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September 14, 1998

Mr. Craig M. Kline
Watson, Farley & Williams
380 Madison Avenue
New York, New York 10017

Dear Mr. Kline:

This is in response to your letter of September 10, 1998 in which you request that Board staff provide you with an interpretation of Regulation X.

In your letter you state that a foreign corporation (Company A) intends to purchase a substantial portion of the shares of a US corporation (Company B). In order to purchase Company B, Company A will borrow funds from a foreign, i.e., non-US, lender. Company A will effect the purchase of the stock of Company B through one of its subsidiaries. The subsidiary is a US corporation, Company C, that has been newly organized solely to purchase and hold shares of Company B and that initially will have only nominal capital and assets. Company A will contribute the funds it borrowed from the foreign lender to Company C so that it can purchase the stock of Company B. (As an alternative, Company A may effect its purchase of the stock of Company B by purchasing a US limited liability company whose assets consist entirely of the stock of Company B.) In either case, the stock of Company B, which stock is traded on the New York Stock Exchange, and therefore constitutes margin stock under either Regulation T or U, will be pledged to the foreign lender as collateral for the loan to Company A.

You have asked whether Company A would be subject to Regulation X. Regulation X applies to persons who obtain credit from outside the US if they are: (1) US persons; (2) foreign persons who are controlled by US persons; or (3) foreign persons acting on behalf of, or in conjunction with, US persons. Since, on the basis of the facts you present, Company A is not a US person, or a foreign person controlled by a US person, the only way Company A could be subject to Regulation X is if it were acting on behalf of, or in conjunction with, US persons (in this case, with Company C or the US limited liability company). In 1980 Board staff issued an interpretation of Regulation X which held that a foreign corporation, that was acting through one of its US subsidiaries, which was a "shell corporation," would not cause the foreign corporation to become subject to Regulation X. Board staff stated that the foreign corporation's use of the US subsidiary was "a mere vehicle of convenience, and, as such would not make the foreign corporation a borrower ‘acting on behalf of or in conjunction with' a US person. See FRRS 5-982.1 (June 24, 1980). Because Company A is also employing the use of Company C, or the limited liability company, as "a mere vehicle of convenience" for financing its purchase of the stock of Company B, staff believes that it would fall under the terms of the previous staff opinion and, therefore, Company A would not be subject to Regulation X.

I hope this information is helpful to you.

Yours sincerely,

(signed) Oliver Ireland

Oliver I. Ireland

Associate General Counsel

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