4) the "First Bank Limitation.
"3'

The Percentage-of-Deposits Limitation provides that the establish-

ment of a branch by acquisition in contiguous counties will not be

permitted if, after the acquisition, the acquiring bank and its Indiana

affiliates will have a percentage of all Indiana deposits greater than the

percentages allowed in intra-county branching. ^^

The Five-Year Existence and Continuous Operation Limitation pre-

cludes the establishment of a branch by acquisition if either the acquiring

bank or the acquired bank has not been in existence and continuously

operated as a bank for more than five years." This requirement is met

if a bank was formed from a consolidation of banks each of which

'-''Id. § 28-2-13-14.

~'Id. § 28-2-13-19(d).

"Id. § 28-2-13-18, which defines "state banic" as a bank that has been organized

or reorganized under Indiana law.

"12 U.S.C. § 36(c) (1982). This provision authorizes national banks to establish and

operate branch banks in the same manner and to the same extent that state banks are

so authorized. Thus, the Indiana Act may be viewed as applying to both state and federally
chartered banks.

-""See supra note 15.

-See Ind. Code § 28-2-13-8 (Supp. 1985), which defines a "branch by acquisition"
as a branch acquired by merger, consolidation, or purchase of all or substantially all of

its assets by the acquiring bank.

'''Id. § 28-2-13-11.

-'Id. § 28-^2-13-20.

''Id. § 28-2-13-20(c).

'''Id. § 28-2- 13 -20(d).

'''Id. § 28-2- 13 -20(g).

"M § 28-2-1 3-20(i)(2).
""'Id. § 28-2-13-20(c); see also supra note 19 and accompanying text.

''See id. § 28-2-13-20(d).



US INDIANA LAW REVIEW [Vol. 19:115

satisfies the five-year requirement^-* or if the bank was a "phantom"

bank that survived a merger with a bank which satisfies the five-year

requirement.'' Akhough these two exceptions to this Hmitation are sen-
sible, one consequence of the entire requirement is that, if hterally read,

it would require a new bank less than five years old that formed a one-

bank holding company by merging into a phantom bank to wait an

additional five years after the merger to qualify for cross-county branch-

ing.

The Once-Per-Period Limitation establishes a five-year period, be-

ginning July 1, 1985, and ending June 30, 1990, during which the number

of branches a bank can establish de novo or by acquisition outside its

home county is limited. ^^ The limitations based on the total deposits
of the bank including its Indiana affiliates are as follows: (1) Banks

with deposits-^ of $200,000,000 or less can establish one out-of-county

branch per year,^* (2) banks with deposits greater than $200,000,000 but

not greater than $400,000,000 can establish one out-of-county branch in

each twenty-four month period ending June 30, 1987, and June 30,
1989, and another branch in the twelve month period ending June 30,
1990,'' and (3) banks with deposits exceeding $400,000,000 can establish

one out-of-county branch in each thirty-month period ending December

31, 1987, and June 30, 1990.^" Following any cross-county acquisition,

the total deposits of the acquiring and acquired banks, including their

affiliates, will be combined to determine the category into which the

acquiring bank will fall for purposes of the Once-Per-Period Limitation."*'

Under this provision, banks can lay the groundwork for acquiring future

branches by making noncontrolHng investments in target institutions with

arrangements to consummate the acquisition at the beginning of the next
available "period."

The First Bank Limitation provides that, until June 30, 1990, only
the//>5/ Indiana bank controlled by a bank holding company is permitted
to establish out-of-county branches. ^^ If a bank holding company si-
multaneously gains control of more than one bank during that period,
then the bank that first established an out-of-county branch will be the

only one to have cross-county branching rights.

The First Bank Limitation could create a problem for individuals
who because of their stock ownership in a certain bank or bank holding

'"IND. Code § 28-2-13-20(d)(l) (Supp. 1985).
''Id. § 28-2-13-20(d)(2).

"Id. § 28-2-1 3-20(g).

"Deposits are defined as of December 31, 1984. Id. § 28-2-13-14.

'"Id. § 28-2-13-20(g)(l).

'"'Id. § 28-2-1 3-20(g)(2).

*"Id. § 28-2-1 3-20(g)(3).

''Id. § 28-2-1 3-20(h).

''Id. § 28-2-1 3-20(i)(2).



1986] BANKING 119

company are deemed to "control" that entity/^ Depending on how the
limitation and certain related definitions are interpreted, the growth

opportunity for banks "controlled" by such individuals could be severely

restricted.

As previously noted, the First Bank Limitation states that "[a]mong

affiliates, the only bank that has branching rights under this section is

the first Indiana bank controlled by the bank holding company. . . ."'^

Several definitions must be reviewed to understand fully the potential

consequences of this provision to "controlling" shareholders. Under the

Act, "control" means:

[D]irectly or indirectly (1) to own, control, or hold, with power

to vote, twenty-five percent or more of the voting shares of a

bank or company; (2) to control in any manner the election of

a majority of the directors or trustees of a bank or company;

or (3) to exercise controlling influence over the management or

policies of a bank or company. . . .""^^

"Bank holding company" is defined as "any company that has or
acquires control over: (1) any bank; or (2) any company that has or
acquires control over any bank,""^^ subject to certain exceptions provided

under the statute. "Company" means "any corporation, partnership,
joint-stock company, business trust, voting trust, joint venture, associ-

ation, or similar organization, domestic or foreign. "^^ The possibility of

a group being characterized as a company depends largely upon how
"joint venture" and "association" are defined. If those terms are defined

broadly, it is possible that a group of persons that owns or controls

the stock of several banks or bank holding companies might be deemed

to constitute a company, and consequently, a bank holding company
for purposes of enforcing the First Bank Limitation. In that event, only
the first bank controlled by the group would have branching rights. ^^

Two Indiana cases focus on the definition of "joint venture." In
both State ex rel. Uebelhor v. Armstrong^^ and Kochert v. Wiseman, ^^

the courts concluded that the collaborative actions of the respective

groups caused them to be characterized as joint ventures for purposes

of the Indiana Bank Holding Company Act.^' In Uebelhor, a group of
individuals came together to buy part of the outstanding stock of a

''Id. § 28-2-13-12.

*'Icl. § 28-2-13-20(h)(2) (emphasis added).

''Id. § 28-2-13-12 (emphasis added).

'''Id. § 28-2-13-6 (emphasis added).

"Id. § 28-1-13-10 (emphasis added).

""See id. § 28-2-14-20.

^"^252 Ind. 351, 248 N.E.2d 32 (1969).

^"148 Ind. App. 613, 269 N.E.2d 12 (1971).

^'IND. Code §§ 28-8-2-1 to -4 (1982).



120 INDIANA LAW REVIEW [Vol. 19:115

target bank. They jointly borrowed $160,000 to purchase the stock and

then divided the stock up among the group. The group held a number
of meetings to discuss how to divide the stock and appointed a treasurer
who opened a special checking account for the group. The court held
that, given the circumstances, a joint venture did exist."

In Kochert, a group of individuals took action to purchase voting

control of a target bank. The court held that the existence of a profit

motive and the division of the acquired stock among the group, as well
as the filing of a joint application with the Indiana Department of

Financial Institutions requesting permission to acquire voting control of

the targeted bank, constituted sufficient evidence of concerted activity."

However, because the factual record could be decided either way, the

court remanded the case to determine whether the group was acting as

a joint venture.^'*

In both cases, the courts closely scrutinized the existence of facts

and circumstances which demonstrated concerted actions on the part of

each group and their apparent intent to act as a group. A group of
shareholders that controls two or more banks or bank holding companies

should, therefore, focus on the extent to which its members' actions in

acquiring control reflect actions taken in concert with one another pur-

suant to a group plan.

Indiana case law fails to provide a definition of the term "asso-

ciation" in a context that is relevant to a group's control of a bank

for purposes of enforcing the First Bank Limitation. However, a Federal
Reserve Board Ruling under Regulation Y^^ of the Federal Reserve

Regulations provides some assistance in defining that term. This ruling

generally requires the presence of a formalized or structured relationship

among individuals, evidenced by agreement of some kind, before an
"association" will be found to exist. ^^

In summary, in light of the definitions discussed above, any group

that owns or plans to acquire control of several banks should examine

carefully the extent to which they risk being characterized as a joint

venture or association. In the event they are characterized as such, they

will be deemed to be a company within the provisions of the Act.
Consequently, only the first bank controlled by the group will be deemed
to have cross-county branching rights.

The Act also includes a provision that "grandfathers" previously

established out-of-county branches of an acquired bank by allowing such

"252 Ind. at 358, 248 N.E.2d at 36.

"148 Ind. App. at 625, 269 N.E.2d at 17-18.

''Id. at 626, 269 N.E.2d at 20.

"12 C.F.R. § 225 (1985).

^^"Company" - Individual Shareholders Not Constituting "Association," Fed. Bank-
ing L. Rep. (CCH) No. 4-420, at 1 33258 (Sept. 13, 1977).



1986] BANKING 121

branches to remain in operation in their current location," and it also

exempts acquisitions of troubled banks"^^ from the above four limitations. ''

However, the growth in deposits resulting from any such acquisition

will be considered in connection with future branching by acquisition/"

Finally, the Act permits state banks^' to establish automated teller ma-

chines at any location in the state, provided notice is given to the DFl

prior to establishing or relocating any such machine/'^

D. Indiana Multi-Bank Holding Companies

Under the Act, a bank holding company" with its principal office
in Indiana is for the first time permitted to control two or more banks

or bank holding companies, ^^ subject to the Percentage of Deposits

Limitation^- and the Five-Year Existence and Continuous Operation Lim-

itation.^^ The Percentage of Deposits Limitation provides that the ac-
quisition by an Indiana bank holding company of an Indiana bank or
Indiana bank holding company is not permitted if all Indiana banks
within the holding company group will control more than the maximum
allowable percentage of deposits for a given period. ^^ These percentages

per period are the same as those applied to intra-country and cross-

county branches. ^^ In addition, under the Five-Year and Continuous

Operation Limitation, an acquisition by an Indiana bank holding com-

pany of another bank or bank holding company is not permitted if the
target bank or a bank subsidiary of the target bank holding company

has not been in "existence and continuously operated" for five or more

years. ^^

If a company^° or bank holding company desires to acquire controF'

of another bank or bank holding company, it is required to file an

-''Id. 28-2-13-20(0- An out-of-county branch is one located in a county that is not
in the county in which the principal office of the acquiring bank is located or contiguous

to the county in which the principal office of the acquiring bank is located. Id.

''Id. § 28-1-7. 2-3(i).

-""See supra notes 28-31 and accompanying text.

'^•Ind. Code § 28-2-13-21 (Supp. 1985).
'''By application of federal law, national banks are also permitted to establish

automated teller machines. See supra note 23.

^-Ind. Code § 28-2-13-22 (Supp. 1985).
''Id. § 28-2-14-3.

"^Id. § 28-2-14-10.

"'Id. § 28-2-14-1 l(a)-(b).

"^"Id. § 28-2-14-1 1(c).

"'Id. § 28-2-14-1 l(a)-(b).

''"See supra notes 19, 32 and accompanying text.

^'^IND. Code § 28-2-14-ll(c) (Supp. 1985).
'"Id. § 28-2-14-5.

''Id. § 28-2-14-6.



1 :: INDIANA LA W REVIEW [Vol. 19:115

application for approval with the DFI.^^ As part of its application, an

appHcani can request that the DFI hold a "fairness hearing" on the

terms and conditions of the proposed transaction.^^ Such a hearing is

available only if the DFI in its discretion^'* decides to grant the hearing

and if the consideration given in the transaction includes "stock" issued

by the acquiring company.^' Accordingly, a fairness hearing may not
be available for a transaction that involves debt or "hybrid" securities

such as convertible debentures. If the DFI conducts a fairness hearing

and rules favorably, the acquiring company can qualify for an exemption^^
from the registration requirements of the Federal Securities Act of 1933^^

and the Indiana Securities Act.^^

The use of a fairness hearing to gain an exemption from securities

registration requirements, although not uncommon in routine corporate
transactions, is of questionable utility in multi-bank holding company

transactions. The possible complexities of multi-bank holding company

transactions can involve the DFI in lengthy administrative hearings,
possibly culminating in litigation. In short, in many cases, it may be
more advantageous for the applicant and the DFI to leave the resolution
of fairness questions to the application of various disclosure requirements

of the securities laws and other mechanisms available under general

corporate law.

E. The Opt-Out Provision and the Business Judgment Rule

A provision unique to the Act permitted a board of directors^^ of
an Indiana bank or bank holding company to adopt resolutions prior
to July 1, 1985, which exempted the institution from the regional bank

holding company or the multi-bank holding company provisions of the

-The DFI application must be accepted by the DFI for processing within ten days

of receipt, assuming it is informationally sufficient as filed. The DFI is then required to
review the proposed acquistion for compliance with the Percentage of Deposits and Five-

Year Existence and Continuous Operation Limitations and to investigate the condition of

the applicant and the party to be acquired. The DFI, at its option, can hold public

hearings on the proposed acquisition at any time after thirty days following the acceptance

of the application. The DFI is required to approve or disapprove the application within

either (1) forty-five days after acceptance of the application (if the DFI elects not to hold

a public hearing on the application) or (2) thirty days after a public hearing is held. See

iND. Code § 28-2-14-12 (Supp. 1985).
'Mnd. Code § 28-2-14-13 (Supp. 1985).
'The existence of the DFI's discretion is inferred by the use of permissive language

in iND. Code § 28-2-14-13(a).
Id. § 28-2- 14- 13(a).

"'Id. § 28-2- 14- 13(c).

"Securities Act of 1933, § 77(0, 15 U.S.C. § 77 (1982).

'iND. Code § 23-2-1-3 (1982).
''Pub. L. No. 265, 1985 Ind. Acts 37, § 9(a).



1986] BANKING 123

Act until July 1, 1987.^^ The adoption and filing of the latter resolution

also precluded the bank from cross-county branching by acquisition until

July 1, 1987.^' However, the bank is still permitted to establish de novo

branches on a cross-county basis. ^^

Because of the unusual nature of this opt-out provision, it is far

from clear at this writing what its overall import will be. Among other
implications, it raises the questions of whether a board of directors

properly exercises its fiduciary duties when by its action or inaction its

institution participates or fails to participate in banking expansion. The

existence of the option also raises the question (at least until the expiration

of the "opt-out" period on July 1, 1987) whether the laws of other

states that do not include similar opt-out provisions will be deemed to

be "reciprocal" by the respective state regulators for the purpose of

regional banking expansion. ^^

The extent to which a board of directors exercises its duty of care

in determining whether or not to opt out of regional or regional and

state bank expansion activity remains to be tested in the Indiana courts.

Such litigation might arise where an otherwise desired or profitable

disposition of stock is precluded by a board's previous decision to opt

out of expansion activity or, conversely, where a board's decision to

participate in bank expansion produces unwanted or unprofitable take-

overs or costly efforts to resist unwanted takeover attempts. As courts

begin to address this issue, they should carefully scrutinize a director's

actions and apply the protection of the business judgment rule to the

director's decisions.

Although the business judgment rule has not yet been codified in

Indiana nor adopted by Indiana courts, statutory duties of due care and

loyalty do exist. ^"^ In addition, the Indiana courts have applied general

concepts of fiduciary duty to a director's decisions which affect the

general well being of the corporation.^^ Courts generally presume that

a director exercises due care when making decisions in good faith, ^^

regardless of whether the courts analyze the case under the business

judgment rule, concepts of fiduciary duty, or statutes similar to both.

''Id. § 9(b)-(c).

''Id. § 9(c).

"/<^. "This subsection does not apply to the establishment of a branch de novo

under IC 28-2-13 or IC 28-6-2.1, whichever is applicable."

"'See infra notes \46-ll and accompanying text.

"^IND. Code § 23-1-2-11 (Supp. 1985).
'''Yerke v. Batman, 176 Ind. App. 672, 376 N.E.2d 1211 (1978); Epperly v. E. &

P. Brake Bonding, Inc., 169 Ind. App. 224, 348 N.E.2d 75 (1976); Hartung v. Architects

Hartung/Odle/Burke, Inc., 157 Ind. App. 546, 301 N.E.2d 240 (1973).

''See, e.g., Panter v. Marshall Field & Co., 646 F.2d 271, 293 (7th Cir.), cert.
denied, 454 U.S. 1092 (1981).



1 24 INDIANA LA W REVIEW [Vol. 19: 1 15

The plaintiff has the burden of rebutting this presumption by establishing

that a director's decisions were guided by improper motives. ^^ Unfor-

tunately, given the unique nature of the "opt-out" provision, the Indiana

audience has little authority by which to predict the manner in which

this standard will be applied or the outcome of any such application.

However, some guidance can be found in case law dealing with corporate

control contests.

In control contest cases, the issue is often raised of whether a

director who advocates anti-takeover measures, which serve a function
very similar to the opt-out provisions, has acted in good faith. Although

a director's interest in retaining control nearly always operates in control

contests, most courts have retained the traditional presumption in favor

of the action of the director, unless the director's primary purpose in

adopting the anti-takeover measure was self-interest.^^ In fact, where an

anti-takeover attempt has proven adverse to the corporation's interest,

a director has had an affirmative duty to resist it.^^ Nevertheless, at

least one court has held that the mere presence of self-interest shifts

the burden to the director to show that his actions are fair and reasonable

to the bank or bank holding company. ^° If Indiana courts follow this

authority, they will presume that a director who voted to opt out of
regional or regional and state expansion exercised due care unless evidence

is presented that the director's primary motive for opting out was self-

interest. In applying this presumption, regardless of whether or not a

decision to opt out of expansion activity was made, the procedure by

which a board of directors made their decision and the extent to which
they documented the decision-making process, especially those consid-

erations in favor of the final determination, will become most critical.

To establish that self-interest was not its primary motivation, a board
will be expected to demonstrate its objectivity in reaching its decision.

This objectivity can be demonstrated in several ways. For example, the

delegation of the opt-out decision to a committee of outside directors

will heighten the presumption of objectivity in favor of the directors.^'

The employment of independent advisors such as accountants, investment

advisors, and attorneys to help evaluate the bank or bank holding

company's best interests will also benefit the board of directors. ^^^ Most

"See infra note 88.

"""See, e.g., Treco, Inc. v. Land of Lincoln Savings & Loan, 749 F.2d 374 (7th Cir.
1984); Panter v. Marshall Field & Co., 646 F.2d 271 (7th Cir.), cert denied, 454 U.S.
1092 (1981); Johnson v. Trueblood, 629 F.2d 287 (3rd Cir. 1980), cert, denied, 450 U.S.

999 (1981).

"'Treco, Inc. v. Land of Lincoln Savings & Loan, 749 F.2d at 378.
'Heit V. Baird, 567 F.2d 1157 (1st Cir. 1977).

"Panter v. Marshall Field & Co., 646 F.2d at 294.
"Id.



1986] BANKING 125

important, however, will be the extent to which the board has carefully

documented the facts and reasoning underlying the decision to opt out

or to opt in. The board should retain detailed minutes of the meetings

at which these decisions were considered.

A recent Delaware Supreme Court decision^^ provides an alarming
example of what can result from a board of directors' failure to adhere

to any form of procedure before or during its deliberations and to

document completely the actual decision-making process. In Smith v.

Van Gorkom, the board of directors of Trans Union Corporation, con-
sisting of five inside directors and five sophisticated outside directors,

approved a merger transaction that on its face presented very favorable
terms to Trans Union's shareholders.''' The board's decision to approve
the proposed cash-out merger occurred at a meeting where the majority

of the directors and counsel had had no notice of the matter to be

considered. Additionally, there was no written summary of the terms
of the merger or other documentation to support the adequacy of the

sale price-per-share which had been offered and accepted. The directors

conducted no discussion of the method by which the proposed sale price-

per-share had been obtained. Rather, they acted entirely in reliance upon

a summary presentation by Trans Union's chairman and chief executive
officer.

The Delaware Supreme Court held that Trans Union board had

failed to exercise its duty of care in that it lacked valuation information

adequate to reach an informed business decision with respect to the

fairness of the price offered. ^^ Although the fifty-five dollar price-per-

share agreed upon appeared to be a "good deal," and despite the lack

of evidence of self-deahng or self-interest, the simple fact remained that

the board failed to make an informed decision. Thus, the court stated
that the protection of the business judgment rule was not available. ^^

In its decision, the court indicated that boards of directors must act

carefully, methodically, deliberately, and cautiously to be certain that

their decision will later receive the protection of the business judgment

rule.

To summarize, it is likely that Indiana courts will presume that a
board of directors acted with due care when deciding whether to opt
out or participate in banking expansion in the absence of evidence of

self-dealing and acting primarily in the board's own self-interest. In
addition, if the recent Delaware case is evidence of any trend, an

uninformed decision, even in a favorable transaction, might result in

the refusal by a court to adhere to the business judgment rule. Although

•^'Smith V. Van Gorkom, 488 A.2d 858 (Del. 1985).

""'Id. at 869.

^'M at 893.

"''Id. at 872.



126 INDIANA LA W REVIEW [Vol . 19:115

a board of directors can do little about its decision now, it should keep

these principles in mind as it considers opportunities to acquire and to

be acquired by other banks and bank holding companies.

F. Regional Bank Holding Companies

Subject to the DFI's approval, the Act permits a regional bank

holding company to acquire one or more Indiana banks or Indiana bank

holding companies,'^' commencing January 1, 1986.'^^ This legislation de-

fines a regional bank holding company as a bank holding company,
other than an Indiana bank holding company, that

(1) has its principal place of business in Ohio, Kentucky,

Illinois or Michigan;

(2) has more than eighty percent (80%) of the total deposits

of its bank subsidiaries held by regional banks located within

the region (which includes Indiana, Ohio, Kentucky, Illinois or

Michigan); and

(3) is not controlled by a bank holding company other than
a regional bank holding company. '^'^

This last requirement is designed to prevent the ultimate control of

Indiana banks by bank holding companies located outside the five state

region. The acquisition of an Indiana bank'^" or Indiana bank holding

company'"' by a regional bank holding company is subject to the "Per-
centage-of-Deposits Limitation"'"^ and the "Five-Year Existence and

Continuous Operation Limitation."'"^ With the exception of the Per-

centage-Of-Deposits Limitation, the above limitations applicable to re-

gional bank holding companies do not apply to the merger of a troubled

bank or savings bank with a qualified banking institution.'"^

If a regional bank holding company that has obtained control of
Indiana institutions ceases to be a regional bank holding company as
a result of acquiring a bank in another state that is not contiguous to

Indiana, it will be required within two years to divest itself of all Indiana

banks and Indiana bank holding companies, subject to certain narrow

and technical exceptions.'"^

"iND. Code § 28-2-15-17 (Supp. 1985).
""Pub. L. No. 265, 1985 Ind. Acts 38, § 10.

^'IND. Code § 28-2-15-16 (Supp. 1985).
""7</. § 28-2-15-10.

""/f/. § 28-2-15-11.

"•'/</. § 28-2-1 5- 18(a)-(b).

""M. § 28-2- 15- 18(c).

'"'Id. § 28-2-1 5-1 8(d).

""Id. § 28-2-15-22(b).



1986] BANKING 127

The Act also contains a reciprocity provision that must be met before

a regional bank holding company is entitled to acquire an Indiana bank

or an Indiana bank holding company. "^'^' This provision states that the

laws of the state in which the regional bank holding company has its

principal place of business must permit Indiana bank holding companies

to acquire banks and bank holding companies in that state. '^^^ Addi-

tionally, the laws of the state in which the regional bank holding company
has its principal place of business must permit the regional bank holding

company to be acquired by the Indiana bank holding company or bank

sought to be acquired. '^^

Before acquiring an Indiana bank or bank holding company, a

regional bank holding company must file an application for approval
with the DFI.'^'^ The DFI will conduct the same type of investigation

that it would conduct with an Indiana multi-bank holding company

application."" In addition, the applicant can request a "fairness hearing"'"

on the terms and conditions of the proposed transaction, thus raising

the possibility of an exemption from securities laws registration require-

ments."^

Interestingly, the Act contains a somewhat unusual severabiHty clause

that would automatically eliminate the regional holding company pro-
visions of the Act in the event a court authorizes the acquisition of an

Indiana institution by an out-of-state, nonregional bank or bank holding

company."^ The theory of this provision appears to be that, without

such a clause, the reciprocity limitation could be declared unconstitu-

tional, thus exposing Indiana banks to acquisitions by bank holding

companies from any state in the nation. This severability clause prevents

the Act from becoming a multi-bank holding company bill without
reciprocity. Given the recent Supreme Court decision in Northeast Ban-

corp V. Board of Governors,
^^"^ however, the likelihood of Indiana's

needing to rely on this severability provision to protect portions of the

Act is small. The Court in Northeast Bancorp upheld regional reciprocity

legislation against constitutional attack."^

'"^/fif. § 28-2- 15- 18(e).

'"7<^. § 28-2-15-18(e)(l).

""-M. § 28-2-15-18(e)(2).

'"^/c^. § 28-2-15-19.

"'7<i. See also supra note 72.

'"IND. Code § 28-2-15-20 (Supp. 1985).
"-M The applicant could be exempted from Indiana registration requirements under

Ind. Code § 23-2-1-3 (1982) and from federal registration requirements under the Securities

Act of 1933, § 77(0, 15 U.S.C. § 77 (1982).

'"Ind. Code § 28-2-15-26.
"M05 S. Ct. 2545 (1985).



i:S INDIANA LAW REVIEW [Vol. 19:115

II. The Federal Response to Regional Banking

Until recently, states have been reluctant to open their doors to out-

of-state banking organizations. Congress has acquiesced to the states'

wishes by passing the Douglas Amendment,"^ which ties the geographic

expansion of national banks and bank holding companies to that ex-

pansion permitted state-chartered banks and bank holding companies

under state law. The Douglas Amendment to the Bank Holding Company
Act of 1956 prohibits bank holding companies from acquiring out-of-

state subsidiary banks unless the law of the state where the subsidiary

bank is located expressly allows the acquisition."^

In the past few years, however, many states have adopted legislation

allowing reciprocal regional expansion, thereby creating networks of de

facto banking regions. Massachusetts,"^ Connecticut, "'^ Rhode Island'^"

and Maine,''' for example, comprise part of a New England banking
region, and North CaroHna,'^^ South Carolina, '^^ Georgia, '^^^ and Florida'^^

comprise part of a southern region. These statutes allow banking or-

ganizations from specified states to acquire in-state banking organizations,

provided that the target's state law allows similar acquisition privileges

to banking organizations in the acquirer's state.

A. The Northeast Bancorp Case

Prior to June 10, 1985, much speculation existed as to the consti-
tutionality of regional banking statutes and as to whether the United

States Supreme Court or the United States Congress would be the first

to addresss the regional reciprocity issue. On June 10, 1985, the Supreme
Court upheld the constitutionality of regional reciprocity legislation in

Northeast Bancorp v. Board of Governors. ^^^ In that case, three bank
holding companies, New England Corporation, Hartford National Cor-
poration, and Bank of Boston Corporation, had received approval from
the Board of Governors of the Federal Reserve System to acquire out-

"12 U.S.C. § 1842(d) (1982). Congress has also acquiesced in the states' wishes in

the McFadden Act, 12 U.S.C. § 36(c) (1982), which limits the branching rights of national

banks to those permitted state-chartered banks in the state where the national bank has

its principal office.

"12 U.S.C. § 1842(d) (1982).
""Mass. Gen. Laws Ann. ch. 167A, § 2 (West 1984).
""Conn. Gen. Stat. Ann. §§ 36-552 to -563 (West Supp. 1985).

'-"R.I. Gen. Laws § 19-30-1 (Supp. 1984).
'2'Me. Rev. Stat. Ann. tit. 9B, §§ 1011-1019 (1980 & Supp. 1985).
'"N.C. Gen. Stat. §§ 53-209 to -218 (Supp. 1985).

'^'S.C. Code Ann. §§ 34-24-10 to -100 (Supp. 1984).
'-^Ga. Code §§ 7-1-620 to -625 (Supp. 1985).
'^^Fla. Stat. § 658.295 (1984).

'"105 S. Ct. 2545 (1985). The decision was unanimous (8-0). Justice Powell did not
participate.



1986] BANKING 129

of-state banking institutions pursuant to the regional reciprocity statutes

of Massachusetts and Connecticut. Northeast Bancorp, Inc., Union Trust

Company, and Citicorp opposed those acquisitions and appealed the

Board's ruling, arguing that the Douglas Amendment did not authorize
state regional reciprocity legislation and that such legislation violated the

Commerce Clause, '^^ the Compact Clause, '^^ and the Equal Protection
Clause'^*^ of the United States Constitution.

Justice Rehnquist, writing for the Court, first engaged in an extensive

analysis of the legislative history of the Douglas Amendment. He con-
cluded that the Massachusetts and Connecticut statutes, which allow

acquisition of in-state banking organizations only by bank holding com-

panies from states in the New England region, serve well the policy
underlying the Douglas Amendment of preserving local control over
banking. '^^

Secondly, Justice Rehnquist addressed the petitioners' argument that

regional banking statutes burden the flow of interstate commerce between

regional and nonregional states. "There can be little dispute," he wrote,

"that the dormant Commerce Clause would prohibit a group of States
from establishing a system of regional banking by excluding bank holding

companies from outside the region if Congress had remained completely

silent on the subject.'"^' Congress had not remained silent, however, be-
cause it had enacted the Douglas Amendment. Justice Rehnquist thereby
impHed that, by tying interstate expansion of bank holding companies to
state law, Congress specifically authorized states to limit the flow of bank-

ing commerce across their borders and, therefore, made regional banking
statutes invulnerable to Commerce Clause attacks.

Justice Rehnquist next addressed the petitioners' challenge that the

Massachusetts and Connecticut statutes constitute a compact in violation

of the Compact Clause. Even though legislators in Massachusetts and
Connecticut collaborated in promoting the acts at issue and the two acts

resemble each other by imposing reciprocity and a regional limitation.

Justice Rehnquist found the "classic indicia" of a compact to be absent.'^'

He noted that the states did not form a body to establish or regulate
regional banking, that they did not condition their actions upon that

of the other states nor restrict the other states' ability to modify or

repeal their laws, and that they did not make the regional limitation a
requirement of reciprocity.'" A statute that contained such "classic

'-^U.S. Const, art. I, § 8, cl. 3.

'-'Id. art. I, § 10, cl. 3.

'=Vg^. amend. XIV, § 1.
""105 S. Ct. at 2553.

"7c/. at 2553-54.

'"M at 2554.



130 INDIANA LAW REVIEW [Vol. 19:115

indicia," in other words, would satisfy the definition of a compact, but

the Massachusetts and Connecticut statutes did not do so. Even if the

two statutes had created a compact, however, the Court found that such

a compact is not forbidden by the Compact Clause.'^'* Only those agree-
ments "directed to the formation of any combination tending to the

increase of poHtical power in the States, which may encroach upon or
interfere with the just supremacy of the United States" violate the

Compact Clause.'^' Such an effect, Justice Rehnquist wrote, does not
exist in regional banking, particularly in light of the Douglas Amend-
ment. '^'^

Finally, the Court addressed the petitioners' argument that regional

banking statutes violate the Equal Protection Clause. Applying the ra-

tional basis test, the Court admitted that such statutes discriminate

between regional and nonregional states but found a rational basis for

the discrimination.'^^ Justice Rehnquist emphasized the fact that '*our

country traditionally has favored widely dispersed control of banking," '^^

as indicated by the typically local ownership of commercial banks.

Because regional statutes preserve this tradition by allowing growth while

retaining relatively local control of banking. Justice Rehnquist concluded

that a rational basis exists for distinguishing between regional and nonre-

gional states. '^'^ In her concurrence. Justice O'Connor, without granting

tradition the same importance, agreed with Justice Rehnquist that the

need exists for close ties between banks and communities. ''*° In addition,

she pointed out the "longstanding doctrine" which provides that the

"Equal Protection Clause permits economic regulation that distinguishes

between groups that are legitimately different—as local institutions so
often are—in ways relevant to the proper goals of the State. "'^' In other
words, regional banks better serve state needs than do nonregional banks.

B. The House Banking Bill

Just two days after the Supreme Court's decision in Northeast

Bancorp, the House Banking Committee approved a bill"*^ providing a
trigger for nationwide banking. The bill would force states with regional
banking statutes to allow acquisition by bank or thrift holding companies

from nonregional states on July 1, 1990, or two years after the effective

'''Id.

'''Id. (quoting Virginia v. Tennessee, 148 U.S. 503 (1893)).
'"105 S. Ct. at 2554.

"7c/. at 2555-56.

"7c^. at 2555.

""M at 2556.
'"7c/. (O'Connor, J., concurring).

'•"M. at 2557.

'^^H.R. 2707, 99th Cong., 1st Sess. (1985).



1986] BANKING 131

date of the regional statute, whichever is later. ''*^ States could retain

their reciprocity requirements under the bill, however, and could even

escape the national trigger altogether by repealing their regional statutes,

provided that no regional acquisition had occurred pursuant to them."^

The imminent enactment of such a national trigger appears unlikely,

but an eventual response by Congress to regional banking seems inev-

itable.

Indiana regional banking, then, no longer runs the risk of being

held unconstitutional, but it nevertheless could be profoundly affected

by Congress' future response to Northeast Bancorp. If Congress adopts

the bill as approved by the House Banking Committee, Indiana would

be forced to allow acquisitions by nonregional holding companies, except

for the severability clause of the Act.'^^ That clause invalidates the

provision allowing regional bank holding companies to acquire Indiana

banks and bank holding companies if an Indiana or federal court con-

strues the statute to allow the acquisition of Indiana banks and bank

holding companies by nonregional bank holding companies. Thus, In-

diana's regional banking provision would be effectively repealed, and

as long as no regional acquisition had occurred pursuant to Indiana's

law, Indiana would effectively escape the national trigger.

III. Reciprocity Problems Posed by the Regional Bank Holding
Company Provision of the Indiana Act

The regional bank holding company provision of the Act permits

a regional bank holding company, defined as a company with its principal

place of business in Ohio, Kentucky, Illinois, or Michigan, to acquire

one or more Indiana banks or bank holding companies if various re-

quirements are met."^^ Among those requirements is a mandate that two
reciprocity tests be satisfied."*' First, the law of the acquirer's state

must permit Indiana bank holding companies to acquire banks and bank

holding companies located in the acquirer's state. "*^ Second, the acquirer's

state law must allow the target, if it were a bank holding company

attempting to do so, to acquire the acquirer."*^ In addition, the Indiana

Act requires the DPI to subject the acquisition by a regional holding

company to any requirements that would apply to the acquisition of a

bank holding company in the acquirer's state. '^°

'''Id.

text.

-•iND. Code § 28-2-15-26 (Supp. 1985). See supra notes 113-15 and accompanying

^'"IND. Code § 28-2-15-16 (Supp. 1985).
''Id. § 28-2- 15- 18(e).

'''Id. § 28-2- 15- 18(e)(1).

">Id. § 28-2-1 5-1 8(e)(2).

'^"M § 28-2-15-19(0.



132 INDIANA LAW REVIEW [Vol. 19:115

In order to determine whether reciprocity exists between two states,

an examination must be made of the reciprocity tests provided by both
statutes. If one of the states fails the other's test, then no reciprocity

exists. Because this subject is so new and unexplored, predicting how
banking authorities and courts will interpret and apply the reciprocity

provisions is nearly impossible. Those bodies should remain cognizant

in making their decision that the legislatures of Indiana, Ohio, and

Kentucky in enacting their regional banking provisions beheved that they

were introducing regional banking to their states and desired to do so.

To defeat that desire should require a clear failure of reciprocity.
Of the five states that the Indiana Act specifies as belonging to

Indiana's region,'" only Ohio'^^ and Kentucky'" have enacted regional

banking statutes. Michigan will probably enact a regional banking statute

in the future. The future of regional banking in Illinois is less certain.

The following discussion reviews the Ohio and Kentucky regional bank-

ing provisions and discusses the likelihood of finding reciprocity between

Indiana and the above states. '^'*

A. Reciprocity with Ohio

The Indiana Act, if myopically applied, would not pass the Ohio

reciprocity test. If reasonably applied with due regard for legislative

intent, however, the Indiana Act should pass the Ohio reciprocity test.

Such an application would ensure a ruling that the Ohio Act passes the

Indiana reciprocity test.

The Ohio law'^^ provides that a bank holding company with its
principal place of business in states contiguous to Ohio as well as in

Delaware, the District of Columbia, Illinois, Maryland, Missouri, New
Jersey, Tennessee, Virginia, and Wisconsin may acquire a bank or bank
holding company in Ohio, provided that the Superintendent of Banks
"in his discretion" determines that the law of the acquirer's home state
would permit an Ohio bank or bank holding company to acquire a
bank or bank holding company in the acquirer's state on "terms that,
on the whole, are substantially no more restrictive than those established
under [the Ohio Act]."'^^ After three years, the Ohio Act extends to
all states in the nation that can satisfy this reciprocity test.'"

''7<y. § 28-2-15-14.

'"House Bill No. 102, 1985 Ohio Laws 1 (to be codified as amended at Ohio Rev.
Code Ann. §§ 1101.05-051).

'^^Ky. Rev. Stat. §§ 287.900-.990 (Supp. 1985).

"'Prior to the publication of this Article, both Michigan and Illinois passed bills

providing for regional banking with reciprocity provisions.

'"House Bill No. 102, 1985 Ohio Laws 1.
'"-Id. at 2, § 1 (to be codified as amended at Ohio Rev. Code Ann. § 1101.05(B)).



1986] BANKING 133

Unlike the Indiana Act, the Ohio Act also allows regional banks,

as opposed to bank holding companies, to establish operations in Ohio

by entry de novo as well as by acquisition so long as the target's state

offers a reciprocal method of entry. '^^^ In other words, the Ohio Act

would allow an Indiana bank holding company to establish as well as

acquire a bank subsidiary in Ohio if the Indiana Act allowed the same

method of entry for Ohio bank holding companies. Indiana does not,

however, allow entry de novo, only entry by acquisition.'^*^

The Indiana Act also places other limitations on regional acquisitions

not found in the Ohio Act. The Indiana Act places the following three

limitations on acquisitions by regional bank holding companies of Indiana

banks and bank holding companies. First, immediately following the

acquisition, the regional bank holding company cannot control more

than ten percent of the total deposits in Indiana banks until July 1,

1986; eleven percent from July 1, 1986 through June 30, 1987; and

twelve percent after June 30, 1987.'^° Second, either the Indiana target

or its bank subsidiaries must have existed for five years. '^' Third, more

than twenty percent of the deposits held by the acquirer's bank subidiaries

cannot be located outside of the region both at the time of the acquisition

and thereafter. '^^ Ohio's sole restriction is that, immediately after the

acquisition, the acquirer of an Ohio bank or bank holding company
cannot control over twenty percent of the total deposits held by all

banks and thrifts in Ohio.'" Thus, an Indiana bank holding company
could acquire a percentage of deposits in Ohio (twenty percent of deposits

in both banks and thrifts) that is more than twice the percentage of

deposits that an Ohio bank holding company could acquire in Indiana
(ten percent to twelve percent of deposits in just banks). Moreover, the

Ohio law does not require that the target have been in existence for

five years, nor does it require that a bank or bank holding company
with its principal place of business in the region maintain any percentage

of its deposits in the region. The latter "anti-leap-frogging" provision

under the Indiana Act could significantly restrict the expansion of out-

of-state bank holding companies into Indiana's region. '^"^

''"Id.

''''See supra notes 97-115 and accompanying text.

'^'IND. Code § 28-2-15-18(b).
'^'Id. § 28-2-15-18(c). This section contains special provisions for determining whether

the five years have elapsed for banks which are products of consolidation and for phantom
banks created solely to facilitate acquisitions.

'''Id. § 28-2-15-11.

'"House Bill No. 102 1985 Ohio Laws at 4, § 1 (to be codified as amended at Ohio
Rev. Code Ann. § 1101.05(E)).

"^By requiring a bank with its principal place of business in Indiana's five state

region to maintain more than eighty percent of its total deposits of its bank subsidiaries



134 INDIANA LAW REVIEW [Vol. 19:115

In Spite of the above differences, the Ohio Superintendent of Banks

should find that the Indiana Act and the Ohio Act are reciprocal in

that Indiana's provisions "are substantially no more restrictive than those

established under [the Ohio Act]."'^' Both acts allow regional bank

holding companies to acquire in-state institutions with few limitations.

The limitations that do exist under the two Acts are similar, though

not identical, both restricting the percentage of deposits held by an out-

of-state institution.

The similarity of the Ohio and Indiana Acts is further evident when

contrasted with the Illinois statute. The Illinois statute'^^ provides that

out-of-state bank holding companies may acquire Illinois institutions only
if they are failing. As such, it is not expansive enough to promote

regional banking or to afford many out-of-state bank holding companies
significant opportunities to expand into Illinois.

The Indiana and Ohio Acts, however, do promote regional banking

and do afford significant opportunities for expansion into their respective

states. The regulatory agencies and the courts that will decide whether

the Indiana and Ohio Acts are reciprocal, therefore, should honor leg-

islative intent and refrain from interfering with regional banking ex-

pansion. If the Ohio Superintendent of Banks refuses to approve
acquisitions of Ohio banks and bank holding companies by Indiana

bank holding companies, and the courts affirm that decision on appeal

by holding that Indiana's Act is substantially more restrictive than Ohio's
Act, then the Ohio Act will fail the first requirement of Indiana's

reciprocity test. That test states that the law of the acquirer's state must

permit Indiana bank holding companies to acquire banks and bank

holding companies located in the acquirer's state. '^^ Absent such a ruling,

however, the Ohio Act would pass the Indiana reciprocity test.

Assuming that the Indiana Act is not ruled unreciprocal to the Ohio

Act, the Ohio Act satisfies the first requirement of the Indiana reciprocity

test because the Ohio Act specifically provides that Indiana bank holding

companies may acquire Ohio banks and bank holding companies. '^^

Additionally, the second requirement of the Indiana reciprocity test,

which requires that the particular Indiana target at issue be permitted

to acquire the particular Ohio bank holding company at issue, would
probably be met. In practical terms, the Ohio requirement that out-of-

state bank holding companies possess no more than twenty percent of
the total deposits in Ohio banks and thrifts would allow virtually all

within the region, Indiana's Act effectively precludes an out of state bank from "leap-

frogging" into Indiana's region.

"'See supra note 156 and accompanying text.

"*lLL. Ann. Stat. ch. 17, § 2510 (Smith-Hurd Supp. 1984).

'"^IND. Code § 28-2-15-18(e) (Supp. 1985).
"^See supra note 156 and accompanying text.



1986] BANKING 135

acquisitions of Ohio banks and bank holding companies by Indiana

banks and bank holding companies. In summary, in light of the legislative

intent of both Indiana and Ohio to promote regional banking expansion,

reviewing bodies should determine that the Acts are reciprocal.

B. Reciprocity with Kentucky

The Kentucky reciprocity test is essentially the same as the Ohio

reciprocity test. The Kentucky Act'^^ provides that a bank holding com-

pany with its principal place of business in a contiguous state may
acquire control over a Kentucky bank or bank holding company, provided

that the acquirer's state law allows the acquisition of an in-state bank

or bank holding company by a Kentucky bank holding company "under

conditions substantially no more restrictive" than those imposed under

the Kentucky Act.'^^ Like the Ohio Act, the Kentucky Act extends this

provision to nonregional states after two years. '^'

The Kentucky Act contains three basic limitations. First, a bank

holding company may not acquire control over a Kentucky bank or
bank holding company if, immediately thereafter, it would control banks
holding over fifteen percent of the deposits in all Kentucky banks. '^^

Second, for five years after July 13, 1984, a bank holding company
may not acquire control over a Kentucky bank or bank holding company
if, immediately thereafter, it would control more than three banks in

the state during any twelve-month period. '^^ Third, a bank holding

company may not acquire direct or indirect control of a Kentucky bank
chartered after July 13, 1984, unless the target bank has been in existence

for five years.
'^"^

Although a finding of reciprocity between Indiana and Kentucky i^

more likely than between Indiana and Ohio, it is not certain. The

Kentucky Act allows Indiana bank holding companies to acquire a larger

percentage of deposits in Kentucky (fifteen percent of all banks deposits)

than the Indiana Act allows Kentucky bank holding companies to acquire

in Indiana (ten percent to twelve percent of all bank deposits). The
difference between these percentages, however, is arguably offset by the

Kentucky Act's limitation of multi-bank holding companies to control

of only three Kentucky banks for the first five years that the Act is

effective. '^^ Indiana lacks a comparable provision. Indiana and Kentucky

'*'Ky. Rev. Stat. §§ 287.900-.990 (Supp. 1984).

'™M § 287.900(6)(a).
'''Id. § 287.990(6)(b).

'''Id. § 287.990(3).

"'Id. § 287.990(4).

''*Id. § 287.990(2).

'^See supra note 173 and accompanying text.

''^See supra notes 103, 174 and accompanying text.



136 INDIANA LAW REVIEW [Vol. 19:115

also have similar provisions requiring target banks to be in existence

five years prior to their acquisition by out-of-state holding companies. '^^

Finally, the Indiana Act provides that no more than twenty percent of

the deposits held by the acquirer's subsidiaries may even be located
outside of the region. '^^ This provision may so restrict expansion by
Kentucky bank holding companies that it could cause the Indiana Act

to fail the Kentucky reciprocity test.

If the Kentucky commissioner determines that the Indiana Act is

not reciprocal with the Kentucky Act and that Indiana bank holding

companies cannot acquire Kentucky banks and bank holding companies,

then the Kentucky law will fail the first requirement of the Indiana

reciprocity test. But for that fact, the Kentucky law would pass the

Indiana test. The Kentucky Act satisfies the first requirement of the

Indiana test by specifying that bank holding companies with their prin-

cipal places of business in states contiguous to Kentucky may acquire
Kentucky banks and bank holding companies. Additionally, the second

requirement of the Indiana reciprocity test would probably be met, as

in Ohio, in nearly all cases. It is highly unlikely that an acquisition of

a Kentucky bank or bank holding company by an Indiana bank would

cause the latter to hold over fifteen percent of the deposits in all Kentucky

banks. Thus, the Indiana and Kentucky Acts should be deemed to be

reciprocal.

It is not altogether clear whether Senate Enrolled Act No. 1 has

brought interstate banking to Indiana. The reciprocity provisions of the

Indiana, Ohio, and Kentucky Acts remain to be interpreted, initially by

state banking officials and then by the courts. Those bodies should

recognize that the Indiana, Ohio, and Kentucky Acts are reciprocal in

that they are all expansive enough to promote regional banking and to

afford significant opportunities for expansion within their defined regions,

subject to similar, though not identical, deposit restrictions.

IV. Conclusion

Senate Enrolled Act No. 1 has truly ushered in a new era for banking
expansion in Indiana by providing for bankers' banks, intra-county

branching, cross-county branching, multi-bank holding companies, and

regional bank holding companies. The Act has also raised new issues
in Indiana law by including an opt-out provision, which permitted the

board of directors of an Indiana bank or bank holding company to
exempt its institution from various provisions of the Act. This provision

raises the issue of whether a director properly exercises his fiduciary

duties by exempting or failing to exempt his institution from various

bank expansion opportunities. Various other issues, such as whether

'"See supra note 99 and accompanying text.



1986] BANKING 137

Indiana's Act will be deemed to be reciprocal with the Ohio and Kentucky

Acts for the purpose of regional banking expansion, will continue to

engage the attention of banks, state regulatory agencies, and the courts.

Finally, the fate of Senate Enrolled Act No. 1 and other acts like

it has been and will continue to be affected by the federal response to

regional banking. In Northeast Bancorp v. Board of Governors, ""^^ the

Supreme Court upheld the constitutionality of regional reciprocity leg-

islation. A House banking committee has also responded to banking
expansion by approving a bill that would provide a trigger for nationwide

banking. This bill is not Hkely to win congressional approval, but it is

probably a harbinger of future action which will surely affect the im-

plementation of Indiana's Senate Enrolled Act No. 1.

'^'^lOS S. Ct. 2545 (1985).