THE UNIVERSITY OF ILLINOIS LIBRARY 332.14 Di45w cop. 3 E REMOTE STORAS ° i "7 < : 7 a i abe , a aaa ary i « 4 ~ ay i \ 1 ! i" ) ‘ 4 ‘ ‘ xy ; t J ? * bee Ts a THE WORK OF CORPORATE TRUST DEPARTMENTS BY R. G. PAGE VICE PRESIDENT, BANKERS TRUST COMPANY AND PAYSON G. GATES ASSISTANT SECRETARY, BANKERS TRUST COMPANY New YorK PRENTICE-HALL, Inc. 1926 PRINTED IN ’ PREFACE The tendency of modern financial institutions is toward specialization. ‘To-day, the typical trust company or bank in a financial center is a complex organization composed of a number of departmental groups, each busy in its own sphere of activities. The intensive study by each department of its special problems has featured the development of banking institutions in recent years. ‘This concentration on technical requirements, while in no wise lessening the desirability of a broad knowledge of banking, does emphasize the need and the value of trained specialists. The reading matter on the subject of the fiduciary services of trust companies and banks on behalf of corporations, and in relation to corporate securities, is somewhat limited. Sev- eral excellent studies of corporate trusts and certain special phases of corporate agency functions have been made by lawyers of high standing. In the standard books on banking practice some space has been allotted to the trust department. Valuable collateral reading is to be found, also, in the various textbooks on investments and corporation finance. But there is little material in printed form from which those engaged in this line of work can learn the viewpoint and observe the operating methods of others in the same field. The purpose of this book is to discuss the various services rendered by corporate trust and corporate agency depart- ments, and to describe the methods of a large financial insti- tution in this connection. In treating these subjects, emphasis has been laid on how things move, but the reasons why have not been overlooked. A study of this nature might be carried to much greater length. For instance, the legal questions which arise could be discussed authoritatively only by counsel, and such discussion would result in substantial expansion of the book. In respect of legal matters the authors have been con- tent, in most instances, to give quotations from the writings of lawyers of recognized standing and to make references and citations which will assist the reader to an understanding of [ iii | 'S: Aas 3 iL ad IV 7 PREFACE the,point involved. The aim has been to include such material as will be useful to trust officers and others charged with carry- ing on the corporate fiduciary activities of their institutions. In reaching a decision as to the relative value of the various subjects, the authors have been guided by their own practical experience and by the valued suggestions of their banking asso- ciates and their friends in the legal profession. While written chiefly for those engaged in this special field, it is felt that enough of a background has been given to make the book helpful to students specializing in banking and kindred subjects. With the kind permission of ‘The Bell Telephone Company of Pennsylvania, one of its mortgages has been used as a basis for discussion in the chapters on the form of corporate mortgages. This mortgage, with names and dates changed, but substantially as executed, has been reprinted in the appendix. Likewise, other documents which appear through- out the book conform, except for minor alterations, to those used in actual practice. ‘The records illustrated are those of the Bankers Trust Company, New York. The authors are appreciative of the assistance derived from the various sources referred to in the text. Grateful acknowl- edgment is due to the author’s associates at the Bankers Trust Company who cooperated in reading and revising the text of many chapters, and to Mr. Roberts Walker and Mr. Jesse E. Waid, of Messrs. White & Case, for much valuable assistance in both the practical and the legal aspects of the subject. CONTENTS CHAPTER PAGE I—CorRPORATE FIDUCIARIES; ORIGIN, GROWTH, AND ORGANIZATION... l Early history; Development; Federal Reserve Act (with respect to fiduciary powers); Supreme Court decision; Departmental organization of trust company; Fiduciary departments; Custody; Personal trust; Corporate trust; Cor- porate agency departments; Reorganization; Stock transfer; Stock registration; Bond registration; Coupon paying; Joint facilities; General. IJ—CorporaTE Trust SERVIcEs; TRusts BASED ON THE CORPORATE MORTGAGE... i Be Definition of mortgage; Types of mortgages; Indentures other than mortgages; Collateral trust bonds; Equipment obligations; Unsecured obligations; Variations in titles; Individual trustees for corporate mortgages; Qualifications of trustees; Trustee’s duties. III—AccCEPTANCE OF CORPORATE TRUSTS ... a2 Securing business; Preliminary negotiations; Investigation of proposed trusteeships; Qualification in states; Individual and corporate co-trustees; Restrictive state statutes; Con- flicting liens; Examination of form of mortgage; Execution of mortgage; Supporting papers; Examination of mortgage by the trustee. IV—CorPORATE TRusT RECORDS . . : 34 Corporate trust records; Security transactions; Vault con- trol; Cash records; Miscellaneous records. V—TuHE CoRPORATE MORTGAGE; PREAMBLE, GRANTING CLAUSE, AND FoRMOF Bonp . “/5 The typical mortgage; Parties and preamble; Form of bond; Granting clause; Article I; Authorized issues; Series of bonds; Adjustability; Execution of bonds; Trustee’s cer- tificate; Registration, transfer, and exchange; Exchange of denominations; Charges for registration and exchange; * Who is deemed owner; Duplicate bonds; Certificates 0% indebtedness; Temporary bonds and interim certificates; Exchange of temporary for definitive bonds; Issuance before recording. ViI—Issuz or Bonps UNDER CORPORATE MortT- (UN ATIIN: S Lad gah ety heer RN oO UO Heme a ube ena AG Trustee’s responsibility in certifying; Three principal pur- poses of bond issue; The initial issue; Reimbursement for capital expenditures; Acquisition of property; Acquisition wad Vi CONTENTS CHAPTER PAGE VI—Issue of Bonds Under Corporate Mortgages (continued ) Si a Able ‘oe of securities; Pending construction; Rehan ae for permanent additions and betterments; General restrictions; No default; Percentage of cost; Additions and betterments : New property; Earnings; Evidence of compliance with re- strictions; Resolutions; Order; Certificates; Opinion of counsel; Earnings statement; Balance sheet; Issuance of bonds against cash; Authority from public body; Receipts and counsel’s approval; Scope of the trustee’s examination. VIJ—CovENANTS OF THE MORTGAGOR ..) a) ne Reasons for covenants; Trustee’s interest in covenants; “Formal” covenants; Other covenants; As to the underlying bonds; Taxes assessed against bondholders; Insurance; Net quick assets; Covenants restricting dividends or bond issues; Annual financial statements; Equipment; Sales; Appraisal; Maintenance and renewal; Covenants to be calendared; Mortgagor’s breach of covenants. VIII—SINKING FUNDS AND REDEMPTION OF Bonps’ 114 The sinking fund; Sinking funds vary with business of mortgagor; Bases for sinking funds; Operation of sinking funds; Acquisition of bonds; Measure of payment; Applica- tion of fund; Inviting tenders; Acceptance or rejection of tenders; Offer of bonds by mortgagor; Drawing by lot for redemption; Custody of acquired bonds; Accrued interest and expenses; Surrender of bonds in lieu of cash; Mortgages authorizing bonds in series; Capital expenditure alternative; Discussion of “Telephone” mortgage provisions; Large bond drawing; Rights of bondholder and company; Redemption notice; Affidavits of publication; Interest loss through failure to present bonds. IX—PLEDGED SECURITIES; RELEASES; SUPPLE- MENTALUVLORTGAGES Wonca ee Control of pledged securities; Possession of pledge securi- ties; Registration; Nominees of trustee; Directors’ shares; Pledge subject to other mortgages; Dividends and interest; Payment on account of principal; Voting pledged stock; Proxy limitations; Subsidiary or controlled companies; Pro- tection of pledged stock; Reorganization or merger; Release of portions of mortgaged property; Purpose of release pro- visions; Restrictions imposed; Conditions of release; Form of mortgagor’s application; Substitution of property on “utility” basis; Deferred payments; Eminent domain; Aban- donment of mortgaged property; Underlying lien; Applica- tion of proceeds; Release of property during receivership; Supplemental indentures. X—-DEFAULTS: AND REMEDIES (0°...) (G2 “Events of default”; Procedure of trustee; Sale under fore- closure; Junior security-holders; Activities during fore- closure proceedings; Computation of amount due; Final decree and order; Final distribution; Disposition of en- dorsed bonds; General. CONTENTS vil CHAPTER PAGE XI—TuHeE Trustee Ciauses; MIscELLANEOUS PROVISIONS MERE anatase OC Now ioe) 5 Gea ccna NEA Bi i Acceptance of trust; Examining the protective clauses; Liability of trustee; Purpose of immunity clauses; Eco- nomics of situation; Customary provisions; Reliance upon certificate ; Interest on cash balances; Resignation or removal of trustee; Individual trustee; Miscellaneous provisions; Merger and consolidation; Evidence of ownership of bonds; Defeasance; Satisfaction guide; Matured coupons; Period- cal cremation of securities; Definitions; Supervision by bankers; Immunity of stockholders, etc.; ‘Testimonium; Signatures; Acknowledgments. XIT—EQUIPMENT TRUSTS; COLLATERAL TRUSTS; UNSECURED ISSUES Sg 165 Equipment trusts; Philadelphia plan; Conditional sale jee Reasons for Philadelphia plan; Cash deposit with trustee; Covenants of railroad; Comparison between Philadelphia plan and conditional sale arrangement; Collateral trust indentures; Unsecured issues. XIII—MIscELLANEOUS TRUST FUNCTIONS .. 170 Miscellaneous functions; Interim certificates; ‘Bagless shares ; Investment trusts ; American shares; French Bearer certificates; Foreign insurance trusts; Registrar of de- bentures, etc. (for identification) ; Conversions; Fiscal agent for municipalities, etc.; Paying agencies. XIV—CorRPORATE AGENCY SERVICES; REORGANIZA- RP ART MENT et cea en ee BEBE Scope of corporate agency services; Practice—large vs. small companies; Investigating offers of new business; Re- organization department; Corporate reorganization; Cor- porate readjustments; Capital subscriptions; Reorganiza- tions; Protective committees; Deposit agreement; Activities of depositary; Sub-depositaries; Listing of certificates of deposit; Registration of certificates of deposit; Mailing and publishing of notice; Relationship between depositary and committee’s secretary; Interest and other payments; Accept- ance of certificates of deposit of other committees; Cer- tification as to deposits; Summary of depositary’s functions prior to reorganization; Time limit for deposits. XV—REORGANIZATIONS (continued). Pe tas aCe Presentation of the plan; Dissents; Joint reorganization committee; Adoption of plan; Assessments; Consummation of reorganization; Distribution of new securities; General ; Termination of depositaries’ duties. XVI—CorpPoRATE READJUSTMENTS, CAPITAL SUB- SCRIPTIONS, AND REORGANIZATION DE- PARTMENT RECORDS ... Wena is’ Readjustment and reorganization Hea Cees da Capital sub- scriptions; Subscription warrant; Purchase certificate ; Re- organization department records. vill CONTENTS CHAPTER XVII—Stock TRANSFER DEPARTMENT... . Stock transfer department; Stock certificates; Appointment of transfer agent for corporation; Documents to be received; Original issues of stock; Voting trust certificates; Transfers; Power of substitution; Assignments; Guarantee of signa- tures; Classification of transfers; Individuals and partner- ships; Tenants; Corporations; Fiduciaries; Estate and in- heritance taxes; Co-transfer agencies; Transfer Depart- ment records; Records; Control of unissued stock certificates ; Stockholders’ right to inspect records; Closing of transfer books; Annual and special stockholders’ meetings; Divi- dends; Dividend orders; Dividend disbursing agent. XVIII—Stock REGISTRATION, BOND REGISTRATION, AND COUPON PAYING DEPARTMENTS Stock registration; Appointment; Relations with transfer agent; Records; Original issues; Signing and audit; Cer- tificates of deposit, etc.; Stop transfers and duplicate cer- tificates; Bond registration; Full registration; Registration as to principal only; Records; Coupon paying; Receipt of funds; Relations with corporate trust department; Federal tax law; Records; Audit; Payments for correspondents; Coupons from called bonds; Retention of canceled coupons; Stop payments; Return of coupon money. XIX—BEES Ee: : / Fees; Increased volume of business; Decreased expenses; Increased compensation; Standardization of rates; Cor- porate trust fees; Trustee under corporate mortgages, etc.; Trustee of foreign insurance companies; Trustee or registrar of industrial note issues; Fiscal agent under foreign govern- mental issues; Corporate agency fees; Transfer agent of stock; Registrar of stock; Dividend disbursing agent; Regis- trar and transfer agent of bonds; Paying agent of coupons or registered interest; Fiscal agent (returns to Collector of Internal Revenue); Reorganization department fees; Rates in New York City; Fee records and billing; Dis- bursements. BIBLIOGRAPHY @ sts oe Cee APPENDIX < DH so Meier nee Form of Corporate Mortgage APPENDIX 10. 0an oe a ena Mae Form of Equipment Trust (Philadelphia Plan) APPENDIX IIT. ; Form of Deposit Agreement APPENDIKALV 0) 5 2 Se ce ee nae Listing Requirements of New York Stock Exchange EN DEX I OL feta ee eG ea 2172 302 Fig. Form Form Form Form Form Form Form Form Form Form Form /7. > DANNnnPWHON Se oo e e ° e ° ON Ps Form 7A. Form 8. Form 9. Form 9A. Form 10. Form 10A. Form 11. Form 11A. Form 12. Form 12A. Form 13. Form 13A. Form 13B. Form 13C. Form 14. Form 15. Form 16. Form 17. Rap cy 2. iets 3. Form 18. Fig. 4. Form 19. Form 20. Form 21. Form 22. Form 22A. LIST OF ILLUSTRATIONS Organization Chart HBF Sot 88 Mortgage Examination Guide . . . . History of ‘Trust . History of Trust (aioptementaes sheer) Record of Bonds Issued Summary Sheet Exchange Sheet aixchange licket: . Exchange Record Title Sheet Redemption Sheet . Redemption ‘Ticket Securities Ledger Securities Ledger (suitable on save Beaiiey : Corporate Blotter Certification Blotter Certification Slip Vault Deposit ‘Ticket : Vault Deposit Posting aTaoket Vault Delivery Ticket Vault Delivery Posting Ticket Temporary Deposit ‘Ticket Delivery of Temporary Deposit Tieket Temporary Withdrawal Ticket Temporary Withdrawal Posting Ticket . Deposit of Temporary Withdrawal Ticket Deposit of Temporary Withdrawal Posting Ticket Memorandum of Cancellation Memoranda of Splits Property Card (Bonds) Property Card (Stock) Security Stencil (Stock) Security Stencil (Bonds) Collection Register Stencil Title Plate Customer’s Verification Cash Ledger Cash Journal : Memoranda Ticket . Memoranda Ticket (for Redempeian) 1x Form 23. Form 24. Form 25. Form 26. Form 27. Form 28. Form 29. Form 30. Vigk AG) Form 31. Form 32. Form 33. Form 34. Form 35. Form 36. Form 37. Pig iG, Bigs 7, Mean Yipee LIST OF ILLUSTRATIONS Credit: Tickets’ so 30) Se ate a ea Charge Tickets 0) oa i aoe Proof) Sheet: oo) ph GP OR ere ie Trust Check we ae INGA OS 0 ea ee Documents Executed Slip.) 22 27 Tickler Card.) 3) Se Pending Card © *).0¥ 5° a. ee Vault Index!) : POOR Se ts Oe Form of Coupon Bond Se oa a Research Sheet . . . te oe Personal Property Tax Rebiad Apalteoney Me Insurance Recordi oC. See ci, Declaration of Trust! 6 oo. ny A Nominee: Cardy iain or wie,» at NO errr Mortgage Satisfaction Guide ee Cremation Affidavit. Certificate’ .7.°.* 5 ee Interim Receipt . ebb io ae er Bankers’ Shares Garihone SE a 2 aan “American Shares’ Certificate: > +... 29° ee Certificate of Deposit. (Bonds)) 295. 4.) 2) eee Certificate of Deposit (Stock) 2°.) J) Subscription’ Warrant .-. 050) Purchase Certificate . . OR Reorganization Counter Ticket LE NS a Temporary ‘Receipt $2 6.20 ©) Gan Reorganization Record:. 7). 9). 9) Record: of Depositors.50). 2) AL Vault: Marker 00 a oe ee Delivery ‘Record ooo 9) a Requisition for Stock =...) °°" Sa oe Reorganization Counter. Ticket) . 95°...) 2 eee List “of | Depositors (60... 22h ee Subscription Record): 3.5.00 1" FU 25 Common: Stock, Certificate 2) 9) 27 a ee Preferred Stock Certificate . . ON oo a nr Resolution Appointing Transfer Neent Ree: 234 . Resolution Appointing Transfer Agent Gasthy co- transfer: Agent)..." Yee ie Ge Voting) Trust, Certificate...) (oan se Counter ‘Vicket (General) 207. 3° 2a . Counter) Ticket? (Special) vie Soh . ‘Temporary Counter’ ‘Ticket... 9% (129 320s. 'Transter Record yn). SRL h Eee eo, a ¥ Report of “Pransters 22 Vh5 ee ee se LIST OF ILLUSTRATIONS Stock Ledger . . Stock Ledger Trial THEORe Record of Balance Changes between ted vere Record of Original Issues ae Control Sheet — Unissued Con Stockholders’ List . Dividend Order Resolution Appointing Dividend Dicbies Agent Dividend Check Buse : : Lost Dividend Check Cerech Sheet Indemnity Letter Stock Dividend Record . Stock Dividend, Original Issue Record . Stock Dividend, Post Office Receipt Stop Transfer Resolution Appointing Bee (Stock Gueas Prior to Appointment) Registration Sheet (One Revisiracs Registration Sheet (Two Registrars) Record of Original Issue : Appointment of Bond Registrar Counter Receipt Registration Record ( Benen Only) ( Registration Record (Principal and Interest ) Ledger Sheet ei Cancellation and haere Sheet Report to Issuing Company Registered Interest List Registered Interest Check Coupon Envelope Return Envelope Check Register Coupon Ledger . Tax Deduction Ticket Coupon Account, Statement and Vierincaan Daily Advice : Monthly Statement Ht Recent Redeemed Bond Notice Fee Basis Sheet Commission Ledger Commission Work Sheet Commission Bill Disbursement Voucher . Stock Certificates Issued Sheet THE WORK OF CORPORATE TRUST DEPARTMENTS CHAPTER | CORPORATE FIDUCIARIES; ORIGIN, GROWTH, AND ORGANIZATION Early history.— The extensive development of the services now rendered by trust companies and other corporate fiducia- ries is essentially modern; yet the exercise of trust powers by financial institutions dates from an early period in our national history. In the New York Evening Post of August 6, 1822, The Farmers’ Fire Insurance and Loan Company (now The Farmers’ Loan and Trust Company) announced that, pur- suant to a charter granted by the legislature, the company was prepared “‘to receive, take, possess, and stand seized of any and all property that may be conveyed to them in TRUST, and to execute any and all such trust or trusts in their corporate capacity and name, in the same manner and to the same extent as any other trustee or trustees might or could lawfully do. ‘The TRUST property [continues the announce- ment] will be kept, as the Charter prescribes, wholly separate from other concerns of the Company, and cannot, in any event, be made liable for its losses or engagements.’* Some years later, in 1836, The Pennsylvania Company for Insurances on Lives and Granting Annuities which had been established in the insurance field in Philadelphia since 1812, was given power to add trust business to its activities. Meanwhile, the New York Life Insurance and Trust Company had been chartered. This institution has since merged with the Bank of New York (established 1784), under the name of Bank of New York & Trust Company. Other financial institutions in the eastern 1H. W. Lanier, “A Century of Banking in New York, 1822-1922,” p. 279. (Courtesy of Farmers’ Loan & Trust Company to the authors.) 1 2 WORK OF CORPORATE TRUST DEPARTMENTS states dating from this early period have become trust com- panies or have acquired trust powers. It should be noted that each of these pioneers combined insurance with trust business, the identification of a trust company as a banking institution being left to later years. In fact, it was not until 1874 that all New York trust com- panies became subject to the supervision of the state banking department. Development.— For some years following the organization of these older trust companies, few opportunities were af- forded them to be of service to corporations. At first, com- paratively little business was carried on in the corporate form. However, corporations increased in size and number as the advantages of limited liability and more stable form of or- ganization became recognized. ‘The period was one of ex- pansion which created unprecedented demands for capital. The increased use of machinery and improvements in trans- portation methods furthered this expansion. Soon, the great period of railroad building gave new impetus to the develop- ment of corporations. ‘Taking into consideration the stage of our national development, these early railroads raised con- siderable amounts of capital. For example, in 1844, 17 years after its organization, the Baltimore & Ohio Railroad Com- pany had outstanding $7,000,000 in capital stock and $985,- 000 in bonds.?. The New York & Erie Railroad Company reported, in 1852, $6,000,000 in capital stock and $14,000,- 000 in bonded indebtedness.’ As the security issues of railroads and other corporations increased in size, the need for the service of trust companies in their fiduciary capacities was emphasized. Shortly after the close of the Civil War it became the general practice to appoint trust companies rather than individuals as trustees under corporate mortgages. In 1869 the New York Stock Exchange ruled that all listed stocks must be registered by an independent registrar acceptable to the Exchange, and trust companies generally were named as registrars of stocks. This requirement illustrates the trend toward establishing 2 Stuart Daggett, “Railroad Reorganization,” page 1. (The proportion of stock to bonds is interesting. ) 3 Stuart Daggett, “Railroad Reorganization,” page 34. CORPORATE FIDUCIARIES; ORIGIN, ETC. 3 safeguards to protect investors from irregular issues of securi- ties, which is a primary function of the corporate trust and corporate agency departments of present-day trust com- panies. Of recent years corporations have become a dominant fac- tor in business. ‘The extensive field for corporate trust and agency services is indicated by the amount of the securities in the hands of the investing public. It has been conserva- tively estimated that over $115,000,000,000* of securities are held by the American people. ‘The fiduciary departments of trust companies and other financial institutions, in the capacity of trustee or agent, render service of one kind or another in connection with a large part of the securities held by the public. “Trust company” as used herein.—It might be well to mention at this point that it is not intended that the reader should apply our references to trust companies merely to those institutions which incorporate “trust company’ as part of their title. On the contrary, all companies engaged in the administration of trusts and corporate agencies are meant to be included, and, within this scope, of course, are state banks so engaged and such national banks as have qualified pursuant to the Federal Reserve Act. Federal Reserve Act (with respect to fiduciary powers).— The extension of trust powers to national banks is one of the changes brought about by the Federal Reserve Act of 1913. The wording in the original act was inadequate and some- what obscure and, after a decision by the Supreme Court of the United States, Congress enacted an amendment (approved September 26, 1918) which empowered the Federal Reserve Board to grant fiduciary powers to national banks upon proper 4 Moody, “Manual of Investments” (1926 ed.), p. li, gives the following ap- proximation of securities in the hands of the American people in 1925: Corporation Bonds and Notes (at par value)............... $37,027,816,000 Corporation Stocks (at market value)...........ceeeeeress 35,237,847 ,400 $72,265,663,400 This is exclusive of government and municipal obligations and other so- called public securities which, according to Moody, total another $43,000,000,000, making a grand total of over $115,000,000,000. It will be noted that corporation stocks have been figured at their approximate market value. If the par value had been used, the total would have been considerably higher. 4 WORK OF CORPORATE TRUST DEPARTMENTS application of the latter. According to the amendment the Board may give national banks “when not in contravention of state or local law, the right to act as trustee, executor, administrator, registrar of stocks and bonds, guardian of es- tates, assignee, receiver, committee of estates of lunatics, or in any other fiduciary capacity in which state banks, trust companies, or other corporations which come into competition with national banks are permitted to act under the laws of the state in which the national bank is located.” Supreme Court decision.—As late as 1924, however, the Supreme Court of the United States was called upon to de- cide whether national banks might act as executors of estates in states whose laws permitted trust companies so to act.’ In rendering its decision the court emphasized the paragraph of the amendment reading, ‘“Whenever the laws of such state authorize or permit the exercise of any or all of the fore- going powers by state banks, trust companies, or other cor- porations which compete with national banks, the granting to, and the exercise of, such powers by national banks shall not be deemed to be in contravention of state or local law within the meaning of this Act.’”*® However, prior to this decision, the fiduciary activities of national banks had become iernly established in many states. Organization.—On page 5 appears a chart of the organ- ization of a large trust company. This is given for the purpose of visualizing the relation of the fiduciary depart- ments to the organization of the institution as a whole. From the chart it will be noted that the fiduciary group of departments is one of six major groups comprising the entire organization. Because the subject is foreign to this book, no effort has been made to subdivide the remaining five major groups, but it should be understood that each group may be composed of several related departments. ‘Their functions may be briefly summarized as follows: Banking.—This group includes loan, tellers, bookkeeping, credit, and development (new business) departments. 5 Burnes National Bank v. Duncan, 265 U. S. 17. 6 These quotations are from Section 11(k) of the Act as amended. This section also sets forth the conditions under which national banks may be granted trust powers. » ETC. ORIGIN 9 CORPORATE FIDUCIARIES Sat uolyeaysibay jU2w2sungsid puapialg (s426p27 yo04s } Buid22y -yoog 42jsuedL siajsuedl ‘uoijerjsibay pure ABSUeA] Y204S ‘buijunosoy xe] 2WU09U} lipny uodnog ‘sjuawhed sjuauheg 1S240]UI ucipeuisibay |jn2 yediouiad ©}, se uoljerjsiBoy ‘uoipeasibay puog “sninuabw24e400 407) “UO1peaysiuilu py “HeYyD “SHUDUIYS, fIANDZS ( S}!9U2}S Buipnou ) “spso0r2yy Aiplanoas (a) ‘Sp4A0d2\yJ USED (e) 4| NSA voleurad) pue uoileo -\jl4a UOdNOD pug Ppucg od1udeubouass 22Uu2pu0ds2441045 (q) SpU2WIND0q Buijs “Saippoey pur [PABJS|JOD "SUOISAZAUOZD) ‘juauiheg 9 Uoljdwap2y puog sabueurxy puog SApIANIVS “OSIW 9B SMOAISI “S$2822]2y) fy sodoig ‘spuny buryuis ‘sjuamasinbay 4snaL Sanss| puog Yoaeas2y "S4sn4j 22400405 ‘SUOLIGIUOSQNS yeyides ‘Sjuawysnipe- ay SUOILEZIUSHIOZyJ ‘Suoipeziuebs02y ‘QAYNDDXJ] Jiu “SdpWWO?) DAIGNIIX] "S$401921q JO pueog $U01}92}109 ‘Buida22eyyoog (2) ‘$224 ‘|2UUO0SA2q uonezuesIO—T ‘sly "UOILEHIDIOS SS2UISNG Mah) pue Sayejs3 ‘SISNal jeuossad "SD1PANDIS ( eee * SoHIWIWIOD uauysaaul 4Sn4L 6 WORK OF CORPORATE TRUST DEPARTMENTS Bond.—In many institutions the activities of a bond de- partment are carried on by a separate corporation usually known as a “‘security company,” owned by the institution itself or by its stockholders. The activities of this group, whether operated as a department of the main organization or as a separate corporation, relate to the purchase and sale of securi- ties. Its inventory or stock in trade is acquired through un- derwriting operations, originated by it or in which it par- ticipates with other underwriting houses. As in any other successful merchandising effort. it must sell the goods which it purchases and, for this purpose, maintains a selling force. In addition to selling its own wares, such a department is usually equipped to render the service of a brokerage office in the purchase or sale of any security for the account of customers, and, further, to render to customers general in- vestment advice. As a natural consequence of the latter service, the statistical department is usually grouped with the bond department. In many cases the bond department will control and manage the security investments of the institution of which it is a part. Foreign.—While, as would be implied from the name, this department deals in the currencies of foreign countries, its functions are much broader. In reality a foreign department is an extension to international affairs of the functions of the banking department and its broadest and most important services are rendered in the field of international commerce. Many of the larger financial institutions, particularly those of New York City, now maintain branches in one or more foreign countries. f Administration—Under this heading come the depart- ments which control the activities of the organization pertain- ing to personnel, coordination between departments, the super- vision of the various service groups, and the management of the banking offices and owned or leased real estate or buildings. Audit.—The audit department is independent of all other departments of the bank and ordinarily reports directly to the chief executive of the organization. As its name implies, its purpose is to maintain a continuing check on the accuracy of the records of the institution. In some of the larger institu- CORPORATE FIDUCIARIES; ORIGIN, ETC. 7 tions this department is now headed by a comptroller who, in addition to his supervision of the functions of the auditing department, is charged with the control, from the standpoint of efficiency, of the organization as a whole and its records, and with supervision of the expense account. Management and control of banking institutons.— It is the usual practice of large banking institutions to head each of the major groups discussed above with a senior officer (usually a vice president) who is responsible directly to the president or the chief executive officer. The chief executive in turn reports to the board of directors or executive com- mittee of the board. Ordinarily, the board of directors meets but once or twice a month and the by-laws of the institution will provide that in the interim between the meetings of the board of directors the management of the institution’s affairs shall rest with an executive committee selected from the board, which will have more frequent meetings, say, once or twice a week. While not indicated on the chart, the control of a banking institution, as in the case of other corporations, rests with the stockholders through their periodical election of the directors in accordance with the charter and by-laws of the company. Fiduciary group.—The chart indicates the two principal divisions of the fiduciary group, namely, trusts and corporate agencies. Trusts, in turn, are separated into three depart- ments—custody, personal trust, and corporate trust. Corpo- rate agencies are divided into two major departments— (a) reorganization, and (b) stock transfer and registration, and two smaller divisions, bond registration, and coupon paying. Custody.— This department has the custody of securities deposited by, or for the account of, customers and subject to their order. The department, in addition to the custody of the securities, will attend to the collection of income therefrom and the delivery or receipt of securities on order of the cus- tomer. It is the general practice of companies handling this type of business not to accept any responsibility for the super- vision of the securities from an investment viewpoint. Personal trust—This department administers estates, and testamentary and living (voluntary) trusts, guardianships, 8 WORK OF CORPORATE TRUST DEPARTMENTS etc. The trust investment division, as explained in the fol- lowing paragraph on trust investment committee, supervises the investment of the funds of the various trusts in the de- partment. Ordinarily a separate division takes charge of the management and sale of real estate and makes investments represented by bond and mortgage on real estate. ‘The trust administration division is also subdivided into a group in charge of the administration of estates and a second group administering trusts. Trust investment committee.—In many trust companies doing a substantial personal trust business it has been found impracticable for the trust officer or officers alone to super- vise trust investments. ‘This has led in some cases to the ap- pointment of a trust investment committee whose member- ship ordinarily is composed of one or more directors of the company, one or more officers of the trust department, and perhaps one senior officer from each of the banking and bond groups. ‘The committee will meet periodically and pass on all questions of trust investments which are submitted by the trust department. It will keep a record of its proceedings, and its recommendations are submitted to the executive com- mittee for confirmation. In companies which have organized a trust investment committee the officers in charge of the trust department are required to submit to the committee for approval any proposed investment or reinvestment relating to trust funds. Further, the trust department is required, usually in codperation with the statistical department, to main- tain a continuing review of all trust investments, submitting the results of such review to the trust investment committee for recommendation. While practically all matters submitted to the trust investment committee will come from the per- sonal trust department, the.corporate trust department occa- sionally will have investments which need to be considered by the committee. New business solicitation.— The personal trust department frequently takes charge of its own new business solicitation and has a division organized for this purpose. ‘The solicita- tion of new trust business requires special training, a thorough knowledge of the theory, and at least a general knowledge of the technique, of trust administration. This division, while CORPORATE FIDUCIARIES; ORIGIN, ETC. 9 under the control of the personal trust officers and reporting directly to them, ordinarily will codperate closely with the de- velopment or new business department of the bank as a whole. The trust solicitors often will develop “leads” for banking and custody accounts. Counterwise, the field men of the de- velopment department will uncover trust “leads.” For this reason, there should be close codperation between the two groups. Corporate trust.— The corporate trust department of a trust company has, as its principal purpose, the administra- tion of those functions which are imposed upon such an insti- tution, as trustee, by mortgages or indentures providing for the issue of bonds or other corporate obligations. Corporate mortgages, as we now know them, are a logical outgrowth of the development of corporations. So long as the funds needed by corporations could be supplied by one or a few lenders, mortgages to a trustee were unnecessary. As corpo- rate borrowings increased in amount, it became essential to set up machinery by which numerous lenders could participate in loans to corporations and receive acceptable evidence of the corporations’ indebtedness. The use of a trustee offered a satisfactory solution. ‘To secure its indebtedness a corpo- ration, by means of a mortgage, conveys all or a part of its property to the trustee, but in trust for the benefit of the holders of the bonds which the corporation issues thereunder and which the trustee, for purposes of identification, authen- ticates. Numerous other duties are imposed upon the trus- tees under corporate mortgages but these are mostly of an administrative nature unless the corporation defaults in its obligations under the mortgage. The department may include in its scope certain closely related agency services, such as the payment of bonds and the registration of interim receipts. Circumstances may also render it advantageous to charge the same department with the care of miscellaneous trust and agency accounts which have no relation to mortgage trusteeship.’ Corporate agency group.— Corporate agencies as distin- guished from corporate trusts comprehend, mainly, those fidu- 7 For examples see Chapter XIII. 10 WORK OF CORPORATE TRUST DEPARTMENTS ciary services rendered to corporations where the relationship of the trust company is that of agent rather than of trustee. Reorganization This department’s activities embrace services as agent for protective, reorganization or readjust- ment committees, or for corporations, in connection with the rearrangement (voluntary or involuntary) of the financial structure of corporations. The purpose of committees of this nature is to provide a means for concerted action by security holders. The appointment of trust companies as depositary for such committees became general during the great railroad reorganizations which followed the financial panic of 1893, although appointments of like nature had been made in previous years. Stock transfer.— Under this heading come the activities of the trust company as agent of corporations in issuing and recording changes in ownership of their capital stock. ‘The trust company in this capacity is merely an agent to perform duties which in earlier days were assumed by the corporations themselves. Due to the highly technical and specialized work involved, corporations in increasing numbers have appointed transfer agents. Stock registration.—As stock registrar, the trust com- pany’s duty is to check the issue of the stock of its principal, the issuing corporation, and to prevent any issue thereof (through negligence or fraud) in excess of the amounts authorized. The general use of trust companies as registrar to protect stockholders against unauthorized or overissues may be said to have been brought about by the manipulations of the stock of the Erie Railroad Company in the 1860’s. ‘The Erie “ring’’ of that day was able to produce an apparently unlimited supply of stock with which to flood the market whenever needed in its operations. As a result of this and the irregularities which appeared in the issuance of stock of other corporations the New York Stock Exchange finally ruled that all listed shares must be registered by an independent agency. Bond registration—As bond registrar, a trust company records the registration and transfer of bonds, both ‘‘full’” CORPORATE FIDUCIARIES; ORIGIN, ETC. 11 registration (principal and interest) and registration ‘‘as to principal only.”” Usually, but not necessarily, appointments as bond registrar are the direct outgrowth of mortgage trus- teeships. Coupon paying.— As the name implies, the trust company through its coupon-paying department, acts as the agent of corporations and others in the payment of interest obliga- tions represented by coupons. Joint facilities.—As to the joint facilities indicated on the chart, it should be mentioned that each department of the trust and agency group may maintain its own accounting, collection, shipment, filing, and stenographic divisions, and, in some institutions, this is done. On the other hand, it is generally conceded to be more economical to operate these facilities under centralized control for the benefit of all of the departments of the group. General.—In the chapters that follow the purpose has been to discuss the fiduciary services usually rendered for corpora- tions by a typical trust company. In certain states local laws or practice may result in a trust department assuming other duties. Mention might be made of Michigan, where the statutes restrict the conduct of banking business by trust com- panies, which, however, quite generally act as receivers and liquidators of corporations; also of certain of the states where trust companies do a large business in mortgage loans. CHAPTER II CORPORATE TRUST SERVICES; TRUSTS BASED ON THE CORPORATE MORTGAGE Definition of mortgage.-—When a borrowing corporation conveys real property to a trustee, in trust for holders of the obligations to be issued, the instrument usually is called a “mortgage” or ‘“‘deed of trust.” ‘The word ‘mortgage,’ ” writes Mr. Roberts Walker,’ “is from the French: ‘mor?’ and ‘gage, ‘dead’ and ‘pledge.’ A pledge .. . is the transfer of property by Hodge to Sadler, to secure to Sadler the payment of money loaned by him to Hodge or to secure the perform- ance of some other promise made by Hodge. In its origin, a pledge involved transfer of possession. A pledge may, how- ever, be made without surrendering possession,’ and, gener- ally speaking, this is true of the modern corporate mortgage, regarding which Mr. Walker continues: ‘“The name ‘mort- gage’... is a rank understatement. The modern form of document not only has the effect of a mortgage, but is also a collection of agreements, covenants, and ‘don'ts,’ whereof many have no logical relation to the familiar process of mort- A 99 Paging). 6. | In many instances, however, the company does not mort gage its property to secure the payment of its bonds. It may pledge securities, claims, receivables, chattels, or other per- sonal property as collateral, or it may simply agree to observe certain conditions. “he instrument under which the bonds are issued is then given the title, ‘trust indenture,” “trust agree- ment,” or some similar designation. Its purpose is the same in all cases, that is, to evidence the contract between borrower and lender and to afford the security or assurances required by the lenders in addition to the company’s promise to pay. Types of mortgages.—As any corporate mortgage or simi- lar instrument exists solely to protect the obligations issuable 1“The Modern Corporate Mortgage” (a lecture delivered at Princeton University, March 2, 1917). 12 TRUSTS BASED ON CORPORATE MORTGAGE 18 thereunder, it seems appropriate to draw attention first to some of the more important types of corporate obligations. The title of a bond usually gives some indication of the secur- ity for the issue, although unqualified reliance on the title would be unwarranted. Investors are learning to judge bonds on their merits; they are more interested in equities than in bond titles, and are coming to realize the necessity for an examination of the exact position of each issue. While no reputable corporation would countenance a mis- leading description of its bonds or mortgages, it is customary to select the most attractive designation consistent with the status of the issue. Suppose a corporation wishes to issue bonds under a new mortgage which will be a third lien on its property. It might term the new mortgage a ‘“‘general mort- gage,’ or a “refunding mortgage,” or label its bonds with some title descriptive of one or more of the outstanding fea- tures of the issue; but it would not be likely to apply the title “third mortgage.” Detailed consideration of the various types of bonds and their purposes belongs in the study of investments? and cor- porate finance, but a brief outline is given below of the types of mortgages and bonds which are met with more frequently in trust department work. ‘The descriptions which follow relate to the characteristics of the various mortgages at the ttme of execution. It should be borne in mind that a mort- gage with a title implying a junior lien position ofttimes, through the retirement of prior lien obligations, becomes a senior lien. For example: Assume that in 1925 a corporation executed a general mortgage and issued bonds thereunder maturing in 1950; prior mortgages at that time consisting of a first mortgage securing bonds maturing in 1935; and a first and refunding mortgage securing bonds maturing in 1940, so that the gen- eral mortgage really constituted a third mortgage of the cor- poration. When the first mortgage bonds are paid in 1935 the general mortgage bonds will move up to second rank, 2 A comprehensive classification of bonds appears in Lawrence Chamberlain’s “Principles of Bond Investment”; also in W. E. Lagerquist’s “Investment Analysis,” Catalogue Description of the More Important Bonds, pp. 675-697. 14. WORK OF CORPORATE TRUST DEPARTMENTS and in 1940, upon payment of the first and refunding bonds, the general mortgage bonds will move into first place.’ Some of the characteristics which, at the time of execution, may apply to mortgages of the types indicated, are briefly mentioned below. First mortgage.—This is the most common and simple form of corporate mortgage, constituting a first lien on the property pledged. In some cases, a first mortgage covers all property of the debtor corporation, and, in other cases, only specified property. Sometimes, when the mortgage covers all property of the corporation, it also provides that its lien shall attach to any property of the corporation thereafter acquired. Such a provision, usually referred to as an “‘after-acquired property clause,” is found in various types of mortgages, and is not necessarily restricted to first mortgages.* Second mortgage.—In past years it was usual to have sec- ond, third, and even fourth mortgages on property of the same corporation, particularly railroads, the title of the mort- gage indicating the relative rank of the lien which it created. To-day trust companies are sometimes requested to act under indentures, the titles of which embrace the words ‘second mortgage,’ but seldom under those with titles containing words indicating a lien junior to a second mortgage. This is to a considerable extent due to the current practice of giv- ing to bonds complicated titles which, while technically cor- rect, sometimes fail to emphasize the distance of the lien which they create from the property covered by the mortgage. First and refunding mortgage.-—Such a mortgage is a first lien on a part of the property pledged (sometimes a very small part), and a lien on other parts of the property subject to prior liens. Its lien position on the remainder of the property 8 This illustration relies wholly on precedence in time. The mortgage might permit a prior lien to be created. 4For a further discussion of the “after-acquired property clause,” see C. W. Gerstenberg, “Financial Organization and Management of Business,’ Chapters XII and XIII. | 5 According to the White & Kemble Atlas and Digest of Railroad Mortgages (supplement issued in 1924), the Great Northern Railway Company mortgage, dated May 1, 1911, securing an issue of first and refunding mortgage bonds is a first direct mortgage on 2108.92 miles; a first collateral lien on 543.33 miles; a second direct mortgage on 4112.82 miles; a third direct mortgage on 663.09 miles. TRUSTS BASED ON CORPORATE MORTGAGE 15 is improved as the prior liens are paid off, through the re- funding operations provided for in the mortgage, that is, the retirement, at maturity, or otherwise, of prior obligations, through the issuance of first and refunding mortgage bonds. Refunding mortgage.—This title is inadequate, as it does not indicate in any way the rank of the lien, except by the inference that in due time prior liens will be removed through refunding operations under the refunding mortgage. General mortgage.-—This term, while indefinite, indicates, in most cases, a general lien on all or most of the property subject to several existing liens. First and collateral mortgage.—This title indicates a first mortgage on a part of the property of the company and an interest in other property through pledge with the trustee of stocks or bonds, frequently those of subsidiary or controlled companies. Prior lien mortgage.—This title indicates a lien prior to other obligations of the debtor, and, usually, although not necessarily, a prior lien mortgage secures the prime issue of the company. Purchase-money mortgage.’—As the term implies, such a mortgage is given in part payment of the purchase price of property. It usually constitutes a first lien on the property purchased, but not necessarily on all, or any other, property of the mortgagor. | Leasehold mortgage.—Such an instrument constitutes a lien on a leasehold interest in real estate, but not on the real property itself. Because title to most permanent improve- ments on real estate passes with title to the real estate on which such improvements are located, and because default | of the lessee under the terms of the lease creating the lease- hold may destroy the debtor’s title to the actual value behind such a mortgage, many trustees have had unsatisfactory expe- 6 White & Kemble report that the Great Northern Railway Company general mortgage, dated January 1, 1921, is a first direct mortgage on 238.11 miles; a second direct mortgage on 2,108.92 miles; a second collateral lien subject to the first and refunding mortgage on 543.33 miles; a third direct mortgage on 4,112.82 miles; and a fourth direct mortgage on 663.09 miles. 7C. W. Gerstenberg, in “Financial Organization and Management of Busi- ness,” p. 207, gives an interesting chart to illustrate the process of acquiring property by use of a purchase-money mortgage. 16 WORK OF CORPORATE TRUST DEPARTMENTS riences with this type of mortgage, although there are out- standing exceptions. Income mortgage.—A mortgage of this kind provides for an issue of bonds on which the interest is payable only if earned by the debtor. Such a mortgage usually contains a formula for the determination of net earnings. ‘The title of the mortgage seldom indicates the lien position, which is usually well down the scale of the mortgagor company’s in- debtedness. Interest may be “cumulative” and, if unpaid, continues as a charge against the company secured by the lien of the mortgage. There are many other titles such as “improvement, X- tension,” “unified,” or “‘adjustment”’ mortgage, each title giv- ing an indication of the purpose of the bond issue thereunder; but unless such titles are further amplified they give no indica- tion of lien position. ‘There are also numerous variations and combinations of these titles, such as “first lien and gen- eral mortgage,’ “refunding and improvement mortgage,” “consolidated and refunding mortgage,’ and so forth. These titles convey, to some extent at least, the purpose and nature of the issue. 9 66 e Indentures, other than mortgages.—Many issues of cor- porate securities are secured by lien on, or by the pledge of, personalty; that is, property other than real estate. Two typical examples of issues of this character follow. Collateral trust bonds’ which are secured by the pledge with the trustee, pursuant to the terms of the indenture providing for the issue, of specified collateral, usually securities. Equipment obligations,’ usually issued by railroads, but sometimes by steamship or industrial companies, and secured by the equipment, such as locomotives and cars, specified in the indenture under which they are issued. Unsecured obligations. — Some corporations are strong enough financially to borrow without giving a lien or pledg- ing securities. Such issues are, however, made under trust agreements and are classed as “unsecured.” They are gen- 8 See Chapter XII. 9See Chapter XII. TRUSTS BASED ON CORPORATE MORTGAGE 17 erally given the title of ‘“‘note,” “debenture,” or “‘certificate of indebtedness.”’ Income and adjustment bonds are sometimes unsecured, and, conversely, notes and debentures occasionally are given mort- gage or collateral security, or they may contain a covenant that no subsequent mortgage will be made unless the notes or de- bentures are secured equally with the subsequent issue. Further variation in titles.—Each of the titles just dis- cussed, when applied to the bonds issued under the mortgage or indenture, usually is combined with other terms indicating special features of the issue. Some examples of these terms acer Sinking fund—indicating that the indenture provides for a fund to be’paid periodically to amortize the debt in whole or In part. Serial—indicating maturity in periodical ‘ installments. This should not be confused with the word “‘series.”” Many of the modern mortgages authorize the issue of bonds in series, the terms of each series, such as interest rate, sinking fund, maturity, and so forth, to be determined by the corpora- tion at the time each series is authorized. ‘The different series of bonds under a given mortgage are usually distinguished by a designating letter, such as A, B, C, and so forth. ‘“Serial’’ issues, however, while they may have a distinguishing letter, are usually issued to the entire authorized amount at the time of, or shortly following, the execution of the trust indenture. The payment of each installment as it matures, say, annually or semi-annually, serves as a ‘‘sinking fund.’’ Equipment ob- ligations are the best example of serial issues. Convertible—indicating that the issue gives to the holders thereof, on terms stated in the indenture, the option of con- verting the bond into another security, usually the common stock of the debtor company. 10 Francis Lynde Stetson, in “Some Legal Phases*of Corporate Financing, Reorganization, and Regulation,” p. 6, makes this statement: “In England, accord- ing to Palmer [Sir Francis Palmer], the term ‘debenture’ seems to comprehend all serial obligations of the corporation, whether or not secured by a charge, and whether or not issued under a trust deed, those issued under a trust deed being generally styled debenture stock. In this country, the term ‘debentures’ has come to mean any class of serial obligations of a corporation mot secured by a specific lien upon property.” Py 18 WORK OF CORPORATE TRUST DEPARTMENTS Participating—indicating that the issue is entitled, on stated terms, to receive, in addition to the specified interest, some share in the profits of the debtor company. Guaranteed—indicating that the issue bears the guaranty of some party other than the borrowing company. Joini—meaning a security issued by two or more com- panies. Gold—meaning that the bonds are payable in gold coin of a specified standard of weight and fineness. Sterling, franc, etc.—indicating the currency in which the issue is payable. For example, an issue entitled, “First and Retunding Mort- gage Convertible Sinking Fund 5% Gold Bonds, Series C,” would, by its title, imply: (1) that the bonds are secured by a mortgage which is a first lien on some property and which provides for the refunding of certain prior liens, and through the refunding operations an improvement of the original lien position; (2) that the bonds are convertible at the holder’s option, but on terms set forth fully in the mortgage and briefly in the bonds themselves, into some other issue, usually stock of the debtor company; (3) that the bonds are subject to a sinking fund, the terms of which are fully set forth in the mortgage, and briefly summarized in the bonds, providing for the amortization or partial amortization prior to maturity of the debt represented by the bonds; (4) that the bonds of this series bear interest at the rate of 5 per cent annually; (5) that the principal and interest of the debt represented by the bonds is payable in gold; and (6) that the bonds under this mortgage are issued in series of different terms, Series C being presumably the third series. Mortgage, etc., as used herein.—The use of the word ‘mortgage’ technically should imply that the instrument is a lien on property. However, as most of what follows in re- spect of corporate mortgages applies with equal force to agree- ments providing for the issue of other kinds of corporate ob- ligations, it will serve our purpose to understand that, except where the context clearly indicates a limited use, subsequent references to mortgages include other similar types of agree- ments, and likewise references to bonds and bondholders are TRUSTS BASED ON CORPORATE MORTGAGE — 19 to be understood as embracing, respectively, bonds, notes, debentures, or other principal obligations and the holders of such obligations. In principle a corporate mortgage is essentially the same as the simple mortgage of an individual on his home. In fact, corporations may, and frequently do, borrow money on the security of the familiar real estate bond and mortgage, pro- vided the amount required is not too large to be advanced from one source. But the present-day corporate mortgage provides a means by which a loan may be divided among a great many lenders through the issuance to participants in the loan of numerous separate bonds, all secured by a single mort- gage to a trustee. Individual trustees for corporate mortgages.— [he earlier mortgages were made to an individual trustee (or per- haps to two individual trustees); but it soon became evi- dent that this practice was unsatisfactory, as many times the individuals so named were not available when their services were needed, and they might die during the term of their trusteeship. Consequently, in recent years, it has been the almost invariable custom to appoint a bank or trust company as trustee. An individual co-trustee sometimes is joined with the corporate trustee, because of statutory requirements ;” but, except upon default, his duties are merely nominal, the corporate trustee being charged with the active duties. It is customary, where no reason exists for making a distinction, to refer to the corporate trustee as ‘‘the trustee.”’ Qualifications of trustees.— Corporate fiduciaries are nowa- days appointed as mortgage trustees to the practical ex- clusion of individual trustees, due not alone to the perma- nence of their corporate form, nor even to the quali- ties of strength and stability which we are accustomed to associate with financial institutions, for of equal or greater im- portance are the advantages which result from the appoint- ment of an adequately, equipped trustee whose experience enables it fully to understand the responsibilities, and properly to perform the duties involved in the trust relationship. To these desirable qualities, namely, permanence, strength, sta- bility, experience, and facilities, let us add one more—im- partiality. 11 See page 23.. UY / ; |/ 20 WORK OF CORPORATE TRUST DEPARTMENTS Trustee’s duties.—The paramount duty of the trustee is to protect the rights of the bondholders, and its actions under a mortgage should always be considered from the viewpoint of the bondholders’ interests. It is only natural that. the trustee should also wish to administer a trust to the satisfac- tion of the mortgagor. Until default the trustee has a con- tract with the mortgagor and should live at peace with it. However, in the event of a conflict between the mortgagor’s and the bondholders’ interests, the trustee must respect its duty to the bondholders. Every carefully drafted mort- gage will clearly define the duties and responsibilities of the trustee which, in later chapters, will be considered in detail. But it seems appropriate to point out at this time that, under a typical corporate mortgage, the responsibilities which the trustee accepts are definitely limited. Its position is well stated by Mr. William Lilly:” “Assume that the mortgage is made to a trust company. Though in form the trust com- pany is the mortgagee, it appears that it is mortgagee, not to secure a loan it has made but to secure the loans made by a multiplicity of people who receive the bonds of the corpora- tion as evidences of their rights as creditors of the corporation. The trust company is mortgagee for the benefit of the bond- holders. ‘The position it occupies in the transaction is called that of ‘trustee.’ It is not to be assumed, however, that its position exactly corresponds with that of the trustee of an estate left by a will who is charged with the duties of man- aging the estate. The trustee under a corporation mortgage, as will be seen, does not accept a responsibility of this kind. In essence, unless and until the corporation defaults in its obli- gations to the bondholders, the trustee has no active part to perform excepting purely formal administrative duties.”’ The scope of the trustee’s duties varies with the mortgage, consequently, the trustee must examine closely into the mort- gage provisions in each case. In our discussion herein we shall consider a typical mortgage; other instruments might impose greater or less responsibility on the trustee. The trustee does not seek to avoid responsibility which it might properly accept, but to have the mortgage clearly set forth its duties and responsibilities so far as it is possible to do so. Of course, the provisions in the mortgage relative to the 12 William Lilly, “Individual and Corporation Mortgages,” p. 78. TRUSTS BASED ON CORPORATE MORTGAGE 21 trustee should be considered in the light of the many legal decisions on the subject. It might well be said that trustees generally would be willing to accept a much greater degree of responsibility than at present, if adequately compensated for the risks involved. It is probable that the trustees’ serv- ices will be gradually broadened as the value of more exten- sive service is recognized. CHAPTER III ACCEPTANCE OF CORPORATE TRUSTS Securing business; preliminary negotiations.—How and where is corporate trust business secured? What are the necessary steps in establishing such a relationship? These questions naturally arise at the very outset of our study of this subject. Corporate trusts, from the standpoint of solicitation, are a most difficult subject. Appointments as trustee are receiyed from two main sources: (1) the borrowing corporation, and (2) the bankers who underwrite or sell the issue; and, strange as it may seem to those who are not familiar with this field, it is the bankers who, in the majority of cases, control the ap- pointment. Few corporations desiring to borrow on a large scale through the medium of a bond issue will undertake, them- selves, to sell the bonds to the public. The business of selling securities is highly specialized, and one or more of the bond- selling houses is usually requested to consult with the officials of the corporation, in determining the details and terms of the proposed issue. ‘The entire issue is then sold by the corpo- ration to a bond house or underwriting group at a price fixed by mutual agreement, or at times the sale is made after competitive bidding by as many of such houses as may submit an offer... The successful bidder and associates, if any, then offer the bonds to the public at a price intended to net a profit to the underwriters commensurate with the risk and service involved. The practice has grown among the banking houses of inserting in the underwriting contract a provision that the trustee shall be nominated by the bankers. ‘There are two reasons for this practice: (1) the bankers are interested in selecting as trustee an experienced and efficient guardian of the rights of the bondholders; and (2) the appointment, in the eyes of banking institutions with fiduciary powers, is desir- able business which the bankers like to place with their own friends among the banks and trust companies. 1p, F. Jordan, in “Investments,” Chapter XVII, discusses the work of syndicates and bond-selling houses. 22 ACCEPTANCE OF CORPORATE TRUSTS 23 Investigation of proposed trusteeships——Unless the pro- posed mortgagor is already a client in good standing, any offer of corporate trust business should be carefully investigated. The trust company should satisfy itself as to the character and ability of the corporation’s management and the reason- able expectancy of success in its operations. In some cases it may be desirable to obtain credit reports and to request the corporation to submit financial statements. The trust company also should be assured as to the standing of the bank- ers who are to underwrite the issue. Qualification in states.—One of the first questions in con- sidering the offer of a trusteeship under a mortgage on real property is whether the trustee is qualified to act under the laws of the state or states in which the property is located. This problem, while purely legal, requires constant vigilance, because of the wide variation and constant change in state laws. It would be most embarrassing to the trustee, as well as expensive, and perhaps seriously detrimental to the bond- holders if, when occasion arose to proceed under the provi- sions of a mortgage, it developed that the trustee could not act, because it was not qualified under the laws of the state in which the mortgage must be enforced. Individual and corporate co-trusteeships.— ‘Those states which have legislated against ‘‘foreign’’ corporate trustees (corporations organized under the laws of other states), by prohibiting them from enforcing trusts in the state courts or otherwise restricting their activities, cannot similarly restrict the individual citizens of other states.* Consequently, one 2The United States Constitution, in Section 2 of Article IV, provides, “The citizens of each state shall be entitled to all privileges and immunities of citizens in the several states.” ‘This is the basis for the constitutional point that no state can prohibit a natural person, citizen of the United States, from acting as trustee within its borders. Some state statutes relating to trusteeship make the distinction between natural persons and corporations of the several states. When the United States Constitution was adopted, business was scarcely done at all in the corporate form, and the question of corporations holding trusteeships in foreign states certainly was not in mind. Corporations have grown up under special statutes of the several states and, in this connection, are not at all to be compared with natural persons. It has never been held to be unconstitutional for a state to restrict the business that a foreign corpora- tion may do therein, or to prescribe the conditions upon which it may exercise its powers. In other words, the states may admit “foreign” corporations on the states’ own terms. \ 24 WORK OF CORPORATE TRUST DEPARTMENTS or more individuals often are joined as co-trustees with the corporate trustee. ‘he situation is sometimes met by appoint- ing, a9 co-trustee, a trust company or bank situated in the state in which the mortgaged property is located. Generally speaking, an individual or corporate co-trustee has no active duties to perform unless and until proceedings are undertaken to enforce the mortgage. Even in this event, while the pro- ceedings may necessarily be had in the name of the co-trustee, this situation is almost without exception directed by the cor- porate trustee and its counsel. Frequently a mortgage dele- gates to the corporate trustee the power to name a successor to the individual trustee in case of the death or resignation of the individual originally designated, or permits the appoint- ment of a co-trustee in case of need. Restrictive state statutes—Iwo or three illustrations of the attitude of several states toward the exercise of fiduciary powers by foreign trustees may not be out of place: Some years ago Indiana passed a statute requiring that intra-state trusteeships must be exercised by citizens of Indi- ana. [he statute has been held unconstitutional, so far as natural persons residents of other states are concerned; but prior to the decision on the constitutional point it was the basis for joining a resident of Indiana as co-trustee under mortgages on property in that state. In Missouri the restrictive statute has taken a somewhat different tack, and prohibits foreign corporations from en- forcing trusts of real estate in the courts of Missouri, unless joined by a resident trustee. The prohibition is not recog- nized by the Federal courts, but it has not been held unconsti- tutional. California statutes along this line started in 1913 with an attempt to deny to foreign corporate trustees the right to cer- tify bonds secured by property in California. ‘The validity of this statute was immediately questioned, so far as it con- cerned acts to be performed outside of California. However, during the time when the law remained in effect it resulted merely in the appointment as trustee of individuals, officers of trust companies which, but for the law, would have been selected in their corporate capacity. Subsequent modifications of the California statutes have resulted in a situation wherein ACCEPTANCE OF CORPORATE TRUSTS 25 individuals or California trust companies are joined as co- trustee. At the risk of repetition, emphasis is laid on the necessity for legal advice on all questions involving the qualifications of a corporation to accept, with or without a co-trustee, trusts covering property in foreign states. Conflicting liens——As corporations have expanded, the complexity of their financial structure has increased, and it is now quite usual for a number of different liens to exist on the property of one corporation. In the earlier days of cor- porate trusteeships the situation was comparatively simple, as in most instances the mortgages ranked in relative order first, second, and so forth. ‘To-day, however, a refunding mortgage, for instance, may be a first lien on some of the property, a second lien on another part, a third lien on still another part, and so on almost without limit.2 There is no legal bar to a trustee accepting two or more mortgages with different lien positions on the same property, and it is often done.* However, the possibilities of future embarrassment and expense should always be frankly considered before ac- cepting the appointment under a mortgage constituting a lien in conflict with the lien of an existing trust to the same trustee. So long as no occasion arises to enforce the provisions of either mortgage, there will be no difficulty and probably no objection; but promptly upon the commencement of court pro- ceedings under either mortgage the discerning trustee will resign under all but one lien on the same property. ‘There are a number of court decisions severely criticizing trustees which have attempted to enforce a mortgage lien while at the same time acting under one or more conflicting liens. Examination of form of mortgage.—Promptly, upon con- summation of the underwriting contract covering a proposed bond issue and the selection of a trustee, it becomes necessary to draft the mortgage and the form of bond to be secured. Three parties are interested—the borrowing corporation, the 3 See example in footnote 6, p. 15. 4 However, the regulations of the New York Stock Exchange provide that “each mortgage, indenture or deed of trust should be represented by a separate trustee,” and as regards listed issues, the Stock Exchange holds to this position, except on application stating circumstances satisfactory to it, as the basis for a special ruling to the contrary. 26 WORK OF CORPORATE TRUST DEPARTMENTS bankers who have underwritten and who will sell the issue, and the trustee. ‘The borrowing corporation having agreed with the underwriters as to the essential features of the issue, the business of preparing the mortgage is left in the hands of the lawyers. Counsel either for the bankers or for the debtor may set up the first draft of the mortgage, which is then subjected to a series of negotiations between the inter- ested parties. One draft of the mortgage will be submitted to the trustee and examined in detail by its counsel. Good practice demands that an officer of the trustee also should examine the proposed mortgage from a strictly practical view- point, and particularly with the thought of suggesting changes which might tend to facilitate the administration of the trust. Careful examination by an experienced trust officer of a pro- posed mortgage often results in correcting inaccuracies, clari- fying doubtful expressions, eliminating unwieldy provisions, and materially improving the mortgage at one point or an- other. | It is important that these weak points be located and strengthened before the mortgage is executed. While in some of the recent mortgages it is provided that material changes in the provisions of the mortgage (not including, however, such matters as terms of payment and interest rates) may be made on the written approval of the holders of a specified percentage, say 80 per cent or 90 per cent of the outstanding bonds, a most important point in considering all other mort- gages is that, once the indenture is executed and the bonds issued and distributed, no change adversely affecting the inter- est of the bondholders can be made without their unanimous consent, which is difficult and frequently impossible to obtain. All too often it is discovered after the bonds are distributed that some part of the mortgage is impracticable or is working an unnecessary hardship on the borrowing corporation. Un- less the mortgage contains special authority, it is then too late to make a change without the delay and expense of obtain- ing unanimous consent from the bondholders, if that be pos- sible. As a result of this difficulty the company, and some- times its bankers, often request the trustee to consent to what appear to be necessary and advisable changes without the bondholders’ consent. The trustee cannot give such consent without taking upon itself some risk, for, no matter how evi- Ric ACCEPTANCE OF CORPORATE TRUSTS 27 dent it may be at the time that the proposed change is for the benefit of the bondholders as well as the mortgagor company, any bondholder who may later prove that he has sustained a loss through the act may hold the trustee to a strict accounta- bility. While the monetary risk is important, the risk of cen- sure for a breach of trust is an even greater consideration. Execution of mortgage.—When approved as to form! by all interested parties, the mortgage is executed by the debtor company and the trustee, in as many original counterparts as may be necessary (usually one counterpart for the company, one for the trustee, and one for each jurisdiction in which it is to be recorded). The number of counterparts to be executed is not a matter of great importance and is left to the discretion of the company, but each copy should be care- fully examined to see that it agrees with the others in every detail. Having a separate counterpart for each place of record facilitates the recording and reduces the time required to complete the operation. Upon execution of the mortgage the trustee usually retains one original counterpart, delivering all others to the counsel for the company or the bankers, with the understanding that, upon completion of the proper recording, all recorded originals will be filed with the trustee. The one point insisted upon by all trustees is that at least one original counterpart must always be in their possession, as well as complete evidence of all recordings. There is another point of importance to the trustee in re- spect of execution, that is, the mortgage frequently provides that execution by the trustee shall constitute a receipt by it for all securities or other property deliverable to the trustee at the time of execution, and, consequently, the trustee should see that full delivery is made to it of all such securities or property, if any, prior to delivery by it of any executed coun- terparts. Supporting papers.— Prerequisite to, and as a part of, the execution of a mortgage, the trustee should assure itself that the execution by the mortgagor company is fully authorized. The following is a list of the documents by which such authori- zation is usually evidenced: 1. A copy of charter or articles of incorporation with all amendments. This document should be certified by the sec- 28 WORK OF CORPORATE TRUST DEPARTMENTS retary of state for the state under the laws of which the com- pany is organized. It outlines the powers granted to the company by the state of incorporation and sometimes it also imposes conditions which must be fulfilled before certain pow- ers are exercised. 2. A copy of by-laws with all amendments, certified by the secretary of the company under its corporate seal. This document contains the rules or regulations adopted by the company to control its own actions, through its directors and oficers. ‘Taken together items (1) and (2) should evidence to the trustee, first, that the company is duly organized and existing under the laws of a specified state; and, second, that, upon the corporate action proposed, it is authorized to borrow money and mortgage its property as contemplated. 3. Copies certified by the secretary of the company under its corporate seal, of the proceedings by the board of directors, and, in cases where the law of the state of incorporation so requires, the proceedings by the stockholders, authorizing the execution of the mortgage and bonds. 4. A copy, certified by the proper recording officers of the jurisdictions involved, of certificates of consent of stockhold- ers, for those jurisdictions where the law requires the filing of such consent. 5. A certificate by the secretary of the company under its corporate seal of the election of the officers of the company, with a specimen of the signature of each officer. Upon receipt of the papers listed in items (1) to (5) inclusive, in proper form and properly certified, the trustee will have in its possession evidence of the chain of authority passing from the state of incorporation, through the com- pany’s incorporators, stockholders, and directors to its officers, to execute the mortgage. Additional documents, as follows, are sometimes necessary: 6. A copy of order of approval of any public service com- mission or other public body having jurisdiction over the issue of securities by the company. Such copy should be certified by the secretary or clerk of the public body. The question of whether any such approval is required should be answered by the company and the answer accepted as satisfactory by - counsel to the trustee. 7. Opinion of counsel to the company that the mortgage ACCEPTANCE OF CORPORATE TRUSTS 29 gives the lien which it and the bonds issuable thereunder purport to create. 8. Opinion of counsel to the company as to the necessary recording of the mortgage, that is, the jurisdictions in which it should be recorded, and whether it need be filed as a chattel lien as well as a real estate lien. While items (7) and (8) do not strictly have to do with the authorization of the mortgage, they are of importance to the trustee. It is no part of the duty of the trustee under a corporate mortgage to verify the lien, and practically all mortgages specifically relieve the trustee of this responsibility, which it cannot afford to assume, from the standpoint of cost and time. Nevertheless, the careful trustee desires to make sure at the time of execution that the matter of lien purported to be given by the mortgage and bonds and the due recording of the mortgage in public offices has been given adequate and responsible consideration by the legal representatives of the debtor. | When the mortgage goes into default, if such should hap- pen, it would be embarrassing to the trustee to have it shown that the lien was insufficient and that a small amount of inves- tigation on its part would have disclosed its infirmities at the time of the execution of the mortgage and bonds. 9. Evidence as to the payment of any mortgage tax im- posed by law. The practice of the various states as to mort- gage tax differs, but as in some states a mortgage does not become a valid lien until the tax is paid, it is important for the trustee to have in its files evidence of the payment of any such tax legally imposed. 10. Specimen of the bond or notes to be issued. While the text of the bond is contained in the mortgage, it is a good practice for the trustee to have in its file for ready reference a specimen bond certified by the secretary of the company. This is particularly valuable if the authenticity of an out- standing bond is questioned, for the trustee may then not only verify the signatures of the company’s and trustee’s ofh- cers appearing on the bond, but it may also verify the form of bond, style of engraving, tint, and, in fact, every detail. The papers described above indicate the usual require- -ments of a trustee. In some cases not all of the papers mentioned are required, and, in others, additional evidence 30 WORK OF CORPORATE TRUST DEPARTMENTS Form 1.— Mortgage Examination Guide (front). Corporate Trust Department. BLE VINA. 5 Siete Parise otal cate anomeiiele No. of counterparts a. ...; ese Date executed: 74 Usados wane Counsel) sadsiwins ol Oe Pitle OF) Accounts ook nee sa keok bee Soba le aie a anes ne Sa 5 a sk ea A CT AeA be De an POORER Mee Nei Ciao ceil ele RE Procedure to be observed in setting up Corporate Trust Department Records. Enter the following symbols in the column at the left to indicate action taken with respect to each requirement: ¥=Fulfilled. F=Follow-up card prepared. O=Not applicable. VI. VII. VIII. IX. Enter execution in (a) Documents Executed Record, (b) New Business Record. Report to (a) Officers’ Meeting, (b) Executive Committee, (c) Development Department. Prepare “History of Trust” Sheet. (a) Enter in ink the number of original counterparts executed and in pencil the number on file. (b) Enter document file number in red ink. Prepare Index Cards (a) Window file, (b) Officer’s desk file, (c) Statistical Department, (d) Information desk file. Send New Business Memos to: (a) Bond Registration Division, when Bankers Trust Company is Registrar. (b) Coupon Paying Division, when Bankers Trust Company is Coupon Paying Agent. (c) Commission Division. (This memo should eventually be filed in Reference Folder of Letter File.) Prepare Tickler Cards: (a) Maturity—Due date of issue and where payable. (b) General—(Duties of Trustee) Preparation of S. F. notices. Calling of bonds. Receipt of collateral under prior mortgages at maturity. Refiling as chattel mortgage. Cancellation of bonds on our records in case others act as Paying or S. F. Agents. 6. Any other duties. (c) Trust Requirements* (Duties of Mortgagor) 1. Sinking Fund payments. 2. Redemption notices. 3. Insurance schedules. 4. Financial statements. 5. Equipment schedules. 6. Any other requirements. For Equipment Trusts (if variety of equipment warrants) rule off a blank “Title of Trust” sheet and place next to “History of Trust” sheet, showing class, numbers, quantity, prices and dates of payments for equipment. Obtain supporting documents (per reverse) and approval of counsel on execution of Indenture and documents. Ascertain that pledged collateral has been deposited and that Bankers Trust Company holds title thereto. VP ON ACCEPTANCE OF CORPORATE TRUSTS dl X. Write to Company for: (a) Signature Cards. (b) Insurance policies or first insurance schedule. For a schedule request annual date for filing. (c) Date fiscal year ends (when necessary and not shown by documents). (d) Any other information. XI. Write prior trustees (letter usually to be prepared by counsel). (a) Send copy of above Indenture. (b) Call attention to our lien upon securities held by them or restrictions of above Indenture upon issuance of their bonds, etc. (c) Ask for copy of their mortgage. (d) Send any other notices. XII. Memos to Corporate Trust Department re:— (a) Preparation of card as to splitting of temporaries and defi- nitives and any charges. (b) Notation of collection cards as to disposition of interest or dividends on collateral. (c) Conversion privilege. XIII. Memo to Statistical Department of statements expected from Company. XIV. Memo to Document File Clerk when firm, other than — & —, acts as our counsel. XV. Obtain all recorded originals or evidence of recording and enter on records. XVI. Obtain supply of printed copies of Indenture for our files. Examination completed (This record, when completed, should be filed in the Document Folder.) Form 1.—Mortgage Examination Guide (back). 1. Certified copy of charter, or articles of incorporation, with all amend- ments. 2. Certified copy of by-laws of the Company. 3. Copy of minutes, certified by the Secretary of the Company under its corporate seal, showing proceedings of the board of directors, and in cases where the law under which the Company is incorporated so requires, the proceedings of the stockholders, by which the execution of the mortgage and bonds are authorized. 4. Certified copies of any certificates of consents of stockholders or of their proceedings in those jurisdictions where the law requires such to be filed. 5. Certificate of the election of officers of the Company executing the mort- gage and the bonds, with certified specimen signatures. 6. Order of approval of any public service commission or other body having jurisdiction over the bond issues of the mortgagor company. 7. Opinion of counsel to the mortgagor company that the indenture gives the lien which it and the bonds issued under it purport to create. 8. Opinion of counsel to the mortgagor company that the indenture need not be filed as a chattel mortgage, or evidence that it has been so filed. 9. Evidence as to the payment of any mortgage tax imposed by law. 10. Specimen of bond or note. 32 WORK OF CORPORATE TRUST DEPARTMENTS may be desirable. The question is primarily legal, and each case should be passed on by the trustee’s counsel. Many trust companies, however, furnish, for the convenience of corpora- tion officers and counsel, a printed list of documents usually required in setting up a corporate trust. In requiring these proofs the trustee is actuated, first, by the sense of duty which any person entering into a serious contract should possess to see that all the surrounding circumstances of the contract are entered into with due authority and with the observance of all proper safeguards; and, second, by the circumstance that the documents above-mentioned, or most of them, are readily to be obtained at the time of the execution of the mortgage, but might become more difficult to obtain after the lapse of years, when, perhaps, by reason of defaults and by disagree- ments in the construction of the mortgage, the debtor has become unwilling to furnish proofs, or to disclose its private record to the trustee. Examination of mortgage by the trustee.—Promptly upon execution of a mortgage the trust department will read and thoroughly analyze all of its provisions, in order that its records of the trust may be properly set up, and the necessary steps taken to see that the trustee’s duties are accurately and promptly performed. While the trustee’s general records are discussed in the next chapter, the “mortgage examination guide,” ° illustrated on page 30, will indicate the general scope of this examination. While, generally speaking, the items on the mortgage ex- amination guide appear to be self-explanatory, perhaps a brief statement on one or two points is desirable. The “develop- ment department’’ referred to in Item II is a modern and broader designation for the ‘“‘new business department.” It is important that in any company making an organized effort to develop and expand its business, the department having control of this effort be notified promptly of each piece of new business received. Item V is important only in the case of trust departments which have been subdivided into distinct divisions. Similarly, Item XIII applies only if there is a separate statistical department, in which case that department 5 This form is reproduced through the courtesy of the Bankers Trust Com- pany, New York. ACCEPTANCE OF CORPORATE TRUSTS 33 should be informed of statements expected to be received, in order that such statements may be delivered to the trust department, and not retained in the files of the statistical department. ‘The supporting documents referred to in Item VIII are those described on page 27 to 29 [ (1) to (10) inclu- sive] which, for convenience, are listed on the back of the mortgage examination guide. Item XI, relating to prior trustees, has to do with a very important matter. In many cases a mortgage pledges prop- erty or securities, subject to the lien of existing mortgages. It is then of real importance that the trustee notify prior trustees of the newly created subordinate lien and warn such prior trustees that, upon the extinguishment of the prior liens, the property or securities may not be redelivered to the mort- gagor company, but must be delivered to the trustee under the new lien. Sometimes, also, the new mortgage may con- tain a covenant “‘closing’”’ prior mortgages,’ that is, an agree- ment that no further prior lien bonds shall be issued. Simi- larly, the prior trustees should be placed on notice of such a covenant. 6 See footnote, page 90. CHAPTER IV CORPORATE TRUST RECORDS Corporate trust records.—In presenting this material the authors are fully aware of the difficulty of prescribing any set of forms which would be applicable, in their entirety, even to a small percentage of banks and trust companies engaged in corporate trust business. Widely different conditions exist. The institution with a dozen trusteeships will not feel the necessity for some of the records which are indispensable to the administration of several hundred trusts. Neverthe- less, every corporate trustee is likely to have situations arise which will emphasize the value of complete records. This chapter is based on the records of a single company for several reasons: (1) the manifest advantage of con- tinuity in describing one complete departmental system, rather than the outstanding features of several different systems; (2) the essential simplicity of the system described, although at first glance it may appear somewhat complex; and (3) the authors’ greater familiarity with these records.” As will be noted from the accompanying cuts, loose-leaf records have been used wherever practicable. ‘The conven- ience and flexibility of such records recommend their general use and account for their adoption by most of the larger institutions doing a fiduciary business. In all cases where loose-leaf records are used by trust departments, it is impor- tant that there be a complete and independent audit of the work so recorded. Many trust departments follow the prac- tice of retaining bound volumes for all books of original entry. This furnishes an additional safeguard, and may be of considerable value in case it becomes necessary to submit the records as legal evidence. In the following discussion a cut is given of each record with a brief statement of its purpose and use. 1 Those of Bankers Trust Company, New York City. Records of the Cor- porate Agency Departments are discussed in Chapters XVI to XVIII and Fee Records in Chapter XIX. 34 35 RUST RECORDS CORPORATE T ‘jsn1 yp jo AloO}sIf[—"Z WI0Y | “me, 4Q pasodut xe} a3e3}10m Auv jo yuaurded ay) 03 Se s0NapIAq ‘pa[y Os useq sey af yey) Sotlapida 107 ‘aBeZyow jayeyd 8 sB pajy eq OU poeu piNjuapur oy) yy. Suvdwod 1o3e3\10ul ay, 0} fasunoa jd vormdG *ay8219 0} y1odind yt sepun ponsst cia aedwos i0sesjiour Syy Oy fesunod jo uojidG -kuedaod 2OZBBz10w oy} jo sonsst~ 2 puoq eq) saA0 uonsipsynt Suraey Zpoq 19410 10 GOIssuimodS sd1Ajes Syqnd fuv jo jssoidde jo sJapio “sainjeusis uouoeds paynseo YM ‘spuoq ay pus eduswour ayy Bapinooxe Suvdwod a) JO Si20YO Jo woljoea 94} eo: HEIGHISD' |) "pery 29q OY Yons Poirier Mey oq} araym : SuONoIpslint eSOy) Ul SSuypasooid sey} yO JO SIapjoyyoos JO SWesuos JO EsywoyH Sus jo soldoo poyliie *pazliogine ole §puoq pus osesjiowm oy) jo UoyNdexo yolyM Aq ‘sieployys0ys ey} JO sBurpsaccid oy) ‘saumber qoiyas Japan Mel oy} areyMm sasvo Ut pues “GIOWSIP JO preog omy jo" Spuoq eq) pur if YoIyM Gall eq) sears sinjaepul Tey call che mua aR BAPE PUA aR a Os paiwiodsoour st Aueduiod 9} ie SSUIPIISO BUIMOYS *[8Is IjB1OGIOD sj}I Joput AULA UY joa eq “ON WWoeuins0g 233110} SB paplosay JsNIy JO GONBSIUIMpY Jo SLOISIF{ PUB SjuaMINI0q jo p1099y Ney We oquavg 38 a[qvesuvyoiawy sayBoynsied E Palspstos yg peresizZay Aline paiejnar 10 yso7T condmapay € Ouss} poze ye s[qesedg q = S PsyyUsissp Spuog aouUEINSH] : surgey jO SMBy Jepun ps38q Jopui adjsnIy “Od MIL sJoyaug peztuesio ‘OD 10s¥BZ 0K ‘ON a[fy lueuns0g NAL JO UL 36 WORK OF CORPORATE TRUST DEPARTMENTS Record of trusts.—The day-to-day transactions of each trust are compiled on Forms 2 to 7, termed, collectively, the “record of trusts.’”’ Separate binders for exchange, redemp- tion, and securities sheets (Forms 5 to 7) facilitate posting and audit. FORM 830 DOCUMENT FILE No. Title of Trust INSTRUCTIONS: This sheet will be opened for every new series of bonds which - differs from the first series. The aaa COUNTERPARTS EXECUTED History of Trust sheet should be appropriately noted with reference to this sheet both as to execution and recording. SUPPLEMENTAL INDENTURE DATED: REDEMPTION: Form 2A.—History of ‘Trust (supplementary sheet). 37 TRUST RECORDS CORPORATE *(egq) ponss] spuog jo prod9y—"¢ WIO —— | ee TOO ae bees f poyorny (pso224y *uByoxg aos ‘sau—aAtjop 2BuL>x2 Jo S[tej2p 104) = 2 payjsoued Pavoatloq, SOON. PuCd uodnog suemnonseg Ayuoqay ONIGNVISLNO GNV GATTAONVO ‘CauSAITAC SANO@ JO AYVWINNS $ ‘onss po sony [FOL *(jUO1,J) penss] spuog jo ploday—'e WI0 7 (2nojg wonwegnssy nay s1esVdi0D 29 sIA=P 30) Gqd4ILado SANOG 88 WORK OF CORPORATE TRUST DEPARTMENTS Form 4.—Summary Sheet. w =) n ce Qa fa) N a4 2) peo a 2 < CORPORATE TRUST RECORDS 39 Immediately upon the execution of a new mortgage, a “‘his- tory of trust sheet’’ is opened and the salient features of the indenture noted thereon in the spaces provided at the top of the sheet (Form 2). The columns at the right are reserved for mortgage recording data. The remainder of the sheet is devoted to a chronological history of the administration of the trust compiled from documents received or originated by the trustee. Before being entered each document is en- dorsed with a brief typewritten summary of its subject matter and is assigned a number. The entry of documents usually required at the time of the acceptance of the trust is simplified through printing on this sheet a schedule of such documents. In addition to its value as a history, this sheet forms a com- prehensive and convenient document index. In dealing with a mortgage authorizing the issuance of bonds in series, a ‘supplementary sheet’? (Form 2 A) is used for each new series, as it is impracticable to summarize more than one series on the main history of trust sheet. The “record of bonds issued sheet” (Form 3) is the control record of bonds received, certified, delivered, and canceled. It indicates, at a glance, the status of a bond issue. Postings to these sheets are made from the “security tickets’ (Forms 10 to 15), with the exception of bond certifications, which are posted from the “‘certification blotter” (Form 9). Any delivery which does not constitute an additional issue under the mortgage is “circled”? without increasing the total of bonds delivered. ‘The delivery of a duplicate in lieu of a lost bond is an example of an entry of this kind. In the two memoranda columns on Form 3 (back) are recorded entries affecting the amount of bonds held in the vault awaiting certification or delivery. When, as in most large modern mortgages, issues of bonds are authorized under several sections, a “summary sheet” (Form 4) is used to provide a continuous record of the amount of bonds outstanding under each section, and to prevent an overissue under any section. This sheet is filed directly following the ‘“‘bonds issued” sheet and entries are made as the record of bonds issued is posted. - The “exchange sheet”’ (Form 5) comprises the detailed rec- ord of bond exchanges, that is, (a) the delivery of definitive (permanent) bonds upon the cancellation of temporary bonds, or (b) interchange of denominations, referred to in the par- WORK OF CORPORATE TRUST DEPARTMENTS 40 "yous osueyoxyA—'s WI0T aqagqAITAG AONVHOXE NI AaAIaOFa SAONVHOX ANOd” Pee SHIMAAITAC GaTIv Lad ¢ ‘adueyoxy siqyy jo qunowy pezuoyjny CORPORATE TRUST RECORDS ANSI ‘ONY Ni Gata At “UBdOUd 1d139SY SIHL #20 YSONSYYNNS NOd HAWOLSND | srevusarac 3a TM MOBHD UNO saLLIUNDas NOILVSISILNSOI LNOHLIM JO3RN3SH USUVSE SHLOLOGAYSAITSG 3S AVW'S3ILINNDSS HONS LYHL ANVdNODS LSNYL SYSANVE SHL HLIM SEY OV LdIaD3y SIHL Ad GSLN3S3ud3y S3iILINNDAg JO SHANMO YO YSNMO SHL Elli LNNOWY NOI Ldlwd5S30 L3gYULS TIVM 91 ANYANO9 ISMUL SHBYNVE | sLvuosioa ; WOus G3AIZOFY 6h MYOA MAN el Ny Le Hy MELT i c| | ; DELIVERED $100 BONDS $500 BONDS NUMBERS SERIES NUMBERS RECEIVED 19__. ADDRESS DEPOSITOR il SERIES CHECK DELIVERED $ AM OUNT INSTRUCTIONS $1000 BONDS NUMBERS a See — — | ——— —— AMOUNT | No. £114773 Form 5A.—Exchange Ticket. Ay 42 WORK OF CORPORATE TRUST DEPARTMENTS lance of the bond houses, as “splits.” The number of the “exchange ticket’? (Form 5A) is inserted-after each entry, so that ready reference can be made to the customer’s receipt. Form 5A is a numbered ticket which originates when securities are received for exchange from temporary to permanent form, or for interchange of denominations. ‘The ticket is divided into three sections: (1) the customer’s receipt; (2) the body of the ticket, which remains with the new securities until they are delivered; and (3) the auditor’s stub, which is attached to the canceled securities. “The exchange sheet is also used to record conversions of one class of security into another, say, bonds into stock. A “title sheet” (Form 5B), giving data and instructions as indicated thereon, precedes each account in the exchange record. The method of exchanging temporary for permanent bonds, conformably with the records described in this chapter, is as follows: The temporary bonds are received over the counter or by mail and (after preparation of exchange tickets) are entered on the exchange record (Form 5), opposite which are entered the permanent securities, when allotted. At the end of the day (1) the exchange record is totaled, (2) the surrendered bonds are counted, and (3) the total of the per- manent bonds allotted is calculated by the difference between the lowest serial number of the bonds available at the begin- ning of the day and the lowest serial number of the bonds remaining at the close of the day’s business. These three figures must agree. The bonds surrendered are then canceled, and placed in a safe available to the auditors, who, on the following morning, verify the canceled bonds against the amount of permanent bonds shown by the exchange record to have been delivered. The exchange record serves, so far as exchange transac- tions are concerned, as a book of original entry, and no entry is made in the corporate trust blotter. As soon as the de- partment is to commence an exchange, a memorandum ticket is prepared covering the amount of permanent bonds allocated to the exchange. ‘This ticket is posted to the record of bonds issued (Form 3) as a delivery in exchange for temporary bonds, with a reference to the exchange record for details. At the same time a cancellation entry is made in the record CORPORATE TRUST RECORDS EXCHANGE RECORD TITLE SHEET DocUuMENT FILE NO,——. ACCOUNT INTEREST DATES TRUSTEE VAULT INDEX [C00 Vole ie ee eae Oe Sekar a [ay ae aL cae INTERDENOMINATIONAL EXCHANGE (S) INSTRUCTIONS RECEIVED CONVERSION (C) CASH ADJUSTMENT DISPOSITION OF SECURITIES SPECIAL INSTRUCTIONS RBI Stop NumBers Form 5B.—Exchange Record Title Sheet. a 3 a 43 44 WORK OF CORPORATE TRUST DEPARTMENTS & £ 3 Z ils 8] § tes § 2 é 5 e Al @ Form 6.—Redemption Sheet. Total Par Value $ CORPORATE TRUST RECORDS AS of bonds issued, covering the cancellation of all the temporary bonds. The advantage of keeping the mass of detail involved in such an exchange on subsidiary, rather than on the main trust records, is obvious. Payments of bonds, whether at maturity or upon prior redemption or purchase, are entered on the “redemption sheet” (Form 6) from the “redemption ticket” (Form 6A) which carries full details of the transaction. While this sheet and.ticket are similar in principle to those used for exchanges, an important difference lies in the omission from the redemp- tion record of the depositor’s name and the bond numbers. 4 No. 50751 (DO NOT TAKE OUT OF THIS OFFICE) LETTER OF DATE______- DEPOSITOR ADDRESS CHECK CREDIT ” PAR VALUE DESCRIPTION OF SECURITIES—ONE KIND ONLY— SS COUPON ATTACHED PRINCIPAL —— Bankers Trust ComPANY PREMIUM ENT CORPORATE TRUST DEPARTMENT CHECK No. aren COUNTERSIGNED. CHECK fOR PROCEEDS OF TOTAL... ; ES REPRESENTED BY THIS TICKET WILL BE DELIVERED NOS. ENTERED AGAINST SURRENDER HEREOF ON REVERSE. ANO PROPER IDENTIFICATION Form 6A.—Redemption Ticket. The elimination of this data relieves the department of a considerable burden of detail and materially accelerates serv- ice at times when speed is essential. Exchange and redemp- tion tickets are consecutively numbered, and carefully pre- served, and every ticket number must be accounted for at the close of each day’s business. On the day following their payment all canceled bonds are counted by the auditors and the total of each issue proved to the departmental figures. In other words, the auditors treat the canceled bonds as vouchers and there must be canceled bonds to an amount equivalent to the cash disbursed for bonds during each day’s business. The canceled bonds, as audited, are stamped or perforated by the auditors to guard against the possibility of a resubmission of the same bonds. ~ Securities other than those received for one of the purposes heretofore mentioned are posted to the “‘securities ledger” 46 WORK OF CORPORATE TRUST DEPARTMENTS Disposition Principal Due Interest or Dividends Due Form 7.—Securities Ledger. Q a a a a n 24 4 om Q Q Zz a Q a x = 0% =I oO a w Details (from whom received or delivered to, certificate numbers etc ) CORPORATE TRUST RECORDS Al (Form 7). Bs -- —e- ~ i) =] Form 8.—Corporate Blotter. CORPORATE TRUST RECORDS 49 DATE CERTIFIED BY TITLE AMOUNT $ —_— DENOMINATION $ BONDS COMPARED EXAMINED FOR EXECUTION BY. EXAM'D FOR CERTIFICATION BY TAX STAMPS POSTED Form 9.—Certification Blotter. TRUST SEPARTMENT. BANKERS TRUST COMPANY 19 dla a a —no__1 7664 | MR. | PLEASE CERTIFY THE FOLLOWING TITLE , : AMOUNT $ NOS. DENOMINATION -$ Si eS es FORM OF BOND HAS BEEN COMPARED. WITH MORTGAGE AND ' 1SSUE’ IS PROPER ———_______- - APPROVED FOR EXECUTION By. N. B.—THIS SLIP IS TO BE TRUST DEPT. INITIALED BY THE SIGNING OFFICER AND PLACED IN AUDITORS BOX, SIGNING OFFICER Form 9A.—Certification Slip. All tickets are written or typed in duplicate with the excep- tion of “temporary withdrawal tickets’ (Form 13) which are typed in quadruplicate. The original vault tickets serve as authority to the vault for the withdrawal or deposit of securities. All trust securities in the vault are kept in double 50 WORK OF CORPORATE TRUST DEPARTMENTS combination safes and each deposit or withdrawal must be witnessed by (1) an officer or a vault officer, and (2) one of several designated clerks. After securities have been de- posited or withdrawn the tickets are retained by the vault oficer and delivered to the auditors. The auditors maintain an independent set of control ledgers which are proved from time to time with the ledgers of the trust department. We shall first explain the vault control system in a general way and then make a more detailed examination of the form of the tickets. Fu79 Oats VAULT DEPOSIT TICKET No. CT 192_. BANKERS TRUST COMPANY... CORPORATE TRUST ACCOUNT TRANSACTION —— it UNITS ‘Cor AMOUNT _ DESCRIPTION i fil | \ | i ‘ Form 10.—Vault Deposit Ticket. The vault control is based on a system of control units established as follows: A. For corporate bonds, notes, and like securities, includ- ing deposit receipts therefor (where bonds are canceled the CORPORATE TRUST RECORDS 51 title of account should so state), each dollar or other standard of currency in which principal amount or par value is expressed. B. For “bonds and mortgages” and other evidence of in- debtedness not otherwise provided for, each dollar or other standard of currency of unpaid principal. C’. For stock, each share and part of a share contained in each certificate. D. For subscription warrants and receipts and participa- tion receipts, each share or dollar, as the case may be, in which the face of the warrant or receipt may be expressed. E. For all other valuables not in support of an item under control, each paper, package, or single article. Securities and other valuables having been assigned a value under control units must, thereafter, in all transactions, retain pecs 192 VAULT DEPOSIT POSTING CORPORATE TRUST aemmamerierEaT caudeicsie vito TICKET No. CT ACCOUNT TRANSACTION CONTROL UNITS ACTUAL AMOUNT sai Ee eee eee SCRIPTION Re eat Sede ea pds aitpeeee et eget ote pee eons | | Laat NS EnoRe CHECKED [PROPERTY CARDS NEW STENCIL Lud ee ee | | | | VAULT INDEX ————————————————————————S INCREASE STENCIL TO TITLE PLATE ———————————————— Es NO STENCIL REQUIRED Form 10A.—Vault Deposit Posting Ticket. 52 WORK OF CORPORATE TRUST DEPARTMENTS that value, unless suitable adjustments of account, including the control, are made. Payments on account are treated as follows: A. Upon “bonds and mortgages” and other evidence of in- debtedness, as deliveries. B. Upon subscription warrants and participation receipts, as memoranda. ‘They are entered ‘“‘short” in the ledgers upon the deposit side. When subscription warrants or par- ticipation receipts are temporarily withdrawn for payments thereon, such payments are made to appear on the deposit or temporary withdrawal slip. The amounts of such payment are not included in the control. Papers in support of the items under control, unless they be in the form of collateral having an independent value, need VAULT DELIVERY: “a Sono Franee ace a eos ecm ec TICKET No. CT ACCOUNT TRANSACTION CONTROL UNITS ACTUAL AMOUNT DESCRIPTION arene == as = ne | AUDITOR'S COLUMN APPROVED VAULT WITHDRAWAL WITNESSED BY BLOTTER CasH LEDGER Form 11.—Vault Delivery Ticket. CORPORATE TRUST RECORDS 53 not be entered in the control, but must be fully described in the appropriate record and be jacketed and kept with their respective control items. Cents, and denominations of currency smaller than the standard money of account of other countries, are ignored in the control, though carried in the ledger accounts, as are the exact fraction of shares of stock. RATE VAULT DELIVERY POSTING $92 ssl SOE SOR UAL SA einen salary CORPORATE TRUST TICKET No. Ge ACCOUNT TRANSACTION CONTROL UNITS ACTUAL AMOUNT DESCRIPTION Form 11A4,—Vault Delivery Posting Ticket. Jewelry and papers which it is undesirable to enter separ- ately in the ledger are sealed after being inventoried and a copy of the inventory placed on the outside of the package and entered in the record of trusts showing the same in the control merely as a sealed package “‘details of contents as per ~record of trusts.” 54 WORK OF CORPORATE TRUST DEPARTMENTS Many institutions employ a “dollar” rather than a unit con- trol. Either scheme is satisfactory if consistently maintained in assigning control values to items such as no-par-value stock, foreign securities, and fractional shares. With respect to, the ‘temporary withdrawal” and “tempo- rary deposit tickets’? (Forms 12 and 13), it is worth while to note that the practice of the auditors is to retain the original DATE TEMPORARY DEPOSIT CORPORATE TRUST TICKET No. CT ACCOUNT TRANSACTION INTROL, UNITS ACTUAL AMOUNT DESCRIPTION No WRITING IN THIS SPACE Form 12.—Temporary Deposit Ticket. of each ticket as an indication that the transaction is incom- plete, while the department retains the carbon copy of the ticket until it is finally indorsed and used as a deposit or de- livery ticket, as the case may be. ‘Transactions not completed within a reasonable time are investigated by the auditors. The temporary tickets are not an essential part of the control system; but they are a great convenience to the trust depart- CORPORATE TRUST RECORDS 55 ment in simplifying the recording of temporary transactions, and to both the department and the auditors in properly fol- lowing up the completion of such transactions. Forms 14 and 15 are “cancellation” and “split” tickets which are operated along the same lines as the vault tickets, although they do not affect the vault. The cancellation tickets are posted to the canceled column of the record of bonds is- sued (Form 3) and the “‘split’’ tickets are used to reduce the vault column balances on the same sheet. DATE DELIVERY OF TEMPORARY DEPOSIT TICKET Ne. CT CORPORATE TRUST ACCOUNT TRANSACTION CONTROL UNITS ACTUAL AMOUNT DESCRIPTION DESCRIPTION AND TRANSACTION VAULT DELIVERY No. INITIAL ORIGINAL ENTRY IN DELIVERY BLOTTER Rep, Boor | Form 12A.—Delivery of Temporary Deposit Ticket. It will be noted that all of the security tickets just described are uniform in size and general set-up. The entries under the heading of “‘transaction” at the top of each ticket should not be too brief to indicate, clearly, what has taken place. Infor- mation as to the source of the trustee’s authority is always 56 WORK OF CORPORATE TRUST DEPARTMENTS valuable. For example, a typical explanation of a delivery of bonds would read “Delivered to , Lreasurer of Com- pany, pursuant to Article II, Section 1, of mortgage.” The column for actual amount is used only when that amount differs from the amount entered under control units. In the space for description should be entered complete de- tails of the securities—the full title, interest or dividend dates and rate, maturity date, par value, and bond or certificate numbers. DATE Ma | BANKERS TRUST COMPANY, MEO a Tee LOZ CORPORATE TRUST 5 TICKET No. CT ACCOUNT . TRANSACTION CONTROL UNITS ACTUAL AMOUNT DESGRIPTION No WRITING IN THiS SPACE VAULT INDEX eH ECKED TO EI 1 H AUDITOR'S COLUMN LEDGER BLO’ R BLOTTER CASH Form 13.—Temporary Withdrawal Ticket. The purposes of the blocked spaces at the bottom of each ticket are indicated by their titles. Each space is initialed or filled in as the ticket is passed along. ‘The space for “‘prop- erty cards’ on each posting ticket relates to Forms 16 and 17. ‘These cards are indexed under the name of the security. CORPORATE TRUST RECORDS 57 Reference to the card of any given security issue quickly deter- mines the account or accounts interested in a situation bearing upon the status of the issue. As reports are received of changes in capitalization, reorganizations, bond redemptions, and so on, these cards are examined and appropriate action taken or suggested. DATE E Re | CANKe es TeUst COMPANY MUA NCA Ra CORPORATE TRUST P , POSTING TICKET No. CT ACCOUNT ‘TRANSACTION CONTROL UNITS ACTUAL AMOUNT DESCRIPTION NEW STENCIL INCREASE STENCIL TO NO STENCIL REQUIRED Form 13A.—Temporary Withdrawal Posting Ticket. The “stencil”? information referred to on the posting ticket is for use in preparing or revising security stencils. ‘These stencils, or embossed metal plates, are illustrated on page 63.” The use of stencils greatly facilitates making up the “‘col- lection register” (Form 18) and the preparation of lists of securities required from time to time by mortgagors and others. In both cases the result is highly satisfactory. A 2 Stencil cuts reproduced through courtesy of Addressograph Co. 58 WORK OF CORPORATE TRUST DEPARTMENTS collection register with each item stenciled is preferable to a hand-written record and, if the stencils are properly kept up, no collection items will be missed. The ‘“‘symbols’’ appearing in the lower right-hand corner of each stencil card indicate the instructions in effect as regards income on the securities. For example: C indicates all coupon items on which the interest is. col- lected. DH, coupon items from which the coupons are regularly detached and held for disposition. DU, coupon items from which the coupons are detached and delivered uncanceled. DX, coupon items from which the coupons are detached, canceled, and delivered. : - DEPOSIT OF TEMPORARY DA ei OO MINRA@! WITHDRAWAL TICKET CORPORATE TRUST No. CT ACCOUNT TRANSACTION a CONTROL UNITS ACTUAL AMOUNT DESCRIPTION DATE UNITS DESCRIPTION AND TRANSACTION VAULT DEPosiIT NO. INITIAL ‘VAULT INDEX SECURITIES ENTERED IN NED rR Form 13B.—Deposit of Temporary Withdrawal Ticket. CORPORATE TRUST RECORDS 59 QO, coupon items from which coupons are not detached and other items on which income is not collected. R, fully registered bonds, stock, or notes on which interest or dividends are regularly received. S, items subject to special instructions. DATE : a — com DEPOSIT OF TEMPORARY mg | BANKERS Teust COMPANY, | Munem CORPORATE TRUST x 79 ct aa TICKET No. CT ACCOUNT TRANSACTION CONTROL UNITS ACTUAL AMOUNT DESCRIPTION DaTe UNITS DESCRIPTICN AND TRANSACTION VAULT DEPosiT No. INITIAL ae VAULT INDEX oo varies eee = CHECKED |PROPERTY CARDS REMOVE STENCIL DECREASE STENCIL TO SS =— NO CHANGE REQUIRED Form 13C.—Deposit of Temporary Withdrawal Posting Ticket. Stencils are tabbed for the month in which interest or divi- dends are payable. For this purpose 6 tab positions are used, the first indicating January and July, the second, February and August, etc. Title plates (Fig. 4) show the title of account as it appears in the “‘security ledgers” (Forms 7 or 7-A). These, also, are appropriately tabbed. By use of an automatic selector it is possible to print only the stencils ~ tabbed for a given month and to skip all others. Some trust officers may feel that the volume of securities 60 WORK OF CORPORATE TRUST DEPARTMENTS passing through their departments does not justify the ex- pense of a system involving all the operations just outlined. Under such circumstances, it is feasible to simplify the process of recording security transactions. Several methods present themselves; for instance, it would be practicable to eliminate posting tickets entirely and substitute a detailed blotter from Vas tuihisne and iatanameanenar Gale aieemettel CANCELLATION N CORPORATE TRUST ACCOUNT TRANSACTION BONDS ISSUED DESCRIPTION COUPON ATTACHED Form 14.—Memorandum of Cancellation. which the ledgers would be posted. Another method prob- ably could be worked out whereby the summary blotter would be retained and only a single copy prepared of each security ticket (except temporary withdrawal and temporary deposit tickets which would have to be in duplicate). Such a scheme would require the posting of each ticket to the ledger before its delivery to the vault or to the auditors. The security stencils present many advantages to the trust CORPORATE TRUST RECORDS 61 department whose business is large enough to warrant their installation. However, the cost of equipment and the salary of a specially trained operator must necessarily restrict the use of the stencil system to institutions where it can be justi- fied on economic grounds. MEMORANDA OF spLits No. CORPORATE TRUST SUMMARY OF SECURITIES OF ONE DENOM- INATION DELIVERED IN EXCHANGE FOR OTHER DENOMINATIONS CANCELLED, (SEE EXCHANGE RECORD FOR DETAILS) BONDS ISSUED DESCRIPTION EXCHANGE BOOK ENTERED D IN BLOTTER CHECKED IEDR EXAMINE! CHECKED | | Form 15.—Memoranda of Splits. As part of the securities control, the auditors make unannounced examinations of the department in addition to the regular examinations by directors, the clearing house, and the banking department. During these examinations the auditors’ duplicate records are availed of by the examiners counting the contents of the vault, thus permitting the undis- turbed use by the department of its own records. ‘Customers verifications” of each account (Form 19) are secured period- ically by the auditors and checked with the trust department records. 62 WORK OF CORPORATE TRUST DEPARTMENTS BONDS INTEREST PAYABLE RATE PRINCIPAL DUE HELD| FOR ACCOUNT OF AMOUNT Form 16.—Property Card (Bonds). STOCK CLASS DIV PAYABLE RATE PAR VALUE HELD FOR ACCOUNT OF | SHARES FORM 1772A Form 17.—Property Card (Stock). CORPORATE TRUST RECORDS 63 200 shs American Tel & Tel Co Capt.Stock |% Pe eel dil fed ae ae Oa a i =. fa ts? 3 ig? wsotsowA ala OOS Ry Cos tTELAL DG veep 1 $50000 Pennsylvania R.R. Co Genl Mtge Series B 5s due Dec 1 1968 En Ganel cel oat Liad 0D Ff sduesvfyasaat! OOOOT3 3d9f £ vat oud ad If aod COL 5 out " Fig. 3.—Security Stencil (Bonds). WORK OF CORPORATE TRUST DEPARTMENTS 64 dO HLNOIW "1d30 LSNYL SLYYOdYOO *I9}SISIY UOTIIT[ODN—"ST W109 NSOJaNOsS - NO ATaVXVL = S33¢udq XV.L- a QaLOATIOD SANACIAIC GNVY SNOdNOD CORPORATE TRUST RECORDS 65 pee 4 / California Manufacturing Company lst Me Mtge dated May 1 1925 Sinking Fund Account. wee Sal goeseeuod getsotostere sll aie Hse guttertZ SIIt £ ysM dovad ag7zil TuswodgoN Fig. 4.—Stencil Title Plate. New York,. Deer Please find below statement of securities held. by. this Company at clove of business. for the account of If you find that the statement agrees with your records please sign the attached verification‘and return it to us in the enclosed addressed envelope, retaining the original for your files. Par’ Value i Bonds: whleapr ge DESCRIPTION OF SECURITIES eeneee ec eesee Leven Sy ey ry Very truly yours, BANKERS TRUST CO. By Form 19.—Customer’s Veritication (Original). a, 66 WORK OF CORPORATE TRUST DEPARTMENTS The Auditor, Bankers, Trust Co., New York. Dear Sir: The staternent of securities held by the Bankers Trust Company at close of business far the adcount .of as listed below is hereby acknowledged and agrees with our records. Par Value of rag or er oO! Shares of Stock Wie DESCRIPTION OF SECURITIES CGS Lea By THIS VERIFICATION SHOULD BE SIGNED ONLY BY THE PRINCIPAL OR BY AN OFFICER OR AGENT THEREUNTO DULY AUTHOR(ZED Form 19.—Customer’s Verification (Duplicate). Cash records.— Entries in the “trust ledger” (Form 20) are based upon trust memoranda tickets and are checked against corresponding entries made in the “journal” (Form 21). “Memoranda tickets” (Forms 22 and 22A) officially approved, authorize ledger and journal entries affecting de- partmental funds, but “credit”? or “charge tickets’ (Forms 23 and 24) are required where other departments are con- cerned. The stub portion of Form 24 is used by an officer who signs checks in payment for securities purchased, to check such payments with the deposit of the securities in the vault. Form 25 is the “‘reconcilement”’ or “proof sheet” of the de- partment, prepared at the close of each day’s business and delivered to the general bookkeeper of the company. The “collection register’’ (Form 18, illustrated on page 64) is designed to relieve the cash journal of the detail in- volved in the collection of income on securities held by the department. The sheets comprising the register are in loose- 67 CORPORATE TRUST RECORDS ‘IaspeyT YSeg— 0Z W190 = tT oe ps EE SR ee BER RBe Sree eee ere BE 0 epee esol pe cad CPE — Pie eect eA SSE CIS Rie Bilie = ahi aks all + HP Le Fe 2 | ae eee eet ee ott eet Stet | net CLT LL ica Oc | some, 6 0 Sept ae ee DiS Be me ime aii HH : TUES i Seed See eee ee et Bh Sigel Eee ie aly mal al Hf is oe eae isay3Lni 3u33| 2 eee = 1 di atyao - oo. ~ ale een enc 41S3YNSLNI a eet a ae aa a na CONV MONA 6ose WYO 68 WORK OF CORPORATE TRUST DEPARTMENTS leaf form and, except for dates and amount of income, are prepared from the stencils. Postings to the trust ledger are made directly from this register, a single entry recording the aggregate of each day’s collections in the journal. ‘Trust checks’ (Form 26) are not in book form, but are bound in pads of one hundred, numbered consecutively. No check is signed by an officer unless the corresponding stub is presented with the check. This stub is detached, initialed by Corporate Trust Department Journal aioe Roe Ht HH ia OT] ACO ACO CTE ETT TU [+h PUT TTT TT Form 21.—Cash Journal (Right). -L | A rts CORPORATE TRUST MEMO $ CREDIT__ OFFICER Form 22..\-Memoranda Ticket. CORPORATE TRUST RECORDS 69 the signing officer, and delivered by him to the auditors who record the issuance of the check in a check register, whence it is marked off at the time the canceled check is returned through the clearings. The issuance of checks is recorded on the trust department journal through the departmental memo- randa tickets. F 922-5-23 CORPORATE TRUST — REDEMPTION MEMO Reeeraty rm wes Pease et. ot 192, Pee ee ne ee ee DEBIT % FOR FLA Re ete aT $ OTHER CHARGES CREDIT TRUST CHECKS OTHER CREDITS ACCT. OR DEPT. AMOUNT —- |———_$|§ ——— | | | j TOTAL CHECKS (OR CARRIED FORWARD) | MEE Slee alt a ee — = PREPARED BY CHECKED OFFICER Form 22A.—Memoranda Ticket (for Redemptions). Miscellaneous.—When any instrument of a formal char- acter required of the trustee is presented to an officer for signature, it must be accompanied by a ‘“‘documents executed slip’ (Form 27). The slips are in book form, twelve to a page, similar to the certification blotter. The original of each forms the departmental record, while the carbon copy 1s retained by the signing official and delivered to the auditors. 70 WORK OF CORPORATE TRUST DEPARTMENTS ‘Tickler” cards (Form 28) are filed alphabetically, while the tabs at the top index them by date. From these cards monthly work sheets are prepared listing current maturities, trust requirements, and general items to be given attention by the department. The “follow-up” or “pending card” (Form 29) was de- signed as a step toward insuring proper attention to matters requiring action at some future date. These cards are orig- inated by members of the department, collected by a file clerk, and retained in the file room until the date specified thereon, when they are brought to the attention of the de- BANKERS TRUST COMPANY New York, 132. CREDIT, For “APPROVED OrFicER Form 23.—Credit Ticket. F. 130 OFFICERS MEMO. BANKERS, TRUST COMPANY A, New York, 192 oe § CHARGE, ; Broker For p : Uarta ad Se P ee oa Amt. Ck. $ APPROVED CLE = Taro ee OREICER Form 24.—Charge Ticket. CORPORATE TRUST RECORDS ae partment. The cards are filed in chronological order while any accompanying papers are detached and arranged alpha- betically. If the pending matter is not cleared on the date originally fixed, the card is marked with a new date and re- turned to the file room. = - aint — CORPORATE TR oe —A —j eS) re) : 4 = ti 1 Fi v2) 2) O kaa 8 | For 192 (a a aad WS aS eae ey eee Rc gn ee Credit Clerk GA AAnBaE STARR a ee Loan Department PRUE NG Ree eee key A Man Tatler 82 Ey ee A SGI at es aa “Other Office Teller AOS Se aes hen OD Coupon Paying Dept CORREO ius of OSCE ES ae eee ne eel OLAS Gd Sa cL el eee ee ee Seas pe Dept i Ee ood EET BLS OG FE i cs ea OS WAT ere eter seer eo Ee he ETE TE Sr a inca es A OUTS DOS a la i a Cd SEBS ae he res Customers Securities Department Ce SR Se a Bee meiner oN pe Deere eee ET JOE a Eee a a NCH ESSE ee } Ramana PeLmee Phy) be bts. oo Total Department Balances OR naa BeBe cet PEAS Te ey ee ce ae i ee tS ie ee ep ee ea cor Fe a ee Eis SD Be a na ed ed ee LC) ies Accrued Interest Payable PRERPIeOe PS te pa ran anes Fa (hice 88 Deans Chetek Wa Eo . ORE Cuil), el White an! Coa ae Ama ne mee colo i ET TG es T Lines “Nes eamenan Teno uirotin le Cn 20 oj MSIERG Be Get PSG S eeibde ee Sateen Meanie te teen Gama bP © et RR | Cash Collections re | Due from Trust Deposjtories fl Far pO a 3 Ss is CN AE Scat ameniee Deen tne cet ree eer Form 25.—Proof Sheet. WORK OF CORPORATE TRUST DEPARTMENTS V2 AUYLELIOUR LAV.LSISSY "Hoey ysnIp—9z wWI0g ‘IUOL MAN * en oe ACM aL 2a CRASSUS A Soren an) Sevieeeaneney nthe io AIST: ATE? saosin ak hae Ae S22 Seeehs 22 22 FFE EOEEOEE BOSSES EEKAAREEEEE “diva ne) 4O U3GYO OL : 4 vos | ey ‘NOdNOD YOSHD ISNdL ALWYOdYOO TRUST -DEPARTMENT DOCUMENTS EXECUTED SLIP No. GE 600. TITLE OF TRUST DESCRIPTION OF DOCUMENTS PROCEEDS IF ANY, AND DISPOSITION EXECUTED IN __. COUNTERPARTS, APPROVED BY COUNSEL (DATE) BY VICE-PRESIDENT ASS’T SECRETARY THIS SLIP TO BE INITIALED BY SIGNING OFFICERS AND DELIVERED TO AUDITOR. Form 27.—Documents Executed Slip. Form Tay ape Card. 73 74 WORK OF CORPORATE TRUST DEPARTMENTS “Vault index cards” (Form 30) comprise a record of the location of securities of all kinds in the vaults. This informa- tion must be given on vault deposit and withdrawal tickets. While the records discussed in this chapter comprise a complete corporate trust accounting system, supplementary and special records are shown in other chapters. FOLLOW UP ACCOUNT DETAILS Form 29.—Pending Card. UNISSUED CANCEL D BONDS 9 SAN D COUPONS RITIES HELD FOR CREMATION a Shin a Form 30.—Vault Index. CHAPTER V THE CORPORATE MORTGAGE; PREAMBLE, GRANTING CLAUSE, AND FORM OF BOND The typical mortgage.—In this and succeeding chapters the discussion of the form of a corporate mortgage will gen- erally be based on a typical modern mortgage, hereafter re- ferred to as the “Telephone” mortgage, the full text of which appears on pages 333 to 391. A careful reading of the portion of the “Telephone” mortgage under discussion in each chap- ter will probably assist the reader to a fuller understanding of the subject. ‘There is, of course, no “‘standard” corporate mortgage—each instrument being drafted to fit the needs of a particular situation. However, there will be found a gen- eral similarity in form, and many common characteristics. As stated in the preface, the purpose of this discussion is to de- velop, chiefly, the points which are of greatest interest to those engaged in corporate trust administration. Consequently, some points of considerable legal importance, but of less prac- tical interest, will receive only brief mention. Parties and preamble.—The opening pages of a corporate mortgage are devoted to a number of formal statements, in- cluding (1) the date of the mortgage, which is not, as a rule, the date of actual execution; (2) the names of the mortgagor, the trustee, and other parties, if any, to the instrument; and (3) recitals as to the authority of the borrowing company, its purposes in creating the mortgage and the outstanding fea- tures of the bonds to be issued thereunder. } Form of bond.—Included in the recitals is the form of bond to be secured by the mortgage. Mr. Francis Lynde Stetson: has described a bond as follows: “Primarily, a corporate bond contains a promise to pay a fixed sum at a time and place specified, and to pay interest 1Francis Lynde Stetson, “Some Legal Phases of Corporate Financing, Reorganization and Regulation,” p. 16. 75 76 WORK OF CORPORATE TRUST DEPARTMENTS thereon at a rate, time, and place also specified. To identify the bonds as entitled to the benefits of the indenture, the bonds set forth the amount and title of the issue, and the parties and date of the indenture, and refer to the indenture for a statement of the security (if any), and the rights of the trustee and of the bondholders in respect of such security or under such indenture. ‘There is a recital also that certification by the trustee un- der the indenture is requisite to the enforceability of the bond. This certification then becomes as essential to the validity of the bonds as to the security thereof by the indenture. ‘Such a simple bond properly executed and attested is the stock upon which from time to time have been grafted various provisions intended to make the bonds attractive to purchas- ers or to protect the obligor. The number and variety of such provisions are many, limited only by the ingenuity of the borrower and the necessity of avoiding any contravention of the promise to pay.” Until the comparatively modern innovation of securing bonds of different series by the same instrument, the full text of the bond was set out in the mortgage. Unless issues of bonds in series are contemplated, this practice is still fol- lowed. In the newer mortgages, providing for more than one series, a skeleton form is given, with the statement that the bonds of each series shall substantially conform thereto, with such alterations and insertions as may be authorized pursuant to the mortgage. Promptly upon receipt of the bonds for certification and delivery, the trustee should compare the text thereof with the form in the mortgage. No variation in substance should be permitted unless authorized by the mortgage. This com- parison should include the form of coupon, trustee’s certifi- cate, and any authorized legends or endorsements, as well as the form of the bond itself. In accordance with common practice, the ‘Telephone’ mortgage sets forth, not only the form of the coupon bonds, but also the form of the coupons, the fully registered bonds and the trustee’s certificate. THE CORPORATE MORTGAGE; PREAMBLE, ETC. ‘77 Granting clause.-—In the words of Mr. Roberts Walker 3 “The granting clauses, the habendum and the ‘in trust, never- theless’ clause are fundamental. The granting clauses de- scribe and convey the property to be mortgaged. The habendum completes the conveyance; to this point the docu- ment would be a deed or mortgage for the sole benefit of the trustee. Then follows the language that transforms the document into a deed of trust, defining the quality in which the trustee receives the property as grantee, but ‘in trust, nevertheless’ for the bondholders, thus making the bondholders the real beneficiaries of the transaction. “In logical sequence, here should follow the passage com- monly entitled ‘Possession until default; Defeasance Clause,’ wherein it is provided that the mortgagor shall continue in possession of all or some of the mortgaged property until default is made in paying the bonds or coupons or in living up to other terms of the mortgage; and also that upon final payment and performance of the bonds and mortgage, de- feasance shall occur, that is, the mortgage shall be undone and the mortgagor shall retake the mortgaged estate as its sole absolute property.’ The mortgage may cover various classes of property— real estate, chattels, securities—as well as franchises, leases, patents, income from the mortgaged property, and so on. Many mortgages are intended to convey for the security of the bondholders, not only the property of the company, in existence at the date of the mortgage, but also all property which may come into the possession of the company, during the life of the mortgage. In such cases there is inserted in the granting clause, an “‘after-acquired property clause’’ setting forth the intention. Such clauses have resulted in some very interesting legal contests. Following the granting clauses it is customary to insert a statement of excepted property and appropriate references to any prior encumbrances. 2In the “Telephone” mortgage set forth in the appendix the real property _conveyed was described in detail in a separate instrument which was recorded with the mortgage. See Article VI, Section 3 (p. 362). 3Roberts Walker, “The Modern Corporate Mortgage.” 4See Chapter XI, p. 159. 78 WORK OF CORPORATE TRUST DEPARTMENTS Article I — the bonds.’— In the first article of a modern mortgage usually appear the terms of the bonds to be issued thereunder, the method of execution, provisions as to de- nominations, registration and exchange thereof, the authori- zation of temporary bonds, and regulations for the issuance of duplicate bonds, in the event that bonds become mutilated, destroyed, lost, or stolen. Authorized issues.— The total authorized amount of bonds is in some cases stated in the preamble and at times in this article. In the preamble of the ‘Telephone’ mortgage it is recited that the immediate issue shall be $25,000,000 of Series “‘A’’ bonds, but the total authorized issue is not pre- scribed. Article II of the ‘Telephone’ mortgage, referred to in the next chapter, provides that the company may issue bonds thereunder, without any fixed limit as to principal amount, but subject to certain restrictions. While such a mort- gage is sometimes referred to as authorizing an “unlimited” issue, it is more accurate, in view of the express conditions, to refer to the issue as “indeterminate.” Series of bonds.—Indeterminate bond issues are of recent origin, but are becoming quite common in railroad and public utility borrowing. The reason is, perhaps, best illustrated by the picture of the economical country mother who, in buy- ing a new suit of clothes for her growing boy, purchases one at least two sizes too large, so that it will not become too small before it has worn out. Think of her joy if it were possible to buy an adjustable suit. Corporations, particularly railroads and public utilities, like the small boy, have the growing habit. Before the days of the adjustable mortgage, their bankers and directors used to provide a mortgage author- izing a much larger issue than was at the moment required, but all too often the corporation outgrew the mortgage in a few years, and then had to undergo all the trouble and expense of securing a new and larger one. Adjustability— Experience has indicated the necessity of flexibility in respect of matters other than mere size. Nearly all of the old mortgages provided for a fixed rate of interest on the bonds to be issued. The fallacy of establishing a rigid 5 See page 340 for Article I of the “Telephone” mortgage. THE CORPORATE MORTGAGE; PREAMBLE, ETC. 79 interest rate was clearly shown in the period of high money rates immediately following the War. Many a corporation found itself confronted with the necessity of borrowing, in an 8 per cent market, and under a mortgage authorizing only 5 per cent bonds. There was a period of some years before the War when internationally known corporations could borrow to advan- tage in Europe; but the Englishman wished his bonds to be payable in sterling and the Frenchman in francs, and most corporations found that their mortgages authorized bonds payable only in dollars, and were consequently faced with much legal detail in furnishing bonds payable in the required currencies. It is because of circumstances such as these that many mort- gages of large corporations authorize the issue of bonds in series, each to be plainly designated, usually by letter or year of issue or maturity, so that it can easily be distinguished from other series under the same mortgage, and issuable on such terms as to interest rate, maturity, convertibility, cur- rency, etc., as the directors of the company may authorize pursuant to the terms of the mortgage. The form of the Series “A” coupon bond issued under the “Telephone Company” mortgage is reprinted, in full, below: Fig. 5—Form of Coupon Bond. United States of America. No. THE TELEPHONE COMPANY OF AMERICA Twenty-five year First and Refunding Mortgage 5% Sinking Fund Gold Bonds, Series “A” Due October 1, 1950 The Telephone Company of America (hereinafter called the “Telephone Company’’), a corporation of the Commonwealth of Pennsylvania, for value received, hereby promises to pay to bearer, or, if this bond be registered, to the registered holder hereof, on the first day of October, 1950, at the office or agency of the Telephone Company in the Borough of Manhattan, City of New York, Dollars in gold coin of the United States of America of or equivalent to the standard of weight and fineness existing on October 1, 1925, and to pay interest thereon from the date hereof at the rate of five per cent (5%) per annum, without deduction for any tax imposed by the Commonwealth of Pennsylvania upon this bond or upon the holder as a resident thereof, not 4m excess of four mills per annum on each dollar of the principal amount of this bond, such interest to be payable at such office or agency, in like gold coin, semiannually, on the first day of April and the first day of October 80 WORK OF CORPORATE TRUST DEPARTMENTS in each year until the payment of said principal sum, but only upon the presentation and surrender of the interest coupons hereto annexed as they severally mature. This bond is one of a duly authorized issue of First and Refunding Mort- gage Gold Bonds of the Telephone Company, issued and to be issued under, and all equally secured by an indenture of trust, dated October 1, 1925, duly executed and delivered by the Telephone Company to National Trust Company, a corporation of the State of New York, as Trustee, to which indenture refer- ence is hereby made for a description of the properties and franchises mort- gaged, the nature and extent of the security, the rights of the holders of said bonds and of the Trustee in respect of such security, and the terms and conditions under which the bonds are issued and secured. As provided in said indenture, said bonds may be for various principal sums and are issuable in series, which different series may mature at different times, may bear inter- est at different rates, and may otherwise vary as in said indenture provided. Series “A” bonds, of which this is one, are known as the Twenty-five year First and Refunding Mortgage 5% Sinking Fund Gold Bonds, Series “A”, of the Telephone Company, and are limited in the aggregate principal amount of $25,000,000, at any one time outstanding. In case an event of default, as defined in the said indenture, shall occur, the principal of this bond may become and be declared due and payable in the manner and with the effect provided in said indenture. This bond shall pass by delivery unless registered as to the principal thereof in the holder’s name at the office-or agency of the Telephone Com- pany in the Borough of Manhattan, City of New York, such registry being noted on the bond by the agent, for such purpose, of the Telephone Company, after which no transfer shall be valid unless made at said office or agency by the registered holder in person or by his attorney duly authorized in writing, and similarly noted on the bond; but thereafter it may be discharged from registry by being transferred in like manner to bearer, and thereupon trans- ferability by delivery shall be restored, and may again, from time to time, be registered or transferred to bearer as before. Such registration, however, shall not affect the negotiability of the coupons hereto annexed, which shall continue to be payable to bearer and transferable by delivery merely, and the payment thereof to bearer shall fully discharge the Telephone Company in respect of the interest therein mentioned, whether or not this bond be registered. The bonds with coupons of this Series “A” are issuable in denominations of $1,000, $500, and $100. The registered bonds without coupons of this Series “A” are issuable in denominations of $1,000, $5,000, and $10,000. Such bonds with coupons, and such registered bonds without coupons, and such bonds of the several denominations of either form, are interchangeable; and in and by said indenture it is covenanted that upon payment of charges and otherwise as provided therein, any such interchange may be made by the holder of any such bond or bonds upon presentation thereof for the purpose at the office or agency to be maintained by the Telephone Company in the aforesaid Borough of Manhattan, City of New York. On any interest payment date this bond is subject to redemption at 105% of the principal amount thereof and accrued interest by operation of the sink- ing fund or at the option of the Telephone Company upon publication of notice of such redemption in the Borough of Manhattan, City of New York, as provided in said indenture, the first publication of said notice to be not less than sixty days prior to such redemption. Said indenture provides for a semiannual payment by the Telephone Com- pany to the Trustee of $205,000, as and for a sinking fund to be used in THE CORPORATE MORTGAGE; PREAMBLE, ETC. 81 acquiring bonds of Series “A” at not exceeding 105% of their principal amount and accrued interest. No recourse shall be had for the payment of the principal of, or the interest upon, this bond, or for any claim based thereon, or in respect thereof, or of said indenture, against any incorporator, stockholder, officer, or director of the Telephone Company, either directly, or through the Telephone Company, or through a receiver or trustee, whether by virtue of any statute or rule of law, or by the enforcement of any assessment or penalty or otherwise, all such liability being, by the acceptance hereof and as part of the consideration for the issue hereof, expressly released. This bond shall not become valid or obligatory for any purpose until it shall have been authenticated by the execution of the certificate, hereon endorsed, by the Trustee under said indenture. In WITNESS WHEREOF, The Telephone Company of America has caused these presents to be signed by its President or Vice President and its corporate seal to be hereunto affixed and attested by its Secretary or Assistant Secretary, and coupons for said interest bearing the engraved facsimile signature of its Treasurer to be attached hereto in the City of New York. Dated the first day of October, 1925. THE TELEPHONE COMPANY OF AMERICA, By Vice President Attest: Assistant Secretary Form of Interest Coupon. No. $ On the day of (unless the bond to which this coupon is attached shall have been called for previous redemption), The Telephone Company of America will pay to bearer, without deduction for any tax imposed by the Commonwealth of Pennsylvania upon the bond to which this coupon is attached, or upon the holder as a resident thereof, not in excess of four mills per annum on each dollar of the principal amount of such bond, at its office or agency in the Borough of Manhattan, City of New York, Dollars in gold coin of the United States, being six months’ interest then due on its Twenty-five year First and Refunding Mortgage 5% Sinking Fund Gold Bond No. Series “A.” ‘Treasurer. Form of Trustee’s Certificate. This bond is one of the bonds, of the series designated therein, described in the within-mentioned indenture. NATIONAL TRusT COMPANY, Trustee, By Assistant Secretary. (Back oF Bonp) The stamp tax imposed by act of Congress for and in respect of this bond has been paid by stamps affixed to the indenture under which this bond is issued, and duly canceled. 82 WORK OF CORPORATE TRUST DEPARTMENTS Legend as to Stamp Tax (LEGEND ON $1,000 Bonps As TO EXCHANGEABILITY FOR OTHER DENOMINATIONS) The holder of this bond may, at his option, on surrender and cancellation and on payment of charges, as provided in the Indenture, receive in exchange, coupon bonds of the same issue and series for an amount aggregating $1,000 in denominations of $500 or $100, of numbers not contemporaneously out- standing. Form for Registration of Principal. NoTicE: No WRITING ON THIS BOND EXCEPT BY AN OFFICER OR AGENT OF THE COMPANY Date of Registration| Name of Registered Owner| Signature of Registrar Filing Back. THE TELEPHONE COMPANY OF AMERICA — $1,000 Twenty-five Year First and Refunding Mortgage 5% Gold Bonds Series ee Due October 1, 1950. Interest Payable April 1 and October 1. Principal and Interest payable in the Borough of Manhattan City of New York. In the case of a mortgage authorizing the issuance of bonds in series, the first article will usually set forth in detail the terms of the initial series, and provide that subsequent series shall be issued upon such terms, within the limits prescribed by the mortgage, as may be determined by the directors of the company, by appropriate resolution, a certified copy of which should be filed with the trustee with the first applica- tion for issue of bonds of the new series. In some cases the mortgage provides that the terms of each new series shall be set forth in a supplemental indenture. ‘This method is more formal, and some lawyers consider it better practice. THE CORPORATE MORTGAGE; PREAMBLE, ETC. 83 Execution of bonds.—Bonds are often executed by the cor- poration well in advance of issuance, and to meet the contin- gency of an ofhcer severing his connection with the company prior to the date of actual issue of bonds signed by him, pro- vision is nearly always made that bonds so signed may be delivered as valid obligations of the company, and similarly, provision is made that bonds may be signed by officers of the company at the date of issue, although such persons may not have been officers of the company at the nominal date of the bonds. At this point it is also usual to authorize the ex- ecution of the coupons by the facsimile signature of the pres- ent or any future treasurer of the company. The reasons for these provisions are obvious. It is customary also to provide that all coupon bonds, irre- spective of the date of issue, shall be dated as of the date of the mortgage, and that all matured coupons at the time of issue shall be detached by the trustee and canceled. If the mortgage authorizes fully registered bonds, such bonds are usually dated as of the interest date next preceding the date of issue, unless issued on an interest date when the bonds are dated as of the date of issue. Trustee’s certificate.— That the trustee’s authentication or ‘certification’ of a bond is essential to its validity is recited not only in the bond itself (see page 81), but in the mort- gage as well. Authentication by the trustee identifies the bonds regularly issued under the mortgage. Unfortunately, investors have sometimes assumed that the trustee’s signature on a bond implied some guaranty of value. The mere read- ing of the trustee’s certificate (which generally takes the form set forth on page 81) should correct any such im- pression. Registration, transfer, and exchange.°— Practically all bond issues provide for registration as to principal, and many long- term bonds for full registration. Registration ‘‘as to prin- cipal only” is endorsed upon the coupon bonds, in a space provided for that purpose as indicated on page 82. Such registration does not affect the interest and the coupons con- tinue to be payable to bearer. ‘The owner’s name is inscribed 6 The operation of transfer and registration of bonds is discussed in Chap- ter XVIII. See page — for the provisions of the “Telephone” mortgage. 84 WORK OF CORPORATE TRUST DEPARTMENTS on the bond and entered upon the registration record by the company or its authorized bond registrar, usually the institu- tion which acts as trustee; in fact, many mortgages designate the trustee as bond registrar. Subsequent transfers are made on the books of the company and endorsed upon the bond by the registrar upon presentation to it of the bond accompanied by a proper assignment executed by the registered owner. Registered bonds of this type may be restored to their original bearer form by transfer to “bearer” instead of to a new registered holder, and may again, from time to time, be regis- tered and retransferred to bearer. Full registration, that is, registration of both principal and interest, is accomplished in a different manner. Some of the older mortgages provide that in case of full registration the coupons shall be detached and canceled, and the bond endorsed as in the case of registration as to principal. Under most mortgages, which provide for full registration, however, sepa- rate forms of fully registered bonds are authorized, in speci- fied denominations, and upon surrender of a block of coupon bonds for full registration, the coupon bonds are canceled and in lieu thereof fully registered bonds in the name of the new owner are certified and delivered. As interest falls due, checks for the interest on fully registered bonds are mailed to the registered holder by the company or its agent. In many cases fully registered bonds carry a legend to the effect that they have been issued against the cancellation of coupon bonds of specified serial numbers and denomination and that the specified coupon bonds will be reissued, on appli- cation of the registered holder and on surrender and can- cellation of the fully registered bond. ‘This is considered good practice and is a listing requirement of the New York Stock Exchange as to registered bonds which are interchange- able with coupon bonds.’ Exchange of denominations.—Many mortgages which pro- vide for coupon bonds in denominations other than $1,000 (usually $500 and $100) authorize the exchange of one de- nomination for another. Some mortgages restrict this privi- lege to the consolidation of small denominations into larger, while others permit a full exchange either way. Similarly, 7 See listing requirements of New York Stock Exchange, page 441. THE CORPORATE MORTGAGE; PREAMBLE, ETC. 85 in the case of fully registered bonds of specified denomina- tions, provision is made that bonds of one denomination may be exchanged for other denominations. In the case of fully registered bonds, the usual denominations are $1,000, $5,000, and $10,000, although sometimes blank certificates are used _which may be issued for any multiple of $1,000. Fully regis- tered bonds of less than $1,000 are rarely authorized. Charges for registration and exchange.— Mortgages which authorize fully registered bonds and the exchange of denom- inations usually provide that the company may charge the bondholder for any registration, transfer, or exchange involv- ing the issue of a new bond, a specified sum (seldom in excess of $2) for each new bond issued, plus reimbursement for any tax imposed on the transaction. Who is deemed owner.—For the protection of the com- pany and the trustee, the statement that the company and the trustee may treat the bearer of any unregistered coupon bond, and of any coupon, and the registered holder of any registered bond, as the absolute owner thereof, and shall not be affected by any notice to the contrary, is practically always made in the mortgage. While this provision is inserted for the pro- tection of the company and the trustee, too much reliance should not be placed upon it, as there may be circumstances in which neither the company nor the trustee could legally disregard other notice. Duplicate bonds.—The volume of securities lost and stolen during the past few years is a matter of concern to trustees which are called upon to certify duplicates. Practically all corporate mortgages make provision for replacing bonds which have been mutilated, destroyed, or lost. Section 7 of Article I of the ‘Telephone’ mortgage is typical of the re- quirements for the issuance of duplicates. Some recent mort- gages specifically permit the issuance of duplicates of stolen bonds. Where specific authority is lacking, the trustee will do well to secure counsel’s opinion as to whether the word “lost,” as used in the mortgage, embraces the meaning of the word “stolen.” Immediately upon receiving a report of the loss or theft of securities the trustee should make appropriate notation in 86 WORK OF CORPORATE TRUST DEPARTMENTS the different accounts pertaining to the securities, such as exchange, bond registration, coupon paying records, etc., and should also record the notice in a central “stop” file. As securities are recovered or duplicates issued supplemental no- tations should be made on the same records. It is hardly safe to generalize on the subject of the issuance ~ of duplicate bonds, because in each case the surrounding cir- cumstances have an important bearing, but the trustee should proceed with caution and, before acting upon any application for the issuance of a duplicate of a bond reported lost, stolen, or destroyed, should carefully consider these questions: 1. Does the mortgage permit the issuance of a duplicate? 2. Has acceptable indemnity (usually for (a) twice the face amount of the bond plus (b) the amount of interest to maturity) been furnished the company and the trustee? 3. Has the applicant established his ownership and filed satisfactory proof of loss, theft, or destruction? 4. Has the mortgagor duly authorized the issuance of the duplicate? 5. Has a thorough examination been made of the com- pany’s and the trustee’s records and securities for any trace of the missing bond or the coupons pertaining thereto? 6. Have the paying agents, sinking fund agents, and the registrar, if other than the trustee, been apprised of the loss, and have they completed the examination of their records and securities? 7. Have counsel examined the application and approved the issuance of a duplicate? The payment of missing bonds or coupons at maturity involves practically the same questions as the issuance of a duplicate. ‘The circumstances surrounding each case will, of course, determine the extent of the trustee’s investigation. It is advisable for the trustee to require at least six months, preferably twelve months, to elapse before taking final action on any such applications. At the end of that period, the investigation should be brought down to date and the case again examined from all angles. It is desirable from the standpoint of a trustee that dupli- cate bonds and all coupons attached thereto be identified by some mark which will distinguish them from the original bonds. However, before marking duplicate bonds, the trus- THE CORPORATE MORTGAGE; PREAMBLE, ETC. 87 tee should ascertain the requirements of any stock exchange on which the bonds are listed. A special committee of the Corporate Fiduciaries Asso- ciation of New York City rendered a report on the subject of duplicate securities and submitted for the benefit of its members forms of letters to be used by trustees in acknowl- edging receipt of notice of loss or theft of securities. In such acknowledgment, notice is served on the bondholder or his representative as follows: “Your attention is directed to the fact that these securities are or may be negotiable and enforceable in the hands of an innocent holder for value. For this reason, we are regret- fully constrained to advise that we can assume no respon- sibility in respect of any payment, exchange, or transfer made to or at the request of any holder... . ‘Notice of the alleged loss should first be filed with the debtor company at and its consent to the issuance of duplicate securities should be lodged with us, and our prac- tice is to require, in substantially the form enclosed (a) proof of loss, theft, or destruction, and (b) a bond of indemnity issued by one of the standard surety companies in an amount equal to: (1)twice the par value of the securities; (2) interest foumaturitys <7. It is advisable in all cases to have the bond of indemnity executed by a reputable surety company, in form approved by the trustee’s counsel and so drafted that the trustee will receive all possible protection. Certainly, in matters of this kind, where one misstep may result in serious loss, the trustee is fully justified in pressing its demands. At best, the certification of a duplicate bond, or the payment of securities alleged to have been lost, stolen, er destroyed, means an increase in contingent liabilities which the trustee should incur only when protected to the fullest extent possible. Certificates of indebtedness.—The courts of New York® have held that, where the provisions of a mortgage do not 8 The outstanding New York case is Switzerland General Insurance Com- pany of Zurich v. New York Central and Hudson River Railroad Company, 152 N. Y. App. Div. 70. 88 WORK OF CORPORATE TRUST DEPARTMENTS entitle the owner of a lost bond to secure a duplicate bond, he may require the issuance by the debtor corporation of a “certificate of indebtedness” conforming to the lost bond in principal amount, rate of interest, and so on, but containing a provision that in case the lost bond is found in the posses- sion of one entitled to enforce it the certificate of indebtedness shall be unenforceable and void. Before certifying a certifi- cate of indebtedness against a lost bond, a trustee should re- ceive proof of loss and adequate indemnity, and generally it should follow the procedure outlined for the issuance of a duplicate bond. Temporary bonds and interim certificates.— Io assure a maximum of protection against forgery most permanent or ‘‘definitive” bonds are elaborately engraved or lithographed, in fact, the New York Stock Exchange insists that as a pre- requisite to listing, such securities be engraved. Many corpo- rations which do not contemplate an immediate listing, antici- pate the possibilities of future requirements to the extent of preparing their securities in form approved by the exchanges of the leading security markets. But the engraving of an issue of some thousands of bonds and appurtenant coupons is a slow process, and pending such preparation it is often necessary for the borrowing corporation to arrange for some substitute acceptable to investors. This accounts for the use of temporary bonds and interim certificates. “[emporary bonds follow the general form pro- vided in the mortgage, and are subject to the same conditions as the definitive bonds for which they will, at a later date, be exchanged. As a rule, they carry no coupons, although a coupon or coupons may be attached to cover interest which will mature prior to the probable date of exchange for defini- tive bonds. ‘Temporary bonds are usually printed on engraved or lithographed forms, are plainly marked ‘‘temporary,” and, when interest coupons are not attached, provide that interest payments shall be endorsed on the bond. Interim certificates and interim receipts serve the same pur- pose in the security market as temporary bonds. However, their form is quite different and their issue is not controlled by the mortgage, but usually is provided for in a separate agreement or letter of instructions. Issued on behalf of the THE CORPORATE MORTGAGE; PREAMBLE, ETC. 89 borrowing corporation or an underwriting syndicate, in many cases prior to the execution of the mortgage, they usually entitle the holder to receive the actual security when, as, and if issued, or, failing delivery thereof within a specified time, to receive a cash refund based on the subscription price of the bonds. Banks and trust companies frequently act as agents for the issuance of interim certificates.” ‘The practice of the underwriting house issuing its own interim receipts, where the underwriting house retains the proceeds of the securities sold, is not sound. ‘The proceeds thus held may, in bank- ruptcy or insolvency proceedings, be held to have become mingled with the other assets of the underwriting house, thus occasioning losses to the holders of the interim receipts. Cer- tain underwriting houses make a separate trust deposit of such proceeds with a banking institution, the underwriting house then issuing its interim receipts, registered by the bank- ing institution. This is a sound and desirable practice, where it results in a complete segregation of these proceeds for the sole protection of the holders of the interim receipts. As the investing public comes to better understand the principles and risks involved, it is likely that the receipts issued or registered by fiduciary institutions will be demanded. Exchange of temporary for definitive bonds.— The delivery of definitive bonds against the surrender of interim receipts or temporary bonds is a phase of the trustee’s activities which requires a system calculated to provide speed with a careful check of the securities received and delivered so as to prevent any overissue. As most large issues are marketed in temporary form and later exchanged, this feature of the trustee’s activities results in a large turnover of securities. Issuance before recording.—Most mortgages permit bonds to be certified and delivered by the trustee in advance of the recording of the mortgage. This is due to the time required to place a mortgage of record in a number of jurisdictions. While the authors know of no loss to bondholders because of this provision, the authority to deliver bonds before recording the mortgage is justified only on the score of practicability. Bankers underwriting an issue are willing to extend the privilege only to companies of unquestioned standing. 9 See Chapter XIII, page 170. CHAPTER VI ISSUE OF BONDS UNDER CORPORATE MORTGAGES Trustee’s responsibility in certifying.— The provisions of a corporate mortgage which control the issuance of bonds are of special importance to the trustee, whose duty it is to see that issues for specified purposes, as well as the total issue, are kept within prescribed limits. Corporate mortgages fre- quently contain provisions limiting the issuance of bonds under the mortgage not only in the aggregate amount but in the amount that may be used for specified purposes. For ex- ample, the total issue for which a mortgage provides—the so-called ‘authorized’? amount—may be $5,000,000, but not more than $1,000,000 may be used for retiring underlying bonds. The trustee, then, must certify not more than $1,000,000 of bonds for refunding purposes. The research sleet (see page 100) is useful in checking the limitation just discussed and other points which the trustee should watch when called upon to certify bonds. In the simpler forms of instruments one paragraph, or even a single sentence, may suffice to express the bond issue provi- sions. [he purpose, in such instances, is merely to provide immediate cash for a known requirement, and generally no restrictions are imposed other than a limitation on the total 1A variety of terms are applied to mortgages to indicate the relationship of the amount of bonds issued to the “authorized” issue. While these terms are not altogether standard, the following conform to general usage: When bonds are issued to the extent authorized, the mortgage is sometimes re- ferred to as a “closed” mortgage. If the “authorized” amount is specified in the mortgage, but bond issues have not reached the authorized limit, we speak of the mortgage as a “limited open end” mortgage. In cases where the mortgage sets no limit upon the amount of bonds which may be issued, or the authorized amount cannot be determined from the mortgage itself — being dependent upon some other factor, such as the amount of outstanding stock — we refer to it as an “open” or “indeterminate” mortgage. A company may also “close” a mortgage by making a formal agreement to issue no more bonds thereunder. A covenant to this effect is often contained in a subsequent mortgage. 90 BOND ISSUE UNDER CORPORATE MORTGAGES 91 issue. Ordinarily, in such cases, the bonds are issuable imme- diately upon execution of the indenture, or, from time to time thereafter, upon the written order of designated officers of the company, or in accordance with resolutions of its board of directors. Three principal purposes of bond issue—The more elabo- rate regulations in respect to bond issues have come from a realization of the advisability of providing for future financ- ing by the borrowing corporation, whose requirements cannot be forecast at the time the mortgage is made. As a result, the sections of a mortgage placed under the heading, ‘‘Issue of Bonds,’”* are frequently drawn to provide for three main objects: 1. The initial issue for immediate needs. 2. Issuance to refund underlying bonds. 3. Issuance for permanent additions and betterments.° The initial issue—Bonds for immediate requirements are usually deliverable upon a simple order of designated officers of the company or pursuant to resolutions of its board of directors. An initial bond issue will probably have as its purpose one or more of the following: Reimbursement for capital expenditures actually made by the company prior to the date of the mortgage. In such a case the trustee usually has no obligation other than to deliver the bonds; but the section authorizing the issue of bonds against subsequent capital expenditures will then provide that only expenditures made after the date of the mortgage may be the basis of additional bond issues. Acquisition of property included in the granting clauses of the mortgage. Such an issue requires a so-called “clearing transaction” at the time of the execution of the mortgage. Representatives of the company, its bankers, the trustee, and thé seller of the property meet and go through a “simulta- neous” procedure, of which the following is an example: 1. The company receives a deed from the seller of the property. 2 This reference is to the text of the “Telephone” mortgage, page 345. 3 Sometimes the term “capital expenditures” is used. The mortgage should always clearly state what items are admissible under this general heading. 92 WORK OF CORPORATE TRUST DEPARTMENTS 2. The company and the trustee execute the mortgage. 3. The trustee delivers the bonds (previously signed and certified) to the company. 4. The company delivers the bonds to its bankers, against payment. 5. The company pays the seller for the property. 6. The deed, together with the mortgage, is delivered to a joint representative of the interested parties to be promptly recorded. The mortgage must, of course, contain the customary pro- vision permitting delivery of bonds in advance of actual re- cording. Acquisition of securities to be pledged with the trustee. This may involve a ‘“‘clearing transaction” similar to that de- scribed for the acquisition of real property. The question of the control of pledged securities is discussed in Chapter IX. Pending construction.—At times a mortgage contemplates financing, through the proceeds of the initial issue, the con- struction of a new factory, power-house, line of railway, or some other project. In that event, the mortgage will usually provide that the cash proceeds of the bonds shall be deposited with the trustee for the purpose of paying for the construction as it progresses. [he requirements for the withdrawal of such cash are similar to those prescribed for the issue of bonds against capital expenditures. (See page 93.) Refunding.—Several methods are used to accomplish the refunding of underlying obligations. In case the mortgage authorizes the issuance of bonds against underlying obligations before the maturity of the latter, the company may indepen- dently acquire the underlying obligations and deliver them to the trustee with its formal application for the issue of addi- tional refunding bonds. Issues for the purpose of redeeming underlying bonds are not quite so simple, because the refund- ing mortgage generally requires the trustee to receive evidence that the proposed redemption will be accomplished. This will probably include evidence that the company has complied with the provisions of the underlying mortgage as to publi- cation and mailing of the redemption notice and that it has provided the cash necessary to effect the redemption. Ordi- narily these funds are secured through the sale of refunding BOND ISSUE UNDER CORPORATE MORTGAGES 93 bonds and the cash is held in trust by the refunding trustee, until deposit with the underlying trustee is necessary to accom- plish the redemption. ‘The deposit is then made by the re- funding trustee, in trust, for the express purpose of the re- demption. ‘The refunding of underlying bonds at maturity may consist simply of the delivery of the new bonds upon receipt by the trustee of the canceled underlying bonds accom- panied by an appropriate application of the company under the provisions of the refunding mortgage; or the operation may involve the issuance of the refunding bonds upon deposit with the trustee of cash sufhiicient to pay the maturing under- lying bonds, this cash to be released as the matured bonds are received. Canceled underlying bonds received by a trustee as a result of their payment or redemption constitute prima facie evidence of a reduction of the underlying lien. Further than this their value is problematical. As a rule, uncanceled underlying bonds so received are held alive and, generally speaking, such bonds are enforceable in case of default, thereby entitling the trustee to a proportionate share in the underlying lien. As to coupons from underlying bonds deposited with the underlying trustee, it is customary to provide that they shall not be enforceable against the company unless a default exists. It is sometimes provided that underlying bonds shall be stamped by the trustee “Not negotiable, held by the trustee under mortgage,” or words to that effect. The trustee of a refunding mortgage is practically always authorized, when it has acquired all bonds of an underlying issue, to cancel the entire issue and secure from the underlying trustee an instrument of satisfaction and release. However, if there is an intervening lien, such underlying issue will be held by the refunding trustee, until the intervening lien has Been satisfied. Issues for permanent additions and betterments.—At the time the mortgage is drawn, the company will usually en- deavor to make these provisions as broad as possible, while the bankers will insist upon such restrictions as in their judg- ment are necessary to protect the bondholders. The careful trustee, in examining such a mortgage, prior to execution, will satisfy itself, first, that the necessarily complicated pro- visions are entirely clear, so that no embarrassing questions 94 WORK OF CORPORATE TRUST DEPARTMENTS of interpretation will arise during the administration of the trust, and, second, that the provisions and restrictions, as stated, are practicable. Counsel for the trustee will, of course, pass upon the legal questions involved. General restrictions.—Perhaps the best way to give a gen- eral idea of the character of restrictions which mortgages generally place against the issuance of bonds for refunding purposes and for capital expenditures is to cite a few typical provisions: No default——Bonds may not be issued while a default exists. Percentage of cost.—Bonds are usually issuable only to an amount equal to a specified percentage, say, 75 per cent or 80 per cent, of the actual cost or fair value to the company, whichever shall be lower, of the property or betterments. The percentage restriction, however, is not usually applied to refunding operations. Character of additions—The mortgagor is usually re- quired to certify that the expenditures are properly chargeable to capital, that they have been made on property subject to the lien of the mortgage, and that such additions and better- ments are necessary and advantageous to the business of the company. New property.—If new property is involved, there is usu- ally a further requirement that such property be subjected to the lien of the mortgage simultaneously with the issuance of the bonds. ‘There may also be special restrictions on the char- acter of property which may be made the basis of bond issue, for instance, a railroad mortgage may require new property to connect with the existing right of way, or a public utility mortgage may restrict the company’s pledge of property as a basis for bond issues to property required in connection with the company’s business and located in territory served by the company or adjacent thereto. Practically every mortgage of this kind requires that the property which is the basis of the application shall be free of any lien superior to the lien of the mortgage under which the bonds are issuable, or, if there are any prior liens, that ade- quate provision be made to take up such liens. BOND ISSUE UNDER CORPORATE MORTGAGES 95 Earnings.—Provisions as to net earnings, as a prerequisite to bond issue, are contained in many mortgages. A typical requirement is that the net earnings for 12 consecutive months within 15 months next preceding the application shall equal twice (the ratio varies from 1% to 2 times) the total interest requirements for the same period on all obligations with a lien equal, or prior, to that of the mortgage, and including the interest on the bonds applied for. Evidence of compliance with restrictions.—Every mort- gage will specify certain documents which shall be filed with the trustee on each application for the issue of bonds, as evi- dence of compliance by the mortgagor with the requirements of its mortgage. The following outline of the documents comprising a typical bond application illustrates the general practice: 1. Resolution.—Practically every mortgage requires that the application shall include a certified copy of resolutions passed by the directors of the mortgagor, authorizing the application and generally stating the purpose of the proposed bond issue. 2. Order.—Most mortgages require a written order by specified officers directing the delivery of bonds. 3. Certificates—The different mortgages present a rather wide range in their requirements as to certificates covering the detail of the basis of the application. Nearly every mort- gage will require a certificate as to the facts by one or more designated officers of the company, for instance, by the presi- dent or a vice president and by the treasurer or chief account- ing oficer. Under many mortgages it is required that such certificates take the form of affidavits by the subscribing off- cers. he certificates of disinterested engineers or other ex- perts selected by the company and approved by the trustee are frequently required in support of the statements by the company in its application. Ordinarily, it is required that such afidavits or certificates shall describe the betterments and additions in reasonable detail, and shall certify to their cost or value, and also to their utility or necessity with respect to the mortgagor’s business. A good rule for a trustee to follow on the question of ‘reasonable detail’ is to insist upon a description sufficiently broad to enable the trustee, in case 96 WORK OF CORPORATE TRUST DEPARTMENTS of default and foreclosure, readily to identify the property subject to its mortgage. 4. Opinion of counsel.—lIt is usual to require an opinion of counsel that the expenditures certified in the application are of a nature authorized by the mortgage, that the company has good title to the new property, if any, covered by the application, and that the property or betterments and improve- ments are, or, upon the issue of the bonds or payment of cash representing bond proceeds, will become subject to the lien of the mortgage, without prior lien, or, if a prior lien exists upon any such property, that adequate provision has been made to discharge such prior lien. Some mortgages require the opinion of independent counsel, but this is the exception rather than the rule. In many instances a supple- mental indenture is necessary to extend the lien of the mort- gage to new property, and it is usual for a mortgage to require the opinion to state whether a supplemental indenture is neces- sary, and, if necessary, to approve the form thereof and to specify the proper recording. 5. Earnings statement.—Any mortgage which requires a specified ratio between net earnings and interest payable will provide for an earnings statement as a part of a bond appli- cation. ‘The general practice is to permit the certification of such a statement by the treasurer or an assistant treasurer of the company, but some mortgages will require certification by public accountants selected by the company and approved by the trustee. 6. Balance sheet-—Some mortgages, particularly those which contain a covenant with respect to net quick assets, will require a balance sheet. WHere, again, the general rule is for certification by the treasurer or assistant treasurer of the company, although in exceptional cases the requirement is for a public accountant’s certificate. In addition to the requirements discussed above, some mortgages contain one or more general restrictions on the issue of bonds, such as a provision that the total amount of the mortgagor’s outstanding bonded debt shall never exceed the amount of its outstanding capital stock. The first para- graph of Section 1, Article II, of the ‘“Telephone” mortgage (page 345) is an example of such a provision. BOND ISSUE UNDER CORPORATE MORTGAGES 97 Issuance of bonds against cash—_ Many mortgages permit the company to take advantage of favorable bond markets by providing that the trustee may deliver bonds against the de- posit of cash equal to the principal of the bonds so delivered. As a rule, a limit is placed on the amount of cash representing the proceeds of such bonds which may be held under the mortgage at one time. ‘The restriction is to obviate the pos- sibility of the company relying on its judgment of conditions in the bond market to the extent of selling in advance an unreasonably large block of its bonds. The company, of course, is required to pay the full interest rate on the bonds which it sells, while the cash proceeds, so long as they remain under the mortgage, must necessarily return a much smaller yield. The loss from a transaction of this kind carried to extreme might easily have a serious effect on the net earnings of the company. It is just this situation which produces a rather serious problem for the trustee. The company, considering on the one hand, the rate of interest which it is paying on its bonds, say 6 per cent, and, on the other hand, the rate of interest it is receiving from the trustee, usually from 2 per cent to 3 per cent, on some millions of dollars of proceeds of bonds awaiting withdrawal pursuant to the mortgage, often, and quite naturally, considers ways of investing the funds more profitably. As a consequence, it comes to the trustee with various proposals for the temporary investment of the fund. Unless the mortgage makes express provision for this situation, any such investment is at the risk of the trustee and may constitute a breach of trust. Furthermore, the intent of the mortgage is that there shall be one hundred cents on the dollar of principal to cover the future capital expenditures of the company or to protect the bondholders in the event of a prior default by the company, and the bondholders are not directly interested in the income produced by the fund. Consequently, the trustee should refuse to make such invest- ment unless authorized by the mortgage or unless extraordi- nary conditions exist. The tendency in drawing mortgages, particularly since the World War, is to authorize the investment of such funds, usually in the short-term obligations of the Federal govern- ment. In cases where specific authority is contained in the 98 WORK OF CORPORATE TRUST DEPARTMENTS mortgage, the trustee is protected in making investments of this type which conform to the requirements of the mortgage. In drawing such provisions in a mortgage, how- ever, it is not considered good policy to widen the field beyond the short-term Federal obligations. “There are many other safe investments which might be considered acceptable, such as Liberty Loan bonds and the stronger municipal issues; but the prices of all except the very short-term investments fluctuate with the major swings of the money market. Con- sequently, although the long-term investment may be exactly as sound on the day the funds are required as on the day it was purchased, the difference in market price may, particularly in the case of a large fund, result in serious loss to the trust estate. A very good practice, even in the case of authorized. investments in short-term Federal obligations, is to purchase maturities, conforming as nearly as may be with a budget prepared by the company of the anticipated dates and amounts of its expenditures. Another perplexing question is involved in the request, at times presented to the trustee under a mortgage authorizing the issue of bonds against cash, to deposit all or a part of the cash fund with other depositaries. Here} again, the provi- sions of the mortgage are, or at least should be, controlling. If specific authority is given, the trustee is protected in acting in accordance therewith. If the mortgage does not contain authority some degree of risk attaches to the trustee, even though careful selection of depositaries may render this risk remote. 4 Authority from public body.—The Interstate Commerce Commission has jurisdiction over practically all capital issues by interstate railroads, and the various states have established commissions or other public bodies to control security issues by special classes of corporations, or, in some cases, all corporations, within their respective jurisdictions. Some mortgages require that all necessary consents or approvals from any public body having jurisdiction over a bond issue shall form a part of the company’s application. But irrespec- tive of the provisions of a mortgage the trustee, for its own protection, should receive duly certified copies of all such consents which counsel may advise are required by law. BOND ISSUE UNDER CORPORATE MORTGAGES 99 Receipts and counsel’s approval.—It is of the utmost im- portance that in the case of each bond issue the trustee shall take a formal receipt completely describing, by title, maturity, denomination, serial numbers, and coupons attached, the de- livery of bonds. Each receipt should be carefully filed, pref- erably with the documents constituting the corresponding bond issue application. The trustee’s responsibility for any unauthorized or over- issue of bonds is so clear that good practice dictates the invari- able rule that each bond application, in addition to careful examination by the trust department, should be submitted to counsel for approval, and counsel’s approving opinion should also be filed with the documents comprising the application. Scope of the trustee’s examination.—The research sheet, illustrated in Form 31, is used as a guide for the corporate trust department in checking bond applications. It presents a rather complete list of the matters which the trustee must consider prior to approving an application for the issuance of bonds. The calculation in the heading necessitates checking the amounts of bonds authorized and issued, not only under the mortgage as whole but under the section or sections involved in the application. An overissue under a particular section would be only less serious than an overissue in the total authorized amount. Most of the items on the research sheet have already been discussed. Regarding the present U. S. documentary tax of 5c per $100 of bonds issued, which must be paid by the corporation, it is good practice, approved by the Treasury Department, to cancel and aflix the proper amount of stamps to an original counterpart of the mortgage. It is then neces- sary that an appropriate endorsement appear on the bonds reading somewhat as follows: “Federal stamp tax imposed on the issue hereof has been paid, stamps having been attached to the Indenture herein mentioned and canceled.”’ If, at the time of issue of temporary bonds, one or more interest payment dates have elapsed, it is proper to stamp such bonds with a notation reading: 100 WORK OF CORPORATE TRUST DEPARTMENTS “Tnterest on this bond accrues from ———”’ inserting in the blank space the interest payment date, next preceding the date of issue. The questions regarding consents (other than by public bodies, previously discussed) pertain only to a few mortgages, usually those on the property of reorganized companies. Such mortgages sometimes require the consent of certain F. 1111-3-24 RESEARCH SHEET Date Trust Issue of $ of under Article Section Authorized Issue under Indenture $ under this Section $ x « “ : Total Issue to Date, under Indenture (including this Issue.) Balance Unissued under Indenture Indenture Recorded? Mortgage Tax Paid? q U.S. Documentary Tax Paid? Tax Legend Required on Bonds? “ co) & ” a REMARKS Approval! Required by Public Bodies? Certified Copies of Approvals Filed? Interest Notation Required on Bonds? Past Due Coupons Detached & Cancelled? (Note disposition) Consents Required of: Bondholders or Finance Committees? Other Trustee? He 08 (Daa - Signatures on Bonds Verified? Collateral or Cash to be Received? Approval by Counsel? _ Are mathematical calculations on eppli- calcula cation correct? All figuring re tions to appear on back hereof. Credit Balance Carried Forward . (Cash or Expenditures) | Prepared by Approved by Form 31.—Research Sheet. BOND ISSUE UNDER CORPORATE MORTGAGES 101 committees, or perhaps the company’s bankers. In other cases, the trustee of some junior mortgage may have served notice that a covenant in the junior mortgage restricts further bond issues under the senior mortgage or requires that consent to any such issue be secured from the junior trustee. Upon completion, the research sheet is signed by a member of the department, attached to the papers comprising the bond issue application and the entire file is submitted to an officer for approval. When approved the papers are placed in the document folder. CHAPTER VII COVENANTS OF THE MORTGAGOR Reason for covenants.—At the time a mortgage is drafted the sections concerning the covenants or agreements of the mortgagor receive most deliberate consideration on the part of the bankers who have purchased the bonds. It is obvious that no company would gratuitously insert burdensome pro- visions in its mortgage; hence, it may be assumed that the covenants therein expressed are the result of the bankers’ re- quirements in this respect. The provisions contained in the article entitled, “Covenants of the Company.’’* are, conse- quently, a fairly reliable barometer of the strength of the mortgagor as judged by the bankers at the time of the execu- tion of the mortgage. Strict covenants are intended to pro- tect the bondholders against existing or potential weaknesses in the company’s assets, financial position, or organization. On the other hand, lenient provisions imply that the company’s position, management, and prospects have satisfied the bank- ers that further assurances in the mortgage are unnecessary. Trustee’s interest in covenants.—The scope and substance of the covenants will depend upon the circumstances under which the mortgage is made. The trustee, while not involved in the adequacy of the covenants, should make it a point to examine them carefully when reading the draft of a mortgage, so as to assure itself that the covenants are satisfactory from the standpoint of administration of the trust and that they impose no duty upon the trustee which it is unwilling to accept. Various types of covenants of the mortgagor are found in corporate mortgages. Some of these are merely formal “re- statements of obvious obligations” expressed in practically all mortgages in more or less the same language. Other covenants attempt to regulate the conduct of the mortgagor by providing what it shall or shall not do. 1See Article VI of the typical mortgage, p. 362. 102 COVENANTS OF THE MORTGAGOR 103 “Formal” covenants.—Among the so-called “‘formal’’ cove- nants, are the following: To pay as they mature the principal and interest on the obligations issued under the mortgage. To keep an office or agency, in a specified city, where notices and demands under the mortgage may be served on the com- pany. That the mortgagor has good title to the property mort- gaged, and that it will, at its expense, warrant and defend its title. To furnish to the trustee, upon its reasonable demand, such further assurances as to title as may be necessary or desirable. That the mortgagor will not do, or permit to be done, anything which would impair the lien of the mortgage. To pay all taxes and other claims against the company, which if unpaid might become a lien upon the mortgaged property prior to the lien of the mortgage. In this section, however, it is usually provided that the company shall not “be obligated to pay any such claim so long as it shall in good faith contest the validity thereof, and so long as, in the judg- ment of the trustee, the security afforded by the mortgage shall not be materially endangered by the contest. That no lien on the mortgaged property shall be created which would be prior to the lien of the mortgage. To maintain its corporate life and right to do business. To properly record the mortgage and to pay any fees and expenses incident thereto. To keep the mortgaged property in repair and in at least as good condition as it was at the date of the mortgage and to make all necessary renewals or repairs. To protect bondholders from an unauthorized increase in the debt secured by the lien of the mortgage, nearly all mort- gages contain a covenant that the mortgagor will not extend or in any way assent to the extension of the time for the payment of any interest on the outstanding bonds. Most mortgages go one step further and provide that any interest so extended shall not be entitled to the benefit of the lien of the mortgage except after the full payment of the principal of the outstanding bonds not so extended and of all interest thereon. 104 WORK OF CORPORATE TRUST DEPARTMENTS Other covenants.—Other covenants vary with the mort- gage in hand. They frequently impose some administrative duties on the trustee. Typical of these covenants are those discussed below. As to the underlying bonds.—In the case of a refunding mortgage, it is usual to insert covenants to the general effect that the mortgagor will pay as it matures the principal and interest on all underlying bonds, and that it will not issue additional underlying bonds, or extend the date of payment of existing underlying bonds. The trustee, under a mortgage containing such a provision, should promptly serve formal notice on the trustees of the underlying mortgages, of the execution of the new mortgage, and of the covenant therein contained. Sometimes the right to issue further underlying bonds for deposit under the refunding mortgage is reserved. Taxes assessed against bondholders—Many mortgages contain provision that the principal and interest shall be paid to the bondholders without deduction for taxes. Since the enactment of the Federal Revenue Act of 1913, with its pro- vision for the “‘withholding at the source” of the normal tax on certain types of income, including bond interest, the tax covenant, in so far as it relates to income taxes, has generally undergone some qualification. Under the older mortgages with the unqualified tax covenant some effort was made to force the mortgagor to assume the full normal tax. Conse- quently, the newer mortgages containing a provision of this kind usually limit the liability to 2 per cent of the interest. When, during the discussion on the passage of the Federal Revenue Act of 1917, it appeared that collection of tax at the source would be abolished (except in the case of non- resident aliens) fears were felt as to the effect on bonds with such covenants of the rescinding of the withholding provisions of the law, and largely through the efforts of the Investment Bankers Association, ‘‘collection at the source’’ was continued in respect to the so-called ‘‘tax-free covenant’’ bonds. Some mortgages also provide for the payment or refunding, within prescribed limits, of taxes such as the Pennsylvania ‘four mills” tax, the Massachusetts income tax, and the per- sonal property or income taxes of other specified states. In the case, for example, of such a covenant made by a Penn- COVENANTS OF THE MORTGAGOR 105 sylvania mortgagor (see the ‘“Telephone’’ mortgage, page 363), it is sometimes provided that the interest will be paid free of such tax. It is more usual, however, for the covenant to take the form of a promise to refund to the bondholder the amount of the specified tax, up to the agreed limit, as- sessed by the specified state against the bondholder, as the holder of bonds issued under the mortgage. The mortgage will usually provide that such refunds shall be made by the trustee, as the agent of the mortgagor, but from funds to be furnished for that purpose by the mortgagor, and only upon receipt from the bondholders, of written application, in form specified by the mortgage, and filed with the trustee within a specified period, say sixty or ninety days, after the date of payment of the tax to be refunded. Form 32 is a good example of the type of refund application, which is often required. Form 32.—Personal Property Tax Refund Application. APPLICATION FOR REFUND OF PENNSYLVANIA PERSONAL PROPERTY TAX DIRECTIONS Applicants for refund of tax on this form should, to avoid delay, observe the following directions: 1. This request may be made only by a holder who was an owner of the bonds and a resident of Pennsylvania on the date when such tax was assessed. 2. This request must be filed within sixty (60) days after the date on which the tax was paid and within ninety (90) days after such tax shall have become due and payable. 3. Request should only be made for the amount of tax actually paid (on the market value or the face value of the bond, whichever is less). The Com- pany is not liable to pay to any owner in any calendar year a sum in excess of four (4) mills on each dollar of the face amount of the bonds with respect to which the tax was paid. 4. Applicant must sign affidavit following form of request. THE HAGERSTOWN STEEL AND TUBE COMPANY 20-YEAR 6% DEBENTURE GOLD Bonps To THE HAGERSTOWN STEEL AND TUBE COMPANY, Care, National Trust Company, Trustee, 200 Wall Street, New York, N. Y. Dated, —— 19—. Sirs :— I am the owner of $ principal amount of 20-Year 6% Debenture Gold Bords, Nos. issued by Hagerstown Steel. and Tube Company, under its 106 WORK OF CORPORATE TRUST DEPARTMENTS Debenture Indenture to National Trust Company, Trustee, dated July 1, 1925, and was the owner thereof and a resident of the Commonwealth of Pennsyl- vania at the date of the assessment of the tax hereinafter mentioned. As a resident of Pennsylvania, I returned said bonds for taxation for the year 19— at a valuation of $ , and on the day of 19—, I paid the sum of $ , the tax assessed against me by said State as the owner of said bonds, and which became due and payable on the day of A 19—. Such taxes were not income, succession or inheritance taxes and the amount for which I claim reimbursement does not include any interest or penalty assessed upon or paid by me in addition to the amount of tax origin- ally assessed. I hereby request from you reimbursement of said tax as provided by said Indenture. No other or previous application has been made with respect to the aforesaid bond or bonds for reimbursement of any tax or taxes imposed or paid for the same year to which this application relates. Respectfully, Name Address COMMONWEALTH OF PENNSYLVANIA COUNTY OF ae , above named having been duly sworn according to law, on oath, de- poses and says that the facts set forth in the foregoing request are true. Signature of Applicant. Subscribed and sworn to before me this day of 19— Notary Public or other Official authorized to take acknowledgments. Insurance.—An agreement to insure against loss or damage by fire is found in practically every mortgage. Losses, if any, are payable to the trustee and the company as their inter- ests may appear, and unless required by the trustee of a prior mortgage, the proceeds of any insurance are deposited with the trustee; although mortgages frequently provide that any single loss not exceeding, say, $5,000, may be paid direct to the mortgagor. The amount of loss which may be paid direct varies in different mortgages, depending upon the value of the insured property and other circumstances. The company is generally permitted to withdraw insurance moneys to reim- burse it for the cost of (a) replacing the damaged or de- stroyed property, or (b) making betterments or extensions to other portions of the mortgaged property. 107 COVENANTS OF THE MORTGAGOR SyIeUIOY *‘plosay souvINsuUT— EE WIIOW — astiay, Jo Opn, "ON Adtod OD 0} peuinya1 * pesonsep ANVINOS AQNVANSNI toa prnols SaIsog peidxy 108 WORK OF CORPORATE TRUST DEPARTMENTS Until recently the familiar insurance clause provided for the deposit of the insurance policies with the trustee. How- ever, many of the newer mortgages permit the trustee to accept an annual statement from the company signed by one or more of its officers, giving the details of the insurance in force. In cases where the policies are deposited with the trustee they should be entered in an insurance record similar to that illustrated on page 107 (Form 33). Occasionally the insurance provisions call for the periodical filing of a certificate by a recognized insurance expert that the insurance in force constitutes full coverage as required by the mortgage. Protection solely through the establishment by a company of its own insurance fund, such as that permitted by Section 8, of Article VI, of the “Telephone” mortgage,’ is sometimes permitted in cases where the property is scattered and the mortgagor is especially strong. Life insurance policies are occasionally deposited with a trustee pursuant to a covenant providing for insurance on the lives of one or more of the mortgagor company’s officers. The conclusion to be drawn from such a provision is that the mortgagor is short of executives of ability and that the death of the insured would have a detrimental effect on the business. Covenants to maintain “use and occupancy” insurance some- times are found in mortgages covering factories and office buildings. Net quick assets —The covenant to maintain the com- pany’s net quick assets (the excess of the company’s current assets over its current liabilities as defined in the mortgage) at a stated figure, or in a specified proportion to the total liabilities of the company, or to the amount of bonds out- standing, is of comparatively recent origin and has been de- veloped by the underwriting bankers as a selling point.’ A covenant of this kind is unsatisfactory from the stand- point of administration by the trustee, and affords little or no actual protection to the bondholders. Barring bad faith on the part of executives, no corporation will intentionally permit net quick assets to fall below a safe point. It often 2 See p. 364. 3 See p. 109 for an example of net quick assets definition. COVENANTS OF THE MORTGAGOR 109 happens that, during a period of financial stress, an otherwise sound corporation may find itself temporarily unable to comply with the terms of such a provision; but ordinarily it would be to the interest of the bondholders to give the company a reasonable opportunity to work out of its strained position. In any event, a foreclosure during a time of business depres- sion seldom produces satisfactory results from the standpoint of the bondholders. In other words, such a provision makes it possible for a small percentage of bondholders, through an over-zealous trustee, to bring about a foreclosure at a most inopportune time. If such a default occur, the trustee is quite likely to be criticized by some bondholders if it takes no action; and, on the other hand, it is almost certain to be criticized by other bondholders if it does institute legal proceedings. It would not be so bad if the trustee could feel free to notify the bondholders of the situation and leave the matter in their hands. ‘The practical aspect is that a notice from the trustee to the bondholders of the existence of such a default might so seriously injure the company’s credit that liquidation would be brought about, even without the intervention of the bond- holders. Covenants restricting dividends or bond issues.— There are other varieties of the net quick assets provision which are sound in principle, the most common being that the company will pay no dividends on its stock or that it will issue no more bonds unless its net quick assets shall meet with the require- ments of the mortgage provision. Such covenants are entirely workable from the standpoint of the trustee, and are of real protection to the bondholders. In any mortgage containing provisions relating to net quick assets, there is also a covenant by the company to file with the trustee periodically a state- ment, usually certified by accountants approved by the trustee, of its assets and liabilities, and of its net quick assets. Such a mortgage should contain a very clear and comprehensive de- finition of what is meant by net quick assets, as for example: “The term ‘net quick assets,’ whenever used herein with respect to the Company, means the excess of its unencumbered quick assets over its current liabilities. 110 WORK OF CORPORATE TRUST DEPARTMENTS ‘The term ‘quick assets,’ whenever used herein, means and includes only, (a) Cash on hand or on current deposit in banks or other depositaries. (b) Good and collectible notes, trade acceptances, accounts, and bills receivable contracted in the ordinary course of busi- ness, if not in default and if due and payable within one year from the date as of which quick assets are being ascertained. (c) Readily marketable securities taken in any case at not more than their market value. (d) Goods manufactured and in process of manufacture, materials and supplies on hand and inventoried, the said goods, material, and supplies being taken at actual cost or at market value, whichever is the lower at the time of such inventory. (e) Unexpired insurance premiums, discounts prepaid on bills payable (not including bond discounts), and prepaid taxes. ‘The term ‘current liabilities,’ whenever used herein, in- cludes accounts, drafts, bills and notes payable, royalties, rentals, and sinking fund obligations accrued, earned and un- matured interest charges upon the bonds at any time out- standing hereunder and reserves for taxes of every kind and nature, but excludes: (a) The principal amount of the bonds issued and out- standing hereunder. (b) Obligations not payable within one year from the date of the last preceding audit herein provided for. (c) Drafts or bills of exchange drawn for the whole or any part of the amount payable on account of merchandise sold to others and which drafts or bills of exchange have been negotiated, and other contingent obligations.” Annual financial statements.—- Many mortgages which do not contain a net quick assets covenant do require the annual — audit of the companies’ books, by certified public accountants, satisfactory to the trustee, and the annual filing with the trustee of a balance sheet, and sometimes, also, a statement of earnings certified by such accountants. Such a requirement, particularly in the case of industrial companies, is of real COVENANTS OF THE MORTGAGOR BEL value, as it places in the hands of the trustee available to the bondholders, an authentic, year-to-year record of the financial progress (or lack of progress) of the mortgagor. In regard to the approval of accountants selected by the company the trustee should investigate the standing of any firm not already known to it. This is usually a simple matter except when the accountants employed are located in another city. In that event the trustee can secure a report from one or more local banks or protect itself with opinions from other members of the accounting profession. Likewise the trustee may be called upon to ascertain the standing of engineers or appraisers whose opinions are required by other provisions of a mortgage. Equipment.—Other mortgages, particularly those of rail- roads and public utilities, contain a covenant to file periodi- cally with the trustee a certified list of equipment or other similar property subject to the mortgage.* Sales.—Still other indentures which permit the mortgagor to sell certain classes of property, or property of less than a stated value, without payment of the proceeds to the trustee, require the filing with the trustee at stated intervals of a certificate covering the details of such sales. Appraisal.— Occasionally in mortgages of industrial com- panies, a covenant will be found requiring the filing with the trustee, periodically, but usually not oftener than every two or three years, of an appraisal of all of the mortgaged prop- erty, made by an engineer or appraiser, satisfactory to the trustee. Maintenance and renewal.—Some mortgages require that the mortgagor shall annually expend out of earnings, for maintenance, a specified amount in dollars, or, as is more usually the case, a specific percentage of earnings. In that event the mortgagor is required to file with the trustee, in addition to the balance sheet and statement of earnings, a certificate giving the details of the expenditures for maintenance during the period covered. This certificate frequently takes the form of an affidavit by certain officers. 4See further discussion under Equipment Trusts, Chapter XII. 112) WORK OF CORPORATE TRUST DEPARTMENTS Generally, such a mortgage will further require that, if the amount so expended, as shown by the certificate, is less than the required amount or percentage, the difference must be paid in cash to the trustee as a depreciation or maintenance fund, and held by the trustee, until withdrawn by the com- pany, in accordance with the terms of the mortgage, after it has completed the delinquent maintenance expenditures. Covenants to be calendared.—It is essential that the trustee carefully study the covenants as soon as possible after receiving the mortgage. All covenants, the terms-of which call for observation on the part of the trustee, should be calendared on “‘tickler’” cards (see Form 28, page 73) sufh- ciently in advance of the requirement date to assure proper attention. | Mortgagor’s breach of covenants.—In case of failure by a mortgagor to comply with such a requirement, the trustee should send a prompt reminder. As stated in Chapter X, page 146, failure by a mortgagor to observe such covenants does not, under many mortgages, become a default entitling the trustee to enforce the remedies of the mortgage, except upon the elapse of a specified period, say 60 days, after writ- ten notice from the trustee to the mortgagor. Ordinarily, the first reminder from the trustee would be informal and not of the type to set running the period of grace prescribed by the mortgage. In the absence of directions from the holders of the percentage of the bonds required by the mort- gage, the question of when the formal notice should be served would depend largely upon circumstances. Formal notice should not be served except after consultation with counsel. It is not possible safely to generalize as to the proper action to be taken by a trustee in case the mortgagor should disregard its notice or fail to make good its breach of cove- nant. The question is first of all one of the exact legal rights of the trustee. ‘The relative importance of the covenant in default and the apparent ability and willingness of the mortgagor to live up to the requirement may well have some practical bearing on the attitude of the trustee. If it is pos- sible for the trustee to consult with the holders of a substan- tial percentage of the bonds, or with bankers who have under- written all or a part of the issue, the views of such holders COVENANTS OF THE MORTGAGOR 113 or bankers should be considered. However, the situation is cne in which the trustee should act only after submitting all phases of the question to its counsel. In closing the discussion of this article of the mortgage the following quotation seems appropriate: ‘Tt is important to keep in mind that the purpose of these covenants is to safeguard the value of the mortgaged premises in the interest of the mortgagee. They impose a personal liability on the mortgagor. Aside from the covenant to pay interest and principal promptly when due, they may not be valuable, in terms of currency, to the mortgagee; but the presence of these covenants in the mortgage may be highly important in affording a basis for stipulating that a breach shall constitute an event of default, so as to permit the trustee to exercise promptly remedies to prevent depreciation in the value of the mortgaged property, disastrous to the mort- TATee 5 William Lilly, “Individual and Corporation Mortgages,” p. 114. CHAPTER VIII SINKING FUNDS AND REDEMPTION OF BONDS The sinking fund.—Many corporate mortgages provide a means of amortizing the debt for which they are security, by requiring the mortgagor to make periodical payments into a fund, which is commonly known as the Sinking Fund.* Such a fund is ordinarily administered by the trustee under the mortgage, although in some mortgages a separate sinking fund trustee is named. Sinking funds vary with business of mortgagor.— Generally speaking, the question of whether a given issue is to have a sinking fund is decided by the underwriting bankers, with the concurrence, of course, of the mortgagor. In de- termining this point the type of business in which the mort- gagor is engaged is the first consideration. It is the general practice of underwriters to require a sinking fund in the case of bond issues by lumber, mining, and other companies, where the property which is mortgaged as security for the bonds obviously will be depleted through the operation of the busi- ness. It also is usual to recommend a sinking fund for bond issues of industrial concerns. ‘The reason in this class of business is not so apparent, but, nevertheless, is sound. The chief value of an industrial plant is its value as a “going concern,” and it almost invariably happens that a forced sale of such a plant, through bankruptcy or foreclosure proceed- ings, will produce much less than the actual value. It is consequently a prudent policy to require a periodical reduc- tion of the debt, so that the equity of the company in its plant (or, to put it another way, the bondholders’ margin of safety) shall be constantly increased. In many cases sinking funds are also required by underwriters because, if their provisions are wisely drawn, they have a stabilizing effect on the market, thus adding to the attractiveness of the issue. On the other hand, it is becoming more and more the rec- 1 Reference is made to the “Telephone” mortgage, p. 358. 114 SINKING FUNDS AND REDEMPTION OF BONDS — 115 ognized theory that railroad and certain public utility com- | panies are entitled, because of their permanency, and so long as in their accounts they make proper allowance for deprecia- tion, and maintain a conservative ratio between the amount of their capital stock and debt, to carry a practically perman- ent debt, bond issues being refunded from time to time as they mature. For this reason, many recent issues of such companies do not provide a sinking fund. Bases for sinking funds.—In the case of a company whose property is depleted through the normal operation of its business, the logical basis is the amount of property used, as, for instance, a specified amount per thousand feet of lum- ber cut or per ton of ore mined. Industrial companies pass through periods of prosperity and periods of depression, and for this reason it is generally wise to require substantial reductions in their debt during profitable years and to avoid handicapping them by unnecessary fixed charges during periods of depression. Consequently, sinking funds of companies of this class are usually based on a percentage of net earnings. In still other cases, where the purpose is to increase the bond- holders’ margin of safety or to stabilize the market, the amounts of the periodical payments into the sinking fund are fixed, or are based on a specified percentage of the principal amount of bonds outstanding. At times the purpose is to amortize the entire debt by maturity, and the amount of the periodic payment is then set at a figure which at compound interest at the rate borne by the bonds will at maturity of the bonds equal the amount of the issue. Operation of sinking funds.— There is a considerable varia- tion in the provisions covering the operation of sinking funds. In some of the older mortgages it was provided that the cash payments should be invested by the trustee in specified classes of securities and such investments held by the trustee until maturity of the issue. This practice is not generally favored. While there may be some point to the acquisition by the trus- tee of underlying bonds, the plan of investing in securities entirely foreign to the mortgagor’s business at an income yield smaller than a fair return on any successful business is not sound. It is now recognized as better practice to provide for the use of the fund in the acquisition of bonds of the issue 116 WORK OF CORPORATE TRUST DEPARTMENTS for the benefit of which the fund is created. Some sinking funds require that bonds acquired shall be canceled, while others require that they shall be held alive and the interest thereon collected as it matures and added to the sinking fund, thus adding the feature of compound interest, and over a period of years materially increasing the amount amortized through the operation of the fund. Where this cumulative feature is desired, the same result may be accomplished by authorizing the cancellation of the bonds as acquired, and providing that the sinking fund payments at the specified sum or rate shall be increased by a sum equal to the periodic interest which would have been due on the canceled bonds in the sinking fund. Some mortgages permit the company to deposit with the trustee additional amounts not required by the sinking fund provisions. We speak of these as voluntary or optional pay- ments. ‘They are usually added to the required sinking fund payments and treated in the same manner. Acquisition of bonds.—The sinking fund provisions relat- ing to the methods by which bonds are to be acquired are of particular interest to the trustee. Here, again, there is a rather wide variety. One mortgage may require that the bonds shall be drawn by lot by the trustee for redemption at a specified redemption price; another, that bonds may be purchased by the trustee on tender by the bondholders, pur- suant to published notice from the trustee requesting such tenders; while still another will authorize the purchase of bonds at public or private sale and, if suficient bonds are not secured at or below a specified price, will require the redemp- tion of as many bonds as will exhaust the balance of cash in the sinking fund. Application of moneys in the sinking fund often is not required unless the balance standing to the credit of the sinking fund amounts to a specified sum, deemed large enough to warrant setting the machinery in motion. Some of the new mortgages which authorize the issue of bonds in series, each subject to different provisions as to sinking fund and redemption, necessarily contain rather complicated sinking fund clauses. The trust officer in reading a mortgage prior to execution should be certain that the provisions are entirely clear and SINKING FUNDS AND REDEMPTION OF BONDS 117 workable. Some of the particular points which should be considered are discussed below. The measure of the payment.— In the case of variable sink- ing fund payments the mortgage should set forth just what evi- dence must be furnished to the trustee as to the sufficiency of each payment. If the payment is at a specified rate per cent of the net earnings, it is important that the mortgage should contain a clear definition of what constitutes net earn- ings, and further provide that the trustee may rely, as to the amount of such earnings, on some statement to be filed with it, as, for instance, a statement certified by certified public ac- countants, or verified by designated officers of the debtor. If the payment is at a specified percentage of the outstanding bonds, the mortgage should clearly state what bonds are to be considered as outstanding, for example, that all bonds which at any time have been certified and delivered by the trustee and have not been surrendered to it for cancellation shall be considered as outstanding. At first glance, the meaning of the word “outstanding” seems perfectly clear; but, from the trustee’s viewpoint, bonds are outstanding as soon as certified and delivered pursuant to the provisions of the mortgage, while, generally speaking, the company will not consider bonds outstanding until they have been disposed of by the company for value. ‘The newer mortgages are carefully drawn to clarify this point, but the question has arisen under a number of mortgages. Under one, a test suit on an agreed statement of facts was brought in the New York courts,” and a decision rendered to the effect that bonds are issued and outstanding, not when they have been certified and delivered under the mortgage, but as soon as they have passed into the hands of third persons as enforce- able obligations. In other words, in this particular case, bonds which had been certified and delivered under the mort- gage, but were held free in the treasury of the company, were not considered outstanding. On the other hand, bonds which the company had sold, or which it had hypothecated, were considered outstanding. This decision was only partially sat- isfactory from the trustee’s point of view, and while it has 2 Bankers Trust Company v. The Denver Tramway Company, 233 N. Y. 604. 118 WORK OF CORPORATE TRUST DEPARTMENTS been used as a precedent in several other cases, it is not of creat value in helping to settle similar questions under other mortgages, because there is almost always a difference in phraseology between any two mortgages. The application of the fund.—The first question is whether the methods by which the trustee may acquire bonds for the fund are clearly stated. If, as is sometimes the case, provision is made merely for the redemption of bonds, it is only neces- sary to see that the redemption price or prices are clearly stated, and that there is sufficient time between the sinking fund payment date and the date on which the trustee is re- quired to make the redemption to permit the trustee to draw bonds by lot and to publish notice of redemption as required by the mortgage. If the trustee is permitted to purchase bonds at public or private sale or on tender, and authorized to call for redemption only if suficient bonds cannot be pur- chased to exhaust the funds available, it is important that sufficient time be allowed to complete the necessary steps. The duration of the purchasing period, the requirements as to publication of notice inviting tenders, and the provisions covering publication of the redemption notice should be ade- quately detailed in the mortgage. Inviting tenders.—In all cases where the trustee is per- mitted or required to publish notice inviting tenders the mort- gage should specify the period during which the notice must be published and the media of publication. A further stipula- tion should be made that the trustee may accept or reject any tender in whole or in part. The following sinking fund notice is typical: | GENERAL MACHINE COMPANY Six Per Cent Ten Year Sinking Fund Convertible Gold Bonds The undersigned, as Trustee under Trust Agreement between General Machine Company and National ‘Trust Company as Trustee, dated June 1, 1924, hereby gives notice that it will receive sealed offers for the sale for the account of the Sinking Fund of sufficient of the above-mentioned bonds to exhaust the sum, $51,292.21, now on deposit with it as such Trustee. All tenders must be for all or any part of the bonds offered, must state the price at which the bonds are offered, not exceeding 105 per cent of their principal amount and accrued interest, and must be received at the Corporate Trust Department of the Trustee, 200 Wall Street, New York City, before 3 o’clock SINKING FUNDS AND REDEMPTION OF BONDS __ 119 P. M. on April 27, 1925. Bonds accepted must be delivered on May 4, 1925, and interest on accepted bonds will cease on that date. The Trustee reserves the right to reject any and all offers in whole or in part. Dated at New York this 10th day of April, 1925. NATIONAL ‘TRUST COMPANY, Trustee. By H. F. Wall, Vice President. Acceptance or rejection of tenders.—It is well to have the mortgage provide a method by which the trustee shall deter- mine which tender or tenders to accept in case more bonds are offered at one price than the available funds will purchase. As a simple example of this last point assume that $50,000 were available in a sinking fund and four tenders were re- ceived as follows: A—$20,000 at 99 and interest C—$10,000 at 100 and interest B— 20,000 at 99%4 and interest D— 10,000 at 100 and interest After accepting offers 4 and B the trustee would have some- what over $10,000 left to take up $20,000 of bonds offered at 100. ‘Three methods are used: 1. To draw by lot from all bonds offered by C and D. 2. To purchase $5,000 from C and $5,000 from D. 3. To take bonds, as between C' and D, from the first tender received disregarding the subsequent offer. This last method should be used only when specified in the mortgage. If the mortgage is silent on the question it would seem that the trustee might use either method “1”? or method 2” and accord fair treatment to the bondholders concerned. It is not always possible to determine at first glance which tenders of bonds are to be accepted. Some bonds may be tendered at certain prices and interest; others may be offered at “flat” prices, that is, without interest; while still other bonds may be offered for a stated amount in dollars. ‘The trustee must place all offers on a comparative basis. For example: A tender of bonds at 98 “flat”? may warrant ac- ceptance over a tender at 97% and interest. In any event the tenders can be compared only by computing in each case the actual cost in dollars. In some mortgages the accrued interest on bonds taken up through the sinking fund is pay- able by the mortgagor, in which case the factor or accrued interest should be disregarded in comparing the price of sink- © ing fund offerings. 120 WORK OF CORPORATE TRUST DEPARTMENTS The trustee should send prompt notice of acceptance or declination of tenders, and the acceptance notices should give full directions as to the delivery of the bonds to the trustee. If the published notice has not specified the date on which interest ceases on the bonds purchased, that date should be stated in the trustee’s acceptance. Offer of bonds by mortgagor.—Frequently the mortgagor itself will tender bonds to the sinking fund. ‘This situation may present some difficulties to the trustee, particularly in case the bond issue is so closely held that, perhaps, no other tenders are received and the trustee cannot secure market quotations to compare with the mortgagor’s tender. It is well to have the mortgage clearly state whether the mortgagor shall have the right to tender bonds which it may own. Drawing by lot for redemption.—If the mortgage provides that bonds may be drawn for redemption for account of the sinking fund, it should state that if less than all of the out- standing bonds are to be so redeemed, the bonds to be called shall be drawn by lot, by any equitable method which the trustee in its discretion shall determine upon. ‘The details of drawing by lot will be discussed later. Custody of acquired bonds.—There should be specific pro- vision as to whether bonds acquired by the trustee should be (a) held uncanceled, (b) held alive but endorsed as having been acquired by the sinking fund, (c) canceled. If the bonds are to be held uncanceled, or alive and appropriately endorsed, the mortgage will provide that the interest as it matures on such bonds shall be collected by the trustee and added to the sinking fund for use in future purchases. Accrued interest and expenses.—To avoid possible dispute during the administration of the trust it is well for the trust officer, in examining the draft of a proposed mortgage, to see that specific provision is made that all expenses of administra- tion, such as publication costs, as well as accrued interest on bonds acquired, shall either be charged to the sinking fund, or as is more usual (at least with respect to expenses), be paid by the company. Surrender of bonds in lieu of cash.—If it is intended to permit the company to surrender bonds to the trustee in lieu SINKING FUNDS AND REDEMPTION OF BONDS _ 121 of making a cash sinking fund payment, this right should be clearly expressed, as well as the price at which the bonds shall be accepted by the trustee as offsetting the company’s cash obligations. Mortgages authorizing bonds in series.—Mortgages au- thorizing bond issues in series will provide that bonds of the different series may differ in their terms, such as maturity, interest rate, sinking fund, redemption, or conversion, and that the terms of each series may, within limits set forth in the mortgage, be fixed by the directors of the company. In such a mortgage, unless it is provided that an independent sinking fund may be operated for each series pursuant to the terms of the supplemental indentures or resolutions estab- lishing such series, it is good practice to insert a sinking fund article which will set up provisions governing the general operation of all sinking fund deposits. ‘These general provi- sions should direct the trustee to pro-rate the sinking fund moneys to the different series on the basis of the amount of outstanding bonds of each series, or should authorize the trustee to place tenders of different series on a comparative basis. It is simple for the trustee, if the funds are pro-rated and the amount available for each series transferred to sub- accounts. Otherwise, it may be necessary for the trustee to reduce all sinking fund tenders to terms of the “yield” or net return on the bonds offered. Assume, for example, that series “‘A”’ 5 per cent bonds maturing in fifteen years are tendered at 87% and series “B” 6 per cent bonds maturing in twenty years are tendered at 91. While the offer of series “A” bonds is at the lower price, their yield to maturity would be only 6.30 per cent against a yield of 6.75 per cent for the series “‘B’’ bonds if purchased at 91.? Consequently, on the basis of yield, the ‘‘B” bonds are the more favorable purchase. Capital expenditure alternative—Some mortgages, par- ticularly those on property of public utilities, will provide that, in lieu of permitting the trustee to apply the sinking fund to the retirement of bonds, the company may withdraw 3Computed by Montgomery Rollins, “Table of Bond Values” (Interest payable semiannually). ‘The above figures are carried to two decimal places only. 122 WORK OF CORPORATE TRUST DEPARTMENTS the cash in reimbursement to it for capital expenditures of the type which may be used as the basis for the issue of bonds. If such an option is contained in a mortgage and is availed of by the company, the sinking fund changes in character and becomes, in effect, a maintenance or betterment fund, not a sinking fund. ‘The provisions of such a fund should be very carefully checked just as the bond issue provisions are checked. The problems from the trustee’s point of view are practically the same. Discussion of “Telephone” mortgage provisions.—The sinking fund and redemption provisions of the ‘“Telephone”’ mortgage are typical (see Articles IV and V, pages 358 to362). By those provisions the company covenants to pay the trustee a fixed amount semiannually. ‘The moneys so received by the trustee are required to be applied to the purchase of bonds of series “‘A’’ at a price not exceeding that at which bonds may be called by lot for redemption, namely, 105 per cent of their principal amount. ‘The matter of advertising for tenders is, in this case, left to the discretion of the trustee. Its decision on this point would depend chiefly on the extent to which bonds are available in the open market. For ex- ample, there would be much less reason for advertising for bonds which were actively traded in on the Stock Exchange than for bonds of an issue closely held by investors. If the trustee under the ‘“Telephone’”’ mortgage were unable to ac- quire enough bonds by purchase at or below the specified price it would be obliged to “call” bonds in an amount sufficient to exhaust the fund and the holders of bonds so called would be required to surrender such bonds to the trustee on the interest date specified in the redemption notice after which date interest on the “called” bonds would cease. The process of selecting bonds for redemption should be carried out in exact compliance with the stipulations of the mortgage. At least two representatives of the trustee should be present and, if practicable, a representative of the company. From cards, each bearing the number of an outstanding bond, the trustee selects a sufficient number, calculated at the re- demption price, to exhaust, as nearly as may be, the avail- able sinking fund moneys. Care should be taken to see that no cards are included for bonds which have been canceled SINKING FUNDS AND REDEMPTION OF BONDS — 1238 or those previously acquired for the sinking fund. As soon as the numbers have been drawn arrangements should be made for publication of the redemption notice as required by the mortgage. The ‘Telephone’ mortgage, in common with many others, charges the mortgagor company with the re- sponsibility of making proper publication of the notice. In practice the trustee generally supervises this detail at the re- quest of, and in codperation with, the company. In case a registered bond is called, notice should always be sent to the registered bondholder through the mails and most mortgages will so provide. Large bond drawing.— The exacting nature of this phase of the trustee’s activities will be realized by all who have been closely connected with a large bond drawing. One trust com- pany in New York recently drew by lot for redemption $10,000,000 of bonds represented by more than 11,000 pieces, the bonds being a part of an outstanding issue of $35,000,000. The task of drawing and listing that number of bonds, pre- paring and proofreading the redemption notice, and, finally, making payment of the bonds on the redemption date is one likely to tax the organization of any trustee. Rights of bondholder and company.—The subject of the redemption of bonds prior to maturity is one which warrants attention from every student of corporate trusts. In this connection the following statement of Mr. Francis Lynde Stetson* is of interest. “The right of the bondholder to continue his investment until payable in due course is as inviolable as his right to receive payment at maturity. The right of the obligor to free himself from his interest-bearing debt when due either upon a named or accelerated date, as the stipulation may warrant, is similarly inviolable. These relative and conflict- ing rights must be made the subject of careful and adequate stipulations. ‘’The right to redeem before maturity is a valuable privilege of the obligor, particularly one obligated to supply a sinking fund. ‘The redemption price may be par or a premium over par. The redemption price is a matter of bargain between 4“Some Legal Phases of Corporate Financing, Reorganization and Regula- tion,” p. 64. 124 WORK OF CORPORATE TRUST DEPARTMENTS the obligor and the bond buyer. Usually it operates as a peg to stop the increase in the market price of the bonds, and, therefore, a redemption price high enough to leave some specu- lative possibility of increase in such market price is the usual insistence of the bond buyer.” During a period of high money rates the investor desires long-term bonds at the current rate of interest. On the other hand, the company which finds itself in the unfortunate position of having to borrow at such a time wishes if possible to issue either (1) short-term obligations, or (2) long-term bonds carrying a redemption feature, so that, when the money market eases sufficiently, it may refund the loan on a more favorable basis. When that time arrives the company, or the trustee act- ing under the company’s instructions, will take such steps as may be required by the mortgage to call the bonds for redemp- tion on a specified date. Should the company elect to redeem less than the entire issue (assuming that it has the right so to do) it will be the duty of the trustee to select by lot the bonds to be redeemed. Redemption notice.— When bonds of an issue are to be re- deemed, notice is published of the company’s intention. Here is an example of such a notice prepared pursuant to the terms of the “Telephone” mortgage: NOTICE OF REDEMPTION THE TELEPHONE COMPANY OF AMERICA To the Holders of The Telephone Company of America Twenty-five year First and Refunding Mortgage 5% Sinking Fund Gold Bonds, Series “A,” issued under First and Refunding Mortgage, dated October 1, 1925, to National Trust Company, as Trustee. Notice is hereby given that The Telephone Company of America has elected to redeem and pay off, on April 1, 1926, all of the above-mentioned bonds then outstanding, at 105 per cent of the face value thereof, with accrued interest thereon, in accordance with the terms of said bonds and said First and Refunding Mortgage, and that all of said bonds are called for redemp- tion on said date. On said date there will become due“and payable on each of said bonds, at the office of National Trust Company, 200 Wall Street, Borough of Manhattan, City of New York, the principal of said bonds, together with said premium and accrued interest to said date. Interest on said bonds will cease to accrue from and after said date. The coupons due April 1, 1926, should be detached and presented for pay- ment through the usual channel. Dated January 30, 1926. THE TELEPHONE COMPANY OF AMERICA. By L. H. Bell, President. SINKING FUNDS AND REDEMPTION OF BONDS 125 Affidavits of publication.—Upon completion of publication of the redemption notice the trustee should secure from the publishers of the newspapers, or other periodicals wherein the notice appeared, afidavits bearing a copy of the notice and setting forth the dates of publication. If notices have been mailed to registered holders an appropriate afhidavit should be given to the trustee by the person mailing the notices. ‘The afidavits of publication and mailing are then placed in the trustee’s document file as evidence of compliance with the mort- gage provisions. Interest loss through failure to present bonds.—Interest on ‘called’? bonds ceases on the redemption date and investors who do not carefully follow this feature of their investments frequently discover many months afterward that they are receiving no return from the ‘“‘called”’ securities. A situation of this kind often results in complaints from bondholders who have failed to take notice of the redemption. ‘The feel- ings of the bondholder are sometimes aggravated by reason of the deduction from the redemption price of interest paid since the redemption date. Paying agents use their best efforts to prevent payment of coupons from called bonds, but, not- withstanding their vigilance, coupons from called bonds occa- sionally will slip through. For example, assume that bonds of certain numbers are called for redemption on April 1. On the following July 1 coupons from some of the called bonds are collected by the bondholder. On the next succeed- ing January 1 the coupons from the same bonds are detected by the paying agent and returned to the bondholder who then presents his bonds for payment with a demand for interest subsequent to the call date. In matters of this kind several New York trustees and paying agents have used the following form of letter in replying to the bondholder: “Under the terms of the call, the bonds, when presented for payment, must bear the July 1, 1924, and all subsequent coupons, and as the bond in question was presented with the July 1, 1924, coupon detached, we followed the prevailing custom of paying agents in this city and deducted the amount of the missing coupon from the redemption value of the bond. ‘“‘A matter of policy is involved which concerns not only ourselves but all paying agents. Experience has shown that 126 WORK OF CORPORATE TRUST DEPARKTMEN'S no amount of care in the offices of such paying agents will insure both the instantaneous payments of all coupons which ought to be paid (and that is a matter which is of vital im- portance to the bondholders as a class), and at the same time insure non-payment in every instance of every coupon which ought not to be paid because called for previous redemption. As paying agents, we do not act as guarantors either to the obligor on the bond or to the bondholder that no error what- ever will occur in connection with the payment of coupons. All we can undertake to do is to furnish the best possible service and establish the best possible safeguards against error. “The terms of the bond and coupon are explicit and carry clear notice to the bondholder that he is not entitled to receive payment of coupons from bonds called for previous redemp- tion. ‘The call for redemption was published in accordance with the requirements of the bonds. ‘The coupon presented was one which, according to its terms, should not have been presented by the bondholder, and to the payment of which he was not entitled. It goes without saying that the bondholder’s action in presenting this void coupon for payment and in ob- taining payment of it from us was altogether the result of a mistake and not intentional on his part. It was, however, as much his duty to heed the terms of the contract and the pub- lished notices of redemption as it was ours to do so. Upon full consideration, we cannot feel that the bondholder is, under such circumstances as these, entitled to collect the January 1 coupon or to retain the proceeds of the July 1 coupon, which was paid as the result of a mutual mistake. ‘The amount involved is small and we so much wish to give satisfaction to all who have dealings with us that we should be glad indeed if we could see our way clear to meet your wishes and refund the amount of the July coupon. But, after con- sultation with the principal paying agents in this city, we are advised that this would involve the establishment of a very troublesome precedent. ‘They feel that the solution of the problem lies in bringing very emphatically to the attention of the investors, and of banks, trust companies, and dealers who collect their coupons, the fact that it is necessary to keep track of the published calls for redemption of bonds of the issues in which they or their clients are interested. The paying SINKING FUNDS AND REDEMPTION OF BONDS — 127 agents fear that the result of refunding the July coupon in this case would be to lure investors and their representa- tives into a false sense of security and make them less atten- tive than heretofore to published notices of redemption, thus aggravating a situation which is already troublesome. It would seem that this problem canbe solved only by the cooperation of investors and collecting agents with paying agents, to the end that redemption notices shall not be dis- regarded.” CHAPTER IX PLEDGED SECURITIES; RELEASES; SUPPLEMENTAL MORTGAGES Control of pledged securities.— Mortgages which involve the pledge of stocks or bonds as security, in addition to the lien of the mortgage on physical property, contain various provisions relating to the control: of the pledged securities. The recognized practice is to group provisions of this nature in a separate article of the mortgage’ to which the trustee will refer when considering questions arising out of its inter- est, as pledgee, in such securities. Briefly, the intent of these provisions is to permit the com- pany, in the absence of default, to collect the income from, and to vote upon, the pledged securities, although the trustee has physical possession thereof and the right to assume full control in case default occurs. With the object of preventing any diminution in the security, a number of protective clauses are usually inserted in the mortgage. For example: (a) While the company shall be entitled to collect the in- come from the securities it shall not receive any payments on account of principal nor any capital distributions; (b) while the company shall be entitled to use a sufficient number of shares of stock to qualify directors or officers of the com- pany whose stock is pledged, the use of stock for that pur- pose must be under conditions satisfactory to the trustee; (c) while the company shall -have the right to vote stock for all ordinary purposes, it shall vote for an increase in the corporation’s indebtedness or capitalization only to the extent permitted and upon the conditions imposed by the mortgage; (d) in case of reorganization, consolidation, or merger of any company whose securities are pledged, the mortgagor com- pany is authorized, with the assent of the trustee, or the trustee alone is authorized to take such steps as may be neces- sary to protect the interest of the bondholders. 1 Reference is made to Article III of the typical mortgage, p. 354. 128 PLEDGED SECURITIES; RELEASES; ETC. 129 To summarize, in the company and the trustee are com- bined the full powers of the ordinary security-holder. Gen- erally speaking, the company, in the absence of default, is per- mitted to manage the interests represented by the pledged securities as it manages its business; but its rights in this re- spect are subject at all times to mortgage provisions designed to protect the interests of the bondholders.? Possession of pledged securities and registration thereof.— In practically all cases the pledged securities are actually deposited with the trustee. Exceptions to this rule are those instances where the securities are in the hands of the trustee under a prior mortgage, which circumstance is discussed later in this chapter. Certificates of stock placed with the trustee under a mortgage may or may not be registered in the trus- tee’s name. There is no uniformity in mortgage requirements on this subject. Under many mortgages the company is per- mitted, in the absence of default, to have pledged securities registered in its name or in the names of its nominees; while in other mortgages the trustee is required promptly to secure transfer of the securities into its name or the names of its nominees. In still other mortgages the matter of transfer is left to the discretion of the trustee. It is preferable from the trustee’s viewpoint that the requirement of the mortgage be specific; if, however, the matter of transfer is optional with the trustee, its action will be controlled by the standing of the mortgagor and other circumstances surrounding the trust. Nominees of trustee.— The practice of permitting registra- tion of pledged securities in the names of nominees rather than the name of the company or the trustee is largely due to the greater difficulty of effecting the transfer of securities registered in the name of a corporation or a fiduciary. ‘The nominee is required to execute an assignment of the securities and to surrender possession thereof promptly upon completion of the transfer. Good trust company practice goes one step further and requires the execution by the nominee, as of the date of transfer, of a declaration of trust. Form 34 is an 2'The reader should bear in mind that this chapter concerns only collateral pledged under mortgages as additional security. For provisions affecting col- lateral trust indentures, under which only stocks, bonds, or other intangible security is pledged, see Chapter XII. 130 WORK OF CORPORATE TRUST DEPARTMENTS example of such a declaration. In cases where a nominee who is an employee of the trustee leaves its employ the trustee should carefully consider the advisability of transferring the securities to another nominee. All holdings of nominees should be recorded on nominee cards (Form 35), so that notices, dividends, etc., sent to the nominee may be readily traced to the proper account. Form 34.—Declaration of Trust. ~DECLARATION THIS IS TO DECLARE that Certificate — No. for shares of Stock of the issued in my name was not purchased with funds belonging to me, and the said Certificate is not my property either directly or indirectly, but is subject to the control of Bankers Trust Company and has been assigned and delivered to it prior to the execution of this Declaration. I further declare that I never have had, and do not now have any personal or beneficial interest in said Stock, and that the dividends thereon or the rights in respect thereof, if any, as well as any proceeds arising from the sale thereof do not in any manner belong to me, but are subject to the order and control of said Trust Company. WITNEss MY HAND AND SEAL THIS —— day of 19—. [E.$.] Signed in the presence of: Form 35.—Nominee Card NOMINEE FOR ACCOUNT OF No. OF SHARES AMOUNT S ce Mg I eee PAR DATES %, VALUE PAYABLE ToTat | $ PLEDGED SECURITIES; RELEASES: ETC. 181 Directors’ shares.— There is usually contained in this article of a mortgage authorization to the trustee to do whatever may be necessary to maintain or to extend the corporate existence of any corporation, all or a part of whose stock may be pledged under the mortgage, and further authorization to the trustee to use, or to permit the company to use, a sufficient number of shares to “qualify” directors or officers of such corporations where the law or the corporation’s by-laws require officers or directors to be stockholders. The usual practice, after such transfers for qualifying purposes, is to require the directors or officers to endorse their respective qualifying certificates and to redeliver them to the trustee. Pledge subject to other mortgages.— Especially in the case of refunding mortgages, securities frequently are pledged, subject to prior pledge under existing senior mortgages. Un- der such circumstances actual delivery of the securities can- not be made to the trustee of the junior mortgage until the securities are released from the prior lien, in accordance with the terms of the latter, usually only upon the satisfaction and discharge of the senior mortgage. ‘The junior trustee promptly upon execution of the junior mortgage pledging securities subject to a prior lien, should serve formal notice of such pledge upon the senior trustees and demand that the senior trustees upon release of the securities from the senior liens shall deliver the securities to it under the junior mort- gage, rather than to the company or to any other party other- wise entitled thereto.* Dividends and interest.—With but few exceptions mort- gages which cover pledged securities provide that, in the absence of default, the mortgagor shall be entitled to receive and use, without restriction, all interest and dividends paid on the pledged securities. In the case of coupon bonds it is usually provided that the coupons as they mature shall be detached and delivered to the company. Registered securities, if standing in the name of the company or its nominee, require no action by the trustee. If, however, the registered securities are in the name of the trustee or its nominee, the trustee will be called upon to deliver all necessary dividend or interest 3Item XI of the Mortgage Examination Guide, p. 31, covers this point. 182 WORK OF CORPORATE TRUST DEPARTMENTS orders in favor of the company or its nominee. In the event of a default under a mortgage covering pledged securities, one of the first duties of the trustee is to review the condition of the pledged securities, to arrange for a prompt transfer to its name of any securities not so transferred, and to cancel all outstanding interest or dividend orders in favor of the com- pany. During the existence of a default the trustee should collect and hold as a part of the trust estate all payments on account of the pledged securities. Payment on account of principal.—Practically all mort- gages of this kind provide that payments on account of the principal of pledged obligations, or dividends on pledged stock which are of the nature of capital distributions or liquidating dividends, shall be payable to the trustee and not to the company, and shall be held by the trustee until applied by the company for purposes set forth in the mortgage. It is usual for the mortgage to permit such funds to be repaid to the company to reimburse it for capital expenditures of the nature authorized as the basis of an application (1) for addi- tional bonds, or (2) for the withdrawal of the proceeds of released property.* Sometimes the company, may, at its op- tion, add such funds to an existing sinking fund or require the trustee to apply the funds to the redemption of outstand- ing bonds. Voting pledged stock.—Following the principle outlined in respect of income on pledged securities, it is generally pro- vided that, in the absence of default, the mortgagor shall have the right to vote the pledged stock at stockholders’ meetings, but subject to certain logical restrictions. Again, as in the case of dividends, no action is required of the trus- tee, unless the securities are registered in its name or in that of its nominee. If so registered it is usual for the mortgage to provide that, unless a default exists, the trustee shall, on the written application of the company, deliver to it or on its order all necessary proxies to permit the company to vote the pledged securities. The usual restrictions on the exercise of voting power in respect of pledged stock are such as to prohibit: 4 These provisions are discussed on pages 93 and 139, respectively. PLEDGED SECURITIES; RELEASES; ETC. 133 1. Any increase in the indebtedness of the company, the stock of which is voted, unless provision is made for the de- posit of the full amount of such increased indebtedness as additional security under the mortgage. 2. Any increase in the capital of the company the stock of which is voted, unless provision is made for the deposit under the mortgage of a proportionate amount of the new stock; so that, after the increase, the trustee shall hold no smaller proportion of the entire capital stock than it did be- fore such increase. 3. In the case of certain subsidiary or controlled com- panies, where a voting control or substantial control is repre- sented by the stock originally pledged, any increase in the securities having a voting right unless provision is made that the percentage of voting control represented by the pledged stock shall not be diminished. 4. Any action to surrender the company’s franchise, or to terminate its corporate existence, except with the assent of the trustee. Proxy limitations.—In executing proxies covering pledged securities, it is good practice for the trustee to give proxies which are limited to certain expressed purposes, as, for ex- ample, the election of directors, or, if it is necessary to give a full power, to refer in the proxy to the mortgage and pro- vide that the proxy shall not be voted for any purpose in- consistent with the provisions of the mortgage. Even though the mortgage may not specify the form of the company’s application to the trustee for the execution of proxies, it is appropriate for the trustee to require a certified copy of a resolution of the directors of the company author- izing each request, or a general resolution of the directors, authorizing certain officers of the company to make such re- quests. During the existence of default it is the rule for the trustee itself to exercise the voting power. Subsidiary or controlled companies.—In the case of mort- gages where all or a part of the pledged stock represents the mortgagor’s interest in certain subsidiary or controlled companies, such interest being a substantial factor in the com- panies financial or industrial position, it is usual to find most 1384 WORK OF CORPORATE TRUST DEPARTMENTS stringent and detailed provisions as to the voting rights on the stock, particularly in the event of the merger of any of such companies, either with the mortgagor or with other sub- sidiary or independent companies; or in the event of their reorganization. Protection of pledged stock.—Many indentures which con- template the deposit of stock as collateral provide that in case a majority of the stock of a corporation is pledged no part thereof may be released which would reduce the amount pledged below 51 per cent of the capital stock of such cor- poration, unless all of its stock is simultaneously sold and re- leased. The obvious reason for this provision is to continue in the trustee, once it is obtained, the voting control of any corporation, all or a part of whose stock is pledged. Reorganization or merger.— Under the more modern mort- gages the trustee is often given a wide discretion to act for the best interests of the bondholders in the event of reorgan- ization, consolidation, or merger, affecting a company whose securities, in whole or in part, are pledged under the mort- gage. ‘The well-drawn mortgage always takes into consider- ation the possibilities of merger or reorganization, and the careful draftsman endeavors to insert provisions broad enough to cover all contingencies which reasonably can be foreseen. The discretionary powers of the trustee in this direction are checked by such restrictive provisions as may be deemed neces- sary for the protection of the trust estate. Release of portions of mortgaged property.— After the re- cording of a mortgage in the various jurisdictions in which the mortgaged property is located, and pending the final discharge and satisfaction of the mortgage, the property cov- ered can be conveyed only subject to the lien of the mortgage, unless there is recorded in the jurisdiction in which the prop- erty to be conveyed is located an instrument executed by the trustee releasing, from the lien of the mortgage, the trustee’s right, title, and interest in and to the property to be con- veyed.’ As such instruments cover a part only of the mort- gaged property they are generally referred to as “partial releases,’ to distinguish them from the instrument of release 5 Reference is made to Article VIII of the typical mortgage (page 368). PLEDGED SECURITIES; RELEASES; ETC. 135 or satisfaction executed by the trustee upon the final payment of the debt secured by the mortgage, completely to discharge the lien of the mortgage. Purpose of release provisions; restrictions imposed.— A corporation would find a mortgage a severe handicap if during the life of the mortgage, it were unable to sell and give good title to any part of the mortgaged property. As a con- sequence, practically all mortgages contain provisions which permit property no longer necessary or advantageous in the proper operation of the company’s business to be released, upon certain conditions, from the lien of the mortgage. It is customary to require that the proceeds of sale of any property so released shall be deposited with the trustee. Some mortgages contain special provisions which have par- ticular reference to the type of business carried on by the debtor. For instance, the release clauses of most railroad mortgages contain a restriction to the effect that no property shall be released if thereby the continuity of the line of rail- road would be broken. A similar restriction is applied to transmission lines in power company mortgages. Mortgages on properties of industrial and other concerns using a con- siderable amount of machinery and equipment often specially authorize the sale by the company, without release by the trustee, of such machinery or equipment as is no longer neces- sary in the operation of the business, on the condition that such property is replaced by other property of at least equal value. In some mortgages of this kind the debtor company is required to account periodically to the trustee for such sales, and in other mortgages a limit is placed on the amount of property which may be sold annually without release by the trustee. Some mortgages permit the mortgagor to make all necessary alterations to its operating property such as plant, transmission lines, or lines of railroad, not including changes in its real estate holdings, without obtaining from the trustee a formal release of the property replaced in the course of such alterations. The release of a very large part of the property might so affect the character of the mortgaged premises that subse- quent sale of the bonds would constitute deceit or misrepre- sentation. In such cases a supplemental indenture may be 136 WORK OF CORPORATE TRUST DEPARTMENTS advisable, pursuant to which the outstanding bonds would have to be deposited with the trustee and an appropriate en- dorsement stamped thereon. In examining into any large re- leases the trustee should keep this possibility in mind. Before executing any release the careful trustee should com- pare the detailed description of property appearing in the release with the description given in the company’s application, so that no property will be released except that formally ap- plied for by the company pursuant to the mortgage provisions. Conditions of release.—In some few mortgages it is possi- ble to determine in advance the consideration which the trustee must receive when releasing property. For example, a mort- gage on property of a real estate development can very well identify the plots by number and specify the amount to be deposited with the trustee for each plot released. However, such mortgages are exceptions; as a rule, it is necessary to draft elaborate provisions which must be complied with be- fore the trustee is authorized to execute any release of prop- erty. The typical provisions of a mortgage in respect to the release of property are: (1) that the property to be released shall not be necessary or advantageous in the operation of the business of the mortgagor; (2) that the company has sold or exchanged, or has contracted to sell or exchange, the prop- erty for a consideration of at least equal value; (3) that the consideration shall be paid or conveyed to the trustee; and (4) that the company shall make written application to the trustee, in the form prescribed by the mortgage, for such re- lease making the showing as to facts required by the mortgage. Form of mortgagor’s application.— The form of applica- tion differs widely with each mortgage. In the older mort- gages it was common to require merely a resolution of direc- tors, but the right to obtain the release of property was often rather closely restricted. ‘The more modern mortgage is apt to be much more liberal in its right of release; but, on the other hand, it is much more exacting in its requirements as to the showing necessary to obtain a release. For example, one modern mortgage permits the release of any part of the mortgaged property but requires the following to support the application: PLEDGED SECURITIES; RELEASES; ETC. 137 1. A certified copy of a resolution of the board of directors or executive committee of the mortgagor stating the facts as to the sale or agreement to sell, and authorizing the applica- tion for release. 2. A certificate in affidavit form by the president or any vice-president and by the chief engineer, treasurer, or any assistant treasurer stating: (a) That the property to be released is no longer neces- sary or advantageous in the proper operation of the business of the company. (b) That the company has in good faith sold or has con- tracted to sell the property for a specified consideration. (c) That, in the judgment of the officers, the consideration to be received is of a value to the company at least as great as the value of the property to be released. (d) If the consideration is to be other than money a full detailed statement of such consideration. 3. If the consideration is to be other than money, an opin- ion of counsel that, upon completion of the transaction, the company will acquire good title to the property comprising the consideration, and that such property will, without further action by the company or the trustee, become subject to the lien of the mortgage; or, if further action is required to sub- ject the new property to the lien of the mortgage, approval of the form of such instruments as may be necessary for that purpose. | : 4. If the stated value of the property to be released exceeds the sum of $100,000, an appraisal by an independent engi- neer or appraiser, selected by the company and approved by the trustee, of the value of the property to be released and of the consideration to be received. 5. Delivery of the consideration to the trustee, simultane- ously with the delivery of the release. It is apparent from the above that, while authority 1s granted for the release of any part of the mortgaged prop- erty, great care was taken, in drafting the provisions author- izing releases, to prevent possible loss to the trust estate through such transactions. Substitution of property on “utility” basis.—Some of the modern mortgages provide that property substituted for prop- 138 WORK OF CORPORATE TRUST DEPARTMENTS erty released must have a value or utility at least equal to that of the property released. A somewhat comparable provision is contained in the ‘“Telephone” mortgage.® ‘The use of utility as an alternative for value, particularly in the case of public utility mortgages, is becoming more common, and, while, from a broad point of view, the provision is undoubtedly wise, it can be safely used only in the case of a company of financial strength and capable management, as the dollar value of the mortgaged property might be materially reduced through a series of sales and replacements on a “utility” basis, if no regard were given to the values involved. Deferred payments.— Many of the newer mortgages make specific provision for the release of property on deferred pay- ment sales. In such a case the mortgage usually provides what percentage of the sale price must be paid in cash and also for a properly recorded assignment to the trustee of the purchase-money mortgage, and the deposit with the trustee of the notes or other obligations issued thereunder. In general this is a wise provision, as inability to sell against a reasonable purchase-money mortgage often mitigates against a possible advantageous sale of property no longer of real use to the company. Eminent domain.—Another provision now commonly found in mortgages is that covering the contingency of a part of the mortgaged premises being taken under the power of ‘eminent domain.’ Frequently, property subject to a mort- gage will be required by a governmental body for public pur- poses, such as parks, roadways, and so on. In that event condemnation proceedings may be brought, or the govern- mental body may purchase the property in question, from the mortgagor. Some mortgages authorize the trustee, under these circumstances, to execute a release upon receiving an appropriate opinion of counsel acceptable to the trustee and upon deposit with the trustee of the moneys received as com- pensation for the property so taken or purchased. Abandonment of mortgaged property.— Due to changed conditions railroads sometimes find themselves burdened with mileage which is actually more of a liability than an asset. ® See page 369. PLEDGED SECURITIES; RELEASES; ETC. 139 The development of automobiles and improvement of roads has forced the railroads, in many cases, to operate some of their mileage at a loss. Usually these unremunerative por- tions of the line are small branches which may be cut off without affecting the operation of the main lines. In a situation of this kind the railroad probably will ap- proach the trustees of its mortgages on the subject of aban- doning the unremunerative mileage. If the railroad is applying to the Interstate Commerce Commission for authority to abandon the line in question the trustee probably will be con- tent to appear before the commission, state its position as trustee, and await the commission’s decision. Of course the trustee should not take any action in matters such as this with- out having its counsel approve each step. It should also see that the “scrap” value of the abandoned line is paid to the trustee of the senior mortgage on the line. Underlying lien.— In the case of mortgages which are sub- ject to underlying liens it is usual to provide that, if property released is subject also to an underlying lien, the com- pany shall deposit the proceeds of the release with the prior trustee in lieu of its obligation to deposit under the mortgage in question. Good practice dictates the policy of the junior trustee receiving a formal acknowledgment from the prior trustee that it has received the proceeds and will apply them in accordance with the provisions of the underlying mortgage. Application of proceeds.—As previously stated, most mort- gages require the deposit with the trustee of the proceeds of released property and also provide for the disposition by the trustee of such proceeds. If the consideration takes the form of property rather than cash, the property is held as a part of the trust estate. The following alternatives sometimes are given, as to the disposition of cash proceeds: 1. Repayment to the company in reimbursement for the cost of additional property purchased and subjected to the lien of the mortgage, or for the cost of additions or better- ments, chargeable to capital, made to the mortgaged property. It is usual to provide that only such expenditures as are made after the date of the release may be the basis of such an ap- plication. 2. Application, at the option of the company, to the re- 140 WORK OF CORPORATE TRUST DEPARTMENTS demption of outstanding bonds in accordance with the terms of the mortgage, to the purchase of outstanding bonds at public or private sale, or on tender, or payment into the sink- ing fund for use as therein provided. Many mortgages pro- vide that if the company shall not apply the proceeds, within a specified period, say, one year, to the purchase of property or to additions or betterments, or in writing notify the trus- tee of its intention so to do, the trustee shall, without further action by the company, apply the funds to the redemption or purchase of outstanding bonds as provided in the mortgage. A provision of this kind requires careful watching by the trus- tee, and the date of each release should be carefully calen- dared so that the expiration of each period may be noted. Many trustees, as an act of courtesy to the mortgagor, notify it a month or so before the expiration of each period, so that the company may not be embarrassed through an oversight on its part. Release of property during receivership.— Most recent mortgages provide that the right of the mortgagor to apply for the release of property shall terminate with the happening of an event of default. Even though the mortgage does not contain such a provision, the diligent trustee will use extreme caution in the case of an application at a time when the mort- gagor is in default. While good policy dictates that the form of all applications for release should be submitted to counsel for the trustee for their approval, any application received during the existence of a default should be passed on by coun- sel with due consideration of the circumstances of the default and of the effect of the proposed transaction on the interests of the bondholders. Many modern mortgages contain a very wise provision that, during the existence of a default, the receiver of the company (if one has been appointed) shall have the right, with the consent of the trustee, to act in the place of the company in connection with the release of property, and if the trustee, upon default, shall have entered into possession of the mort- gaged property, it shall have the right, without action by the company, to release property from the lien of the mortgage, upon terms which, in its judgment, shall be in the interest of the bondholders. PLEDGED SECURITIES; RELEASES; ETC. 141 Supplemental indentures.’—As may be inferred from the name, a supplemental indenture is an instrument, executed by the mortgagor, or by both the mortgagor and the trustee, to modify or add to the provisions of the mortgage under which it is executed. Supplemental indentures are created to accomplish a variety of purposes, among which are: 1. To convey to the trustee, as additional security for the bondholders, property, real or personal, not previously sub- ject to the mortgage. This is by far the most common type of supplemental indenture, and usually is executed by the mortgagor only, as it is merely a conveyance in trust to the trustee. Such an indenture should be properly recorded. 2. ‘To evidence the terms of new series of bonds, issuable under a mortgage providing for bonds in series. Supplemental indentures are not required or executed in all such cases, as many mortgages provide that the terms of each new series of bonds may be fixed by resolution of the directors of the com- pany. However, even in such cases, it is sometimes consid- ered better practice for the mortgagor and the trustee to execute a supplemental indenture, which is placed on record in the various public offices in which the mortgage is recorded.* 3. To evidence the surrender by the mortgagor of one or more of its rights under the terms of the original mortgage, or the extension to the bondholder of some additional priv- ilege. To this point we have considered only supplements which in no way diminish the rights of the bondholders, consequently, the consent of the bondholders is not required or obtained. 4. To evidence a change in one or more of the covenants of the mortgagor in the original mortgage. Such a change must always affect, to some extent, the rights of the bond- holders, and, therefore, the trustee should not join in the execution of such an indenture except upon the assent of the holders of all the outstanding bonds in any way affected by the proposed change. The assent of the bondholders is usually TSee the “Telephone” mortgage, page 389. 8A supplemental indenture of this kind should be analyzed in the same manner as the original mortgage. See Mortgage Examination Guide, Form 1, page 30, and History of Trust, “half sheet” Form 2A, page 36. 142) WORK OF CORPORATE TRUST DEPARTMENTS evidenced by the deposit of the bonds with the trustee, or other designated depositary, under an appropriate agreement or letter of instructions, authorizing the trustee to join in the execution of the proposed supplement and to place on the bonds themselves an appropriate endorsement. ‘The purpose of the endorsement is to put all subsequent holders of any of the bonds upon proper legal notice of the change in the terms of the original mortgage. While, in the absence of any provision to the contrary in the mortgage itself, the unanimous consent of the bondholders is required, there are exceptional cases under which a trustee for the good of the bondholders as a whole will join in the execution of such a supplement, provided the consent of sub- stantially all of the bondholders has been obtained, and pro- vision to the trustee’s satisfaction is made for the protection of non-assenting bondholders. Unanimous consent by bondholders to any change in the terms of a mortgage is most difficult to obtain, and this re- quirement presents an opportunity to the type of bondholder who attempts to secure personal profit from a chance to ob- struct. As a consequence, the more modern mortgages some- times contain a provision that supplemental indentures alter- ing the provisions of the mortgage, but making no change in the terms of payment of the outstanding bonds, may be ex- ecuted by the trustee and shall become effective upon the assent by the holders of a specified percentage, say, 85 per cent of the outstanding bonds. ‘This, it seems, is a very sensible pro- vision and one which, if generally adopted, would, in time, do much to make unprofitable the business of obstruction now pursued by a few investors who are not too scrupulous as to the source of their profit. CHAPTER X DEFAULTS AND REMEDIES “Events of default.”—So long as the financial life of the mortgagor runs smoothly, the corporate trust department has little or no interest in those sections of the mortgage’ which define the various “‘events of default” and the remedies avail- able to the trustee and the bondholders in case of default, such as the mortgagor’s failure to pay interest or principal on the bonds, to provide sinking fund installments, or to keep other covenants contained in the mortgage. However, as soon as a default occurs or is impending, the trustee should examine into the methods by which the remedies may be en- forced and discuss with its counsel a proper course of action. Because any action by a trustee under these provisions of a mortgage should be taken only after full consultation with counsel, and, further, because any discussion of the subject would be mainly legal in its scope, no attempt will be made in this book to do more than look into the practical aspects of the subject. Those readers who are interested in pursuing further this phase of corporate mortgages are referred to existing works by well-known attorneys. One of the best discussions, from the point of view of the trust officer, is found in the paper read by Mr. James Byrne before The Association of the Bar of the City of New York, entitled “The Foreclosure of Railroad Mortgages in the United States Courts,’ and, supplementing this, the lecture before the same body by Mr. Paul D. Cravath on “The Re- organization of Corporations; Bondholders’ and Stockhold- ers’ Protective Committees; Reorganization Committees; and the Voluntary Recapitalization of Corporations.” Both of these addresses have been published in “Some Legal Phases of Corporate Financing, Reorganization and Regulation” to which the authors have referred on several occasions. 1 This reference is to the text of the “Telephone” mortgage, Article IX (page 372). 143 144, WORK OF CORPORATE TRUST DEPARTMENTS The following statement of Mr. Roberts Walker,’ relat- ing to the broader aspect of the subject, is also of interest: ‘“These remedies [in event of default] ordinarily occupy a separate Article of from ten to twenty-five Sections, and de- fine the defaults—for example, failure to pay interest, failure to pay principal, failure to live up to covenants, or failure to keep out of a receivership—and provide a diversity of courses available to the trustee or bondholders when defaults occur. You will readily apprehend that lawyers have expended their most vigilant efforts in making the default provisions “‘leak- proof.’ According to the terms of the mortgage, the trus- tee may take possession of, and may operate, the mortgaged property, may declare the principal of the bonds due and re- cover a money judgment without more formality or red tape, may have its own receiver appointed forthwith, may sue for a foreclosure and sale, may sell of its own motion, or may do other things. In practice, the matter is by no means so easy as it sounds. Things have not changed greatly since 1897, when Moorfield Storey, Esq., of Boston, wrote: “The most skillful lawyers . .. have been engaged to draw mortgage deeds . . . with careful and explicit provi- sions defining the rights and remedies of the creditors in case of the debtor’s inability to pay its debt, authorizing them through their trustee to take immediate possession . . . and providing further for speedy foreclosure and sale. . . . It would be impossible . . . to draw instruments which were clearer or more carefully guarded than many of these agree- ments. “The last three years have shown us that these contracts cannot be enforced in the courts; that the rights which they are intended to secure are not recognized, and that for all practical purposes the creditor is at the mercy of the debtor. . As matters now stand, counsel must advise their clients that, they can draw no instrument of this character with the least assurance that its provisions will be respected.’ “Mr. Storey was writing, it is true, shortly after the panic of 1893, and in severe criticism of the so-called ‘friendly re- ceiverships’ into which so many corporations were thrown during that period. But his commentary is to-day even truer 2“The Modern Corporate Mortgage.” DEFAULTS AND REMEDIES 145 than in 1897, though for partly different reasons. In the last twenty or thirty years our courts have shown, paralleling the increasing magnitude of corporate security issues, an in- creasing tendency to deal with insolvent properties for the benefit of all strata of bondholders, creditors, and stockhold- ers. Only in most extreme cases is a trustee permitted to foreclose and thereby ‘freeze out’ the junior creditors and the stockholders. Arrangements whereby bondholders and stockholders agree to sell and reorganize without making adequate provision for intervening claimants are looked at askance. In the absence of any statute requiring reorganiza- tions to be conducted under judicial control, the courts are doing their utmost to prevent unfair reorganizations or harsh foreclosures even though trustees are within their legal rights and to delay their enforcement thereof is abstractly unjust— to the trustees and bondholders. So we must deem the de- fault clauses to be the most effective possible under existing circumstances. ‘The circumstances are no reflection on the scrivener’s ability, but show him and his mortgage as single factors among many weighty considerations.” Procedure of trustee.— Perhaps it would not be out of place to attempt here a very brief outline of the various steps taken by a trust department, following a default. In these matters the corporate trust department usually comes in close contact with the reorganization department;’ in fact, in many trust companies, reorganizations and similar kinds of business are in charge of a division of the trust department. If the default is in the payment of principal or interest it soon comes to the attention of the bondholders. In the case of other defaults one of the first questions which the trustee faces is whether to notify the bondholders. ‘This is a delicate problem and no set rule can be established, but the advisability of communicating with the bondholders should be carefully considered by the trustee and its counsel. Even should it be decided to do so it will often be found difficult to reach any considerable number of bondholders because, if the bonds are outstanding in bearer form, the trustee probably will have difficulty in ascertaining the names and addresses of the hold- ers. 3 See Chapters XIV and XV, pages 187 and 206 respectively. 146 WORK OF CORPORATE TRUST DEPARTMENTS The default may be of a nature entitling the mortgagor to a “period of grace,’ and, further, requiring the service on the mortgagor by the trustee, or by the holders of a designated percentage of bonds, of a formal notice, specifying the de- fault, so as to set running this period of grace. ‘The provi- sions of the ‘“Telephone”’ mortgage are typical (see Article IX, Section 2 (c), page 372). In that mortgage the period speci- fied is 90 days and the notice to the mortgagor may be given by the trustee in its discretion, but shall be given at the direc- tion of the holders of 25 per cent in amount of the outstand- ing bonds. ‘The period stipulated after due service of notice, as required, must elapse before the trustee may‘declare the principal of all bonds to be immediately due and payable or otherwise proceed to the enforcement of the remedies pro- gided by the mortgage. Usually, before matters have progressed very far, some of the larger bondholders (and probably the bankers who sold the bonds) get together and organize what is known as a pro- tective committee. This committee will come to a trust com- pany, often the trust company which is acting as trustee, and request it to act as depositary under a protective or deposit agreement.’ Such an agreement is entered into between the protective committee, and the holders of such bonds as may be deposited thereunder. The agreement defines the author- ity which the committee shall have in acting for the bondhold- ers, provides for the payment of the compensation and ex- penses of the committee, and contains provisions for protect- ing the interest of depositing bondholders. Acting under this agreement the committee attempts to work out the financial dificulty and, perhaps, to reorganize the company. It some- times happens (unfortunately in but comparatively few cases) that the committee is able to relieve the situation without actual foreclosure. In most cases, however, the committee has to decide upon foreclosure, preliminary, as a rule, to a complete reorganization. In this event, it usually instructs the trustee to proceed to foreclose the mortgage, and, on be- half of the bondholders who have deposited under the agree- ment, gives formal instructions to that effect, offering the trustee indemnity as required by the mortgage, for its ex- 4 Chapter XIV, page 187, contains a more complete discussion of the provi- sions of a deposit agreement. DEFAULTS AND REMEDIES 147 penses and liabilities. ‘This indemnity, almost without excep- tion, is given by the committee as a committee and not in- dividually, and is often secured by the pledge of all of the deposited bonds. ‘This form of indemnity is satisfactory, however, only if the deposit agreement contains the customary provision giving the committee the right to pledge the de- posited bonds, and if, in the judgment of the trustee, the probable recovery on’ the deposited bonds will be sufficient ‘to equal its liabilities, disbursements, and fair compensation. In some cases the trustee will require a surety bond or the pledge of other security. During the progress of the fore- closure proceedings, it is usual for counsel for the trustee to confer with counsel for the bondholders’ committee, and, so far as is compatible with the interests of the bondholders as a whole, to work in harmony with the committee. The extent to which the trust company will endeavor to meet the wishes of the committee is largely dependent upon the per- centage of bonds represented by the committee and whether there is any organized minority of bondholders. Sale under foreclosure.—Provided a reorganization has been determined upon, it is customary for the bondholders’ committee (directly or through an intermediary) to bid for the property at the foreclosure sale and to offer in payment (1) the deposited bonds, in the proportion to which they will be entitled to share in the net proceeds of the sale; and (2) cash for the balance. It is then usual for the committee to organize a new corporation, issue the securities of the new corporation in exchange for the properties of the old, giving to the holders of junior securities such recognition as, in their judgment, the equities justify. The treatment of the junior security-holders is important, as the courts have adopted the policy of carefully scrutinizing this part of a reorganization plan, and are inclined to give a sympathetic hearing to the holders of junior securities who can show that they have not been equitably treated in the plan. After the sale, the deposited bonds are stamped with an endorsement showing the payment on account out of the pro- ceeds of the sale, and are returned to the committee, although, in certain circumstances, with the approval of the court, stamp- ing of the deposited bonds may be avoided by having them 148 WORK OF CORPORATE TRUST DEPARTMENTS canceled by the trustee and its receipt given to the committee. It is sometimes possible—provided the court approves—to solve the problem of disposing of the deposited bonds by having them canceled and one temporary bond for the entire amount issued to the committee. As a formal step, the trustee will obtain a deficiency judg- ment for the unpaid balance due on the bonds.’ For the deficiency the bondholders will rank equally with the unse- cured creditors of the company as to any unmortgaged assets. A receivership nearly always accompanies a foreclosure, and, if there are substantial unmortgaged assets, the bondholders will receive on the deficiency judgment a further dividend from the receiver’s sale. The bonds, if paid in full, are then can- celed. Unfortunately, however, full payment seldom results. The deficiency judgment gives to the trustee the right to par- ticipate on behalf of the bondholders in any further assets of the company which may be discovered later. Junior security-holders.—Reference has been made to the treatment of the equity security-holders. In the earlier days, when a first mortgage was foreclosed, the result was nearly always the complete wiping out of ‘he stockholders, and, in some instances, of the junior bondholders. ‘To-day, because of the change in the attitude of the courts, which has already been mentioned, it is usual for the first mortgage bondholders’ committee to give the junior security-holders an opportunity to offer a plan of reorganization. If the junior security-hold- ers fail to do so, the first mortgage bondholders, after care- fully analyzing the situation, prepare a plan and offer therein such treatment of the equity represented by the junior security- holders, as they believe to be fair and likely to meet the approval of the court. Almost any reorganization involves the raising of cash, and the burden of providing it is prac- tically always placed on the junior security-holders. Activities during foreclosure proceedings.—During the foreclosure proceedings the trustee will be called upon to sign various notices and petitions, including the trustee’s bill 5 This states the procedure generally, but in New Jersey, for example, a trustee under a corporate mortgage cannot, on foreclosure, obtain a deficiency judgment. In bankruptcy the bondholder and not the trustee is regarded as the creditor, and should prosecute any claim for deficiency. DEFAULTS AND REMEDIES 149 of complaint in foreclosure. Perhaps, through one of its officers, it will be necessary for the trustee to testify in the foreclosure proceedings. Eventually it will join in the deed by which title to the property passes to the purchasers. In all these matters, however, the trustee should secure the ap- proval of its counsel before taking action. Computation of amount due.—The trust department, in connection with the preparation of the bill of complaint in foreclosure, and also at the time of the entry by the court of the order of distribution on foreclosure probably will be called upon to figure the amount due for principal and interest on the bonds. The following example illustrates the calculation in one instance. The laws of the various states relating to usury and the compounding of interest often affect the method of figuring interest on the debt, and counsel’s approval of the method used should be secured in each case. In the following illustration the bonds carried 6 per cent interest which had been paid to April 1, 1921. The company had defaulted on one of its covenants under the mortgage. On the application of creditors a receiver was appointed on July 15, 1921, and, on the same date, at the request of holders of the specified percentage of bonds, the trustee declared the bonds due and payable. The order of distribution on foreclosure was entered by the court on July 16, 1923. NEW YORK COMPANY, INC., lst MORTGAGE 6% 10-YEAR GOLD BONDS 1. Principal due July 15, 1921, by declaration of the trustee.... $4,168,500.00 2. Interest thereon from April 1, 1921, to July 15, 1921 (3 months and 14 days at 6% on a 360-day basis) ........... 72,254.00 3. Interest on principal from July 15, 1921, to July 16, 1923 Cra ay sat 601 Oia OO5-day |DASIS ii s.'% ae lwee's ween wee aie 500,905.23 4. Interest on interest accrued and unpaid on July 15, 1921, from that date to July 16, 1923 (731 days at 6% on a 365- VD ASIS JU Oe Seales bites wins wan o's) g @ hile Side sv olalswiesd ela ata 8,682.36 mae otal amount Ges bly 16,0 1925. 5 iis ey ake a ale wis a a Swine Oo ateiale $4,750,341.59 The court, in its final decree of foreclosure and order of distribution, will fix the amount payable upon the outstanding bonds, out of the net proceeds of the foreclosure sale, and direct payment accordingly. The payment is sometimes made by a special master or other officer appointed by the court in the proceedings; in other cases the court will authorize the 150 WORK OF CORPORATE TRUST DEPARTMENTS deposit of the necessary funds with the trustee and direct it to make the distribution. Final decree and order.--In the event of the purchase of the mortgage property by the bondholders’ committee, the committee will have tendered the deposited bonds in part payment of the purchase price and cash for the balance. Among other things the final decree and order will fix the expenses of the foreclosure and will direct, first, the payment, in cash, of such expenses; second, the acceptance on account of the obligation of the purchaser, of deposited bonds to the ex- tent of their pro rata share in the net proceeds of the sale; and, third, the distribution of the balance of the cash pro- ceeds in the payment of the pro rata share of the undeposited bonds in the net proceeds of the sale. The amount of moneys applicable to undeposited bonds, when paid over to the trus- tee, should be set aside by the trustee in a separate fund awaiting presentation of such bonds. The decree and order will further provide for the endorse- ment on both the deposited and undeposited bonds of a legend to evidence the payment. If the distribution constitutes full payment of the debt represented by the bonds, their cancella- tion probably will be directed, otherwise the decree and order will direct the return of the bonds to the holders after appro- priate endorsement. The following is an example of such an endorsement: Paid on account of the principal of and interest on the within bond the sum of $217.37656, being its pro rata share of the proceeds of the mortgaged prop- erty sold on September 14, 1923, by virtue of an Amended Foreclosure Decree entered nunc pro tunc as of July 26, 1923, in the Consolidated Cause in the District Court of United States for the Southern District of New York entitled “National Trust Company, as Trustee, Plaintiff, against New York Company, Inc., Defendant, in Equity No. 1234. Dated CHARLES H. GRAVES Special Master Final distribution.— The payment of subsequent distribu- tions, if any, is likewise evidenced by appropriate endorsement upon the bonds. When the final payment has been made it may be preferable, in place of stamping and returning the bonds to their respective owners, to cancel and hold them for cremation. In that event the trustee’s receipt would be issued to the bond owner. This method should be adopted, DEFAULTS AND REMEDIES 151 however, only with the approval of the court. The reasons which may make this procedure desirable are: (1) to save the insolvent estate the expense which is incident to stamping bonds; and (2) to make it impossible for anyone to efface the stamp and, perhaps, sell the bond to some unsuspecting person. Disposition of endorsed bonds.—One of the annoying re- sults of many reorganizations is that the committee often requests the depositary or the trustee to hold the endorsed bonds in the hope of further recovery which is extremely remote. In time, the committee disbands and its members die or become unfamiliar with the details of the reorganiza- tion, and a number of years later, when the trust company desires to clear its vaults of a large accumulation of these bonds, it finds no one qualified to give it instructions. The modern trust company is very careful, upon completion of each reorganization, to secure explicit instructions, so that within a reasonable time it may be freed of the burden of carrying these practically worthless bonds. General.— In closing this chapter it may be well to repeat that, while every careful trust company makes it a point before accepting a corporate trusteeship to satisfy itself that the mortgagor is organized in good faith and has at least a reasonable chance of success, the trustee in no way gives any assurance that the bonds will be paid, or makes any warranty as to the financial standing of the mortgagor. Un- fortunately, it is true that some investors purchase bonds rely- ing upon the standing of the trustee, and, however unfounded this theory may be, they feel that some blame must attach to the trustee in case the mortgagor fails. This feeling is never more evident than in the trustee’s correspondence following a default, and emphasizes the need for careful investigation before the acceptance of any corporate trusteeship. If, in re- plying to such criticism, a trustee will be at some pains to make its status in this regard entirely clear, it will not only be defending its own good name, but will be doing its part in the very necessary work of educating the investing public. CHAPTER XI THE TRUSTEE CLAUSES; MISCELLANEOUS PROVISIONS Acceptance of trust.—The article “Concerning the Trustee” usually opens with the statement that the trustee accepts the trust under the terms and conditions stipulated in the mortgage. Following this, come the so-called “protective” clauses. Examining the protective clauses.— In the course of his ex- amination of the draft of a mortgage the careful trust officer will give particular attention to any provisions relating to the duties and responsibilities of the trustee. These will be found at different points throughout the mortgage, but it is customary to group under one heading a statement of the many things in respect to which the trustee shall not be liable.’ The trust officer will wish to have these protective clauses broad enough to cover all matters in which, judging from the experiences of his company and fiduciaries generally, the trustee should assume no liability. Some trust companies go so far as to prepare printed copies of a standard article of this kind, to meet their particular requirements, which they endeavor, whenever possible, to have incorporated ver- batim in the proposed mortgage. Liability of trustee.—Anyone inexperienced in corporate trust practice, after reading the “protective” or “immunity” clauses in any modern mortgage would very naturally assume that the liability or risk assumed by a trust company as trustee under such an instrument was slight, to say the least. Ig is true that these provisions have been gradually evolved by the ablest of trust company counsel to limit, so far as ts possible, the liability of trust companies as trustee. In reach- ing anything like a clear conception of the situation, however, the law and the attitude of the courts must be considered, 1 This reference is to the text of the “Telephone” mortgage (p. 384 et seq.). 152 TRUSTEE CLAUSES; MISCELLANEOUS 153 and here we find a very different situation. The law has always held a fiduciary to a very strict accountability for his acts. ‘The trust company of to-day has far-reaching sources of information and a broad experience, and the courts are inclined to deal even more strictly with a trust company than with an individual as trustee. Consequently, the situation is far from being as secure, from the trust company’s point of view, as it would seem from a consideration, merely, of the protective provisions. Purpose of immunity clauses.—The fact of the matter is that trust company counsel have attempted to write into the corporate mortgage, for what they may be worth, every pos- sible safeguard against risk attendant upon all action required of the trustee, except acts of bad faith. But the trust officer who goes ahead blindly relying upon these provisions is cer- tain, sooner or later (probably sooner), to cause his company financial loss and at the same time to bring about a serious loss to its prestige. The situation may perhaps be summarized somewhat as follows: first, the trust company before the execution of the mortgage should see that the broadest possible protective pro- visions are inserted; second, throughout the administration of a trust, whenever a question of responsibility or liability of the trustee arises, it should carefully examine the protective clauses and endeavor to proceed in conformity with all per- tinent provisions; and last, but most important of all, the trustee should never overlook the fact that these provisions are not necessarily conclusive, and, therefore, all doubtful questions should be passed upon by counsel before action 1s taken. Economics of situation.—The whole problem of responsi- bility under a corporate mortgage, in the last analysis, re- solves itself into a question of compensation. ‘Theoretically the trustee ought to have an active supervision of the trust; but practically the liabilities which in such case it would assume would be altogether out of proportion to the compensation which mortgagors are able or willing to pay.” ‘The modern 2Francis Lynde Stetson, “Some Legal Phases of Corporate Financing, Re- organization and Regulation,” p. 52. 154 WORK OF CORPORATE TRUST DEPARTMENTS trust company has an experienced staff and employs able counsel, and, if the mortgagor is willing to pay the expense and the bankers who underwrite the issue and usually select the trustee are willing that it should do so, the trust company is really equipped to assume a materially greater responsi- bility than is now the general practice. A number of trust oficers and trust company counsel feel that a greater measure of safety for the bondholder, both before and during reor- ganization, could be secured if the trustee was authorized to perform more active duties. The problem, however, re- mains one of policy with the bankers, and of economy and dislike of outside supervision on the part of the debtor cor- porations. Customary provisions.—Some of the points usually cov- ered in the article under discussion are as follows: The trustee shall have no responsibility for the proper re- cording, filing or refiling of the mortgage, and may certify and deliver bonds prior to recording or filing.® The trustee is entitled to reasonable compensation for all of its services (not limited to the compensation of trustees of an express trust as provided by law) and to reimbursement for all of its proper expenses, including the services of its counsel and agents, and, for such compensation and expenses, as well as for any liability which it shall properly incur, the trustee is given a lien on the trust estate, prior to the lien of the bonds. The trustee shall be fully protected in any action which it may take pursuant to any proper instrument, which it believes to be genuine. Any action taken by the trustee pursuant to authority from a bondholder shall be binding upon all future holders of the same bond or of any bond issued in exchange therefor. In the administration of the trust the trustee may, at the .,.expense of the mortgagor, consult with counsel, and be pro- yrected for any action taken in good faith in accordance with A! the opinion of such counsel. The trustee may also, at the expense of the mortgagor, employ all necessary attorneys, agents, or employees, and 3 However, see dicta in Green v. Title Guarantee and Trust Company, 123 Misc. (N. Y.) 731. | TRUSTEE CLAUSES; MISCELLANEOUS 155 shall not be answerable for their misconduct if they are selected with reasonable care. The trustee shall not be liable for the exercise of any dis- cretion or power granted to it by the mortgage, nor for anything except willful misconduct or gross negligence. The trustee shall not be liable for the use of any bonds properly delivered under the mortgage, or for the applica- tion by the company of the proceeds thereof. All recitals, except the trustee’s certificate, shall be taken as made by the mortgagor and not by the trustee. The trustee assumes no responsibility for the validity of the mortgage or of the bonds or for the security therein provided. The trustee may become a bondholder with the same rights as though it were not trustee. The trustee shall not be required: (1) to take any action to enforce the trusts under the mortgage, which in its judg- ment might involve it in expense or liability, unless indemnified to its satisfaction by one or more of the bondholders; nor (2) to take notice of any default, until notified in writing by the holders of a specified percentage of the outstanding bonds; nor (3) to take any action in respect of a default until requested in writing so to do by the holders of a specified percentage of the outstanding bonds and indemnified to its satisfaction. It is usually stated, however, that these provi- sions are for the protection of the trustee, and do not affect any discretion or power which the trustee may otherwise have. The trustee need not recognize any person as a bondholder, until the bonds are presented for inspection to the trustee, and the title thereto, if disputed, established to the satisfac- tion of the trustee. If the trustee, pursuant to the terms of the mortgage, shall enter upon or operate all or any part of the mortgaged prop- erty it shall not be individually responsible for any debt or liability incurred. It shall be no part of the duty of the trustee to see to the payment of any tax or other charge against the mortgaged property, nor to see to the insurance or maintenance. Without intending to detract from the importance of any of the provisions just referred to, it might be well to invite particular attention to two very practical points affecting the 156 WORK OF CORPORATE TRUST DEPARTMENTS trustee which frequently are covered in this part of the mortgage. Reliance upon certificate.—It is desirable, in dealing with all matters where the mortgage does not make specific pro- vision as to the evidence upon which the trustee may rely in acting under the mortgage, or in refraining from acting, that the trustee should be permitted to rely on a certificate of the company executed in a given manner, for example, by two specified officers of the company under its corporate seal. This provision is most important from the viewpoint of the trustee and is, at times, of material assistance in meeting a situation which otherwise might be most embarrassing. Interest on cash balances.— Provision is usually made for the payment of interest by the trustee on funds in its hands, and the statement made that, in the absence of default, the company shall be entitled to receive all such interest. If, in the draft of the mortgage, this section attempts to specify the rate of interest which shall be paid by the trustee, it is usually objected to by the trustee on the theory that the mortgage runs for a long period of years, and it is not good banking practice for a financial institution to contract to pay a specified rate of interest over a long term. In fact, the trust officer should take care to see that this provision does not conflict with the prac- tice of his banking department. From the trustee’s point of view, the mortgage provisions will be satisfactory if phrased in keeping with either clause quoted below: ‘The Trustee will pay to the Company, from time to time, interest on any cash balances held by the trustee on deposit hereunder, at such rate, if any, as is customarily allowed by it on similar deposits. ‘‘Any moneys received by the Trustee under any provisions of this indenture may be treated by it, until it is required to pay out the same conformably herewith, as a general deposit, without any liability for interest save as may be agreed upon between the Company and the Trustee.” Resignation or removal of trustee.—This article generally also contains the provisions relating to the resignation or removal of the trustee and the appointment of successor trus- tees. It is important merely that these provisions be perfectly TRUSTEE CLAUSES; MISCELLANEOUS 157 clear and workable, so that if it becomes necessary or ad- visable for the trustee to resign the trust, there shall be no difficulty in accomplishing the resignation. The more modern mortgages also provide that any financial corpora- tion, resulting from a merger or consolidation to which the trustee shall be a party, shall, if qualified to accept such a trust, become successor trustee under the mortgage without further action on the part of the mortgagor, the trustee, or the successor trustee. | In the event that a trustee resigns or is removed and a successor is appointed the practice is to turn over to the new trustee all securities, cash, and executed counterparts of the mortgage and any supplemental indentures. It is not custom- ary for the resigned trustee to relinquish documents support- ing acts performed by it in the course of its administration of the trust or to turn over its records to the new trustee, although the new trustee should be furnished with an appro- priate certificate of the status of the trust. Individual trustee.— If there be an individual co-trustee, appropriate provisions will be included in this part of the mortgagee for the appointment of a successor individual trustee in case of the death, resignation, or incapacity of the individual originally appointed. Frequently an officer of the corporate trustee serves as co-trustee, and in such cases it is usual to permit the appointment of his successor by the president or board of directors of the corporate trustee. It is wise to provide that the individual trustee may appoint, as his attorney in fact, the bank or trust company named as corporate trustee. Sometimes the individual trustee, imme- diately upon the acceptance of the trust, executes a power of attorney pursuant to this provision. ‘This enables the cor- porate trustee, in the absence of the individual trustee, to con- clude matters of importance which otherwise might be delayed. If no individual trustee be appointed by the mortgage it is customary to provide that such an appointment may be made by joint action of the company and the corporate trus- tee in case any necessity arises for such an appointment at a later time. This particular provision is intended to cover the more or less modern practice of certain of the states in prohibiting or restricting, by statute, the performance of trust 158 WORK OF CORPORATE TRUST DEPARTMENTS functions, within their territory, by corporations organized in other states. Miscellaneous provisions.—It is customary to insert in each mortgage an article of miscellaneous provisions which cover a variety of topics. We shall mention briefly a few of the more familiar provisions which come under this heading. Merger and consolidation.— Nearly every mortgage pro- vides for the contingency of the mortgagor merging or con- solidating with another company or leasing or selling its prop- erty as a whole. The mortgage of the Telephone Company covers this point in Article VII.* It is usual to provide that nothing contained in the mort- gage shall be construed as prohibiting the company from merging or consolidating with any other company which is legally authorized to carry on its business, nor from selling or leasing its property as a whole on such terms as will not weaken the security of the mortgage. The provision is further made that any such lease shall be subject to termination by the company or the trustee upon an event of default under the mortgage, and by any purchaser of the property of the mortgagor at any sale, under the power of sale conferred by the mortgage or under judicial proceedings. ‘he reasons for such limitations upon the terms of an authorized lease are evident. There is, in connection with the merger and consolidation provisions, a further logical requirement that any successor company through consolidation or merger shall execute and deliver to the trustee a proper instrument expressly assuming the obligations of the mortgagor. Ordinarily, the mortgage will go one step further and provide that, upon the proper filing of such an instrument, the successor shall be fully sub- stituted for the original mortgagor and shall have all of its rights, as well as its obligations under the mortgage including the right to issue bonds. In actual practice these provisions of a mortgage are seldom invoked. However, unless the article in question clearly specifies the evidence on which the trustee may rely as to the sufficiency of the instrument of assumption or of 4 See page 365. TRUSTEE CLAUSES; MISCELLANEOUS 159 the terms of lease or sale, the trustee will often find itself in a rather difficult position. For this reason it is good policy for the trustee in considering the mortgage prior to execution to make sure that the article, if included, makes ade- quate provision for the guidance and protection of the trustee. The usual method is to provide that if any question arises under the article, the trustee shall be fully protected in acting upon the opinion of any counsel selected by it. Some mort- gages state that the counsel selected by the trustee may be of counsel for the company. The basis for permitting the trustee to accept the opinion of the company’s counsel is that the legal examination involved in a merger, sale, or lease is necessarily long and expensive, and as counsel for the company has passed on the transaction in behalf of the company, the same counsel can render the required opinion much more expeditiously and cheaply than independent coun- sel. Assuming, that all of this is true, the situation is one where, under ordinary circumstances, the bondholders are entitled to the protection of an independent opinion, and if called upon to act in such a case the trustee will find itself in a more comfortable position if its mortgage specifically requires the opinion of independent counsel. Some mortgages contain special provision in respect of sub- sidiary companies. Section 3 of this article’ in the mortgage of the Telephone Company is an example. Evidence of ownership of bonds.—It is usual to provide in a separate article’ for the evidence upon which the company and the trustee may rely as to ownership of bonds. The ownership of registered bonds is indicated by the bond regis- try. In the case of coupon bonds the trustee is permitted, as a rule, to accept, as evidence of ownership, certificates executed by the trust companies, banks, bankers, etc., satis- factory to the trustee. ‘This article is purely formal and of little interest to the trust officer except in the event of bond- holders meeting or other concerted action by bondholders. Defeasance.—Unless, as in the ‘“Telephone”’ mortgage,’ the provisions as to defeasance appear in the preamble, they 5 See page 367. 6 See Article X of the “Telephone” mortgage, p. 383. 7 See the “Telephone” mortgage, p. 339. 160 WORK OF CORPORATE TRUST DEPARTMENTS are usually set forth in a separate article toward the end of the mortgage. When the bonds have been paid at maturity or provision made for their retirement through redemption or otherwise, the mortgagor probably will request of the trustee a duly executed certificate of satisfaction and discharge of the mort- gage which it can record in all jurisdictions in which the mort- gage is of record. The mortgagor will also expect the trustee to return all securities pledged or deposited with the trustee under the mortgage and any cash which may have been placed with the trustee, except that which the trustee will be required to pay out conformably with the mortgage provisions. The points to be checked by the trustee at the time are enumerated in the Mortgage Satisfaction Guide (Form 36). Form 36.—Mortgage Satisfaction Guide. Corporate Trust Department. Date Executed Mortgage Satisfaction Guide. Procedure to be observed in satisfying above Indenture and closing records. Enter the following symbols in the column at the left to indicate action taken with respect to each requirement: V = Fulfilled. F = Follow-up card prepared. O = Not applicable. . I. Arrange with Commission Division to collect unpaid fees and disbursements of Bankers Trust Company and of counsel, and to propose satisfaction fee. II. Ascertain that all bonds or notes and coupons are accounted for and/or that arrangements have been made for their retirement. III. Determine action to be taken with respect to any demands or notices served upon Bankers Trust Company claiming a lien upon collateral or other property subject to above Indenture at time of satisfaction. IV. Determine disposition to be made of the following: (a) Cash on hand. (b) Collateral held. (c) Insurance policies on file. VY. Obtain opinion of counsel approving satisfaction. VI. Enter Execution of instrument in “Documents Executed” record. ¢ VII. Notify Co-Trustee and Co-Paying Agents (unless previously in- formed). VIII. Ascertain that usual report has been sent to Development Depart- ment. TRUSTEE CLAUSES; MISCELLANEOUS 161 Form 36.—Mortgage Satisfaction Guide (continued) IX. Prepare memos for: (a) Corporate Trust Department (in duplicate). (b) Coupon Paying Division, (c) Bond Registration Division. (d) Statistical Department. (e) Document Files. (f) Trust Files. X. Remove and destroy any cards in the following files: (a) Maturity. (b) General. (c) Trust Requirements. (d) Vault Index (when all securities are released). XI. Stamp the word “Satisfied” and date of satisfaction on the fol- lowing records: (a) Index card in window file. Transfer card to closed-out file. (b) Index card in officer’s desk file. (c) History of Trust sheet. (d) Record of Bonds Issued. (e) Securities Held Ledger sheet. XII. Transfer to closed-out binder auxiliary records which have been completed. XIII. Arrange for cremation of the following: (a) Canceled bonds or notes. (b) Unissued bonds or notes. (c) Coupons. Procedure completed, (This record, when completed, should be filed in the Document Folder.) Satisfaction guide.—Item II on the Guide refers to ac- counting for all bonds and coupons. In addition to the deposit by the company of cash equal to the principal of all outstanding bonds, interest to date of maturity or redemption, and the premium on the bonds (if any), the trustee should require that funds be placed with it for all past-due coupons not surrendered. Old coupons.—In the case of some old mortgages it is ex- tremely difficult for the mortgagor to secure all of the matured coupons. However, unless the trustee receives satisfactory evidence that the company has made payment for coupons which may be missing, it is well within its rights in requiring an equivalent cash deposit. Depending on the period of years which may have elapsed since the due date of the coupons 162 WORK OF CORPORATE TRUST DEPARTMENTS the trustee, acting under advice of counsel, may be willing to accept a bond of indemnity in place of the missing coupons. Cremation.— As soon as practicable after the satisfaction of the mortgage, the trustee, with the company’s permission, should arrange all bonds and coupons for cremation. ‘The cremation should include not only paid and canceled bonds and coupons, but unissued bonds (see Item XIII of Guide). It is highly important that both the company and the trustees have an accurate record of cremated securities. ‘To this end it is desirable that the trustee list all securities to be cremated on a certificate (Form 37). A full description of the se- curities should appear on the cremation certificate, including the bond or coupon numbers, the number of pieces, the ma- turity date, and the principal amount. Witnesses.—The mortgagor may wish to have a represen- tative present when the securities are cremated. Railroads are required by the Interstate Commerce Commission to des- ignate a representative for this purpose. ‘The trustee should always have at least two witnesses of its own at any cremation of securities. Periodical cremation of securities—— Corporations which have large bond issues outstanding find it convenient to deliver paid and canceled coupons and bonds to the trustee from time to time and arrange for periodical cremations. ‘This prevents an accumulation of canceled securities and facilitates the final “check-up” when the mortgage is satisfied. Corporate trus- tees handling a considerable volume of canceled securities frequently establish, under control of the corporate trust de- partment, a separate verification division for attending to audit and cremation work. . Definitions.—It is quite usual to find several sections of a mortgage (particularly in the larger and more involved mort- gages) devoted to a series of definitions explaining the mean- ing of certain terms used in the mortgage, for example, “net earnings,” “underlying mortgages,” ‘“‘permanent additions,” ‘“engineer’s certificate,” and so on. These definitions may be very useful in settling points on which the parties to the mortgage may be at variance. TRUSTEE CLAUSES; MISCELLANEOUS 163 Form 37. Cremation Affidavit Certificate. STATE OF New York County of New York f* *) S766 ‘aye! pe) & (0: 'e (e 6) ee) Wia (ee ee 66 6 0 6 © 6 6 0 fe 60) 0.6 © 6 0 6 Bs 6 0 6 6 6 60 6 6 50 6 66 6 8 6 6 6 ore 6 Ea hd aoe oh ie Ps ries BR ea ae a , being duly and severally sworn, do each severally depose, certify and say: VEU Be Qcotaty Sees LG Nk aA a MARAE tah ree GRE UAL MUR ASB p Sue NM ra, WU Meee LING eek fechas Foe it eS have wthis vases ays ayn ObRirea ertaia haere alee es 19 , at No. 16 Wall Street, in the City and State of New York, in the pres- ence of one another, destroyed by burning to ashes the property below described in detail. Sworn to before me this PRAYER reso ints God Sates 19 Representing soya ee iyi ae ae anette ee Representing BANKERS TRUST COMPANY Accepted Corporate Trust Dept. Pen ERE GE RUSH COMPANY ily Mitek Cig ity wis, hime aia\ dio iw wioln a che tote etre) allel eh tre lan Sinteg Cabade Representing BANKERS TRUST COMPANY MRS Sie tedela'sl is ite las hata ale sia Coupon Verification Dept. Asst. Secretary Supervision by bankers.—Occasionally we find a mortgage in which the bankers who have floated the issue retain a certain amount of supervision of the mortgagor company. For example, the company may covenant to furnish the bank- ers with financial statements, or it may agree to make appoint- ments of accountants or appraisers subject to the bankers’ 164 WORK OF CORPORATE TRUST DEPARTMENTS approval. The extent of these supervisory relations of the bankers should be clearly expressed. Immunity of stockholders, etc.—Some reference is also made in a mortgage to the immunity of stockholders, officers, and directors of the company. This emphasizes the corpo- rate nature of the obligation and is designed to relieve the owners of the company and the management from personal liability. Testimonium; signatures; acknowledgments.— The mort- gage closes with the signatures and seals of the parties to the instrument, the signatures of witnesses to the execution, and the acknowledgments in form required by the jurisdictions in which the mortgage is to be recorded. ‘The regularity and suficiency of the mortgage in these respects are matters as to which the trustee will be guided by the advice of its counsel. The trustee, however, should see that the officer signing the mortgage on its behalf and the officer attesting the corporate seal affixed to the instrument are duly authorized by its board of directors to perform these acts. CHAPTER XII EQUIPMENT TRUSTS; COLLATERAL TRUSTS; UNSECURED ISSUES Equipment trusts.—This is a special form of trust which has grown out of the necessity for the purchase of railroad equipment on credit. Equipment trust agreements differ in form from corporate mortgages, although they contain many of the same provisions. We shall examine, briefly, into some of the special provisions relating to the transactions involved. There are in use two general forms or plans of equipment trust: 1. Philadelphia plan.'—The essence of this plan is that the equipment is leased to the railroad and the railroad pays for it through “rental”? payments to the trustee, such rentals being applied to the corresponding maturities of prin- cipal and “dividends” of certificates issued under the plan and held by investors. 2. Conditional sale plan—Here the equipment is condi- tionally sold to the railroad, the trustee retaining ownership (conditional vendor’s title), until all the installments of prin- cipal and interest have been paid. There are various methods of accomplishing either plan, the details of which need not be gone into for present purposes. Reasons for Philadelphia plan The reason for the adop- tion of the Philadelphia plan (which rightfully should be called the ‘‘Pennsylvania plan’’) was the state of the law in Pennsylvania in regard to conditional sales. ‘The Pennsyl- vania courts had uniformly refused to sustain the title of a conditional vendor who had surrendered possession to his vendee, as against the claims of creditors of, and purchasers from, the vendee without notice of the conditional vendor’s claims. Pennsylvania, in the days when the above decisions were made, likewise had no general system for recording or filing chattel mortgages. Bankers and their counsel, there- 1A Philadelphia Plan equipment trust is set forth on page 395 et seq. 165 166... WORK OF CORPORATE TRUST DEPARTMENTS fore, arranged to have the equipment not sold but leased with the privilege to the lessee of purchasing at the expiration of his lease. The lessor’s title not having passed, the pre- sumption in favor of creditors of the railroad that the railroad owned the equipment was not available to them. In nearly all of the states of the United States substantially identical statutes have been passed during the last forty years whereby the conditional sale arrangement is expressly vali- dated in respect of railroad equipment. Many of these stat- utes also permit the lease plan or ‘‘Philadelphia plan” and the chattel mortgage arrangement. In some states, however, the Philadelphia plan still affords the best protection to the interests which furnish the equipment, and in those states the Philadelphia plan is still the most practicable for use. In other instances also the Philadelphia plan is doubtless employed, because investors and distributing houses are fa- miliar with it. Cash deposit with trustee.—In most cases the trust, under either plan, is executed before the equipment is manufactured. The railroad agrees to pay a percentage of the cost, usually 20 per cent, in cash, and the balance with the proceeds of the equipment notes. The cash payment by the railroad and the proceeds of the notes will be deposited with the trustee, and used pursuant to the terms of the trust agreement in paying for the equipment as it is delivered by the manufac- turers. he agreement will usually provide for the appoint- ment of inspectors to inspect the equipment on delivery and, if satisfactory, to accept it on behalf of the railroad, and so certify to the trustee. Further provision will be made in the agreement for the payment by the trustee of the cost of the equipment upon receipt of: (1) a proper invoice from the manufacturer specifying the equipment and its cost (which must correspond to the prices stipulated in the equipment trust agreement or the purchase contracts); (2) a bill of sale in favor of the trustee; (3) the inspector’s certificates; and (4) opinion of counsel satisfactory to the trustee that the bills of sale are valid and effective to vest title to the equip- ment in the trustee, free of all liens and encumbrances. Covenants of railroad——Under the familiar equipment trust the railroad company, among other things, undertakes: EQUIPMENT; COLLATERAL; UNSECURED ISSUES 167 (1) to pay at their respective maturities, the equipment obli- gations, and the interest thereon; (2) to fasten and to keep on each piece of equipment a metal plate showing that the trustee is the owner or lessor of such equipment, although the railroad also may letter the equipment with its name or other marking to indicate its interest therein; (3) to maintain the equipment in proper condition and repair, and replace at its expense any equipment destroyed; (4) properly to insure all equip- ment in favor of the trustee; (5) to file periodically with the trustee a statement of the location and condition of all equip- ment. Comparison between Philadelphia plan and conditional sale arrangement.—Equipment trust certificates issued under a “Philadelphia plan” are usually signed by two officers of the trustee and its corporate seal is afixed. A statement is contained in the certificates that the amounts due thereon are payable only out of “rentals” to be received from the railroad. ‘The coupons attached to the certificates are re- ferred to as “dividend warrants.”’ Payment of principal and “dividends” is guaranteed by the railroad company in the agreement and, sometimes, by endorsement on each certificate.” Issues under contracts of conditional sale usually are desig- nated as “‘equipment notes” or “equipment bonds.” These are signed by the railroad and certified by the trustee in the usual manner. Most equipment issues mature in equal periodical install- ments over a period of from ten to fifteen years. For ex- ample, an issue of $1,500,000 might be payable over.a fifteen- year period at the rate of $100,000 per year. Certificates Nos. 1 to 50 at $1,000 would probably mature six months from the date of issue; Nos. 51 to 100 in one year, and so on. As in the case of a mortgage the trustee is required, upon complete payment by the railroad of all of its obligations under the trust, to execute an appropriate instrument canceling the trust and assigning the equipment to the railroad. 2In a decision of the Supreme Court of the United States (Lederer v. Fidelity Trust Company, 267 U. S. 12), it was held that equipment trust cer- tificates issued under the Pennsylvania plan are subject to the United States Documentary Tax as “certificates of indebtedness.” ‘This decision was the re- sult of a suit to recover the cost of revenue stamps affixed to railroad equip- ment certificates. 168 WORK OF CORPORATE TRUST DEPARTMENTS The conditional sale agreement has in recent years been applied to the purchase of many things other than railroad - equipment, for instance, vessels of various kinds, equipment for industrial plants, and so forth; but the general principles involved are the same in each case. Collateral trust indentures.— In Chapter IX we discussed typical provisions in respect to stocks or bonds pledged with a trustee as part of the mortgage security. In most cases these provisions also apply with equal force to securities pledged and deposited with a trustee under a collateral trust indenture. The following statements regarding collateral indentures are quoted from an address of Mr. Francis Lynde Stetson’s before the Association of the Bar of the City of New York.’ “Ordinarily, the stock pledged under such agreements is the stock of some company or companies subsidiary to the pledgor, and the bonds pledged are either those of such subsidiary company, or long-term mortgage bonds of the obligor pledged as security for its own short-term notes. Security of the latter class is resorted to when short-time money is obtainable on better terms than long-time money. Accordingly, the cor- poration issues a series of notes payable within a few years and secured by the pledge of its own long-term mortgage bonds, the expectation being that such bonds may be sold on favorable terms at the maturity of the notes, which then may be paid from the proceeds. Unless secured by mortgage such pledged bonds, being merely the obligations of the pledgor, would not constitute collateral security for the pledgor’s own notes.” Frequently, however, collateral trust issues are not secured either by the pledgor’s bonds or its subsidiary’s stocks, but by securities of companies which the pledgor does not control, but in which it may have a substantial interest. In such case, the trustee will, perhaps, be authorized by the indenture to collect the income from the pledged securities and apply it to the payment of interest on the collateral bonds. An adjust- ment is then made with the pledgor at each interest date, the trustee paying over to the pledgor the excess, if any, of 3 “Some Legal Phases of Corporate Financing, Reorganization and Regula- ton Deo 7s EQUIPMENT; COLLATERAL; UNSECURED ISSUES 169 income collected over current interest to be paid on the col- lateral bonds, or, if there is a shortage, receiving from the pledgor funds sufficient to meet such interest. In collateral trust indentures of this type where the col- lateral is diversified, there is no point to inserting provisions such as were discussed in Chapter [X in respect to protecting the trust estate from possible loss of stock control of a company. On the other hand, the indenture probably will permit substitution of collateral, within a certain range of securities, merely on the certificate of certain officers of the pledgor, provided the new collateral is of market value equal to the collateral withdrawn. Unsecured issues.— Generally speaking, trust agreements providing for the issue of unsecured obligations, such as notes or debentures, are simpler than either mortgages or collateral trust indentures. The one article which is apt to be at all lengthy is that dealing with the covenants of the debtor. Outside of the financial strength of the debtor these cove- nants represent the only safeguard of the noteholders, and the bankers who underwrite the issue usually will insist upon inserting such covenants as, in their opinion, will sufficiently strengthen the issue to make it attractive. Quite frequently the issuing corporation covenants that, if a subsequent mort- gage is placed on its property, the debentures will be secured by the mortgage equally with the subsequent issue. Deben- tures and other unsecured issues often are given the privilege of conversion into stock of the issuing company at a given figure. The process of conversion will be discussed in the next chapter. CHAPTER XIII MISCELLANEOUS TRUST FUNCTIONS Miscellaneous functions.— Corporate trust departments of banks and trust companies perform many functions which do not come under mortgages naming the institutions as trus- tees, although a substantial part of this miscellaneous business is a direct outgrowth of mortgage appointments. Interim certificates.— Interim certificates (also called in- terim receipts) are issued in lieu of temporary bonds, in cases where it is desired to place an issue on the market before it is possible to execute the mortgage or issue bonds there- under. Ordinarily, the company which is to issue the bonds, and the underwriters who are to sell the issue, or, if an un- derwriting syndicate has been formed, the syndicate mana- gers, will join in a letter of instructions to a bank or trust com- pany as depositary (usually the institution which is to act as trustee under the mortgage) directing the depositary to issue its interim certificates representing a specified principal amount of bonds of the proposed issue, to, or upon, the written order of the underwriters; but only against the deposit with it of a specified amount in cash per $1,000 principal amount of bonds. The letter of instructions will further direct the depositary to hold the cash for the benefit of the holders of its interim certificates until the mortgage shall have been properly ex- ecuted and it shall have received bonds of the proposed issue in form available for distribution in exchange for the out- standing “‘interims.”’ The letter will further direct the dis- position of the cash deposit to be made by the depositary on receipt of such bonds. Usually, that portion of the deposit representing the price at which the bonds were sold to the underwriters, with any interest allowance, will be paid to the company, and the balance, representing the underwriters profit, will be paid to the underwriters. It is good practice for the letter of instructions to specify a date, on or before which the bonds, in form available for 170 MISCELLANEOUS TRUST FUNCTIONS 171 distribution, must be delivered to the depositary, and to pro- vide that if the bonds are not so delivered the depositary shall use the cash in its hands to make payment of the amount specified in the interim certificates to the holders thereof, upon surrender to it of such certificates. It is important for the de- positary to see that the amount of cash deposited with it will be sufhcient to make the required distribution to the holders of its interim certificates, or that provision is made to its satis- faction, for the deposit of any additional cash required. As the obligation under the interim certificate is directly that of the depositary, an institution issuing its certificates on any terms other than the deposit of the full amount of cash which it might be required to pay out under any circumstances is, in effect, granting credit and should be guided accordingly. At times the letter of instructions will provide that the de- positary shall pay over the cash to the company and the under- writers upon execution of the mortgage and receipt by the depositary of a single temporary bond, to be held pending receipt of definitive bonds in form available for distribution. This may prove to be an unsatisfactory arrangement, as de- lay in delivery of the definitive bonds beyond the date speci- fied in the outstanding receipts would place the depositary in an embarrassing position. The position of an institution under an issue of interim re- ceipts is dangerous, unless all contingencies are fully covered, and the form of its receipts and the letter of instructions meet the legal and practical requirements. A typical letter of instructions and interim receipt are shown below: National Trust Company, New York, March 22, 1926. 200 Wall Street, New York City. Dear Sirs: 1. Pursuant to an agreement dated March 8, 1926, between Johnson Brothers and Read & Co. (hereinafter referred to collectively as the bankers) and Amalgamated Company (hereinafter referred to as the corporation) said corporation agreed to cause all of its assets to be sold to Amalgamated Corpora- tion, a corporation to be organized under the laws of the State of New York (hereinafter referred to as the new corporation) and agreed to cause said new corporation to create, issue, and sell to the bankers $6,000,000 principal amount of its First and Refunding Mortgage Twenty-Year 6 per cent Gold Bonds, Series “A”, to be dated as of March 1, 1926, to mature March 1, 1946, and to bear interest at the rate of 6 per cent per annum from March 1, 1926, all of 172 WORK OF CORPORATE TRUST DEPARTMENTS which will be issued under an indenture to be dated March 1, 1926, between said new corporation as mortgagor and your company as trustee. 2. It was agreed between the parties to said agreement that pending the consummation of various legal proceedings thereby contemplated, the bankers may cause you to issue interim receipts exchangeable for bonds, when, as, and if, issued and received by them and delivered by them to you. Acting pursuant to said provisions, the bankers hereby request you to issue interim receipts (in the form hereto attached) calling for the above-mentioned bonds, to, or upon, the order of the bankers, or any of them, from time to time for a principal amount not exceeding in the aggregate $6,000,000 upon the deposit with you of cash at the rate of $1,000 for each $1,000 principal amount of interim receipts, plus accrued interest at the rate of 6 per cent per annum upon said principal amount from March 1, 1926, to the date of such deposit. Receipts are to be in the denominations of $1,000 and $500 principal amount. 3. The cash so deposited with you is to be held for the benefit of the holders of interim receipts until the above-mentioned bonds in definitive form (or a temporary bond or bonds exchangeable for definitive bonds when pre- pared), together with a copy of opinion of counsel for the bankers to them approving the creation, issue, and sale to the bankers of the bonds, are de- livered to you up to a principal amount equal to the amount called for by the outstanding interim receipts, after which the cash so deposited with you, to- gether with the interest you allow thereon, is to be paid over by you as follows: (a) You shall pay to and upon the order of the bankers out of the cash so deposited with you 5 per cent of the principal amount of said interim receipts, being the sum of $300,000. (b) You shall pay to or upon the order of the new corporation an amount equal to 95 per cent of the principal amount of ‘said bonds, plus all money deposited with you representing accrued interest as aforesaid, together with the amount of the interest allowed by you. 4. In case any holder of an interim receipt proves to your satisfaction that such interim receipt has been lost, stolen, mutilated, or destroyed, then, upon receipt of indemnity satisfactory to you and to the new corporation, and, if mutilated, the surrender of the mutilated receipt, you are authorized to issue to such holder a new interim receipt in lieu of the interim receipt so lost, mutilated, or destroyed. 5. In the event that the above-mentioned bonds and opinion of counsel are not delivered to you on or before May 17, 1926 (or on or before such later date, if any, as the bankers may fix and indicate to you in a writing signed by them and delivered to you prior to May 17, 1926), in a principal amount equal to the principal amount of interim receipts issued by you, you are authorized at any time within two days thereafter to give notice by publication once a day for two successive days in a daily newspaper published in the Borough of Manhattan, City of New York, that you will, upon surrender of such interim receipts, refund to the bearers thereof an amount in cash equal to $1,000 for each $1,000 principal amount of interim receipts then outstanding, together with interest at the rate of 6 per cent per annum upon the principal amount of such outstanding interim receipts from March 1, 1926, to the last day of such publication. In the event of such non-delivery on or before May 17, 1926 (or such later date, if any, as may be fixed by bankers as above provided), the corporation agrees to pay to you, or cause to be paid to you within two days thereafter, for the benefit of the holders of such outstanding interim receipts, a sum equal to the difference between interest at the rate of 6 per cent per annum on the principal amount of bonds represented by such MISCELLANEOUS TRUST FUNCTIONS 173 outstanding interim receipts and the interest allowed by you upon the moneys deposited with you hereunder (which shall be at the rate or not less than 214 per cent per annum) from the respective dates of issue of such interim receipts to the last day of such publication. The bankers hereby jointly and severally guarantee payment by the corporation of said sum as and when the same shall become due as aforesaid. You are hereby authorized to redeem such interim receipts upon the terms aforesaid out of the moneys deposited with you and received by you from the corporation (or the bankers) as herein- above set forth, including the interest allowed by you on moneys deposited hereunder. 6. All your expenses in connection with the trusteeship, including the preparation and issuance of the interim receipts and the bonds, are to be paid by the corporation or the new corporation. You shall not be responsible in any manner whatsoever for the recitals of fact and the covenants and agree- ments of the corporation or the bankers herein or in the agreement above- mentioned contained, all of which are made by the corporation and/or the bankers solely. You may employ agents or attorneys in fact and shall not be answerable for the default or misconduct of any agent or attorney appointed by you in pursuance hereof if such agent or attorney shall have been selected with reasonable care. You may advise with counsel to be selected and em- ployed by you at the reasonable expense of the corporation, and you shall be fully protected in respect to any action hereunder taken or suffered in good faith by you in accordance with the opinion of such counsel. You shall not be under any obligation to take any action toward the execution or enforce- ment of the trust hereby created or to institute, appear in, or defend any suit in respect hereof, unless, as often as required by you, you shall be indemnified to your satisfaction against any expenses or liability connected therewith. The corporation and the bankers hereby jointly and severally agree to re- imburse you for any liability or damage you may sustain or incur in the premises. Yours very truly, AMALGAMATED COMPANY, By , Vice President JOHNSON BROTHERS, By READ & Co., By AMALGAMATED CORPORATION, By Vice President Fig. 6.—Interim Receipt. No. M INTERIM RECEIPT $1,000 for AMALGAMATED CORPORATION First and Refunding Mortgage Twenty-Year 6% Gold Bonds Series A Interest to be Payable March 1 and September 1 To be dated March 1, 1926. To become Due March 1, 1946. THIS IS TO CERTIFY that the bearer, upon surrender of this Receipt at 174 WORK OF CORPORATE TRUST DEPARTMENTS the office of the undersigned, 200 Wall Street, in the Borough of Manhattan, City of New York, will be entitled to receive ONE THOUSAND DOLLARS ($1,000) principal amount of the First and Refunding Mortgage Twenty-Year 6%: Gold Bonds, Series A, of AMALGAMATED CORPORATION carrying inter- est from March 1, 1926, proposed to be issued under an indenture of mortgage to bear date March 1, 1926, and to be made by said Amalgamated Corporation to National Trust Company and Henry F. Wall as Trustees when, as, and if said bonds shall have been prepared, executed, authenticated in definitive form and delivered to the undersigned for delivery pursuant hereto. This Receipt is issued under and pursuant to a letter of instructions to the undersigned, dated March 22, 1926, from Johnson Brothers and Read & Co. hereinafter collectively called the Bankers and Amalgamated Company and said Amalgamated Cor- poration. One or more temporary printed bonds, exchangeable for such definitive bonds, will, if, as and when issued and received by the undersigned for that purpose (accompanied by a copy of an opinion of Counsel for the Bankers ap- proving the creation, issue and sale to the Bankers of said Series A bonds) be held by it for the pro rata benefit of the bearers of the interim receipts of which this is one, pending preparation and delivery of the definitive bonds. If for any reason such temporary bond or such temporary bonds shall not have been de- livered to the undersigned as aforesaid for the purposes aforesaid (accompanied by a copy of the opinion of Counsel for the Bankers as aforesaid) by May 17, 1926, or by such later date, if any, as the Bankers may fix and designate to the undersigned in a writing signed by each of them and delivered to the under- signed prior to May 17, 1926, the undersigned will forthwith give notice to that effect by publication once a day for two successive days in a daily newspaper published in the Borough of Manhattan, City of New York, and, upon such notice being so given, the undersigned will at any time thereafter, upon surrender of this Receipt, pay the sum of One Thousand Dollars ($1,000) to the bearer hereof, together with an amount equal to interest at the rate of six per cent (6%.) per annum upon the principal amount of $1,000 from March 1, 1926, to the last day of such publication. Said indenture will provide for an issue of $6,000,000 principal amount of Series A bonds to be presently outstanding and as provided in said indenture additional bonds of Series A or any other series may be issued from time to time on or after the execution and delivery of said indenture provided the total principal amount of bonds at any one time outstanding shall not exceed the principal amount of $25,000,000. Every taker and holder of this Receipt, by accepting the same, agrees with the undersigned and with every subsequent taker and holder hereof, that this Receipt may be negotiated by delivery by any person having possession of the same, howsoever such possession may have been acquired, and that any holder who shall have taken this Receipt from any person for value and without notice of prior defenses or equities enforceable against such person, shall thereby acquire absolute title hereto, free of any defenses enforceable against or equities or claims of ownership of any prior holder. Every taker and holder of this Receipt hereby further agrees that the undersigned may treat the bearer of this Receipt as the absolute owner hereof, for all purposes, and that the undersigned shall not be affected by any notice to the contrary. NATIONAL ‘TRUST COMPANY, Dated, New York, N. Y., April 6, 1926. — By Assistant Secretary MISCELLANEOUS TRUST FUNCTIONS 175 Sometimes it is desired to have attached to the interim re- ceipt a coupon for interest due on the first interest date after the issuance of the receipt. There is no objection to this, provided appropriate references are included in the body of the interim receipt, and in the letter of instructions or agree- ment, and, further, that at the time of the issuance of the receipts cash is placed with the depositary to cover in full the interest represented by the coupon, or satisfactory assurance as to such payment is given. Bankers’ shares.— Under the “bankers’ share’ arrange- ment a bank or trust company, as depositary, issues its certi- ficates representing an interest in deposited securities—usually stock. The stock may be selling on the market at a price which is so high that it is difficult to interest the average in- vestor, and the company, for reasons of its own, does not care to issue a stock dividend to bring down the market price of its shares. In such a case the company, or, perhaps, bank- ers, interested in the market for the stock, will place with the depositary, under an appropriate trust agreement, a block of the stock, and pursuant to the terms of the trust agreement direct that institution to issue its ‘“‘bankers’ shares.” ‘The trust agreement may contemplate the deposit of a given num- ber of shares in each of several companies; for example, in “units”? composed of 1 share each of 10 different stocks. The following is the form of a typical ‘‘bankers’ share’’ certificate covering one class of stock. Fig. 7.—Bankers’ Shares Certificate. NYO No. THE CONSOLIDATED COMPANY BANKERS’ SHARES SHARES———— (This Certificate is transferable either in New York, Boston, or Philadelphia.) Tuis Is To CERTIFY THAT is the owner of of The Consolidated Company Bankers’ Shares, so called, each such Bankers’ Share representing a one-tenth (1/10) interest in a share of One Hundred Dollars ($100) par value of the common stock of The Consolidated Company hereinafter called the “Company,” a corporation of the State of Delaware, and is subject to the provisions of the agreement hereinafter referred to, entitled upon surrender at the office of First Trust Company, Transfer Agent of the undersigned in the Borough of Manhattan, City of New York, of this Certificate, or this and other similar Certificates duly assigned for transfer, representing ten (10) or more Bankers’ Shares to a certificate for one (1) share of common stock of the Company of the par value of One Hundred Dollars ($100) for each ten (10) Bankers’ Shares represented by the Certificate or Certificates so surrendered, and to receive a new Certificate for any balance of Bankers’ Shares over the highest multiple of ten (10) contained in the number of 176 WORK OF CORPORATE TRUST DEPARTMENTS Bankers’ Shares so surrendered and until such surrender is entitled to receive, from time to time, the proportionate part, applicable to the Bankers’ Shares represented by this Certificate, of any cash dividends in respect of the common stock of the Company deposited under said agreement, and of the net cash proceeds of any stock or other security dividends or distribution other than cash dividends, in respect of said stock, at the time, in the manner and upon the terms and conditions in said agreement provided. Said cash dividends in respect of said common stock, and such cash proceeds of any stock dividends when received by the undersigned hereinafter called the “Depositary,” shall be paid by or on the order of the Depositary to First Trust Company for distribution by them to holders of Bankers’ Shares, as above set forth, for which said distribution the Depositary shall not be responsible in any respect whatsoever. This Certificate is issued pursuant to, and is subject to, the terms and conditions of an agreement, dated the first day of March, 1924, by and between John Small & Company, National Trust Company as Deposi- tary, and all present and future holders of Certificates issued and to be issued thereunder, to which agreement reference is hereby made, with the same force and effect as if herein fully set forth, for a full description of the rights of the holder hereof and of the rights, duties, and obligations of John Small & Company and of the Depositary hereunder and under said agree- ment, to all the provisions whereof the holder of, by accepting the Certificate, assents. The holder of this Certificate is entitled to no voting rights what- soever.2 This Certificate is transferable only on the books of the Depositary, at the office of any of its transfer agents by the registered holder hereof as the owner hereof for all purposes whatsoever, except that delivery of stock certificates of the Company shall not be made without surrender hereof. ‘This Certificate shall not be valid until and unless countersigned by one of the Transfer Agents and registered by one of the Registrars of the Depositary. In WITNEss WHEREOF, National Trust Company, as Depositary, has caused this Certificate to be executed in its corporate name by one of its Assistant Secretaries, this , 19—. NATIONAL TrusT CoMPANY, Depositary Registered: Assistant Secretary. SECOND TRUST COMPANY, Registrar By Assistant Secretary Countersigned: First Trust CoMPANY, Transfer Agent. ve Assistant Cashier It is important that such an agreement and the correspond- ing “‘bankers’ shares,” make specific provision for (a) the parties who shall have the right to deposit stock and require the issue of “‘bankers’ shares’; (b) the total authorized issue, if any limit is desired other than that imposed by the amount of the company’s stock outstanding; (c) the method of re- ceipt by the depositary of dividends declared and paid on the 3 As an alternative there may be inserted a statement_of the conditions on which che registered holder of a bankers’ share may direct the Depositary to vote the stock covered by the bankers’ shares. MISCELLANEOUS TRUST FUNCTIONS LG stock of the company and the corresponding distribution of such funds to the holders of the “‘bankers’ shares’; (d) the treatment of any dividends paid otherwise than in cash; (e) the control of the voting rights on the deposited stock; and (f) the conditions under which “‘bankers’ shares’? may be sur- rendered and the deposited stock withdrawn. It is good prac- tice for the ‘bankers’ shares’’ to be registered by another institution, and, to accomplish this, the trust agreement must contain appropriate provisions. If it is desired to make a market for the ‘‘bankers’ shares’ in two or more cities, the trust agreement will often provide for a transfer agent and registrar in each city under the general control of the de- positary. Investment trusts.—The investment trust, comparatively new to the American public, has been used in Great Britain for many years. It differs from the bankers’ share arrange- ment chiefly in its provisions permitting investment in a wider range of securities. Instead of being confined to one or a few stocks comprising a “unit,” the investment trust con- templates investment and reinvestments in, perhaps, hundreds of enterprises. In this way, it is claimed, the investor’s risk is lessened by reason of the greater diversity of the investment. In some cases the securities of an investment company take the form of collateral trust bonds and the deed of trust au- thorizes the trustee to allow substitutions of securities (within _ prescribed limits) provided the market value of the collateral is maintained at a certain percentage above the principal amount of the outstanding collateral trust bonds. ‘There ts no marked difference, in form, between an “investment trust”’ issue of this nature and collateral trust bonds which were dis- cussed in Chapter XII, except the provisions as to investment control, which are often complicated and take a wide variety of form. American shares.—Here again a financial institution is re- quested to issue its certificates, but for different reasons. ‘This type of business has followed the War and is due to the grow- ing tendency to sell foreign securities in this market. It is difficult to list foreign securities on the American exchanges, and, in any event, the investor here has not yet been educated 178 WORK OF CORPORATE TRUST DEPARTMENTS to the point where he readily purchases securities in unfamiliar form and expressed in foreign currencies. Consequently, bank- ers interested in making a market in this country for a foreign security frequently execute an appropriate trust agreement to an institution as trustee or depositary providing for the de- posit of the stock of the foreign company and the issue of corresponding ‘American shares.’ ‘The points which the trust officer will desire fully covered in such an agreement fol- low closely those mentioned under ‘bankers’ shares,’ but, because the rate of exchange enters into the dividend prob- lem, and the distance of the home office adds to the voting problem, the provisions relating to these two points are fur- ther complicated and should be worked out very carefully. The following is the form of a typical “American share’’ certificate: Fig. 8.—“American Shares” Certificate. No. 00000 100 ‘American Shares” THE CONTINENTAL COMPANY, LTD. Incorporated in the United Kingdom of Great Britain and Ireland Tuis Is To CERTIFY that is the owner of OnE HUNDRED —— “American shares,” so-called, each of such “American shares” representing an interest in two and one-half Ordinary shares, of the par value of five (5) shillings each, of THE CONTINENTAL COMPANY, LTD., a corporation of the United Kingdom of Great Britain and Ireland (hereinafter called the Company), deposited under the Agreement hereinafter mentioned, and is entitled on or after January 1, 1928, without the consent of the Depositors hereinafter mentioned, or before January 1, 1928, with the consent of said Depositors, upon surrender at the office of the undersigned in the Borough of Manhattan, City of New York, of this certificate duly endorsed for transfer, and upon payment of the charges, if any, provided for in said Agreement, to receive a certificate of the Company for five such Ordinary Shares, of the par value of five (5) shillings each, for each two “American shares” repre- sented by this certificate, or, at the option of the Depositary, to receive an order calling for delivery at the office or agency of the Depositary in London, England, of a certificate of the Company for five of such Ordinary shares of the par value of five (5) shillings each, for each two “American shares” represented by this certificate; and until such surrender is entitled to receive from time to time, and as provided in the Agreement hereinafter mentioned, the proportionate part applicable to the “American shares” represented by this certificate of any dividends and rights received by the undersigned in respect of the Ordinary shares of the Company deposited under said Agreement. This Certificate is issued pursuant to, and is subject to, all the terms and conditions of an Agreement dated the 31st day of December, 1923, by and between James Beaver & Co., a copartnership, of the City of New York, N. Y., therein and herein sometimes called “the Depositors,” the undersigned and all registered holders of certificates from time to time outstanding thereunder. MISCELLANEOUS TRUST FUNCTIONS 179 This certificate is transferable on the books of the undersigned by the registered holder hereof, in person or by attorney duly authorized, on surren- der hereof duly endorsed and according to rules established for the purpose by the undersigned and in consonance with the rules of the New York Stock Exchange. This certificate is not valid unless registered by THE TENTH NATIONAL Bank of the City of New York, as Registrar. In WITNESS WHEREOF, THE NATIONAL TrusT CoMPANY, as Depositary, has caused this certificate to be executed in its corporate name by its Secretary, or’ one of its Assistant Secretaries, this day of , 19—. NATIONAL TRUST COMPANY, Depositary. By Assistant Secretary. day of , 19—. THE TENTH NATIONAL BANK OF THE CITY OF NEW YORK, Registrar. Registered this By Assistant Cashier. French bearer certificates.— Beginning about 1908 the interest of the French investor in American securities ap- peared, in the judgment of some bankers, to justify an effort to supply the French investor with American securities in the form to which he was accustomed. As a result there were issued under agreements with American trust companies, as trustees, bearer certificates of small denomination, with divi- dend warrants attached, and in form acceptable for listing on the Paris Bourse. ‘This transaction, it will be noted, is the reverse of that involved in the issue of “American shares.”’ The World War, with its consequent financial stringency in Europe, has practically put an end to this type of business. Foreign insurance trusts.*—Business of this type is re- ceived by the trust departments of institutions in the financial centers from foreign insurance companies which wish to enter into the business of insurance or reinsurance in this country. Most of the states will not permit foreign insurance compa- nies to write insurance within their borders, unless they have qualified under the statutes and pursuant to regulations estab- lished by the respective state insurance departments. ‘This qualification usually includes the deposit of securities or cash as a fund for the protection of policy holders or creditors. In 4 There is no relation between this type of business and the so-called “in- surance trust” established by an individual. 180 WORK OF CORPORATE TRUST DEPARTMENTS New York state part of the fund is required to be deposited with the insurance department and the remainder may be deposited with three individual trustees or one corporate trustee, located in the state of New York. The following form of deed of trust is the ‘‘standard” form approved by the New York State Superintendent of Insurance. STATES OF NEW YORK AND MASSACHUSETTS Deed of Trust. (To be used by insurance companies of other countries in the appointment of a United States corporate trustee, pursuant to the requirements of the statutes of such states.) (CORPORATE TRUSTEE) Tuis INDENTURE, made this day of , in the year one thousand, nine hundred and , between , (Here insert the corporate name of the company in the English language, adding, if its corporate name is in a foreign language, the following: “incorporated under the name of ”) of the city of , in the of , a corporation organized under the laws of the ot , hereinafter called “the company,” party of the first part, and , of the city of , in the State of , a corporation organized under the laws of the State of , in the United States of America, here- inafter called “the trustee,” party of the second part, WITNESSETH: WHEREAS, under and pursuant to the provisions of the statutes of certain of the states of the United States, an insurance company organized under the laws of a foreign country and transacting business in such states is re- quired to maintain in the United States a trust fund for the protection of all its policyholders and creditors in the United States, and to appoint a trustee or trustees as custodian or custodians of said trust fund; and WHEREAS, the company is a foreign insurance company duly organized and existing under the laws of , and carrying on the business of insurance; (Here insert the kinds of insurance business which the foreign corporation is authorized to transact under its charter or articles of association.) THEREFORE, to the end that the statutes of such states may be fully complied with: Know ALL MEN By THESE PRESENTS, that, the company has appointed : its lawful United States trustee, with this provision, that said trustee or its successor be authorized and have the power to receive such securities and property as the company from time to time may transfer or remit to or vest in said trustee or place in said trustee’s hands or under said trustee’s control, and to hold, invest, reinvest, manage and dispose of the same for the uses and purposes and in the manner and according to the provisions following, namely: First: ‘The trustee shall cause the securities and property in which the said trust fund shall from time to time be invested to be, so far as practicable, entered, registered and kept under the following form or title: ‘The trustee by deed of trust for the time being in the United States of the Company.” MISCELLANEOUS TRUST FUNCTIONS 181 SECOND: The trustee shall hold the above-mentioned securities and prop- erty and their proceeds as a fund in trust, out of which to pay or cause to be paid all lawful and valid claims or demands of policyholders and creditors of the company in the United States, or such pro rata share of such claims or demands as may be possible to pay therefrom. Tuirp: The trustee is authorized and empowered, with the previous writ- ten authority of the board of directors or the manager of the company duly empowered, or of the United States manager acting under the instructions of the company’s board of directors or its duly empowered manager, to be signified in writing to the trustee, to sell or collect any security or property in the said trust fund, and to invest and reinvest the proceeds thereof in such securities or property as are or may be from time to time permitted by the laws of the state of the United States where the principal business office of the United States branch of the company is located, to the same extent and subject to the same restrictions, rules and regulations to which insurance companies incorporated in said state are or may be at, any time subject. FourTH: ‘The trustee shall from time to time, when required either by the company or the United States manager thereof, or by the insurance super- visor, whatever his official title may be, of any state of the United States where the company is admitted to transact business, make and certify a state- ment of the description and amount of the said trust fund, and of items of which it may consist, in such detail as may be required; and such certificate of description shall be a voucher for said funds to the company or the United States manager. . FirTH: The trustee is also authorized and empowered, upon the written direction of said United States manager authorized as in paragraph third hereinbefore provided, from time to time to furnish said United States man- ager with property or securities out of said trust fund or any part thereof: (1) For making deposits in any state or territory of the United States for the benefit and security of all the policyholders and creditors of the company in the United States under laws or regulations, now existing or hereafter to be established, requiring deposits for the benefit and security of all policy- holders and creditors in the United States; and (2) Unless — after five days’ written notice of intention from the United States manager to the insurance supervisor, whatever his official title may be, of the state where the principal business office of the United States branch of the company is located — prohibited in writing by such supervisor, for the payment of moneys due to policyholders or creditors of the company in the United States; and (3) If consented to in writing in each case by such insurance superivisor and not otherwise: (a) for obtaining loans on pledge of such property or securities and for effecting bulk reinsurances of all or any part of the obliga- tions of the company on unexpired policies issued through its United States branch, provided such loans on pledge or such use for bulk reinsurances shall be for the benefit and protection of the company’s policyholders or creditors in the United States; (b) for remittance or transfer to the home office of the com- pany; or (c) for such other use and in such other manner for the benefit of the United States branch of the company as the said United States manager may require or direct. Sixth: The trustee is also authorized and empowered, upon request of the United States manager of the company authorized to that end as in paragraph third hereinbefore provided, to pay or deliver any or all income, earnings, 182 WORK OF CORPORATE TRUST DEPARTMENTS dividends or interest accumulations of the securities or property of such trust fund to such United States manager and accept his receipt therefor. Seventh: The trustee may resign by written resignation, such resignation to take effect not less than .... days from the date of the reception thereof by the company, and, in case of a vacancy caused by such resignation of a trustee or from any other cause, the company shall, subject to the approval of the in- surance supervisor specified in paragraph fifth hereof, fill such vacancy by a hew appointment, and the powers of the trustee shall survive and continue in the succeeding trustee, and every new trustee shall succeed to, take and have all the estate, rights and powers which belonged to or were held by and be charged with like obligations as its predecessors. But the trustee shall not be liable or responsible for any loss to the said trust fund unless the same be caused by its neglect or willful malfeasance. ; Eighth: The company hereby reserves to itself the right at any time hereafter to add to, modify, alter or revoke the trusts, conditions and powers hereinbefore declared, imposed or conferred in such manner as it shall deem fit and as shall be according to law, provided the rights of its policyholders and creditors in the United States shall not thereby be affected or impaired, of which the jn- surance supervisor specified in paragraph fifth hereof shall be the judge, and of which fact his written certificate to the trustee shall be final and conclusive evidence. Ninth: The trustee hereby accepts the trust above created and declared upon the terms above expressed, and signifies its acceptance thereof by joining in the execution of these presents. In WITNESS WHEREOF, the company and the trustee have caused these presents to be subscribed and their corporate seals to be afhxed, the company at , on the day of 19—, and the trustee, at , on the day , 19—, INSTRUCTIONS This DEED OF TRUST must be executed by the foreign company by: (a) Affixing its name at the end of the deed of trust,; underneath such name, the two officers executing it should sign their names and add the titles of their offices, as “President,” “Manager,” “Director,” “Secretary,” etc. (b) Affixing or impressing the seal of the corporation to the left of the signature of the company and its officers. (c) Attaching the certificate of a notary public or other officer of the foreign government, state, city or district, to the effect that the deed of trust was executed by such officers for and on' behalf of such company, on the day of the date thereof; that such officers were duly atithorized by the board of directors of such company to execute it, and that the corporate seal afhxed or impressed is the corporate seal of such com- pany and was affixed to or impressed thereon pursuant to action of the board of directors of such company. Such certificate must be in the English language. MISCELLANEOUS TRUST FUNCTIONS 183 (d) Attaching to the certificate of the notary public or other officer a cer- tificate by a United States consul, or vice-consul, identifying the notary public or other officer as duly qualified to certify the execution of legal documents. (The form usually followed by United States consuls or vice-consuls will be enough.) This DEED oF ‘TRUST must be executed by the trustee or trustees in accord- ance with the laws of the state where the deed of trust is to be first filed. A trustee under a deed of trust of this nature should famil- iarize itself with its state insurance laws and regulations. The trust having been established for the benefit of United States policyholders and creditors, it is the duty of the trustee to see that the fund in its hands is not used for any purpose, except as permitted in the deed of trust. ‘These trusts repre- sent a very clean and profitable type of business, and often carry substantial balances in cash. ‘The foreign insurance company is also required to appoint a United States manager, and the natural place for the United States manager to carry his company’s account is with the institution which is United States trustee. Some interesting legal cases have resulted from these trusts, particularly with respect to Russian insur- ance companies.” Escrows.—An escrow is the deposit with a stakeholder of cash, securities, title papers or other property, in regard to which two or more parties may have conflicting interests. It is one of the least profitable types of trust business, and, as indi- cated by its nature, one which involves considerable risk. The careful trust officer will investigate each escrow which is offered, and will act only upon the advice of counsel. In some instances the parties at interest will desire to make the escrow depositary a party to their agreement which is the basis of the escrow. This is not desirable. A deposit in escrow should be accepted only subject to a letter of instructions, signed by the parties at interest, making reference to no other agreement be- tween the parties, and clearly defining the duties of the deposi- tary under any conceivable contingency. It is also important that the letter of instructions set a time limit and completely in- struct the depositary as to the disposition of the property cov- ered by the escrow, in case the parties at interest shall fail, within the limit fixed, to carry out its terms. In order to avoid 5 See Russian Reinsurance Company et al. v. Stoddard, 240 N. Y. 149. 184 WORK OF CORPORATE TRUST DEPARTMENTS possible embarrassment to the escrow depositary and to parties to the escrow, it frequently is advisable to incorporate in the original letter of instructions a clause providing, in substance, that the escrow depositary shall not be bound or affected by notice of the abrogation or modification of the original escrow terms, unless such notice is signed by all parties in interest. Registrar of debentures, etc. (for identification). — A corporate trust department frequently is asked to act in the capacity of registrar for an issue of debentures or other obligations, with the duty of countersigning debentures to a given amount. Its services under such an arrangement are quite different from those of bond registrar which are dis- cussed under corporate agency functions, but do comprehend a check against an overissue of securities and in that respect are comparable to the services of a stock registrar. The de- tail work involved under an appointment as registrar for identification (comprising the examination, recording, counter- signing, and delivering of debentures) is closely akin to the work of a trustee in authenticating bonds, Hence, business of this kind usually is assigned to the corporate trust depart- ment, particularly as the records of that department are adapted to fit the needs of the case. The appointment of a registrar of debentures is made by the issuing corporation’s board of directors, or, in the case of foreign governments, by the minister of finance or appro- priate governmental body. ‘The registrar’s duties usually con- sist merely of signing, for identification, debentures to the amount authorized by the appointment. In doing so it signs as Registrar of the issue usually in this form. “Countersigned: NATIONAL TRUST COMPANY as Bond Registrar by Assistant Secretary” If the debentures are to be given the benefit of a sinking fund or the privilege of conversion into other securities, the institution acting as registrar also may be appointed the agent of the debtor. Likewise, it may be appointed paying agent for the bonds or coupons. However, these functions are apart from the duties of the registrar. MISCELLANEOUS TRUST FUNCTIONS 185 The purpose of the arrangement is to provide an indepen- dent check on the amount of debentures issued, without the formality of a trust agreement. ‘The signature of the regis- trar adds to the marketability of the debentures, because it carries to the investor an assurance that the authorized amount has not been exceeded. Conversions.— Many bonds are issued containing a provi- sion giving to the holder an option, on stated terms, to con- vert such bonds into another class of security of the debtor (usually common stock). In such case it is important to see that the provisions of the bond and the mortgage are specific as to: (1) the period during which such conversions may be made; (2) the rate at which the bonds are convertible into the other security; (3) the adjustment, if any, to be made between the accrued interest on the bonds to the date of con- version, and the accrued interest or dividends to the same date on the securities to be issued in exchange; and (4) the process by which securities are to be obtained with which to accomp- lish the conversion when bonds are tendered for that purpose. Sometimes it is required that a certain number of days’ notice must be given by bondholders who wish to convert their bonds into stock. This provision must be carefully observed by the trustee or conversion agent, as there might be a sub- stantial difference in the value of the stock between the date when the bondholder gives notice and the date when his stock is issuable. The Exchange Record (Form 5, page 40) is adaptable to use as a conversion record. In some cases, however, special records may be desirable. Fiscal agent for municipalities, etc.—As fiscal agent for cities, counties, and states, a trust company or bank may per- form duties which can hardly be included under “‘agency’’ func- tions. The office of the fiscal agent is the usual place of pay- ment for the bonds and interest thereon. This may not, and usually does not, involve any trust relationship; but the fiscal agent frequently authenticates the bonds of a muncipality and, clearly, this action brings fiscal agencies within the scope of corporate trust department activities. Certain trust compa- nies specialize in this class of business just as certain lawyers 186 WORK OF CORPORATE TRUST DEPARTMENTS specialize in passing upon the validity of municipal issues. However, this type of business is somewhat afield from the ordinary run of corporate trusts. Paying agencies— As we have just indicated, paying agencies usually do not involve a trust relationship, but there are many exceptions to this rule. The question becomes of particular importance in case of insolvency of the debtor. Regardless of whether funds received for the payment of bonds are a deposit in trust, most institutions find it more con- venient to have all bond payments made by the corporate trust department just as all coupon payments are made by the coupon-paying department. Banks and trust companies in the financial centers receive a considerable number of bond-paying agencies from their correspondent banks in other cities, such correspondents being trustees under local issues of bonds whose terms provide that payment at maturity may be had in the financial centre if the holder so elects. CHAPTER XIV CORPORATE AGENCY SERVICES; REORGANIZA- TION. DEPARTMENT Scope of corporate agency services.—The growth of trust company business in the field which we discuss under the head- ing “Corporate Agency Services” has kept pace with, and, in some branches, has exceeded, the development of corporate trust business. The term “corporate agencies,” in trust com- panies where the corporate trust department is separated from the corporate agency department or group of depart- ments, usually refers to the activities assigned to the following departments or divisions: Reorganization. Stock Transfer. Stock Registration. Bond Registration. Coupon Paying. Division between trust and agency departments.—The general practice among large trust companies is to assign to the corporate trust department those functions under which the trust company assumes a relationship of trust and to deal with all or most of the business such as has been mentioned above in its corporate agency department. This is logical, and, where justified by the volume of business, appears to work out very satisfactorily. Such a clear-cut division is not always carried out because of practical reasons which may render it advantageous for one department to assume duties outside the usual scope of its activities. Practice—large vs. small companies.— In the smaller trust companies, and even in many of the larger companies, where most of the trusts are personal, it is usual, and quite properly so, to group all corporate activities in one division of the trust department. But even so, the trust officer will do well to have the logical divisions in mind and so construct his 187 188 WORK OF CORPORATE TRUST DEPARTMENTS records that they can be subdivided with the least possible in- convenience and expense, if the future growth of his company should warrant that course. In the case of the large companies, some diversity of prac- tice will be encountered. For example, the largest trust com- pany in the country includes reorganizations and bond regis- trations as part of the functions of its corporate trust depart- ment. In some companies bond payments are made at the corporate trust department, and in others at a joint bond and coupon-paying division of the corporate agency department, although, in many instances, a trust relationship exists, and, for that reason, theoretically, at least, bond payments fall within the purview of the trust department. But whether the division of functions follows exactly along the lines dis- cussed in this book or whether some variations are adopted is not a matter of great importance provided the fundamental distinction between trust and agency services is always kept in mind. Investigating offers of new business.—The matter of ex- amining into the merits of proposed corporate trusts already has been mentioned (page 23). The same policy of caution should guide a trust officer in the consideration of business offered to the corporate agency department so as to prevent the acceptance of business which might reflect unfavorably on the fiduciary. | In the placing of corporate agency business (particularly transfer agencies and registrarships), corporations generally exercise a larger measure of control than they do in the case of corporate trusts, where the trustee is usually nominated by the bankers who underwrite the bond issue. Much corporate agency business, however, develops through the good offices of the underwriting houses, who frequently are in a position to suggest the name of the fiduciary. Reorganization department.—The reorganization depart- ment of a modern trust company, whether attached to the corporate trust department or placed with corporate agency group, ordinarily takes charge of the following types of busi- ness: . Corporate reorganization.—As here used the word “reor- ganization” is intended to denote the rearrangement of the CORPORATE AGENCY SERVICES 189 capital structure of a corporation, involuntary as regards the corporation, and usually effected through the legal enforce- ment of the rights of one or more classes of security-holders or creditors. In nearly all such cases the foreclosure of one or more liens is involved and the reorganization results in the formation of a new corporation, pursuant to a plan of reor- ganization submitted by committees representing various classes of security-holders and creditors. Corporate readjustments.—In contrast to the use of the word “reorganization,” “readjustment” is the term used to indicate the rearrangement of the capital structure of a cor- poration which is voluntary in nature, and consummated with- out the enforcement of the legal remedies of security-holders or creditors, often before the happening of an event upon which the enforcement of any remedies might be predicated. A readjustment may be effected with or without the inter- vention of committees representing the security-holders and creditors, but in nearly all cases with the aid of trust companies as depositaries. Capital subscriptions.—It is now a well established practice of corporations, planning to issue new or additional securi- ties and to extend to existing security-holders the right to subscribe to the new security, to make use of a trust com- pany’s service as subscription agent. In the case of stock issues (or, possibly, the issue of bonds which, by their terms, are convertible into stock of the debtor corporation) it is the general rule, by statute in some states and under common law in other states, that the right to subscribe to the new security shall, in the first instance, be extended to existing stockholders in proporion to their holdings. Reorganizations.—It is in its capacity as depositary in con- nection with reorganizations that the reorganization division often comes in close contact with the corporate trust depart- ment. As previously stated, reorganizations, within the mean- ing of this discussion, are ordinarily consummated through the enforcement of the lien of one or more mortgages, or the legal remedies of one or more classes of creditors. Usually one or more trust companies stand as trustees for the bond- holders (or creditors—such as noteholders or secured cre- ditors) whose remedies are to be enforced. 190 WORK OF CORPORATE TRUST DEPARTMENTS Perhaps the trust company which is acting as depositary is also mortgage trustee. In its capacity as depositary it will have dealings with the bondholders who codperate with the committee, and with itself as trustee on behalf of all of the bondholders. These activities of the depositary should be kept wholly separate and apart from those of the trustee. In a situation of this kind the advantages of making a clear dis- tinction between trust and agency functions are apparent. : Ordinarily, the initial step of a reorganization takes place when the corporation has failed to pay, when due, one or more of its obligations for principal or interest on its out- standing indebtedness. Dividends on stock and interest on income bonds are not fixed charges, and failure to meet such payments does not constitute a default pursuant to which an involuntary reorganization may be brought about. At times the proceedings for reorganization are commenced before actual default has occurred, but when it is apparent that the company’s financial situation is such that default is inevitable. In such a situation it is usual for the bankers who originally sold to the public the various classes of the company’s securi- ties to confer with the officials of the company as to the ap- pointment of a receiver’ and at or about the same time the bankers usually will take steps to organize protective com- mittees for the holders of the various classes of securities. Protective committees.— As its name implies, such a com- mittee is organized to protect, through the process of reor- ganization, or otherwise, the interests of the security-holders it represents. Ordinarily, a protective committee, as distin- guished from a reorganization or readjustment committee, later discussed, will represent the holders of only one class of security, and, consequently, there are often as many com- mittees in the field as there are classes of securities of a given company. Any attempt by a protective committee to represent two or more classes of securities may well subject the committee to criticism by the security-holders and may also be frowned upon by the courts, because in the very na- ture of an involuntary reorganization there is bound to be 1 James Byrne, “Some Legal Phases of Corporate Financing, Reorganization and Regulation,” pages 77 et seq. CORPORATE AGENCY SERVICES 191 more or less conflict between the interests of the holders of the several classes of securities. The natural assumption is that such committees would be appointed by the great body of holders of the securities of the respective classes. However, as bond and note issues are ordinarily in bearer form, it is not possible to reach many of the holders except after long and expensive advertising. Even in the case of stock and other registered security issues, human nature is such that it is next to impossible to secure prompt, effective, and united action, acute though the situation may be. Consequently, the bankers referred to above will usually consult a few of the larger known holders of the issue in which they are interested, and select the committee, the members being, or representing, large holders, the bankers who sold the issue, and sometimes (in the case of bond or note issues) the trustee. The advisability of the trustee accepting representa- tion on the committee is open to some question, although the practice has many advantages, both to the committee and the trustee. The proceedings advocated by the committee will, with but few exceptions, need to be taken through the trustee. Consequently, a close working contact between these two parties is highly desirable. The other side of the picture, however, is that the committee represents only such holders as may, by depositing their securities under the deposit agree- ment—next discussed—authorize the committee to act for them, while the trustee is the legal representative of the in- terests of the whole body of holders of the issue in question, known or unknown. For this reason, a careful trustee, if it accepts representation on such a committee, will do so only on the distinct understanding that its representative shall be free to resign membership, if at any time an opposition com- mittee is organized to represent the same issue, or any other situation arises which, in the judgment of the trustee, may cause embarrassment to it or to its representative on the com- mittee. This situation is often satisfactorily met by having a member of the trustee’s organization accept the secretary- ship of the committee. ‘The secretary’s duties are merely ministerial and not representative, but his office provides a means for close contact between the trustee and the com- mittee. 192 WORK OF CORPORATE TRUST DEPARTMENTS A similar question arises if counsel to the trustee is asked to act for the committee, and any acceptance by counsel should carry the reservations just suggested with respect to the trus- tee’s representation on the committee. A protective committee, at its organization meeting, will usually elect one of its members as chairman, and select coun- sel, one or more depositaries, and a secretary. Its next step is to adopt a form of deposit agreement and to arrange for the publication and mailing of a notice (see below) addressed to the holders of the securities it represents, advising them of the situation which calls for organized effort to protect their interests, the formation of the protective committee, and its personnel. ‘The notice ordinarily invites the immediate deposit of the securities in question, with the committee’s depositary. It will also state that copies of the deposit agree- ment may be had on application to the secretary or the de- positary, and, in addition to the names (and usually the busi- ness connections) of the committee members, will give the names and addresses of the depositary, counsel and secretary. Notice cf Protective Committee. PROTECTIVE COMMITTEE THE CENTRAL RAILWAY COMPANY FIRST MORTGAGE FIVE PER CENT 50-YEAR GOLD BONDS New York City, January 20, 1925. To the Holders of The Central Railway Company First Mortgage Five Per Cent 50-Year Gold Bonds: Default having occurred in the payment of interest due June 1, 1924, and December 1, 1924, upon the First Mortgage Five Per Cent 50-Year Gold Bonds of The Central Railway Company, the undersigned Protective Committee has been formed in order that the holders of the said bonds may take concerted action for the protection of their interests. Bondholders are invited to deposit their Bonds with National Trust Com- pany at 200 Wall Street, New York City, as Depositary under a Deposit Agreement dated as of December 11, 1924. Copies of this Deposit Agree- ment may be obtained from the Depositary or from the Secretary of the Committee. Bonds must be accompanied by the coupons due June 1, 1924, and all subsequent coupons; Bonds registered as to ownership must be accompanied by properly executed transfers thereof in blank. ‘Transferable certificates of deposit will be issued for the Bonds deposited. Application has been made to list such certificates of deposit on the New York Stock Exchange. All the property and assets of The Central Railway Company have been acquired by the New York and San Francisco Railroad Company, which has CORPORATE AGENCY SERVICES 193 assumed the payment of the Central First Mortgage Bonds. On July 25, 1923, a Receiver was appointed for the Railroad Company in a suit brought by general creditors. ‘The Receiver paid the interest due upon the Central First Mortgage Bonds on December 1, 1923, but subsequent installments of interest have not been paid. There have also been defaults in the payment of interest upon practically all the outstanding bonds or other obligations, issued or assumed by the New York and San Francisco Railroad Company. Since the appointment of the Receiver, a number of suits have been brought to foreclose mortgages securing other outstanding issues of Bonds, and the receivership has been extended to such foreclosure suits. No such suit has been brought to foreclose the Central First Mortgage. In order that the interests of the holders of the Central First Mortgage Bonds may be ade- quately protected in the receivership proceedings, it is essential that a suit to foreclose the said Mortgage should be brought as promptly as possible. The provisions of the Mortgage make it doubtful whether such a suit can be instituted except through the action of the holders of at least 50 per cent in amount of the Bonds secured thereby. Approximately one third of the outstanding Bonds have now been deposited with the Committee’s Depositary. In order to enable the Committee to cause foreclosure proceedings to be in- stituted as soon as possible, Bondholders are urged to deposit their Bonds immediately. The prompt deposit of Bonds is essential also to enable this Committee effectively to participate in the formulation of a plan of reorganization. The other classes of securities will be represented by committees organized to assert their rights, and it is distinctly to the interest of the holders of the First Mortgage Bonds that they should be similarly represented. Pre- liminary investigations already made by this Committee show the necessity of prompt action with respect to a plan of reorganization. ‘The Receiver is now operating the road at a loss. He estimates that for the calendar year 1925 the books will show an operating deficit of approximately $500,000. Receiver’s certificates having a lien prior to all mortgages are now out- standing in the amount of $950,000, and the Receiver expects to apply for authority to issue additional certificates within the next few weeks. An indefinite continuation of the present state of affairs cannot fail injuriously to affect the interest of Bondholders. The Deposit Agreement provides that the maximum expense which may be charged against any depositor will not exceed 2 per cent of the face amount of his Bonds. For the above reasons, Bondholders are urged to deposit their Bonds with- out delay. Henry Grey, Secretary, GeorcE E. Hiti, Chairman, 130 Pine Street, New York City. Hill & Son Root, CasE & GARDINER, Counsel, WILLIAM C. Brown, . Lae CAA Finance Committee, NATIONAL TrRusT COMPANY, Depositary, Coot eaT NARA Tate Tag Oo: 200 Wall Street, New York City. DANIEL J. MorGan, Treasurer, New Haven Fire Insur- ance Co, R. G. READ, Vice President, National Trust Company Committee 194 WORK OF CORPORATE TRUST DEPARTMENTS Deposit agreement.*—Such an agreement evidences the contract between the committee and the depositing security- holders who receive, in lieu of their securities, transferable re- ceipts known as certificates of deposit. Forms of certificates of deposit follow: pe Fig. 9.—Certificate of Deposit (Bonds). Number CERTIFICATE OF DEPOSIT $1000 for 444% Convertible Gold Bond $1000 Due June 1, 1942 of NEW YORK AND SAN FRANCISCO RAILWAY COMPANY (With coupon maturing June 1, 1925, and all subsequent coupons attached) Issued under an Indenture of said New York and San Francisco Railway Company, dated June 1, 1912, to Consolidated Trust Company, of New York as Trustee and deposited under and subject to a Plan and agreement dated June 1, 1925, for the Reorganization of New York and San Francisco Railway Company. NATIONAL TRUST COMPANY HEREBY CERTIFIES THAT it has received one bond of the issue aforesaid NUMBERED of the face value of principal of — ONE THOUSAND DOLLARS — with coupons attached as above stated. Said bond has been deposited subject to the terms and conditions of and is deliverable as stated in the above- mentioned agreement. ‘The holder hereof assents to and is bound by the provisions of said agreement by receiving this certificate and is entitled to receive all the securities, benefits, and advantages to which the depositor of such bond is or may become entitled pursuant to the provisions of said agreement. The interest represented by this certificate is transferable, subject to the terms and conditions of said agreement, by the delivery of this certificate. ‘This certificate may be registered as to ownership, but after registration no transfer except on the books of the Trust Company shall be valid unless the last trans- fer be to bearer, when the Certificate will be transferable by delivery as before. New York, Registered: NATIONAL Trust CoMPANy, Depositary National Commercial Bank, Registrar By By Assistant Cashier Assistant Secretary This certificate is not valid until signed by the Depositary and registered by the Registrar. Fig. 10.—Certificate of Deposit (Stock). CERTIFICATE OF DEPOSIT —— Shares FOR STOCK OF NEW YORK STEEL COMPANY deposited under and in accordance with the terms of a certain Deposit Agree- ment dated June 19, 1925, between William H. Tree, Samuel Hill, and Morgan H. Green as a Committee, parties of the first part, and such stockholders of the New York Steel Company, as shall become parties thereto in the manner therein provided, parties of the second part. The purpose of said Deposit Agreement No. 2 See pages 423 et seq. for form of a typical deposit agreement. CORPORATE AGENCY SERVICES 195 is to facilitate the proposed merger of New York Steel Company and Central Metals Corporation into one Company to be known as Central-New York Metals Company. ‘The original Deposit Agreement has been lodged with National Trust Company, the depositary named therein. NATIONAL ‘TRUST CoMPANY, as Depositary, HEREBY CERTIFIES that it has received and holds for account of a cer- tificate or certificates representing Shares of stock of New York Steel Company, subject to the terms and conditions of the above-mentioned Deposit Agreement. The holder hereof by receiving this certificate assents to and is bound by the provisions of the said Deposit Agreement and is entitled to receive all the securities, benefits, and advantages to which the depositor of said stock is or may become entitled pursuant to the provisions of said Deposit Agreement. ‘This certificate and all rights and interests represented hereby are transferable subject to the terms and conditions of said Deposit Agreement on the books of the undersigned by the holder hereof in person or by attorney, upon surrender hereof duly endorsed. New York NATIONAL TRUST CoMPANY, Depositary By Assistant Secretary The deposit agreement is the committee’s warrant of au- thority.° The parties to such an agreement are (1) the com- mittee, and (2) the holders of certificates of deposit issued in lieu of the deposited securities. The fact that the persons who deposit the securities do not necessarily remain parties to such an agreement is of sufhcient importance to warrant repetition. Such an agreement should be most carefully drawn to cover with legal completeness the authority of the commit- tee; the procedure by which holders of certificates of deposit may become bound by the terms of any plan of reorganization adopted by the committee; the right, if any, of the holders of certificates of deposit to withdraw deposited securities; the method of notifying the holders of certificates of deposit of the adoption of a plan and of other matters which it is neces- sary to bring to their attention; the right of the committee to reimbursement for its expenses and payment of its fair com- pensation; and the duties and responsibilities of the depositary. Some of the terms of such an agreement involve legal ques- tions which are of the utmost importance to the committee, but are hardly within the scope of this discussion which aims to consider points of the most interest to a depositary. The oficer accepting on behalf of a trust company an appointment 3See Mr. Paul D. Cravath, “Reorganization of Corporations,” in “Some Legal Phases of Corporate Financing, Reorganization and Regulation,” pp. 162 et seq. 196 WORK OF CORPORATE TRUST DEPARTMENTS as depositary under such agreement will secure approval by his counsel of the provisions affecting the depositary, and will be interested primarily in seeing that the duties and responsibili- ties of the depositary are clearly and completely stated. In passing, it is worthy of note that the investing public is insisting with increasing vigor that deposit agreements shall contain clear and workable provisions providing: (1) that the holders of certificates of deposit shall have the right of withdrawal, on payment of a pro rata share of the commit- tee’s expenses and compensation to date, if any plan of re- organization submitted by the committee shall not prove ac- ceptable; and (2) that the total amount which the holder of a certificate of deposit may be required to pay toward the ex- penses and compensation of the committee shall be specifically limited, ordinarily to an amount not exceeding, say, 2 per cent of the face amount of the deposited securities. Activities of depositary.— ‘The various phases of a reor- ganization, prior to the adoption of a plan of reorganization, can be indicated by a brief’explanation of the activities of the depositary. Subdepositaries—In cases where large blocks of securities to be covered by a deposit agreement are held in cities other than the city in which the depositary is located, it is customary to appoint trust companies in one or more of such cities as sub- depositaries. ‘This is a convenience to the security-holders and should result in increased deposits. ‘The deposit agreement generally provides the method for the appointment of sub- depositaries; either by the main depositary, or by the commit- tee direct. ‘The former method is advantageous both to the committee and to the depositary, for these reasons: first, the committee will look to the main depositary to transmit instruc- tions to its agents, and, second, all securities held by the sub- depositaries will be subject to the order of the main depositary. Certificates of deposit sometimes are issued by the subdeposi- taries as agents for the main depositary; but it is considered preferable to have only one type of certificate outstanding, to which end the main depositary issues its certificates upon ap- propriate requisition of the subdepositaries as they receive deposits. It is essential that there be a complete system of reports CORPORATE AGENCY SERVICES 197 between the subdepositaries and the depositary, so that the latter shall be in a position promptly to certify to the com- mittee any details as to the deposit of securities. Listing of certificates of deposit.‘—If the securities of the issue to be deposited are listed on a stock exchange, the pro- tective committee will probably determine to apply promptly for listing the certificates of deposit. As the listing will result in the certificates of deposit having as ready a market as the undeposited securities, such action is advisable as an induce- ment to deposit, as security-holders are reluctant to exchange a readily marketable security for a certificate of deposit un- less that, too, has equal trading conveniences. Reluctance of security-holders.—While the listing of certi- ficates of deposit covering listed securities is an important factor in inducing deposits, the lower market quotation for the certificates of deposit deters many security-holders from depositing. Due to the usual provision in deposit agreements that holders of certificates of deposit are obligated to pay a pro-rata share of the expenses and compensation of the pro- tective committee, up to a stated percentage (ordinarily not more than 2 per cent) of the principal of the deposited securities, the market quotation for certificates of deposit will usually be under the quotation for undeposited securities, by an amount approximating the maximum liability for ex- penses provided by the deposit agreement. A hesitancy to exchange securities for certificates of deposit having a lower market valuation is characteristic of many security-holders. Frequently the philosophy of the person who withholds de- posit for this reason is that there are undoubtedly plenty of other holders of the issue in question who are willing to ac- cept the inconvenience of a lower market quotation, for the sake of the benefits eventually to accrue to all holders through a reorganization. When the reorganization has reached its final stage, so that this person may with reasonable certainty feel that his security will be subject to the market handicap for a short time only, he will deposit and, if necessary to par- ticipate in the benefits of the reorganization, pay his share of the expense. 4 See pages 441 et seq. for listing requirements of New York Stock Exchange. 198 WORK OF CORPORATE TRUST DEPARTMENTS The holder of securities of a company facing the prospect of reorganization should recognize that the situation is one where there is little or nothing that he personally can do to protect his interests, and where, furthermore, the interests of all of the holders of the issue in question can be protected efficiently only through united effort. The committee’s ef- fectiveness in negotiations for reorganization is often in direct proportion to the percentage of the issue deposited, and in many cases the written instructions of the holders of a speci- fied percentage of the entire issue are required as a prerequis- ite to setting the trustee in motion. To put the matter differently, it would seem that the holder of securities of a company facing reorganization has two logical courses: one to sell his securities and take his loss, and the other (provided he is satisfied with the personnel and ability of the protective committee) promptly to deposit and so join with the other holders of the issue in an intelligent effort toward mutual protection. ‘The foregoing is not in- tended to carry the inference that the efforts of reorgani- zation committees are uniformly successful. There are cases where the security-holder has profited by withholding codper- ation; but, from the point of view of the security-holder, such results are fortuitous, unless codperation is withheld through a lack of confidence in the committee which later events prove to have been justified. Registration of certificates of deposit—As previously stated, the New York Stock Exchange requires an independent registrar for securities which it lists.” The same requirement is made by other exchanges. Consequently, if the certificates of deposit are listed, usually it will be necessary for the com- mittee to appoint, as registrar of the certificates, a financial, in- stitution other than the depositary. The depositary then sub- mits to the registrar, for registration, all certificates of deposit issued. The registrar of certificates of deposit has approximately the same duties as the registrar of stock.® Mailing and publishing of notice——The depositary main- tains the official record of deposits, and usually the commit- tee gives all required notices to depositors through the depos- > The New York Stock Exchange requirements appear on pages 441 et seq. 6 See pages 272 et seq. CORPORATE AGENCY SERVICES 199 itary. The ordinary procedure is for the secretary of the committee to present the notice, in form approved by the com- mittee, to the depositary, with the committee’s instructions that the notice be mailed to all holders of certificates of de- posit, as their names and addresses appear on the records of the depositary at the close of business on a specified date. If the notice is one of the formal notices, required by the deposit agreement to be given to holders of certificates of deposit as a precedent to proposed action by the committee, the depositary will be requested to see that one of its com- petent employees makes an appropriate affidavit of the facts of the mailing, so that if, later, it becomes necessary for the committee to prove the mailing of the notice, suitable evidence may be available. The method by which notice to holders of certificates of deposit shall be given by the committee should be prescribed by the deposit agreement, and, in the case of all formal notices, the provisions of the deposit agreement should be rigidly followed. While the obligation in this respect is that of the committee, the careful depositary will check to see that such provisions have been complied with, so that possible embarrassment both to the committee and itself may be avoided. Many deposit agreements require publication as well as mailing of notice, and in such cases the secretary of the committee will usually attend to the publication, al- though at times the depositary is requested to see to the publication as well as the mailing of notices. If the deposi- tary handles the publication, it should see to it that the pro- posed dates, places, and media of publication fully cover the requirements of the deposit agreement, securing, in due course, from the papers carrying the notice, affidavits of publication in duplicate—one set of the affidavits to be retained in its files as depositary, and the other to be transmitted to the committee. Relationship between depositary and committee’s secretary. —Ordinarily, the contact between the depositary and the committee is through the committee’s secretary. If experi- enced in the work, the secretary can do much to make the depositary’s work run smoothly, and, by the same token, if the secretary is not conversant with reorganization work, 200 WORK OF CORPORATE TRUST DEPARTMENTS the experienced depositary can be of much assistance to him and, through suggestion and advice, do much toward facili- tating the detail work between the committee and depositary. Interest and other payments.—At times a committee may collect sums on account of unpaid interest on the principal obligation, or even a partial payment on account of principal. It is usual for the committee to pay such sums to the deposi- tary with instructions to it to make pro rata distribution to the holders of certificates of deposit. Except in unusual cases, such payments are made only on presentation of the outstand- ing certificates of deposit for appropriate endorsement, such endorsement giving notice to all subsequent holders of the certificate of deposit that distribution has been made. Excep- tions would be only in the case of fully registered certificates of deposit which by their terms provide for such payments without endorsement. Another somewhat common practice is for the protective committee, acting under authority contained in the deposit agreement, to pledge the deposited securities and borrow funds to pay interest, as it matures on such securities. In that event the committee will notify holders of certificates of deposit of the arrangements made, and of the holder’s option of receiving an advance on account of matured interest, pro- vided the certificates of deposit are presented for appropriate endorsement by the depositary. ‘The holder of a certificate of deposit so endorsed, is required, in case he withdraws his deposited securities, in accordance with the provisions of the deposit agreement, to pay to the committee, in ad- dition to his pro-rata share of the committee’s expenses and compensation, the amount of such advance with interest to date of repayment.” Similarly, upon completion of the re- organization, proper adjustment is made in the distribution of the new securities between certificates of deposit bearing endorsement of such advances and unendorsed certificates. In other words, the scheme may be more or less a matter of robbing Peter to pay Paul, for, while intended to supply those who are in need of the income with the equivalent of the income on the deposited securities during the process of reorganization, the recipient of the advance may find that he 7 See Article XI of Deposit Agreement, p. 434. CORPORATE AGENCY SERVICES 201 has been living on principal instead of income, if the plans of the committee miscarry. Acceptance of certificates of deposit of other committees.— In reorganizations, particularly of the larger companies, it sometimes happens that two or more committees are in the field representing the same issue of securities, usually pro- fessing somewhat different aims in reorganization. There then develops a contest between these committees to represent the largest percentage of the issue in question. To cover this situation, and to provide for a security-holder who has de- posited with one committee but who has subsequently become convinced that his interests will be more ably protected by a second committee, most deposit agreements now permit the ac- ceptance of certificates of deposit of other committees, repre- senting securities of the same issue, in lieu of the actual securities. In discussing the deposit agreement (page 196) mention was made of the right of withdrawal. Deposit agree- ments, as a rule, do not permit withdrawal of deposited securi- ties, except during a specified period following the presen- tation of a reorganization plan, and then only upon the con- ditions and the payment provided by the agreement. The acceptance, therefore, of the deposit of a certificate issued by another committee requires: (1) a proper notation on the certificate of deposit issued in exchange, to the effect, (a) that the certificate is issued against the certificate of deposit of another committee and not the actual securities, and (b) that the committee is authorized, at the proper time, to withdraw the actual securities from the first committee and to pay whatever expense is involved for the account of the holder of its certificate of deposit; and (2) a careful watch of the progress of the reorganization, so that the opportunity to withdraw the securities from the first com- mittee’s deposit agreement shall not be overlooked. While the responsibility for all such matters is on the committee, the efficient trust company as depositary will carefully follow a situation of this kind to prevent possible difficulties both to the committee and itself. Certification as to deposits—In the course of most reor- ganizations, a committee representing bonds or notes will wish to give certain instructions to the trustee of the issue. 202 WORK OF CORPORATE TRUST DEPARTMENTS As explained in Chapter X (page 146) the default provisions of a mortgage ordinarily stipulate that, while the trustee in certain contingencies may take action in its discretion, it shall take the required action on receipt of written instructions from the holders of a specified percentage of the outstanding bonds, and, if it so requires, upon receipt of indemnity satis- factory to it. Consequently, when the committee desires to instruct the trustee, for example, to commence foreclosure proceedings, it will require of the depositary its formal cer- tificate to evidence the amount of bonds on deposit with the committee. This certificate may be used by the committee not only as the basis for its instructions to the trustee, but also as evidence in connection with indemnity which the trustee may require. If the committee represents a substantial ma- jority of the bond issue, and if the position of the issue in the pending reorganization is fairly strong, the trustee usually will accept the pledge of the deposited bonds as security for the indemnity which it requires. ‘This indemnity is to protect the trustee for its liability, expenses, and compensation, in connection with the action requested by the committee. The bonds can be so pledged, however, only if the deposit agree- ment has specifically given to the committee the right so to use the bonds. If such indemnity is given, and accepted by the trustee, the trustee will promptly notify the depositary of its lien on the deposited bonds, and it then becomes the obli- gation of the depositary to see that this lien is satisfied before it releases the deposited bonds for any purpose. Summary of depositary’s functions prior to reorganization. —At this point it might be well briefly to summarize the functions just discussed which, generally speaking, represent the depositary’s duties prior to the presentation of a reor- ganization plan: 1. Receive an executed counterpart of the deposit agree- ment (with a supply of copies for distribution) as evidence of the agreement between the committee and the holders of the certificates of deposit to be issued and, also, as evidence of the appointment of the depositary. 2. Receive from the committee copies of its notice of organization, with details of publication thereof and, for dis- CORPORATE AGENCY SERVICES 203 tribution, a supply of copies of any circular letter issued by the committee. 3. Receive from its counsel approval on its behalf of the form of deposit agreement, notice, and circular. The form of such papers is usually examined by the depositary in advance of execution or issue. While there is, perhaps, no basis for the depositary insisting upon passing on the form of the committee’s notice and circular, there should be the closest possible codperation between the committee and its agent, the depositary, and these forms are usually submitted to the depositary for criticism or suggestions. 4. Accept deposit of securities of the issue covered by the deposit agreement and issue its certificates of deposit (see Figs. 9 and 10, pages 194 and 195). 5. Enter the full name and address of the depositor with the details of deposited securities, such as amount and cer- tificate or bond numbers on the depositary’s records.® 6. If bearer certificates, with the right of registration, or fully registered certificates, are adopted, the depositary should be prepared to record registrations and transfers on forms as explained in Chapter XVIII (page 272). In most cases of the deposit of bonds the bearer form of certificate of de- posit (sometimes with the privilege of registration) is used. 7. If the certificates of deposit are to be listed on a stock exchange, the depositary will furnish to the committee for submission, with its listing application, a certificate of the amount, and, if required, the details of deposits to the date of application, and will agree to notify the listing committee, periodically, of additional deposits. The New York Stock Exchange has certain requirements as to the form of certifi- cates of deposit which it will list.° Most trust companies in New York handling this type of business in any volume have a standard form of engraved certificate of deposit satisfac- tory to the Stock Exchange, upon which it is necessary to print only the details of the issue. 8. In the event that a separate registrar is required to comply with the regulations of the Stock Exchange, the de- positary will see that a registrar is formally appointed by the 8 See Chapter XVI, pages 220 et seq. 9See page 446, ; a ocd 204 WORK OF CORPORATE TRUST DEPARTMENTS committee, that the certificate of deposit contains proper pro- vision for the signature of the registrar, that mutually satis- factory arrangements are made between the depositary and the registrar for the certification to the registrar of the amount of deposits on the basis of which the registrar signs the certificates of deposit, and that no certificates of deposit are delivered until properly signed by the registrar. 9. From time to time, on the request of the committee, the depositary will furnish certified lists of the depositors, or, as is more usually the case, will, on instructions of the committee, attend to the mailing of circular letters to deposi- tors and submit to the committee, if required, affidavits of mailing. In cases where a list of the holders of the unde- posited securities is available, the committee will often deliver a copy of such list to the depositary and request it also to attend to the mailing of its communications to the holders of undeposited securities. Such lists, other than stockholders’ lists taken from the stock ledgers, are usually far from accu- rate, and the careful depositary will see that every effort is made to build up an accurate list from correspondence with security-holders and from other sources. 10. A depositary will receive numerous letters from hold- ers of undeposited securities inquiring as to the situation of the company, the standing and aims of the committee, and the progress of the proposed reorganization, as well as letters from depositors on the latter point. In replying to this cor- respondence, it is well for the depositary to keep in close touch with its counsel and with the committee, usually through the latter’s secretary or counsel. Care and tact in handling these inquiries will often be of material assistance not only to the committee but to the security-holders themselves. 11. If the committee collects and decides to disburse to the holders of its certificates of deposit funds on account of principal, interest or dividends, the depositary will receive such funds from the committee and disburse them on the commit- tee’s instructions, making appropriate endorsement on the cer- tificates of deposit upon which such payments are made. Time for deposits.—Generally the committee’s first request for deposits does not specify a time limit; but, when the committee’s plans for reorganization begin to take definite CORPORATE AGENCY SERVICES 205 shape and the committee feels that it is about ready to present a formal plan of reorganization, it usually will notify non- depositors, by publication or otherwise, that, after a certain date, deposits will no longer be received, or will be received only upon terms to be imposed by the committee. The fixing of such a date usually results in additional deposits, as, un- fortunately, many security-holders dislike to deposit until the last moment. The committee of course has the right, which it often exercises, of extending the time limit. Usually, even after the expiration of the final date, the committee will con- tinue to accept deposits until consummation of the reorgani- zation, upon payment of a specified penalty. CHAPTER XV REORGANIZATIONS (Continued) Presentation of the plan.—When the committee, either by itself or in codperation with other committees or interests, has worked out a plan of reorganization, it will deposit a copy of the plan with the depositary, and publish the notice, required by the deposit agreement." The committee in prac- tically every case will be required to mail a copy to each holder of a registered certificate of deposit. As a matter of good practice, the committee will often mail a copy of the plan to each depositor appearing on the records of the depositary. Ordinarily, the deposit agreement will provide that, for a spec- ified period, say 30 days, from the date of first publication or mailing of notice, the holders of certificates of deposit who do not approve of the proposed plan may, upon surrender of their certificates of deposit and payment of their pro-rata share of the compensation and expenses of the committee, not exceeding the limit fixed by the deposit agreement, with- draw their securities and so become freed of any obligation to the committee. While a deposit agreement may not specific- ally cover the point, a committee, as a rule, will not attempt to consummate a plan, if a substantial part of the deposited securities are withdrawn upon submission of the plan. Dissents.—Many of the newer deposit agreements do not give the right of actual withdrawal until a plan of reorgani- zation is declared to be operative, but do provide that, during the prescribed period following announcement of the plan, holders of certificates of deposit may, if they so desire, file with the depositary their written dissent to the proposed plan,’ and, if such dissents, representing, say, a majority of the deposited securities, are filed, the committee shall declare the proposed plan abandoned, and, at its option, work out another 1 See provisions of typical deposit agreement, p. 423. 2 See Art. VII of the typical deposit agreement, p. 429. 206 REORGANIZATIONS 207 plan. If the dissents filed are not in an amount sufficient to cause the committee to abandon the plan, the committee will, by notice, as required by the deposit agreement, declare the plan operative. In that event, the holders of certificates of deposit, who filed written dissents, will have a further period, specified in the deposit agreement, in which to withdraw their securities, upon payment of their share of the committee’s compensation and expenses, as fixed by the committee within the limits prescribed in the deposit agreement. Joint reorganization committee.— At this point it might well be said that, while in the case of smaller companies, a reorganization plan is often worked out by one committee and approved or assented to by the other committees in the field, a much closer codperation between committees is re- quired in reorganizing larger companies. Frequently the various committees involved in the reorganization of a large company agree to the formation of a reorganization com- mittee, composed of one representative of each deposit or protective committee. Such a reorganization committee will elect its own chairman, often the representative of the com- mittee whose securities seem to hold the commanding position in respect of the proposed reorganization. It will also select counsel and a secretary and proceed to work out a plan. The representative of each deposit or protective committee will keep his own committee advised of the progress of the reor- ganization committee and will present to the reorganization committee the point of view of his committee and the argu- ments on behalf of the securities represented by his committee. This is by far the most effective method of working out a plan for the reorganization of a complicated corporate situation. The selection by each deposit or protective com- mittee of its representative on the reorganization committee is a matter of prime importance, as that representative’s abil- ity as a negotiator probably will have a direct bearing on the treatment of their securities in the reorganization. Adoption of plan.—Upon expiration of the period pre- scribed by its deposit agreement, after submission of its plan, provided the dissents or withdrawals do not indicate a re- jection of the plan by the security-holders, the committee 208 WORK OF CORPORATE TRUST DEPARTMENTS will declare the plan operative, or, if submitted through a reorganization committee, will declare it approved and adopted. Assessments.—In many reorganizations it is necessary to raise cash either to improve the physical properties of the company or to increase its working capital. In the case of a company in process of reorganization, it is usually difficult, if not economically impossible, to secure new cash through public sale of new securities. In practically all such situations there is one class of securities holding a position so strong that, without question, the proceeds, even of forced liquida- tion, would pay their claims in full. There is usually, also, a class of securities whose equity in the situation is dependent upon the “going concern’ value of the business, and as to which it is apparent that a forced liquidation would practically destroy their value. Any plan of reorganization of such a company is, therefore, intended primarily to protect the equi- ties of these junior securities. If new capital is required, and if, as is likely, it is not possible to sell new securities on an economical basis without seriously weakening the position of the senior securities, it is proper and usual for the reorgani- zation plan to provide that the holders of the junior securities, as a condition precedent to participating in the proposed reorganization, must pay a cash assessment, which, when it has been equitably distributed among the various issues of junior securities, will produce the required new capital. Ordinarily the subscribing security-holders will be given for the new cash a security which in the reorganized company would seem to have an assured position, and, upon payment of the assessment, also will be given in exchange for their old security, a junior security, perhaps common stock, to an amount which fairly represents the ‘“‘going concern’’ equity of their old security. The basis of any such assessment is fully set forth in the plan of reorganization and forms a part thereof. It is, of course, not possible to have assurance that all of the security- holders will pay the proposed assessment. Consequently, the reorganization committee will arrange with bankers to under- write the assessment for a commission. At times, where the equity of the assessed stockholders is very weak, it is neces- REORGANIZATIONS 209 sary, in order to secure public underwriting, for the plan of reorganization to place upon the holders of the securities next in rank the burden of an intermediate underwriting. In many reorganizations there is a “‘twilight zone” between the securities of assured position on forced liquidation, and the securities entirely dependent upon the ‘‘going concern’”’ value of the business. The intermediate security holders usu- ally will be offered, without assessment, junior securities in the reorganized company. Consummation of reorganization.—A plan of reorganiza- tion is almost invariably consummated through the foreclosure of the lien of one or more of the mortgages on the property of the company, or through the enforcement of creditors’ claims. At the foreclosure or bankruptcy sale, the reorgani- zation committee will buy in the assets of the reorganized company, and offer in payment (1) the deposited securities, to the extent of their pro-rata share in the net proceeds of the sale, and (2) cash for the balance.’ If the position of the securities which it represents is strong enough, the committee will borrow the funds required to make the requisite cash pay- ment. In many cases this is not possible and, consequently, the reorganization committee will need to arrange with the bankers underwriting the plan to advance the necessary cash. While, as stated, the deposited securities usually are used by the committee in making payment on account of its pur- chase of the properties of the reorganized company, the securities, as a rule, are not physically presented to the officer of the court making the sale. The committee will obtain from the depositary a statement of the securities on deposit, which it will present in lieu of the actual securities. Promptly upon the acceptance of its bid it will direct the depositary to hold the securities for the account of the court officer conducting the sale. Probably, as previously indicated, the depositary will already have been directed by the committee to hold the secur- ities, under its indemnity agreement with the trustee, and perhaps also as security for loans contracted by the committee for current expenses or advances on account of interest. The depositary, of course, must not disregard these pledges, but 3 Paul D. Cravath, “The Reorganization of Corporations,” in “Some Legal Phases of Corporate Financing, Reorganization, and Regulation,” p. 181 et seq. 210 WORK OF CORPORATE TRUST DEPARTMENTS should request the committee, just prior to the sale, to ar- range proper releases. ‘The trustee, at this point, ordinarily will be willing to release its lien and look to the proceeds of the sale of the mortgaged property for its expenses and compensation, and the committee, if it has outstanding loans, will secure from the underwriters sufficient cash to liquidate such obligations. While the committee is necessarily inter- ested in the release of these prior liens, the depositary, until the actual release, is responsible to the holders of the liens, and should for its own protection see that full releases are secured. Unless, as seldom happens, the proceeds are sufficient to pay the securities in full the special master, or other officer of the court conducting the sale, will direct the depositary to place on the securities, for his account, an appropriate endorsement evidencing the payment on account out of the proceeds of the sale, and then to return the securities to the committee. The cash proceeds of the sale, applicable to the undeposited securities, will be held by the court, or paid to the trustee for account of the court, to be disbursed to the holders of the undeposited securities, upon presentation thereof for proper endorsement. In the meantime, the committee will have caused a new corporation to be organized to carry on the reorganized business, and will sell to it, in exchange for its securities (to be delivered in accordance with the adopted plan of reorgani- zation) all of the properties of the old company acquired at the sale. Distribution of new securities.— The reorganization com- mittee will now transmit the securities of the new company to its depositary with instructions to it to deliver such securities in accordance with the plan of reorganization, as adopted, to the depositing security-holders, upon surrender of the outstand- ing certificates of deposit, and upon payment of the assess- ments, if any, imposed by the plan. The depositary will can- cel its certificates of deposit as surrendered in exchange for the new securities, and, on instructions of the reorganization committee, will credit the account of the new company with assessments as received. REORGANIZATIONS 211 If assessments are imposed by the plan, a time limit will be prescribed, within which the security-holders must make payment if they desire to exercise their option. Upon expira- tion of this period the depositary will certify to the committee and the underwriters* the amount and details of the assess- ments paid. The committee will then call upon the under- writers to make payment of the balance, and direct the de- positary, upon receipt of the proper payment, to deliver to the underwriters proportionate amounts of the securities of the new company. General.—In the discussion of the consummation of a reor- ganization we have, for the sake of simplicity and brevity, referred to “depositary” in the singular. As mentioned in the preceding chapter (page 190) there is usually a separate deposit committee for each class of security of a company in process of reorganization. Each deposit committee names its own depositary. As a depositary is purely an agent, there is no reason why one trust company should not act as deposi- tary for two or more classes of security; but in practice this is seldom done. Consequently, it must be understood that there are normally a number of depositaries, each acting for a committee representing one class of securities, and that, when a plan of reorganization has been promulgated, each committee will direct its own depositary in such of the steps discussed above as affect the securities which it represents. Also, for the sake of brevity, we have referred to “plan of reorganization” and not the more usual modern term of “plan and agreement of reorganization.”’ The average se- curity-holder finds it dificult readily to comprehend complex legal documents. For this reason, the practice has grown of separating the plan and the agreement. The plan is a statement setting forth as briefly and as simply as possible, the terms of the proposed reorganization and referring specif- ically to the agreement, which is the contract between the parties at interest, and, consequently, forms the actual basis of the reorganization. Termination of depositaries’ duties—Once a reorganiza- tion is completed, the various committees which brought it 4 See page 208, as to the underwriting of a reorganization plan, 212 WORK OF CORPORATE TRUST DEPARTMENTS about will naturally pass out of existence, and in later years it may be difficult or impossible for the depositary to get instructions from a member who might speak, even infor- mally, on behalf of the committee. It is, therefore, a very wise precaution for the depositary to request of a committee, at or prior to its last meeting, instructions covering, so far as possible, the final disposition of all securities or documents relating to the reorganization, which are in the possession of the depositary or may be received by it later. A committee in passing such a resolution will usually cover the following points: 1. Direct its secretary to deliver to the depositary, for custody, the minutes and important records of the committee. 2. Arrange for the final disposition of the deposited securi- ties, perhaps through delivery to the new company, or crema- tion by the depositary after the elapse of a specified number of years. 3. Authorize the cremation by the depositary of its can- celed certificates of deposit after a specified period of years. This is a matter of considerable importance to a trust com- pany acting as depositary. If this procedure, or its equiva- lent, is not followed, the trust company in the course of years will find itself burdened with the custody of a mass of securi- ties of little or no value, but with no one authorized to direct it in disposing of them. CHAPTER XVI CORPORATE READJUSTMENTS, CAPITAL SUB- SCRIPTIONS, AND REORGANIZATION DEPARTMENT RECORDS ‘ Readjustments.—A readjustment is the “voluntary” rear- rangement of the capital structure of a corporation, although many corporate readjustments, while voluntary in form, are carried out purely to avoid a reorganization. There are two important differences between a readjust- ment and a reorganization: (1) a readjustment does not necessitate the enforcement of the legal remedies of security- holders or creditors, consequently, there is no foreclosure sale and the business after readjustment is carried on by the original corporation; (2) all classes of security-holders in a readjustment ordinarily are represented by one committee. The obvious reason for the first distinction is that the read- justment plan is presented before the happening of a default which could be the basis of remedial action by the security- holders. As to the second, it has been explained, in the discus- sion of reorganizations, that it is not considered proper for one committee to represent more than one class of security- holders. In negotiating a basis, of reorganization , there are, in the very nature of the transaction, conflicts of interest between the holders of the different classes of securi- ties. In the usual form of readjustment, as contrasted with a reorganization, the plan is worked out by the corporation, its bankers, or the readjustment committee itself, before the matter is submitted to the security-holders. Consequently, the deposit of securities under such a readjustment plan con- stitutes the committee the agent of the security-holders, not to negotiate the terms of a plan, but merely physically to carry out a stated plan, the terms of which are approved by the security-holders by the act of depositing their securities. It is not intended by the above statements to convey the impression that substantially all readjustments are undertaken 213 214 WORK OF CORPORATE TRUST DEPARTMENTS merely to escape an involuntary reorganization. It is obvious that many times such a situation may be the immediate reason, and, when it is possible to secure the necessary codperation of security-holders and creditors, a voluntary readjustment rather than a reorganization will benefit creditors, stockhold- ers, and perhaps other security-holders through the saving in expense, and the avoidance of the long delays inherent in foreclosure. On the other hand, many corporations, in the course of their progress, find that their capital structure has taken such shape as to be a handicap, and, although in no immediate financial difficulty, such corporations will sometimes “take time by the forelock” and offer a plan for readjustment before the handicap of their capital situation has become serious enough to threaten reorganization. From the standpoint of trust company practice, the cor- porate readjustment, though simpler, presents little funda- mental difference from a reorganization. As _ previously stated, the plan of readjustment is presented at the outset, either by the corporation, by its bankers, or by a committee organized for the purpose. ‘The security-holders, and, if necessary, the creditors, are invited to deposit their securities and claims, against which the depositary will issue its certifi- cates of deposit. When the readjustment committee, the cor- -poration or its bankers, as the case may be, decide that a sufficient percentage of each class of securities or claims has been deposited, the plan will be declared operative and the new securities will be issued by the corporation as provided in the plan. The depositary, will then proceed to deliver the new securities to the participants in the readjustment, upon surrender and cancellation of its outstanding certificates of deposit. It should be noted that, as there have been no foreclosure proceedings and as the original corporation carries on the business after readjustment, there is no way of forcing into the plan all security-holders and creditors. As a conse- quence, minority holders frequently insist upon maintain- ing their original position. Such situations often con- tinue for years after a readjustment; but gradually work out, through the purchase of such holdings, their maturity or redemption, the enhancement of value of the new securities if the readjustment is successful, or through involuntary reor- ganization, if the company, despite the readjustment, finally READJUSTMENTS, SUBSCRIPTIONS, RECORDS 215 “goes on the financial rocks.’’ Another point to be remem- bered is that a corporate readjustment does not necessarily affect all classes of outstanding securities. On the contrary, in most cases, only junior bondholders, stockholders, and possi- bly the general creditors are involved. Capital subscriptions—A corporation extending to its stockholders the right to subscribe to new or additional securi- ties usually issues “‘rights’’ or subscription warrants evidenc- ing the right of each stockholder to subscribe to the new security on the specified terms. ‘hese warrants are then trans- mitted to the stockholders by the corporation or its transfer agent. To insure complete subscription it is usual for the corporation to arrange with bankers to underwrite, for a commission, such part of the new issue as may not be taken by the stockholders. The “rights” or subscription warrants are usually registered in the names of the company’s stock- holders of record on a given date and specifically state: (a) the class of security to which subscription may be made; (b) the amount of such security to which the stockholder is authorized to subscribe; (c) the place, rate, and method of payment of the subscription, if exercised; and (d) a date on or before which the right to subscribe must be exercised or the subscription warrant will become void. Ordinarily subscription warrants will contain, on the re- verse side, two forms: (1) a subscription form to be executed by the owner when exercising the right of subscription; and (2) a form of assignment so that the stockholder who does not desire further to increase his investment in the company may assign and sell his “‘rights” in the market. (The market price of rights varies with each issue but often is substantial.) A typical subscription warrant appears on page 216 (Fig. 11). The functions of a trust company as subscription agent, upon receipt from the corporation of appropriate evidence of the terms of the subscription and of its appointment as subscription agent, are (a) to accept subscriptions as pre- sented in accordance with the terms thereof (often the stock- holder is given the option of paying fully or in installments) ; (b) to issue to subscribers part or full paid subscription re- 1 Where records of stockholders are kept on stencils the stencils are used to print the stockholders’ names and addresses on the face of the warrants. 216 WORK OF CORPORATE TRUST DEPARTMENTS ceipts—or ‘‘purchase certificates” (Fig. 12, page 218) ; (c) to credit or remit the proceeds of subscriptions to the corporation; (d) at the close of the period during which subscriptions must be made to certify to the corporation the details of subscrip- tions received; (¢) to receive the subscription of the under- writers to the balance of the issue; and (f) upon receipt of the new securities issued by the corporation, to make delivery thereof upon surrender of the outstanding full-paid purchase certificates or subscription receipts. It sometimes has the further duty of transferring warrants (and subscription re- ceipts, if transferable) either to a new owner or into other denominations in the name of the original stockholder. These. transfer services might be assigned to the transfer depart- ment, but frequently it is more convenient for the reorgani- zation department to take charge of them.’ Fig. 11.—Subscription Warrant. VOID AFTER OCTOBER 22, 1925 Subscription Warrant for Shares of Stock. No. Right to subscribe for shares being at the rate of one share for each ten shares outstanding September 21, 1925. THE DETROIT COMPANY 110 Broadway, New York, N. Y., October 1, 1925 This is to certify or assigns, is entitled to subscribe on that October 22, 1925, at the rate of $100 per share, for shares of the stock of ‘THE DETROIT COMPANY, to be issued in accordance with and on the terms and conditions set forth in the circular, dated September 9, 1925, issued by the Board of Directors to the stockholders of the Company and on the terms and conditions hereinafter set forth: Payment of such subscription must be made, either in full on October 22, 1925, or in the following specified installments, to wit: On October 22, 1925, 25 per cent; On December 22, 1925, 25 per cent; On March = 22, 1926, 25 per cent; On June 22, 1926, 25 per cent. All payments must be made either at the office of National Trust Com- pany, 200 Wall Street, New York, N. Y., or at the office of Border Trust 2'The question of Federal transfer tax on transfers of warrants should be kept in mind, also state taxes, if applicable. READJUSTMENTS, SUBSCRIPTIONS, RECORDS 217 Company, Detroit, Michigan, and must be in funds current in the city where such payments are made and free from collection charges. To those paying in full on October 22, 1925, there will be issued on or about October 27, 1925, the stock certificates to which they are entitled. To those electing to pay in installments, there will be issued transferable purchase certificates, acknowledging receipt of first payment, and these cer- tificates must be returned at the times fixed for the second, third, and fourth payments, accompanied in each case by the prescribed payment. The certifi- cates of stock covered by the purchase certificates will be delivered on or about June 22, 1926, upon surrender of such purchase certificates on that date, and interest to June 21, 1926, at the rate of six per cent per annum, will then be paid upon the installments previously paid. Holders of purchase certificates desiring to make advance payment of any installment may do so only on December 22, 1925, or March 22, 1926. This warrant will be void and of no value, unless surrendered on October 22, 1925, either to National Trust Company at its office No. 200 Wall Street, New York City, or to Border Trust Company at its office in Detroit, Michigan, accompanied by payment of the subscription in full, or by payment of the first installment thereof. Failure to pay the second, third, or fourth installment, when and as payable, shall operate as a forfeiture of all rights in respect to the subscription and the installments previously paid thereon. This warrant is transferable or divisible by assignment and may be so transferred or divided at the offices of the Company, No. 110 Broadway, New York, N. Y., or No. 2000 Tenth Avenue, Detroit, Michigan. On the back of this warrant are two forms. The first to be signed when subscription is made, and the second, which is an assignment requiring a witness, to be signed if the subscription privilege covered hereby is transferred or divided. Assistant Treasurer NOTE.—The signature to this assignment must correspond with the name as written upon the face of this Warrant in every particular, without alteration or enlargement, or any change whatever. SUBSCRIPTION 192— To The Detroit Company: The undersigned hereby subscribes for the shares of stock covered by this Warrant. (Signature) (Address) ASSIGNMENT 192— To The Detroit Company: For VALUE RECEIVED, the right to make the within subscription is hereby assigned to whose address is (Signature) Witness: NOTE—For estates or trusts this assignment must be executed by all the executors, administrators, or trustees. Signatures not known to the company or its agents must be guaranteed. 218 WORK OF CORPORATE TRUST DEPARTMENTS Fig. 12.—Purchase Certificate. No. BP —— PURCHASE CERTIFICATE —— Shares For Shares of Stock of THE DETROIT COMPANY Tus CERTIFIES that under the terms of subscription warrants issued by the Detroit Company, dated October 1, 1925, has subscribed at par for shares, of the par value of $100 each, of the stock of The»Detroit Company, and has paid the first installment of 25 per cent, namely, $ , on account of said subscription, and that the said subscriber, or his assigns, on payment, in funds current in New York City and free from collection charges, of the several further installments of the subscription price, as specified in said subscription warrants, to wit, On December 22, 1925, 25 per cent; On March 22;/ 19265 25) per cent; On June 4a; 1926,'25 per cent: and on surrender of this certificate at the office of National Trust Company, Agent of the Company, No. 200 Wall Street, New York City, will be entitled on or about June 22, 1926, to receive shares of stock of The Detroit Company, and also to receive interest at the rate of six per cent per annum on all installments previously paid, from the date of each payment to June 21, 1926. Holders of purchase certificates desiring to make advance payment of any installment may do so only on December 22, 1925, or March 22, 1926. This certificate must be returned at the times fixed for the second and third payments, so that receipt hereof may be endorsed hereon, and must be surrendered on June 22, 1926, when the last payment is due. Failure to pay any installment on said subscription, when and as payable, shall operate as a forfeiture of all rights under this certificate, and in respect to the stock subscribed for as well as any installments previously paid. This certificate is transferable by assignment, and may be so transferred on books kept for that purpose at the said office of National Trust Company, Agent of the Company. In WITNESS WHEREOF, THE DETROIT COMPANY has caused this certificate to be signed in its behalf by National Trust Company as its Agent, this 22d day of October, 1925. THE DETROIT COMPANY By National Trust Company, Agent By Assistant Secretary Second installment has been paid on ‘Third installment has been paid on this certificate as required this certificate as required ‘THE DETROIT COMPANY THE Detroir CoMPANY By National Trust Company, Agent By National Trust Company, Agent By By Assistant Secretary Assistant Secretary While the above is a typical example of a capital subscrip- tion transaction from the point of view of a trust company, as subscription agent, there may be many variations. It is READJUSTMENTS, SUBSCRIPTIONS, RECORDS 219 important for the trust company to see that its instructions are complete and explicit, that it has been duly authorized to perform its duties as subscription agent, and that the right of subscription has been properly authorized on behalf of its principal—the issuing corporation. All papers necessary to evidence these facts, properly certified, together with speci- men warrants, subscription receipts, copies of circular letters, and so forth, should be filed with the trust company and approved by its counsel before it proceeds with its duties as subscription agent. Subscriptions to securities do not necessarily involve the issuance of “rights.’’ A bank or trust company is frequently requested to act as subscription agent on behalf of a corpora- tion offering securities to other than its stockholders. ‘The procedure in such cases is for the corporation to furnish the subscription agent with a certified list of the subscribers and the terms upon which subscriptions are to be received. ‘The agent then accepts payment from the subscribers, issues re- ceipts, and otherwise proceeds substantially as heretofore out- lined. Where subscription warrants are not issued, or do not contain full instructions, it will be found of much practical _ assistance if the trust company will request the issuing corpo- ration to enclose to its subscribers a printed form on which the subscriber is required to indicate to the subscription agent full instructions as to the issue and method of delivery of the new securities. A form of this kind may well cover such of the following points as may be pertinent to the transaction in question: (1) the full name, including the Christian or given name, in which the new securities are to be issued, (2) the full address of such person; (3) the amount remitted, and, if partial payments are permitted, whether such remit- tance is intended to be full payment; (4) a separate state- ment of any amount remitted to cover stock transfer taxes, if any such taxes are imposed, payment of which is not as- sumed by the issuing company (in nearly all cases any original issue tax which may be due is assumed by the issuing com- pany)*®; and (5) complete instructions as to the method of delivery or shipment of the new securities. 3 See footnote, page 240. 220 WORK OF CORPORATE TRUST DEPARTMENTS Reorganization department records.—While the various reorganization and readjustment plans may differ widely as to details, the services performed by the reorganization de- partment are more or less the same in each case. Hence, it is possible to standardize the departmental records. ‘Those illustrated in this chapter are in use by the institution whose corporate trust system has been described in other chapters.* The security and cash tickets, vault control and general rec- ords conform to the corporate trust department system as described in Chapter IV (page 34). THIS RECEIPT MUST BE RETURNED FILLED IN AND SIGNED IN INK BEFORE STOCK WILL GE DELIVERED No. 2277S No 22778 New York. (et suis fe eee g Received fom! BANKERS TRUST COMPANY \ EB & Certificate for shares of Prefered stock Sas RT EATER UN a wet Common CREEP RS PANY Acamn ETAL rule 1a J NOS A Rome MLR AN Ged eel CE REORGANIZATION DEPARTMENT STOCK WILL NOT BE READY FOR DELIVERY UNTIL 1-30 P. THE OWNER OR eee RS OF SECURITIES REPRESENTED BY THIS RECEIPT AGREE BANKERS TRUST COMPANY THAT SU boa poker ts RITIES MAY GE DELIVERED TO THE SERHER' HEREOF WITHOUT IDENTIFICA Borat 38, rT ae Counter Ticket. Upon receiving securities over its counter, the reorgani- zation department issues a “counter ticket’? in Form 38. The right-hand portion is handed to the depositor, to be presented at the department the following day as a receipt and surrendered against delivery to the depositor of the cor- responding certificate of deposit. ‘The left portion or stub of the ticket is attached to the deposited securities as a means of identification pending entry of the deposit on the records of the department. Upon issuance of the certificate of deposit, the ticket stub is attached to it, to identify the item upon delivery the fol- lowing day. Form 39 is a “temporary receipt’’ used if the department is not prepared to issue its formal receipt. Such a situation often arises, on the surrender of securities for deposit, prior to the filing with the depositary of an executed counterpart of a contemplated protective agreement. 4 Bankers Trust Company, New York. 221 READJUSTMENTS, SUBSCRIPTIONS, RECORDS *yd1s990y Ale1Odus [—'6e WIO0 WY ——— i j “MOLLVOIALLNZ OI! INOHLIM JOSUIW URUVAG BHL OL GIVBAIIEG BG AVW SIILINNDAS HONS LAVHL ANYAIWOD asnas SUAUNWA SHL HLIA B2UOV 2diZ5au SIHL AG GZLNIGEUdIY SAILIUNDIS AO SUINMO HO YANMO SHL a ty myoe “ANVdNOS LSNYl S¥SxNNVa “NOILYNINVX2 OL 193rEns Sons OSAII 354 ‘MUOA MBN idiZD3u AMVHOdWAL CETTT 6N “NOILVSIdIANEG! LNOWLIM JOIN GauvaG 2HA OL OBUBZAINZG BEG AVA SZILINNDAS HONS AVHL ANVANOD ASNUYL SUSUNVE BMA HAIMA 2AOV Ldi3DBU SIML AG GBLNESAUCBY SBILIUNDAS 4O BUEINMO HO MENMO FHL — SwuvWaYy NI NI Sel NOG BSVItd ge Sa ae Le ee a a eae ssayuaay - I wOLISOdag 40 32NVN -_—_ S3UVHS EEE ANNONY uos aanssi : SuszGWnNn *GSMOTI0S SV LISOd3d 40 Salvolaius9 ANWdNOD LSNYL SYSYNVa Woud QSAIZ924Y CeTTtT oN ; i i | i 222 WORK OF CORPORATE TRUST DEPARTMENTS Form 40 is the “reorganization record,” in which entries are made from the actual securities as they are deposited. It forms a chronological record of deposits. ‘The columns from left to right are used to indicate: (1) the date of deposit; (2) the deposit number (the primary purpose of these numbers is to supply a vault index, so that it will be a Form 40.—Reorganization Record. simple matter, when necessary, to withdraw from the vault the identical securities deposited by a given depositor); (3) the name and address of the depositor; (4 and 5) the number of shares or principal amount of bonds or notes, as the case may be, deposited; (6) the serial number of the certificate of deposit issued against the deposited securities; (7) the NAME OF COMPANY DATE AMT. BOND NSN s_—_—O°0Rp—OOOOOOOOOOOooooOoooooDO Oe Form 41.—Record of Depositors. READJUSTMENTS, SUBSCRIPTIONS, RECORDS 223 initial of the bookkeeper posting the entry to the record of depositors, next described; and (8) any other supplemen- tary information which may be desirable. In addition to the chronological record of deposits, it is necessary that there be an alphabetical “record of depositors’? which is kept in a card index file (Form 41) posted from the reorganization record. Form 42 is a “vault marker.” In the case of each déposit one of these cards is filled out, showing (1) the deposit or file number; (2) the name of the depositor; and (3) the amount of the securities deposited. ‘This card is fastened firmly to the face of the securities before they are filed in the vault and acts as a vault index. REORGANIZATION DEPARTMENT Bilee NO oy DEPOSITOR Form 42.—Vault Marker. Form 43 is the record used in delivery of the new securities on consummation of a reorganization. ‘The left-hand page is a record of the securities surrendered (ordinarily the cer- tificates of deposit of the depositary), while the right-hand é 224 WORK OF CORPORATE TRUST DEPARTMENTS page records the new securities delivered in exchange, in accordance with the plan of reorganization. In the case of bonds or notes deliverable under such a plan, the total re- quired amount of such securities is usually delivered to the depositary before it commences to exchange its outstanding Title of Securities Received wa Form 43.—Delivery Record (Left). Form 43.—Delivery Record (Right). certificates of deposit. With stock, however, the situation is somewhat different, and the usual procedure is for the new corporation to issue shares, up to a stated number, upon requisition of the depositary. Form 44 is the requisition to — a TRANSFER AGENT NEW YORK CITY GENTLEMEN :— PLEASE ISSUE AND DELIVER TO US CERTIFICATES FOR___________ STOCK AS FOLLOWS: Form 44.—Requisition for Stock. 225 RECORDS , SUBSCRIPTIONS, READJUSTMENTS *‘prosey ‘uondiosqng—/p w0 4 SasVHS SuaaWNN eo BWYN S.y38IHoSENS OG3SYSON3HYNS SLINVYEYNVM NOILdIyOSENs "YOAFUYSHL GINSSI SLMIZOIU ATAVILOOAN-NON GNV 776! “I€ AVIN JNOAAT YO NO AUVHS Ud “68 LV ANVdIOD LSNUL SYUFANVE AG GSAAIZOAY SNOILLdIMOSaNs 4O GuOosY erusojtye>) ‘oosinued 4 ue¢g HOOLS Wlldv> Gayyx3ss3ud *Auedwiod ydei8ajoy pue auoydaya | ——— 9 | INAWLYVdad ~NOLLVZINVDYOSY ANVdNOD HdVeSS13L GNV SNOHdaTSL | 226 WORK OF CORPORATE TRUST DEPARTMENTS the transfer agent for use in such cases. Form 45 is similar in principle to Form 38, except that it is used on delivery of a variety of securities upon completion of a reorganization. Form 46 is used in furnishing lists of depositors to the THIS RECEIPT MUST BE RETURNED FILLED IN AND SIGNED IN INK BEFORE SECURITIES WILL BE DELIVERED Noses No._207 New ‘Youkcnu' ig Received from FB 4 SRER, $ atk UST oy We Sad Depositarp 10 Year 7% Bonds Carrping Int. from Feb. 1,1925 NORTHERN CORP. eounaceagrn —-Part Paid Subscription Receipts, Shares of COMMON Stock, Shs. Dep. Receipt Pfa. Shs. ; i EDEN ORRIDE et Options to Purchase Additional Securities OF THE NORTHERN =" COMPANY REORGANIZATION DEPARTMENT Ad. Int. Receipt Pfd. AAA ALDADPSADEISTOCWIRDS —_—Ad. Int. Receipt Com. Left by THE OWNER OR OWNERS OF SECURITIES REPRESENTED BY THIS RECEIPT 4 AGREE WITH THE BANKERS TRUST COMPANY THAT SUCH SECURITIES MAY SE DELIVERED TO THE BEARER HEREOF WITHOUT IDENTIFICATION. Form 45.—Reorganization Counter Ticket. committee or others authorized to receive them. Form 47 (p. 225) illustrates the record used in connection with the subscription to stock or other securities as described in the paragraphs relating to capital subscriptions. “This sheet may BANKERS TRUST CoO. (EET CR PP rositOns O87 aE DEPOSITARY DEPOSITOR ADDRESS eng : Form 46.—List of Depositors. be handwritten or typewritten in two or more copies, the original forming the departmental record and the duplicates being used as reports to the issuing corporation, its transfer agent, or elsewhere as required. CHAPTER XVII STOCK TRANSFER DEPARTMENT Stock transfer department.—As previously stated, the stock transfer department of a bank or trust company acts as agent for corporations and others (e. g., voting trustees) in issuing certificates representing shares of the capital stock of such corporations, or a participating interest therein, and in recording changes in the ownership of the stock, or par- ticipating interest, on books which it keeps for its principal. In some corporations the entire capital stock is of one kind or class; other corporations issue two or more classes of stock, the more familiar classifications being common and preferred. The ownership of stock is evidenced by: certificates registered in the owner’s name. (See pp. 228-232). It will be noted that, in the forms of stock certificates given below, the common stock certificate is stated to be of no par value, whereas the preferred stock certificate expresses a par value of $100 per share. The practice of issuing no par value stock has increased materially in recent years and there are now numerous issues of common and some issues of preferred stock of no par value. However, preferred stock of no par value must express an amount in dollars to indicate the extent, if any, to which the holders of the preferred stock would be entitled to participate in-a distribution of assets of the cor- poration before any distribution could be made to common stockholders. Currént practice, to some extent, is varying the older classifications of common and preferred with such designations as “A” and “B.” In any case the senior class of stock, whether designated as preferred or “A,” has certain rights or preferences which distinguish it from the junior class or classes. The preference may be as to dividends only, or it may include the right to participate in liquidation prior to the holders of junior securities. ‘These features are mentioned in passing, as it is intended in this chapter to discuss, chiefly, the mechanics of the transfer of ownership in stock. 1 For a discussion of the classes of stock, see Arthur S. Dewing, “Financial Policy of Corporations” (Volume I). 227 WORK OF CORPORATE TRUST DEPARTMENTS 228 le ere [aS er eae -— Ow, ce Dore Nie aaa o ed : eae : Lasers eek) : Se as : co : eo ee SNe eee wa oes os : ~ H a ad S27 S) 0 |0 6 | 6 S=—s fear t 9 | 9 s=|-s ae a GEA t1 s}yiug) suoy Ass’t Secretary *hivjasagy eoeooeeeeteoeoerese eee eee ee eres see eee eee s es ‘Uaplsastgd IItY eeecveveveeeeeceeeeotereereee ere ee eevee eeoe eee ee sty} SIgdyjO paziioyjne A[Np s}I Jo sainjeusis ay} pue uoteiodi0oD ay} Fo [BIg JY], SSANLIMA ‘IBIJsIday ay} Aq paiojsisaI pue Juasy Jajsuesy, sy} Aq pausis -19}UNOD [UN PI[BA jOU SI 9}BdYIIIID sty, ‘suorstAoid pres ay} [[e Aq punNog sI pue 0} SjUasse ‘ayeoyIg199 sity} Suydav0e Aq ‘Joaray Iapl[oy ay} pue 9}¥d41}I19D SIy} JO aSIaAII JY} UO JUIWIA}EIG dy} Ul [[NF UL YIIOF Jas are UOoTJVIOdIOD ay} FO YOO}G UOWWOD ay} puke YI0}G patiIajaig IsIIY 94} 0} Suryorye AjaAtjoadsaI suolje}WI] JO suorjoI4}s91 pue ‘sadatArid ‘saouaiazaid ‘szYSII ayy, ‘pasiopua Ajiadoid a}eoyI3199 siy} Jo Japuarins uodn ‘Aaus0}3e paziioyjne A[np Aq Jo uosiad ur a[qeiajsues} “ajqessasse-uou pue pied [nf ‘NOILYYOdUOD AOLO| AO NOOLS IVLIdVD NOWWOD AHL JO ANIVA AV AO IWNIWON LOOHLIMA Soteys “iirc rest tet et estes eeeeeeeee* yo JoUMO ay} SI eooereoeeree eee ees ewes eee so eoecoeveveeeee eee ee eeeee eee ee ee eee esse evseeese yey} XALLYAO OL SI SIH I, NVOIHOI ‘LIOULAG AO ALID FHL YO HYOX MIN AO ALIQ AHL NI UAHLIQ AIAVAIASNVAT, SI ALVOMILAID SIH], ANIVA UVd YO IVNINON LOOHLIAA SAYVHS (000'009 HOOLS NOWWOD GaZIMOHLAY NVOIHOIA, JO ALVLG AHL 4O SMVT AHL YAGN() CAILVAOdUYOONT saieyg ¢'tt sees Jaquinyy NOILVaOdaxOD AO.LOW soreys OOF UeyL 8S9’J IO} a3edYIID saieyg OO ue y, SSoT 10F dJBOYTIID *(quoIg) 9}e9Y1R199 Y0IS UoUIMIOQ—ET °317 AIIYSD ID JUDISISSP eeceeeen reese seer ee soos eeeeee kg Pf * 4DA4S1B a WYOX MIN JO UNVG IVNOLLVN IHL eervaeeveneoeve eee ere eee e eae ee eee ee ee 6 poeraisisay STOCK TRANSFER 229 Fig. 13—Common Stock Certificate (Back). STATEMENT OF THE RIGHTS, PREFERENCES, PRIVILEGES, AND RESTRICTIONS OR LIMITATIONS, RESPECTIVELY, ATTACHING TO THE EIGHT PER CENT CUMULATIVE FIRST PREFERRED STOCK AND THE COMMON STOCK OF THE MOTOR CORPORA- TION. A. The Preferred Stock shall be entitled to receive out of surplus profits dividends cumulative from the quarterly dividend date next preceding the day of issue, or from the day of issue if it be a quarterly dividend day, at the rate of eight per cent (8%) per annum and no more, payable quarterly on the fifteenth day, to stockholders of record on the Hirst day, of each of the months of February, May, August and November, in each year, before any dividends shall be paid on the Common Stock, which Common Stock, subject to the con- ditions hereinafter set forth, shall be entitled to receive all net income, profits or surplus distributed as dividends in excess of the said cumulative dividends of eight per cent (8%) per annum, payable on the Preferred Stock. B. On any voluntary distribution of capital assets, the Preferred Stock shall be entitled to receive an amount equal to 115 per cent of the par value thereof, and any unpaid dividends accumulated thereon, and no more; and on any other distribution of capital assets, the Preferred Stock shall be entitled to re- ceive an amount equal to 100 per cent of the par value and any unpaid divi- dends accumulated thereon, and no more. After distribution shall have been made to the Preferred Stock as above provided, the Common Stock of the Corporation shall be entitled to receive the remainder of such capital assets. C. The Preferred Stock shall have no preémptive right in or right to sub- scribe for any additional stock of whatever class which may hereafter be issued by the Corporation. D. The Preferred Stock shall be redeemed on September 1, 1949, at par; but the Corporation reserves the right to redeem or retire any or all of the Preferred Stock prior to the said date at 115 per cent of the par value thereof and all unpaid dividends accumulated thereon to the date fixed for such re- demption. If less than the whole amount of outstanding Preferred Stock be so redeemed at any time, the Stock to be so redeemed shall be selected by lot, in such manner as the Board of Directors may determine. At least thirty days’ notice in advance of such redemption shall be mailed to each holder of Preferred Stock to be redeemed, at his address registered with the Corpora- tion, and such other notice shall be given in the manner to be fixed by the By-laws; and on and after the date fixed for such redemption the said Stock shall cease to bear further dividends, and the respective holders thereof shall have no other right or interest therein, except to receive payment therefor, at the said redemption price, upon presentation and surrender of their respective certificates. E. Within ninety days after the termination of each fiscal period, com- mencing with the fiscal period ending December 31, 1920, the Corporation shall set aside in a Sinking Fund a sum in cash equal to at least fifteen per cent of the balance of its net income for such fiscal period, remaining after the payment of current dividends on the Preferred Stock during such period and all accumulated dividends, if any (but in no event less than a sum equal to three per cent of the largest aggregate par value of Preferred Stock at any time issued and outstanding), and the Corporation shall thereupon apply the said Sinking Fund, either to the purchase of Preferred Stock in the open market or at private sale, at prices not exceeding a sum equivalent to 115 per cent and accrued dividends, or if the Corporation shall be unable to apply 230 WORK OF CORPORATE TRUST DEPARTMENTS all the moneys in the Sinking Fund to the purchase of Preferred Stock prior to July 1 in any year, then it shall apply the moneys so remaining to the redemption as above provided, on August 15 next succeeding, of so much of the Preferred Stock as the said moneys shall be sufficient to retire at the said redemption prices. All the Preferred Stock so purchased or redeemed shall forthwith be canceled, and the total authorized amount of Preferred Stock of the Corporation shall be reduced accordingly. F, The Corporation will at all times maintain the aggregate amount of its net current assets and the net current assets of its constituent companies at an amount at least equal to 125 per cent of the par value of the outstanding Pre- ferred Stock, and it will at all times maintain the aggregate amount of its net tangible assets and the net tangible assets of its constituent companies at an amount equal to at least 250 per cent. of the par value of the outstanding Preferred Stock. G. Except as otherwise expressly provided by law, the Preferred Stock shall have no right to vote for the election of directors so long as the Corpora- tion shall not be in default as hereinafter provided. In case, however, and whenever, the Corporation shall be in default in maintaining net current assets or net tangible assets at the respective amounts hereinbefore stipulated, and any such default shall continue for the period of six successive months, or if the Corporation shall be in default for the period of sixty days in the payment of any quarterly dividend or in setting aside any required Sinking Fund in- stallment, the Preferred Stock shall thereafter have equal voting rights with the Common Stock (on the basis of one vote for every ten dollars par value of Stock) for any and all purposes, including the election of directors; and such rights shall continue in the Preferred and Common Stocks, respectively, until all matters in respect of which the Corporation was in default shall have been made good and all accumulated dividends have been paid in full, at which time the right to vote shall again vest in the Common Stock exclusively; provided, that if, at any time, the Corporation shall be in default in the pay- ment of any five consecutive quarterly dividends, thereupon the right to vote for the election of directors shall pass to the Preferred Stock to the complete exclusion of Common Stock, and such right shall continue in the Preferred Stock, exclusively, until all accumulated dividends shall have been paid in full, at which time the said right shall again vest in the Common Stock exclusively; provided, that the Board of Directors elected by the holders of Preferred Stock shall not have the power to retire or redeem Preferred Stock except through the operation of the Sinking Fund. H. The Corporation shall not execute any mortgage upon any of its fixed assets, or cause or suffer any lien in the nature of a mortgage to be placed thereon (except to secure the purchase price of property by a purchase money mortgage of not exceeding seventy-five per cent. of the fair value thereof) except with the prior consent in writing of seventy-five per cent. in amount of the outstanding Preferred Stock; and the Corporation shall not, either directly or indirectly, make, issue or negotiate any issues of secured or unsecured bonds, notes, debentures or other funded obligations by their terms payable more than one year from the date of issuance thereof, or become or be an accommodation endorser, guarantor or surety on any notes, bills, bonds, debentures or other obligations for the payment of money except those of a constituent company, if the holders of twenty-five per cent. or more of the oustanding Preferred Stock shall object thereto. I. The Corporation shall not cause, suffer or permit any constituent com- pany to make, issue or negotiate any issue of bonds, notes, debentures or other funded obligations by their terms payable more than one year from the date STOCK TRANSFER 231 of issuance thereof, or to execute or place any mortgage, or lien in the nature of a mortgage, upon any of the fixed assets of such constituent company, ex- cept to secure the purchase price of property by a purchase money mortgage of not exceeding seventy-five per cent of the fair value thereof. J. In each fiscal period, the Corporation shall cause its books and accounts and the books and accounts of its constituent companies, to be audited by a certified public accountant of recognized standing; and if, in any fiscal period, the Corporation shall fail to cause such audit to be made, then, upon the written request of twenty-five per cent. or more of the outstanding Preferred Stock, the Corporation shall permit such audit to be made by certified public ac- countants designated in such request. K. No class of stock shall hereafter be created ranking prior to or on a parity with the Preferred Stock in the payment of dividends or the distribu- tion of capital assets. The par value of Preferred Stock issued and out- standing shall at no time exceed two-thirds of the Corporation’s actual cap- ital paid in. L. No Preferred Stock, other than the initial issue of $2,500,000 par value, shall at any time be issued unless the average net income of the Corporation for the period of twenty-four months ending not more than sixty days next preceding the issuance thereof shall have been at least equal to two times the aggregate annual dividend requirements of the Preferred Stock outstanding and that proposed to be issued; nor shall the Corporation in any event issue any additional Preferred Stock if the Corporation shall be in default in the payment of any quarterly Preferred Stock dividend or in setting aside any Sinking Fund installment, or if, by the issuance of such additional Preferred Stock, the respective ratios borne to the Preferred Stock then outstanding, in- cluding that proposed to be issued, by the net current assets or the net tangible assets of the Corporation and its constituent companies shall be reduced below the percentages hereinbefore specified. In the computation of the average annual net income for the purpose of this Article L there shall be included the average annual net income for the same period of any property or plant to be acquired with such additional Preferred Stock or with the proceeds of the sale thereof, and also the amount of the annual interest charge for the same period on loans to be discharged by the sale of such additional Preferred Stock; and in the computation of net current assets and net tangible assets for the purpose of this Article L there shall be included the proceeds of the sale of such additional Preferred Stock of the net current assets and the net tangible assets respectively to be acquired with such proceeds. For the definition of the terms herein employed, reference is hereby made to the Articles of Association of the Corporation, as amended, a duly certified copy of which is on file with the Transfer Agent. WORK OF CORPORATE TRUST DEPARTMENTS 232 Spit rs Sats oe Ee i} cast Ri Seah AS Ne A SG aes & ag Te a ate ro, Sewase le Se a ee oad : - A; : oe . a) : ee) : ee | > pee) . A tS . ~~ : See Sil ate eae ee | Ss A ee O 0 |0 sos ae poss 9 |9 ies + | + eae Coe Pode s}iuqQ) sua, ot 4IANSDIAT 1.S5SP eovooveovreeoeeoeeooeeeeee eee eee eee ee eee Hee ee juapisatg aig 2.8 8.6 66 6) 6 O66 Om wD Ore Oa SC BELO LS 6 eae Ree 6 6 8 Oe ge eS Sys ce Aep ccccrscstcscssssessesess sruz ‘sraoqyo paziioyjyne A[np sj Jo sainjeusIs ay} SSHNLIAA ‘1vI}SISIY 94} pue JUSsSY Jajsuery, 94} Aq paudisrajuNOD [HUN PI[BA OU SI 9}VdYHII SIyy, ‘uamAed 10 pUdPIAIp Jay}0 OU O} Jnq prleduN Uay} spuapIAIp aAr}e] -nuind yons Fo JUNOWe ay} pue anjea ied sz Jo yuauAed 0} szasse Jo UOTNQII}sIp UO pue AjIvIs winjuad iad uaAas JO a}e1 ay} Je SPUAPIAIP sATR[NUIND 0} ‘YD0}g UOWWIOD ay} 0} adUaI1aF0I1d UI papuue st ‘uonerodioouy Fo a3¥voyI319D 9Yy} UI paprIAoid A][N} alow se ‘YD0}g Patiafarg ay, ‘9}BOYT}199 SIy} JO Japuarins uo Aaui0Wy Aq 10 ‘uosiad ur Japjoy ay} Aq AueduioD ay} jo syooq ay} uo AjuO a[qeiajsueI} ‘ANVdWOD) NOILONGOAG NVOWAINY 40 AOOLS GAWAATAAd 94} FO soreys 3[qessosse-uou pue pred [[0F Oo .0 8-2 08 8 9 0 6..0 © '@:.@ 6.0.6.0 8 ©. 850-9. @ C_—e 0°68) 60/62 0-6, 2 0-2 2-2 8 jo IdJuUMO 3q} St IVH J, SAIMILUID SIL sareyg ¢t¢t*" veeees Jaquinn Agsuaf MAN JO ALVLS FHL 40 SMV] AHL YAAN() GILVYOdYOONT HOV OOT$ SAUVHS 000'000‘++$ TVL1dvV) 000'000‘r+r$ HDOLS NOWWOD aqaZMoHLay MOOLS AIwAIATAT ANVdWOO NOILLONGOUd NVOIYANV soreys OT UBY YT, soreys OOT UBT, SS9'J OJ 9389413190) 88a] OJ 9}VOYHIAD ‘aqOYTIED YOoIg Pesayolg—bl “31 491YSDD 1 SSP Coeeceresr eer eee seers esrersereene Aq G) ° z S ES o > tar td o ~ a oO: Za > lag) w& a> Q 2 Pie ban >) a a Asem hee a Ams aa kep Matra CTT pasaisidoy STOCK TRANSFER 233 Signatures on stock certificates— As a rule, stock certifi- cates are signed by two officers of the issuing corporation under its corporate seal. A corporation whose stocks are active generally delivers a supply of stock certificates, signed in blank, to its transfer agent, which issues and countersigns them from time to time as required. Thereafter the certifi- cates are also signed by a registrar, whose duties will be dis- cussed in the next chapter. Let us first examine into the prin- cipal duties of the transfer agent. Appointment of transfer agent for corporation; docu- ments to be received.—There should be in the files of the transfer agent proper evidence of: (1) authorization of the issue of all outstanding shares (or, in the case of a newly organized corporation, the shares presently to be issued) ; (2) authority of designated officers to sign stock certificates on behalf of the corporation and to instruct the transfer agent in connection with its duties; (3) formal appointment of the transfer agent. The evidence required, as enumerated in the preceding paragraph, is substantially as follows: 1. A copy of the corporation’s charter or articles of in- corporation (with amendments to date) certified by the sec- retary of state of the state in which the corporation is organ- ized. ‘Chis document will evidence the creation of the cor- poration and also the due authorization of the capital stock of such corporation. 2. A copy of the corporation’s by-laws certified by its secretary or assistant secretary under its corporate seal. The by-laws lay down rules under which the corporation may act. Frequently the by-laws of a corporation are quite gen- eral in their terms, providing, for example, that the duties and authority of its officers shall be such as may be delegated by the board of directors. In such a case the transfer agent will also require certified copies of the resolution or resolu- tions of the board of directors granting authority to the officers of the corporation in respect to the issuance of stock. 234 WORK OF CORPORATE TRUST DEPARTMENTS Form 48.—Resolution Appointing Transfer Agent. Transfer Agent—(Stock Outstanding) CERTIFIED COPY OF RESOLUTIONS of the BOARD OF DIRECTORS of On motion duly seconded, it was RESOLVED: First: That Bankers Trust Company, of New York, N. Y., be and it is hereby appointed agent of this company, with the title “Transfer Agent,” for the transfer of certificates for the capital stock of this Company, of which there are now outstanding shares of said preferred stock and shares of said com- mon stock. SECOND: That for the purpose of an additional original issue of the cer- tificates representing the stock, the Transfer Agent is hereby directed: (1) To record and countersign as Transfer Agent certificates in such names, and for not exceeding shares of such stock, of the par value ot $ each — shares of such stock, of the par value of $ each shares of such stock, of the par value of $ each when signed by* the President or a Vice-President and the Treasurer or Secretary or an Assistant Treasurer or an Assistant Secretary of this Com- pany, and in such amounts, as this Company may direct in a writing, signed by the and/or under the seal of this Company, and (2) To deliver the certificates to the Registrar of this Company, for regis- tration and countersignature and to deliver the certificates when so counter- signed to, or upon the written order of, the _of this Company; TuirD: That the Transfer Agent be and it is hereby authorized and di- rected to make transfers from time to time upon the books of this Company of such certificates for such capital stock, and of the certificates for — shares of the preferred and — shares of the common stock of this company now out- standing as may be surrendered for transfer, properly endorsed and duly stamped as may be required by the laws of f , of New York, and of the United States, and signed by the proper officers of this Company, as provided in paragraph Second of these resolutions, and, as to certificates issued by said Transfer Agent, countersigned by the Transfer Agent and the Registrar, and to record and countersign new certificates accordingly when they shall have been signed by the proper officers of this Company, as provided in paragraph Second of these resolutions, and to deliver the certificates to the Registrar for countersignature, as provided in paragraph Second and when so countersigned to deliver them to or upon the order of the person entitled thereto. * These resolutions should correspond to the provisions of the charter or certificate of incorporation, and by-laws. { Here insert State of incorporation, if stamps are required by the laws of that State. STOCK TRANSFER 235 FourTH: That specimen signatures of the officers of this Company author- ized to sign certificates of stock as aforesaid, and of the officers of the Registrar authorized to sign for the Registrar, and specimen stock certificates, be lodged forthwith with the Transfer Agent to be used by it for purposes of comparison; and that the Transfer Agent shall be protected and held harmless in recognizing and acting upon any signature or certificate be- lieved in good faith to be genuine. When any officer of this Company or of the Registrar shall no longer be vested with authority to sign for this Company or for the Registrar, as the case may be, written notice thereof shall immediately be given to the Transfer Agent and until receipt of such no- tice the Transfer Agent shall be fully protected and held harmless in recogniz- ing and acting upon certificates bearing the signature of such officer or a signature believed by it in good faith to be such genuine signature. FirTH: That from time to time additional officers may be appointed by resolutions of the Board of Directors of this Company not inconsistent with its by-laws, to sign certificates of stock on behalf of this Company, and in like manner additional officers may be appointed to sign on behalf of the Registrar, and in every such case certified copies of the resolutions effect- ing the appointments and specimen signatures of such officers shall forthwith be lodged with the Transfer Agent. S1ixTH: That when the Transfer Agent deems it expedient, it may apply to , City of State of , counsel for this Company, or to its own counsel for instructions or advice, and for any action in accordance with such instructions or advice this Company will fully protect and hold it harmless from any and all liability. SEVENTH: In the event that any such certificate shall become lost or destroyed before any new certificate or certificates shall be issued in lieu thereof, a satis- factory bond shall be required in such amount as may be provided by the by- laws of this Company, and in any event not less than the value of such cer- tificate, wherein the Transfer Agent shall be named as one of the obligees. The bond shall be in a form satisfactory to the Transfer Agent. EIGHTH: That the President and the Secretary of this Company be and they hereby are directed to certify a copy of these resolutions under the seal of this Company and to lodge the copy, together with certified specimen certificates of the stock of this Company in the forms duly adopted by it, certified copies of the charter or certificate of incorporation and all amend- ments thereto (properly certified by the Secretary of State) and of the by-laws of the Company, with the Transfer Agent, and to furnish to the Transfer Agent certified copies of any amendments that may from time to time be made to the charter or certificate of incorporation or by-laws. We, the undersigned, President and Secretary, do hereby certify that the foregoing is a true and complete copy of resolutions duly adopted at a meeting of the Board of Directors of the (hereinafter called “Com- pany”), duly called and held at No. in the City of , State of , on the day of , 19—, a quorum being present. We further certify that the annexed certificates are true and correct speci- mens of the certificates of the capital stock of the Company which have been duly adopted by the Company, and the annexed schedule or signature card or cards, set forth the officers of the Company and of , Registrar, authorized to sign such certificates, and that the signatures set opposite their respective names are specimens of the genuine signatures of such officers. 236 WORK OF CORPORATE TRUST DEPARTMENTS We further certify that the Company was duly organized under the laws of and that under the accompanying charter or certificate of incorporation and all amendments thereto, certified by the Secretary of the State, the Com- pany has an authorized capital stock of $ subdivided into shares of the par value of each of stock, shares of the par value of each of stock, shares of the par value of each of stock, WITNEss our hands and the seal of the Company this day of , 19—. President (Corporate Seal) Secretary Form 48A.—Resolution Appointing Transfer Agent (With Co-transfer Agent). Co-Transfer Agent. CERTIFIED COPY OF RESOLUTIONS of the BOARD OF DIRECTORS of On motion duly seconded, it was RESOLVED: First: That of } , of , and Bankers Trust Company, of New York, N. Y., be and they are hereby appointed agents of this Company, each with the title of Transfer Agent for the transfer of certificates for the aoe capital stock of this Company een SECOND: That for the purpose of the original issue of said stock, said Trans- fer Agents are hereby directed (1) To record and countersign as Transfer Agent certificates in such names, and for not exceeding shares of stock shares of stock shares of stock of the par value of each, when signed by* the President or a Vice-Presi- dent and the Treasurer or Secretary or an Assistant Secretary of this Company, in such amounts, as this Company may direct in writing, signed by the and/or under the seal of this Company; and (2) To deliver said certificates to the Registrar in the same City, as the Transfer Agent so countersigning, viz:— in ; or in New York, for registration and countersig- nature and to deliver said certificates when so countersigned to, or upon the written order of, the of this Company; _ ™These resolutions should correspond to the provisions of the charter or certificate of incorporation, and by-laws. STOCK TRANSFER 237 PROVIDED, HOWEVER, that the stock to be originally issued by each Transfer Agent be limited as follows: —— shares of such stock,t —— —— shares of such —— stock, — shares of such —— stock, —— shares of such —— stock, —— { —— shares of such —— stock, —— shares of such —— stock, —— shares of such —— stock, Bankers Trust Company { —— shares of such —— stock, —— shares of such —— stock, TuirD: That said Transfer Agents or either of them be and they are hereby authorized and directed to make transfers from time to time upon the books of the Company of such certificates of such capital stock as may be surrendered for transfer, properly endorsed and duly stamped as may be required by the laws of + , of New York, and of the United States, and signed by the proper officers of the Company, as provided in Paragraph Second of these resolutions, and countersigned by any Transfer Agent and any Registrar, and to record and countersign new certificates accordingly when the same shall have been signed by the proper officers of the Company, as provided in Para- graph Second of these resolutions, and to deliver said certificates to the proper Registrar for countersignature, as provided in said Paragraph Second, and when so countersigned to deliver the same to or upon the order of the person entitled thereto. FourTH: It is the intention and purpose of these resolutions that certificates of the stock of this Company shall be interchangeably transferable in the cities of ‘ , and New York, N. Y. The fact of the recording and counter- signature of new certificates, whether by way of original issue or upon a transfer, shall be advised immediately by mail by the Transfer Agent counter- signing the same to the other Transfer Agents; and each Transfer Agent shall be fully protected and held harmless by this Company by reason of its failure or refusal to transfer any certificates countersigned by another Transfer Agent when it shall not have received such notice of the issue or countersignature of such certificates. FIFTH: That specimen signatures of the officers of this Company authorized to sign certificates of stock as aforesaid, and of the officers of the respective Transfer Agents and Registrars authorized to sign for said respective Transfer Agents and Registrars, and specimen stock certificates, be lodged forthwith with each of said Transfer Agents to be used by them and each of them for purposes of comparison; and that said Transfer Agents and each of them shall be protected and held harmless in recognizing and acting upon any signature or certificate believed in good faith to be genuine. When any officer of the Company or of any Transfer Agent or Registrar shall no longer be vested with authority to sign for the Company, or for such Transfer Agent or Regis- trar, as the case may be, written notice thereof shall immediately be given to each Transfer Agent and until receipt of such notice said Transfer Agents shall be fully protected and held harmless in recognizing and acting upon certificates bearing the signature of such officer or a signature believed by them or any of them to be such genuine signature. + The sum of these amounts should equal the amount authorized under (1). Where possible, confine original issue to one Transfer Agent. _ t Here insert state of incorporation, if stamps are required by the laws of that State. 238 WORK OF CORPORATE TRUST DEPARTMENTS SIxTH: That from time to time additional officers may be appointed by resolutions of the Board of Directors of this Company not inconsistent with its by-laws, to sign certificates of stock on behalf of this Company, and in like manner additional officers may be appointed to sign on behalf of the respective Transfer Agents and Registrars, and in every such case certified copies of the resolutions effecting such appointments and specimen signatures of such officers shall forthwith be lodged with the Transfer Agents. SEVENTH: In the event that any such certificate shall become lost or destroyed before any new certificate or certificates shall be issued in lieu thereof, a satis- factory bond shall be required in such amount as may be provided by the by- laws of this Company, and in any event not less than the value of such cer- tificate, wherein the Transfer Agent shall be named as one of the obligees. ‘The bond shall be in a form satisfactory to the Transfer Agent. EIGHTH: That when any of said Transfer Agents deems it expedient, it may apply to of City of , State of , counsel for this Company or to its own counsel, for instructions or advice, and for any action in accordance with such instructions or advice this Company will fully protect and hold it harmless from any and all liability. None of said Transfer Agents shall be in any manner liable for any act or omission of any other Transfer Agent. NINTH: That the President and the Secretary of the Company be and they hereby are directed to certify a copy of these resolutions under the seal of this Company and to lodge the same, together with certified specimen certificates of the stock of this Company in the forms duly adopted by it, certified copies of the charter or certificate of incorporation and all amend- ments thereto (properly certified by the Secretary of State) and of the by-laws of the Company, with each of said Transfer Agents, and to furnish to each of said Transfer Agents such certified copies of any amendments that may from time to time be made to such charter or certificate of incorporation or by-laws. We, the undersigned, President and Secretary, do hereby certify that the foregoing is a true and complete copy of resolutions duly adopted at a meeting of the Board of Directors of said Company, duly called and held at No. in the City of , State of , on the day of , 19—, a quorum being present. We further certify that the annexed certificates are true and correct speci- mens of the certificates of the capital stock of said Company which have been duly adopted by said Company. We further certify that the annexed schedule or signature card or cards, set forth the officers of said Company and of ; and , Transfer Agents and ; ; and , Registrars, authorized to sign such certificates, and that the signatures set opposite their respective names are specimens of the genuine signatures of such officers. We further certify that said Company was duly organized under the laws of and that under the accompanying certificate of incorporation and all amendments thereto, certified by the Secretary of the State, the Company _has an authorized capital stock of $ subdivided into shares of the par value of each of stock, shares of the par value of each of stock, and shares of the par value of each of stock. WITNESS our hands and the seal of the Company this day of , 19—. President (Corporate Seal) Secretary STOCK TRANSFER 239 3. A copy, certified by the proper officers of the company, under seal, of the resolutions of the board of directors,’ ap- pointing the transfer agent and outlining its authority. The forms of such resolution, as adopted by a trust company in New York, for standard use, are given below. While the form largely explains itself, it is perhaps well to emphasize the desirability of naming attorneys to whom the transfer agent is directed to look for all necessary legal ad- vice, and the statement that the transfer agent shall be under no liability when acting upon the advice of such attorneys. The transferring of stock is a highly technical matter and legal questions will continually arise. Therefore, it is a wise precaution for the transfer agent at the time of its appoint- ment to require explicit instructions as to the attorneys upon whose advice it is authorized to rely. 4. A certificate by the secretary or assistant secretary, under the corporate seal, of the due election or appointment of all officers of the corporation, authorized to take any action in respect of the issue or transfer of its stock. 5. Specimen signatures of all the officers, covered by the certificate referred to in item 4. All documents received in support of an appointment should be submitted to counsel for approval on behalf of the transfer agent. Original issues of stock.—In the case of a new corporation, one of the first duties of a transfer agent will concern the issuance and delivery of certificates representing stock to the amount authorized by the charter or such part thereof as the corporation may direct the transfer agent to issue. From time to time the corporation may, through amendment to its charter, increase (or reduce) the amount of its author- ized stock, in which case appropriate evidence should be filed with the transfer agent and submitted to its counsel for approval before action thereunder is taken by the transfer agent. 2Under some circumstances the transfer agent might require evidence of appropriate action by the corporation’s stockholders. 240 WORK OF CORPORATE TRUST DEPARTMENTS At the present time (1926) every original issue of stock is subject to the Federal stamp tax, under the Federal Reve- nue Act of 1926. The transfer agent must keep currently informed as to the laws imposing such taxes and the regula- tions thereunder issued by the Federal authorities.’ When the transfer agent is acting in connection with stock listed on the New York Exchange (and other stock exchanges have similar requirements), it must report to the Committee on Stock List of the Exchange any original issues of stock, so that the Committee, if its requirements have been met, may notify the registrar of the issue.* In the absence of such notification the registrar, under its agreement with the Stock Exchange, will be obliged to withhold registration of the certificates. In some cases the original issue of stock may require the ap- proval of a governmental body such as the Interstate Com- merce Commission (as to railroad stocks) or one of the vari- ous state commissions. Evidence of the approval of any such body having jurisdiction of the original issue of stock should be filed with the transfer agent. Voting trust certificates.—In acting as transfer agent for voting trust certificates the duties and responsibilities of the agent are the same, generally, as in the transfer of stock. The transfer agent is appointed by its principal, the voting trustees, not by the corporation. ‘The authority of the voting trustees 3 Federal stamp tax. The following is a quotation from the Federal Revenue Act of 1926, Section 807, Schedule A, Part 2; which imposes the existing tax on original issues of shares of stock: “Capital stock, issued: On each original issue, whether on organization or reorganization, of certificates of stock, or of profits, or of interest in property or accumulations, by any corporation, on each $100 of face value or fraction thereof, 5 cents: Provided, That where a certifi- cate is issued without face value, the tax shall be 5 cents per share, unless the actual value is in excess of $100 per share, in which case the tax shall be 5 cents on each $100 of actual value or fraction thereof, or unless the actual value is less than $100 per share, in which case the tax shall be 1 cent on each $20 of actual value, or fraction thereof. “The stamps representing the tax imposed by this subdivision shall be at- tached to the stock books and not to the certificates issued.” Among the authoritative services on Federal and New York State transfer taxes, are those of Prentice-Hall, Inc., and The Corporation Trust Company. 4 The listing requirements of the New York Stock Exchange are reprinted on page 441 et seq. STOCK TRANSFER 241 is derived by virtue of a voting trust agreement between the trustees and such stockholders as may deposit their stock there- under and accept, in exchange, voting trust certificates. Such an agreement is put into effect when it is desired to concen- trate the voting control of a corporation in a few hands.° The usual arrangement is for the transfer agent (1) to re- ceive certificates of stock (properly assigned for transfer and accompanied by the necessary transfer tax stamps) from either the voting trustees or the stockholders; (2) to transfer this stock to the names of the voting trustees; and (3) to issue and deliver to the depositors voting trust certificates for a like number of shares. The stock certificates should be de- posited with the custody or trust department of the institution which acts as transfer agent, to be released only with the con- sent of the transfer department, which the latter will give only pursuant to the provisions of the agreement and upon surrender for cancellation of voting trust certificates repre- senting an equal number of shares. Dividends paid by the corporation on the stock held by the voting trustees are usually distributed, as received, to voting trust certificate holders. The duration of voting trusts sometimes is limited by statute —in New York to ten years. A typical voting trust certificate reads as follows: Fig. 15.—Voting Trust Certificate. CENTRAL MILLING COMPANY No. —— Shares Preferred Stock Voting Trust Certificates This certifies, that, on March 6, 1926, will be entitled to receive a certificate or certificates, expressed to be fully paid, for shares of one hundred dollars each, in the preferred stock of the Central Milling Company, and, in the meantime, to receive payments equal to the dividends, if any, col- lected by the undersigned Voting Trustees upon a like number of such shares standing in their names. Until the actual delivery of such stock certificates, the Voting Trustees shall possess, in respect to any and all such stock, and shall be entitled, in their discretion, to exercise, all rights and powers of absolute owners of said stock, including the right to vote for every purpose and to consent to any corporate act of said Company except as expressly limited in the agreement in pursuance of which this certificate is issued, it being 5A comprehensive treatment of this subject will be found in Harry A. Cushing’s “Voting Trusts.” 242 WORK OF CORPORATE TRUST DEPARTMENTS expressly stipulated that no voting right passes by or under this certificate, or by or under any agreement expressed or implied. This certificate is issued pursuant to, and the rights of the holder are sub- ject to, and limited by, the terms and conditions of a certain agreement dated the sixteenth day of February, 1921, between certain holders of voting trust certificates and of the preferred stock and the undersigned voting trustees, filed with said company. No stock certificate shall be due or deliverable hereunder before the sixteenth day of March, 1926, but the Voting Trustees may, in their uncontrolled dis- cretion, make earlier delivery thereof. This certificate is transferable only on the books of the Voting Trustees by the registered holder hereof, either in person or by attorney duly authorized, according to rules established for that purpose by the Voting Trustees, and on surrender hereof; until so transferred, the Voting Trustees may treat the registered holder as owner hereof for all purposes whatsoever, but they shall not be required to deliver stock certificates hereunder without surrender hereof. This certificate is not valid unless duly signed on behalf of the undersigned Voting Trustees by National Trust Company (their agent) and also registered by First Trust Company of New York, as Registrar. In Witness Whereof, the undersigned Voting Trustees have caused this certificate to be signed by National Trust Company, their duly authorized agent, this day of , one thousand nine hundred and Henry Fowler, Clarence Weekes, John Howell, Voting Trustees. By NATIONAL TRusT COMPANY. Their Agent. Registered —————__- By First Trust Company of New York Assistant Secretary Registrar By Assistant Secretary Transfers.— One of the most technical duties of the trans- fer agent is to pass upon the validity of the assignments of stock certificates presented for transfer. The assignment 1s usually made on the form provided on the back of the stock certificate itself,° but may be made on a separate assignment (“transfer power’) supplied, in standard forms, by law sta- tioners. Practically all forms of stock assignment contain an appointment of an attorney to record the transfer on the books 6 The following is the form of stock assignment as approved by the New York Stock Exchange: STOCK TRANSFER 243 of the corporation. It will be noted in the forms of stock certificates illustrated on pages 228 and 232, that stock is tranferable ‘fon the books of the Company, by the holder in person or by Attorney,” upon surrender of the certificate prop- erly endorsed." ‘The stockholder may, accordingly, personally enter a transfer of stock upon the stock records of the com- pany. This requirement, without alternative, would be an inconvenience to most stockholders and probably something of a nuisance to the transfer agent. As a practical matter, the name of the attorney to make the transfer is left blank when the stockholder executes an assignment, and the transfer is recorded by an employee of the transfer agent, acting as the attorney of the stockholder. ‘The name of this employee is inserted, in the assignment, as the attorney of the transferor. Power of substitution.—Should an attorney be named, other than the transfer agent’s employee, such attorney per- sonally may make the transfer. As a practical matter he usually executes a power of substitution,® leaving blank the name of the substitute so that the transfer agent may insert the name of its employee. Assignments.—The transfer agent, on behalf of its prin- cipal, is required to pass on the validity of each assignment. presented as a basis for the transfer of stock. As previously »% SB bas For value received hereby sell, assign and transfer unto is) . ° ° aac Pe isk shares of the *capital stock represented by the within B=} o ° . 2 ° ereces o> certificate and do hereby irrevocably constitute and appoint ma Per ° So avs 68 attorney to transfer the said stock on the books of the 5 2 ° ° e ° ° 2 e be SSE 5 = within named company with full power of substitution in the Gen wz Ee A Ee ta ee remises. 7 ee guy ee 4 sagzes%S Dated ————_————— 19—. orn iy a SS erae a ,,[n presence of ° ASkenans *On certificates without nominal or par value the word “capital’? may be omitted. 7 The phraseology varies, as. will be noted by a comparison of the two stock certificates illustrated. 8 The following is the usual form of power of substitution: — hereby irrevocably constitute and appoint ————— substitute to transfer the within named stock under the foregoing power of attorney, with like power of substitution. Dated Witness: 244 WORK OF CORPORATE TRUST DEPARTMENTS explained, the form of assignment is provided on the back of the stock certificate and if this form, or a standard de- tached form is used, there can be no question as to the form of the assignment, but this point should be carefully watched and any unusual form submitted to counsel for approval. The signature of the transferor should appear on the as- signment exactly as it reads on the face of the stock certi- ficate, and should be witnessed and bear a date subsequent to the date of the stock certificate. Lack of a date and witness would not necessarily invalidate an assignment, although both are desirable as evidence of the proper execution of the as- signment. The name and address of the transferee should be entered in the assignment after the words “transfer unto.” Most transfer agents insist that the Christian or given name of a stockholder appear on the face of the certificate and on the stock records, hence the transferee’s name should be entered as ‘‘Henry I. Jay,” or ““H. Ivan Jay,” and not as “HT jay In making a transfer to a married woman, her Christian name rather than her husband’s name should be used, thus— “(Mrs.) Barbara Corlis Day,” not “Mrs. Frank E. Day.” It is not the custom in this country to add any titles to names appearing on stock certificates and, except for the designation ‘‘Miss” or “‘Mrs.,” no prefixes or suffixes are used. The primary question in passing upon the validity of an assignment is whether the signature thereto is in fact the signa- ture of the registered owner of the shares to be transferred. It is apparent that a trust company cannot be familiar with the signatures of the thousands of constantly changing stock- holders of the various corporations for which it acts as trans- fer agent. Consequently, some means of identification are required and it is important that the requirements as to identi- fication, while giving every reasonable protection to the trans- fer agent and its principal, the corporation, shall not place unreasonable difficulties in the way of transfer of the stock. Guarantee of signatures.—At present it is the general rule in New York City to require that the signature on assign- ments of stock be (1) guaranteed by a member of the New STOCK TRANSFER 245 York Stock Exchange, or (2) identified by a banking institu- tion in New York City. Such guaranty or identification is usually endorsed directly below the transferor’s signature on the back of the certificate or on the separate assignment as the case may be. The acceptance of the guaranty of members of the New York Stock Exchange to the general exclusion of other brok- erage firms is due to the fact that the Stock Exchange holds its members strictly responsible for their guaranty of signa- tures and, also, to the high value of membership on this exchange which indicates a generally high financial responsi- bility of its members. The alternative requirement of identification by a banking institution is not always limited to New York banks, as New York transfer agents usually will accept the identification of other banking institutions of recognized standing, provided a specimen of the identifying signature has previously been filed with the transfer agent. The transfer agent should maintain a file of specimen signa- tures of brokerage houses and bank officials which are ac- ceptable to it. In order to keep this file up to date it is neces- sary for the transfer agent to be on the watch continually for changes in personnel of the various institutions and firms. Until some years ago it was the practice to accept an ac- knowledgment before a notary public, plus, in the case of notaries of other states, a county clerk’s certificate as to the due appointment of the notary. ‘This practice has been dis- continued by many transfer agents because of the feeling that they were entitled to the larger measures of protection af- forded by the identification or guaranty of an institution or firm of recognized financial responsibility. The proper identification of the signature to the assignment is, however, but one of many points involved in passing on a stock transfer. There are a number of questions which arise with respect to the assignor’s capacity or authority. It is not our purpose to enter into a discussion of the legal phases of stock transfers which, of themselves, are sufficient to war- rant a separate study.” But it may be helpful merely to draw 9 The reader is referred to H. Brua Campbell’s “Legal Aspects of the Trans- fer of Securities,” and F. L. Maraspin and H. B. Driver’s “Fundamental Principles of Stock Transfers.” 246 WORK OF CORPORATE TRUST DEPARTMENTS attention to some of the difhculties which transfer agents must meet. Classification of transfers——Transfers may be placed in the following general classifications: Individuals. ‘Tenants. Partnerships. Corporations. Fiduciaries.”° Individuals and partnerships.—The simplest class of trans- fers is that of stock registered in the name of an individual or a partnership, where the assignment is made by the in- dividual stockholder or a general partner of the partnership, as the case may be, such transfers requiring from the transfer agent’s point of view, merely adequate assurance as to the genuineness of the signature of the transferor. A different situ- ation exists when the assignment is made by an attorney pur- suant to a power of attorney from the stockholder. In that case the transfer agent should carefully examine the attorney’s authority from his principal, which should be of recent date. The original power of attorney, or a copy certified in a man- ner acceptable to the transfer agent, should be kept on file, and counsel should pass upon the question of whether the power is sufficiently broad or explicit to authorize the attorney to make the transfer. Tenants.— he interests of two or more individuals in a single piece of property may be a joint tenancy or a tenancy in common. From the practical point of view of the transfer agent the chief distinction is that when a joint tenant dies his share in the property goes to the survivor or survivors; while, on the other hand, if one of the tenants in common dies, his interest in the property passes to his estate. In issuing a cer- tificate of stock to two or more persons, a transfer agent should insist on having the character of the tenancy expressed in the certificate, for example, ‘Arthur B. Cliff and Donald E. Field as joint tenants and not as tenants in common.” If a transfer agent is requested to transfer a certificate issued to 10F, L. Maraspin and H. B. Driver’s “Fundamental Principles of Stock Transfers,” p. 26. Mr. Campbell uses the same classifications. STOCK TRANSFER 247 tenants in common when one of the tenants has died, it should require an assignment by the remaining tenant or tenants and by the executor or administrator of the deceased, accompanied by papers such as we discuss under the heading of fiduciary transfers. On the other hand, ‘‘where a joint tenant has died, an endorsement by the survivors is sufficient.” The transfer agent should, however, receive proof of death of one of the joint tenants before accepting an assignment of the survivor or survivors. Corporations.— The transfer of stock registered in the name of a corporation raises the question of the authority of its ofhcers, who, by executing the assignment, have purported to act on its behalf. ‘The careful transfer agent will always require evidence of this authority. ‘The general authority of the officers of a corporation is set forth either in the by-laws of the corporation, or in the by-laws and resolutions of its board of directors. ‘Lhe latter is true when, as is often the case, the by-laws provide that the authority of the ofhcers shall, subject to the regulations of the board of directors, be such as usually pertain to the respective ofhces. Unless, how- ever, the authority, as stated in the by-laws or general resolu- tion, includes the right to execute assignments of stock on be- half of the corporation, a specific resolution authorizing the particular assignment in question should be required. As a consequence, in transferring stock registered in the name of a corporation, the transfer agent should require: 1. Copy, certified by the secretary or an assistant secretary of the transferor under its corporate seal, of (a) its by-laws, (b) its general resolution of authority, or (c) a specific resolu- tion, or, perhaps, the by-laws and a resolution, as the facts of the case may warrant. 2. A certificate, similarly executed, as to the election of the officers executing the assignment. Fiduciaries.—Included in this classification are executors, administrators, guardians, and trustees. ‘Transfers of stock coming under this classification are the most complicated with which the transfer agent deals. ‘To give an idea of the variety 11H, Brua Campbell’s “Legal Aspects of the Transfer of Securities,” p, 25. 248 WORK OF CORPORATE TRUST DEPARTMENTS of questions involved we reprint below the requirements of one New York transfer office with respect to transfers by execu- tors or administrators, of stock registered in the name of a decedent. ‘This applies, also, to transfers of registered bonds discussed in the next chapter. BANKERS TRUST COMPANY NEw YORK Requirements for the transfer by Executors or Administrators of stocks or bonds registered in the name of a decedent. a 2. Copy of will, if any, duly certified by probate or surrogate official. Officially certified copy of decree of appointment of executor or administrator, or, if such decree is older than six months, then probate certificate of recent date showing such appointment to be still in force. Waiver and consent of the New York State Tax Commission, required by New York Inheritance Tax Law, which may be obtained upon application to the New York State Tax Commission at Albany, N. Y. In the case of stock, evidence of the payment of the Inheritance Tax on waivers and consents from state officials as to all States imposing an inherit- ance tax or requiring such waiver or consent in respect to the securities sought to be transferred. Application for such waiver and consent should be made to the Attorney General of such State at the State Capitol. In the case of a foreign decedent, a Federal waiver is required unless American ancillary letters have been issued. Application for it should be made to the Commissioner of Internal Revenue, Washington, D. C. Evidence of payment of Stock Transfer Taxes (Federal or State), rate of 2 cents per $100 face value for New York State Stock Transfer Tax and at the rate of 2 cents per $100 face value for the Federal Stamp Tax (and 2 cents additional for the Pennsylvania tax in the case of stock of Pennsylvania corporations), unless stock is to be put into the name of the executor “as executor’ or administrator, “as administrator.” Stock certificates or bonds properly assigned by the executors or administra- tors, as such. Signatures to the assignment should be witnessed and should be guaranteed by a bank having a New York correspondent or by a New York stock exchange house. Names and addresses of the transferees should be filled in after the words “transfer unto” on the back of the certificate. The space preceding the word “attorney” should be left blank. If the transfer is to a person other than the executor or administrator, then (a) If the transfer is to a legatee there must be submitted an affidavit signed by the executor stating (1) that the laws of the State appoint- ing the executor have been complied with as to giving notice to creditors, and (2) that all claims against the estate and all adminis- tration expenses and prior legacies have been paid, or that there are other assets sufficient to pay outstanding claims and unpaid administration expenses and prior legacies (excepting that in some States a distribution may not lawfully be made within a certain period, and further excepting that in some States a distribution may be made only under order of Court). STOCK TRANSFER 249 (b) If the transfer is to a person other than a legatee a certified copy of a court order must be furnished authorizing the sale of the stock or bonds unless the will expressly gives the executor power of sale, or unless the law of the State wherein the executor or administrator was appointed permits him to sell without a court order. 9. A transfer by an executor or administrator to himself individually will be recognized only: (a) In the case of an executor—(1) if such transfer is specifically authorized by a court order a certified copy thereof must be fur- nished, or (2) if it appear from the will that he is the sole legatee, or a residuary legatee, or a legatee of the specific security sought to be transferred, or that the transfer is with the consent of all those at interest, but in case of “(2)” there must be furnished in addition, an affidavit signed by the executor stating (1) that the laws of the State appointing the executor have been complied with as to giving notice to creditors, and (2) that all legacies, claims against the decedent and his estate, and administration expenses have been paid or have been adequately provided for: (b) In the case of an administrator—only if such transfer is specifically authorized by a court order. A certified copy thereof must be fur- nished. Dated, —— Note. The above requirements are subject to change. Transfers by guardians, and testamentary trustees present their own peculiar difficulties, each involving, in addition to other transfer requirements, the production of a court ap- pointment of the fiduciary. Transfers by individual or cor- porate trustees acting under deeds of trust or other agree- ments usually are simpler, depending upon the terms of the trust instrument, which the transfer agent must always study before attempting to pass upon any transfer. In transferring stock to fiduciaries the transfer agent should be careful to have the character of the fiduciary relationship expressed on the stock certificate; for example, “National Trust Company and William Calvin as Executors of the last will and testament of Theodore Warren, deceased,” or “John Strong as Trustee for Percival Little under deed of trust dated June 6, 1925.” In the case of all transfers requiring documentary evidence in addition to the mere assignment of the securities it is good policy to submit all of the papers to counsel, for approval, betore making the transfer. Taxes on transfers.—Under the Federal Revenue Act of 1926 every transfer of stock is subject to a stamp tax of 2 250 WORK OF CORPORATE TRUST DEPARTMENTS cents on each $100 of par value or fraction thereof, or on each share without par value.” The State of New York and other states, including Mas- sachusetts and Pennsylvania, also impose stock transfer taxes. The transfer agent must keep currently informed on the sub- ject of existing laws, both Federal and State, imposing such taxes, and regarding the regulations and rulings of the Bureau of Internal Revenue and the state tax authorities.” 12Federal stamp tax. The following is a quotation from the Federal Revenue Act of 1926, Section 807, Schedule A, Part 3, which imposes the existing tax on transfers of shares of stock: “Capital stock, sales or transfers: On all sales, or agreements to sell, or memoranda of sales or deliveries of, or transfers of legal title to shares or certificates of stock or of profits or of interest in property or accumulations in any corporation, or to rights to sub- scribe for or to receive such shares or certificates, whether made upon or shown by the books of the corporation, or by any assignment in blank, or by any delivery, or by any paper or agreement or memorandum or other evi- dence of transfer or sale, whether entitling the holder in any manner to the benefit of such stock, interest, or rights, or not, on each $100 of face value or fraction thereof, 2 cents, and where such shares are without par or face value, the tax shall be 2 cents on the transfer or sale or agreement toi sell on each share: Provided, That it is not intended by this title to impose a tax upon an agreement evidencing a deposit of certificates as collateral security for money loaned thereon, which certificates are not actually sold, nor upon the delivery or transfer for such purpose of certificates so deposited, nor upon mere loans of stock nor upon the return of stock so loaned: Provided further, That the tax shall not be imposed upon deliveries or transfers to a broker for sale nor upon deliveries or transfers by a broker to a customer for whom and upon whose order he has purchased same, but such deliveries or transfers shall be accompanied by a certificate setting forth the facts: Provided further, That in case of sale where the evidence of transfer is shown only by the books of the corporation the stamp shall be placed upon such books; and where the change of ownership is by transfer of the certificate the stamp shall be placed upon the certificate; and in cases of an agreement to sell or where the transfer is by delivery of the certificate assigned in blank there shall be made and delivered by the seller to the buyer a bill or memorandum of such sale, to which the stamp shall be affixed; and every bill or memorandum of sale, or agreement to sell before mentioned shall show the date thereof, the name of the seller, the amount of the sale, and the matter or thing to which it refers. Any person liable to pay the tax as herein provided, or anyone who acts in the matter as agent or broker for such person, who makes any such sale, or who in pur- suance of any such sale delivers any certificate or evidence of the sale of any stock, interest or right, or bill or memorandum thereof, as herein required, without having the proper stamps affixed thereto with intent to evade the foregoing provisions, shall be deemed guilty of a misdemeanor, and upon con- viction thereof shall pay a fine of not exceeding $1,000, or be imprisoned not more than six months, or both,” 13 Among the authoritative services on Federal and New York State transfer taxes are those of Prentice-Hall, Inc., and The Corporation Trust Company. STOCK TRANSFER 251 Estate and inheritance taxes.—Under the Federal Rev- enue Act of 1926 and the appurtenant regulations of the Bureau of Internal Revenue, and under the inheritance tax laws now imposed by some of the states, the transfer agent is required, under penalty, to prevent the transfer of stock from the name of a decedent in the absence of evidence in required form of the payment of such taxes, or a waiver from the proper taxing authority. The laws and regulations” re- lating to these taxes are constantly changing. Again, in this case, the transfer agent for its own protection should sub- scribe to a service which will keep it currently informed on the subject. Co-transfer agencies.—Many corporations maintain agencies for the transfer of their stock in more than one place. This is done for the convenience of the stockholders, to stimulate the market for the stock and sometimes to meet the require- ment of stock exchanges. The New York Stock Exchange and other stock exchanges require that a transfer office be maintained in their city for all stock which they list. ‘The New York Stock Exchange also requires that the certificates issued by transfer agents in different cities be interchangeable, that is, transferable at any transfer office of the company ir- respective of the office of issue. There are two distinct methods of handling co-transfer of- fices. One method provides that a certificate is transferable only at the office from which it was issued. As stated above, this method is not acceptable to the New York Stock Ex- change, and it does not offer to the stockholders the full con- venience of the second method. On the other hand, it is simpler and more economical to operate. This plan requires each transfer office to keep records only of the certificates is- sued from its office, and provides for the transfer of shares from one transfer office to another, at the option of stock- holders, but only upon surrender of the certificates represent- ing the shares to be transferred, to the office of issue, against the issuance of a transfer warrant directed to the transfer agent in the city to which the shares are to be transferred. 14 Prentice-Hall, Inc., and The Corporation Trust Company issue services relating to the Federal Estate Tax and the various state inheritance taxes. 252 WORK OF CORPORATE TRUST DEPARTMENTS The latter, upon surrender of the warrant, will issue its own certificates representing the stock transferred. The second (or interchangeable) method, which is much more satisfactory to the stockholder, is required by certain stock exchanges and is rapidly displacing the other system. Under the interchangeable system each stock certificate bears an endorsement to the effect that it may be transferred at any transfer office of the company. The several transfer offices exchange daily reports of all transfers. It is much the better practice for each office to maintain complete stock ledgers covering all of the outstanding stock of the company. Where this is not done, and each agent’s ledgers record only the stock certificates issued at its office, it is necessary to refer to the daily transfer reports when transferring certificates issued by another agent. Each transfer agent will require evidence of the due appointment of the other transfer agents, and evi- dence of the authority of the persons who will sign on behalf of such transfer agents, with properly verified specimen signa- tures. Some states require that all companies incorporated under their laws, or, perhaps, even those registered to do business therein, shall keep at their principal office within such state a complete record of stockholders. If the stock of a corpo- ration subject to such requirements is transferable in another state, the transfer agent will be required to report all trans- fers to the office in which a stockholders record must be kept to comply with the statutory requirements. Records.—The records required in a transfer department, while simple in principle, involve much detail. Forms 49, 49-A, and 49-B illustrate counter tickets issued against the THIS RECEIPT MUST BE RETURNED FILLED IN AND SIGNED BEFGRE STOCK WILL BE DELIVERED A792 New York, ————__— lt owe Mea | DANKERS TRUST COMPANY | Transfer Agent Certificate for__t_t—__——-shares of Stock ber STOCK WILL NOT’BE READY FOR DELIVERY UNTIL 1.30 P. M. Form 49.—Counter Ticket (General). STOCK TRANSFER 253 receipt of stock for transfer. The use of similar counter tickets has heretofore been described under reorganization department records (page 220). THIS RECKIPT MUST BE RETURNED FILLED IN AND Cc 7210 SIGNED BEFORE STOCK WILL BE DELIVERED New Fork, ee Le LC BEE CANKERS .LRUST COMPANY. Transfer Agent Certificate for___—_____shares of Common Stock AMERICAN Tit COMPANY per. r | N STOCK WILL NOT BZ READY. FOR DELIVERY UNTIL 1.30 P. M, | COMMON Form 49A.—Counter Ticket (Special). (TIN COMMON No.AZ024 Now 208 | BANKERS TRUST. COMPANY 16 WALL STREET NEW YORE Received from yamaferred 00x j TRANSFER DEPT. ele EH Loe etal f: Wee sae ee at Ea Saleen Received from ADDITIONAL PAPERS REQUIRED Certificate for_____..__shares of __.__ stock OR ee ser eee os te ey | ee LP Company, together with. certain papers tendered to effect transfer of same and held pending approval of .Counsel. - Stock delivered only on surrender of this memorandum, eee STOCE WITH PAPERS, HELD POR APPROVAL OF COUNSEL. ana Form 49B.—Temporary Counter Ticket. Transfer record.—The transfer record (Form 50) is pre- pared with as many copies as required. If, for example, a certain stock is transferable in three cities, on an _ inter- changeable basis, and, in addition, the principal office of the company required a daily report, an original and three carbon copies of the transfer record would have to be prepared by each transfer office. When more than one carbon copy is re- quired these sheets can best be prepared in typing machines adapted for this purpose. Form 50 is the actual transfer sheet and constitutes the transfer agent’s original record. Form 50-A is the daily report of transfers to one of the co- transfer agents, and Forms 50-B and 50-C (which are not illustrated, being similar to 50-A) are daily reports to the other co-transfer agent and the company, respectively. Form 254 WORK OF CORPORATE TRUST DEPARTMENTS "SIsJSUPL]T Jo Iodey—yos W407 BAYN 8 BOBSs4ENYSL 430, BON O) UDB segs) . ‘ANVdWOD LSNUl SYAYNVSE ‘Vd ebireccee “ANVdWOD JUOD HOUNGSLLId 3° HOCLS NOWWOD 3° #228215H49D YSangeyWg pue erydjepepyg *y30)2 may *mojeg peyeoIpul se peojsUeD AEP S14) OALY aM ysingsjzig jo Amedme’) ysnijy Tomy ey] YOK MAN *‘plooey Iojsuely— os w10oy ozus0Nauuns SUZERNNN BLvoIslesD “HLYOY LAS NOSYSH SV “AANYOLLV GANDISHZGNN FHL Ad GSYYSISNVUL ATSYAH AMV “IDWd SIH NO GagMOSAG SALVIISILUAD AG GALNISAUdTY "ANYdWOD 3NOD HDUNGSLLId SHL JO ASOLS NOWWOD 3HL JO SAUVHS SH1 (OLAUFHL GAHOVLLY YO) ALVOIELLYIO HOV NOdN GSSYOGNZ YSsSNVUL OL AINYOLLV JO YSMOd GNV ITVS 4O THE AHL JO ANLYIA AG ANVdWOD ANOO HOUNASLLId BHL 40 YIOLS NOWWODS MYOA MAN ee STOCK TRANSFER 255 50, the original record, is signed by the attorney making the transfers, who, as explained earlier in this chapter, is an em- ployee of the transfer agent. In many cases reports to the company or co-transfer agents are not required; in that event, the carbon copies may be dispensed with and the columns headed for shares received for transfer but issued by other transfer agents may be eliminated. Each certificate accepted for transfer is entered on this record, followed by the names and addresses of the trans- ferees, the number of shares to be transferred to each, and the other data indicated by the column headings. ‘The certifi- cates to be transferred are then passed to clerks who prepare the new certificates from the assignments. The new certi- ficates are thereupon delivered to the clerks in charge of the transfer records, who check them back to entries on the rec- ord and enter the serial numbers of the new certificates, which are then ready for signature by an officer of the transfer agent. In trust companies where the volume of transfers is not too heavy, the officer in charge of the transfer department will require that the new certificates, when presented for signa- ture, be accompanied by the corresponding old certificates, and he personally will check the total number of shares repre- sented by the old and the new certificates, and, if they balance, will sign the new and cancel the old. In the larger transfer offices auditors are assigned to the department to audit the issuance of new certificates and the cancellation of the corre- sponding old certificates. “These auditors, however, should not be permitted to take any part in the actual work of the department, as an independent check on the issuance of stock is essential. The auditors also check the certificate numbers of the new certificates to see that such certificates have been issued in consecutive order. If any have been spoiled through errors in preparation it is required that they be marked “void” and the signatures canceled by perforation. Stock ledgers.—For each company whose stock is trans- ferred (and for each class of stock if there is more than one) there should be a set of stock ledgers, preferably in loose-leaf form (Form 51), with a separate account for each registered stockholder. Each account should show the name and address of the stockholder, dividend instructions filed by the stock- 256 WORK OF CORPORATE TRUST DEPARTMENTS COLUMBIA HYDRO-ELECTRIC COMPANY COMMON STOCK Date CANCELLED holder, if any, the date of issue or cancellation, the serial num- ber and number of shares represented by each stock certificate issued in the name of such stockholder or transferred by him, and the balance of shares remaining in the account. Normally the transfer record referred to above is delivered to the bookkeepers on the morning following the date of trans- fer, and the bookkeepers are required to complete the posting to the ledgers by noon, so that any discrepancy between the transfer record and the stock ledger may be reported and verified before it is necessary to deliver the new certificates. The practice in New York City is to deliver new certificates at and after 1:30 o’clock on the next business day after the trans- fer is presented (Saturdays excepted). Stock ledger trial balances.—It is important that frequent trial balances be taken in the stock ledgers to be certain that the aggregate of the balances in the accounts reconciles with the total number of shares authorized to be outstanding. The stock ledgers constitute the record from which dividends are paid and stockholders’ lists for meetings and other purposes are prepared; consequently, the ledgers must be kept in con- dition to supply accurate stockholders’ lists on short notice. In the case of a company whose stock is active and its share- holders numerous,” the work of striking a trial balance is simplified by breaking the total figure into a number of sub- 15 For example, the American Telephone & Telegraph Company on July 28, 1926, reported 380,683 stockholders of record. STOCK TRANSFER 257 q NAME OF COMPANY CLASS OF STOCK eam RMI Ting eG A ON aT a Oe Chih canal Rca a PT area ahn uaa | 801 a nA TINT TS LS ee PR eS TO eae ainitenl rani aa| oa Ls [a cor need | aM PT (Se ENS ee a PR Te a TAT Rees DaIne MORO aN A A Ta Ee TMNT CI Pe Sevipa ea EGS TE) Ed Aca eR Rone SUMAN teal CC Oo a HEAP i A i RaRETS sien KG te ig AA TCC Fou 2 2 0" Oe IES Dc 6 RT jo Ts Bere vay LSI TET ever |xwaz Jawa [evar aves de Fa a La aca BR NA a as i eegeneone | ems roma| se ieee ms Sa Eee eae AR Form 52.—Stock Ledger Trial Balance. totals corresponding to the divisions of the ledger, as illus- trated in Forms 52 and 53. Form 52 is the trial balance sheet on which the total of each ledger is entered and footed to prove with the total number of shares outstanding. Form 53 is a record of changes between ledgers; it is posted from the transfer sheets and, if the trial as taken on Form 52 does not balance with the total amount of shares outstanding, the net change on each ledger as indicated by Form 53 is applied to the last previous trial balance, and so the difference is local- ized in one or a few of the ledgers, thus obviating the neces- sity of checking back all changes since the last successful trial balance. Record of original issues.—It is obvious that a transfer agent should keep a record of the number of shares originally issued and of all subsequent issues. Form 54, which may be kept as the first sheet of the stock ledger, is designed for this 258 WORK OF CORPORATE TRUST DEPARTMENTS purpose. In the illustration used columns are provided for one co-transfer agent. The ‘‘Remarks’’ column is ordinarily used to record the date of the resolution of the corporation’s stockholders or directors (or both) authorizing the issue or the retirement of stock. 5 i O a g| O Form 53.—Record of Balance Changes between Ledgers. STOCK TRANSFER 259 BANKERS TRUST CO. STATE INCORPORATED TRANSFER AGENT TITLE OF COMPANY =a CAPITAL _. —..... PREFERRED PRED AV PEY MNS EAP EIN sue COMMON PAR VALUE CLASS OF STOCK Lao Risen CAPITAL Sanaes SHARES CANCELLED ANDO RETIRED DATE AuTHOnizeD LISTED TOTAL N. ¥. STOCK SHARES REMARKS TOBE ISSUED] EXCHANGE OUTSTANDING Form 54.—Record of Original Issues. Control of unissued stock certificates.—The practice of placing with a transfer agent a supply of stock certificates, signed in blank, has already been mentioned. To give these certificates the protection which they should receive makes it necessary to place them under control, and to this end one trust company in New York sets aside a special safe in which unissued stock certificates are stored. This safe is subject to the regulations of the main vault, and deposits or withdraw- als of stock certificates are made only on the authority of vault tickets approved by an officer of the transfer depart- ment.© A limited supply of certificates is kept on hand in the transfer department to take care of current needs, and this supply is replenished by vault withdrawals daily, or as frequently as required. Form 55 illustrates the record used TITLE OF ACCOUNT . a OFFICER DELIVERED DEPOSITED | patance AND DEPOSITED CLERK a Form 55.—Control Paracas Certificates. CVRTMAGATT Nos DELIVERED for unissued stock certificates. Each such certificate, for pur- poses of control, is treated as one unit. The audit depart- ment receives, each day, all vault deposit and withdrawal 16 For an explanation of the use of vault tickets, see pages 47 et seq. 260 WORK OF CORPORATE TRUST DEPARTMENTS tickets. As the auditors assigned to the transfer department also examine all issues of stock to see that the certificates have been used in numerical order, it is possible for the audit de- partment to keep a continuing check on the stock certificates. Stockholders’ right to inspect records.—One of the most dificult questions a transfer agent has to face is the frequent request of stockholders for permission to inspect the stock records. In the case of a stockholder desiring information which he believes will assist him in protecting his position as a stockholder, the request is both reasonable and proper. Unfortunately, however, stockholders’ lists have come to have a commercial value and sometimes such requests are for pur- poses foreign to the best interests of the corporation and its stockholders as a whole. The laws of the various states differ widely on the subject and the transfer ofhcer should in all such situations secure the advice of counsel, and confer with the issuing corporation before action is taken.” Closing of transfer books.— Many corporations during a short period prior to the payment of dividends, or the hold- ing of a stockholders’ meeting, “‘close” their transfer books; that is, they refuse to make transfers of stock for a specified period. In some states the statutes expressly give the right to close transfer books. In states where this is not a statu- tory right, authority is usually included in the charter or by- laws of the company. The purpose, obviously, is to give to the corporation an opportunity to prepare a list of stockhold- ers for use at the stockholders’ meeting or in paying a divi- dend. The custom of closing transfer books is, however, giv- ing way to a considerable extent to the practice of declaring dividends on a specified date payable to stockholders of record of a second, but later specified date, but without closing the books. The latter practice is a convenience and sometimes a decided advantage to stockholders; consequently, it is gener- ally favored. Annual and special stockholders’ meetings.—The transfer agent will be required to prepare and certify a list of stock- holders for use at each stockholders’ meeting. ‘The charter 17 In New York the right of stockholders in this respect is set forth in Section 22 of Chapter 61 of the Laws of 1909, as amended in 1916, STOCK TRANSFER 261 or by-laws of the company will specify that stockholders of record at the date of closing the books, or a certain number of days prior to any such meeting, are entitled to vote thereat. Whether or not the transfer books close, the list will be prepared as of the date so specified. Dividends.—In the case of a dividend declaration the trans- fer agent will also prepare and certify a list of stockholders of record on the specified date (the ‘‘record date’’ just men- acca aes ly pelle ————————-COMPANY LIST OF STOCKHOLDERS a Re ee mT g Rem CRT O NI MERE STOCKHOLDER CHECK No, SHARES AMOUNT Form 56.—Stockholders’ List. tioned) and from this list the dividend will be paid. Form 56 is used for preparing certified stockholders’ lists; the col- umns headed “Check No.” and “Amount” are used only in connection with dividend payments. It will be noted that the form is ruled for use of stencils, which, in transfer work, where the volume is at all heavy, are almost indispensable. These stencils are of the type illustrated in Chapter IV, page 63, except that each one bears the name and address of a stockholder. 1 iene Dividend orders.—In the absence of instructions to the contrary, dividends are paid to the registered stockholders as their names and addresses appear on the stock records. A stockholder, however, has the right to give other instructions as to the disposition of dividends on stock registered in his name. Such instructions are termed ‘‘dividend orders,” and most transfer offices require the use of a standard form such as that illustrated in Form 57. Dividend orders, as received must be carefully noted on the proper account.in the stock ledger (as indicated on Form 51, page 256), and noted on the stockholders’ lists prepared for dividend payments. When the 262 WORK OF CORPORATE TRUST DEPARTMENTS stencil system is used, the dividend orders are noted directly on the stencil and so automatically appear on the dividend lists. If the stencil system is not used, Form 56 (page 261) should have an additional column, to the right, headed, ‘“Div- idend Instructions,” in which all such orders will be noted on each list prepared for use in the payment of dividends. Ab PERMANENT DIVIDEND ORDER Gransfer Agent 16 Wall Street, New York, N.Y. POA Until this order shall be revoked in writing by the undersigned, please mail'checks payable to the order of F Please insert in spate below the numbere of certificates held by you and total num- INaine a fe el a ee ber of shares represented thereby. Certificate Numbers - Shares’ in’ payment of all dividends now due or which may hereafter be payable upon the Stock of the < COMPANY standing on the books of said Company in the name of (Sign Here) 1s io sea cecils a lecga caves coe ten teceetcovaeanesssaeeavsceas theca nena eee een ~ This signature is to be written EXACTLY as the name appears on Certificate. When check is to be made payable to other than the signer, signature of the latter must be acknowledged before a Notary Public on the back of this order, and, if signed by an Attorney, Administrator, Executor, Guardian or Trustee, it must be accompanied by satisfactory evidence of signer’s authority. Form 57.—Dividend Order (Front). DO NOT HAVE SIGNATURE ACKNOWLEDGED BEFORE A NOTARY PUBLIC UNLESS YOU WISH CHECK PAYABLE TO THE ORDER OF ANOTHER PERSON, PORE G OES csse Sih rats es vkas Sep ged vnks phovarcipctetee eptiannsicensreo ss ‘ 8S.¢ ; County hee siinanc esata ssc ael. ha secseecotne tssmsicas ee On (Ghisjee = ase day of. in the year one thousand nine hundred and : before me personally came Form 57.—Dividend Order (Back). Dividend disbursing agent.—Many corporations desire to be relieved entirely of the responsibility and detail involved in the payment of dividends, and so, by proper resolution, will appoint its transfer agent as dividend disbursing agent. If a corporation does not disburse its own dividends the transfer agent, having all the required records, is the logical appointee. Form 58 illustrates a resolution in form required by a trust company in New York to cover such appointments. STOCK TRANSFER 263 Form 58.—Resolution Appointing Dividend Disbursing Agent. RESOLUTION of the BOARD OF DIRECTORS of RESOLVED that Bankers Trust Company, Transfer Agent of this Company, be and it hereby is appointed Dividend Disbursing Agent for the Capital Stoek of this Company, and it hereby is authorized and directed to pay such dividends as may be declared by the Board of Directors of this Company upon the Company’s lodging with said Bankers Trust Company certified copies of the resolution of the Board of Directors declaring such dividends and depositing with said Bankers Trust Company an amount sufficient for the payment of such dividends at least two days before each dividend date. I Heresy CertTiry that the foregoing is a true copy of a resolution adopted at a regularly called meeting of the Board of Directors of held at the office of on the day of 19—, at which meeting a quorum was present. WITNESS my hand and the seal of the Company this 19—. day of If acting as dividend disbursing agent, the transfer agent, upon receipt of due notice of the declaration of a dividend will prepare a certified list of stockholders as of the record date, exactly as though it were not dividend disbursing agent. Such notice should state the number of the dividend, the class of stock upon which it is payable, the rate per share, the date on which it is payable, and the date as of which stock- holders of record are entitled to the dividend. In addition, the dividend disbursing agent will prepare checks, as illustrated by Form 59, over its signature as agent for the company. It will be noted that the check is prepared for the use of stencils and “window” envelopes, thus saving a considerable amount PAYABLE THROUGH NEW YORK CLEARING HOUSE COMMON STOCK DIVIDEND No. 47 NEW YORK, DECEMBER 31, 1925 NOW a ees AMERICAN STEEL CAR COMPANY > < at BANKERS TRUST COMPANY 1-103 Fo THE ORDER OF BANKERS TRUST COMPANY DIVIDEND DISBURSING AGENT FOR AMERICAN STEEL CAR COMPANY ASST, SECRETARY a « e * if) z < ° z < ° = ° a | 2 a «< . ° - z wi z > < a & 4 4 ° w =x ao g z - DIVIDEND OF $2.50 PER SHARE ON THE COMMON STOCK, STANDING IN YOUR NAME AT THE CLOSE OF BUSINESS, DECEMBER 14, Notify BANKERS TRUST COMPANY, 16 Wall Street, New York, of any change of address Form 59.—Dividend Check. 264 WORK OF CORPORATE TRUST DEPARTMENTS of clerical work. The checks, of course, should not be mailed until the dividend agent has received, from its principal, funds to cover the total amount of its dividend checks. Provided funds are in hand it is customary for dividend checks to be Company uns (Aga cae Stock Lae Uy ae CLOT ING. Name Check No.2 oe Amount Le Payables No, of Shares Has check been returned Has check been paid Check remailed Duplicate check mailed_ Change of address made 1041 ----Auditor---SP----Ind. 901---Release NS es Form 60.—Lost Dividend Check Search Eheet. STOCK TRANSFER ; 265 mailed on the afternoon next preceding the day on which the dividend is payable. Lost dividend checks.—Through carelessness on the part of the recipient, miscarriage in the mails, or errors caused by the dividend agent, dividend checks are sometimes lost. In such cases, on receipt of notice from a stockholder that his dividend check has not been received or has been lost, the dividend agent will first examine the paid checks of the divi- dend in question to determine that the check has not been cashed, using for this purpose a blank such as Form 60. If the examination discloses that the check has not been cashed, an “indemnity letter’ as suggested by Form 61 will be sent to the stockholder for signature and upon receipt of the letter Form 61.—Indemnity Letter. 19— To BANKERS TRUST COMPANY, Dividend Disbursing Agent, Dear Sirs:— I hereby request that you issue to me a duplicate of original dividend check of ————— Company, dated , No. , for $ , being dividend No. to which I am entitled as owner of shares of the stock of Com- pany; in consideration therefor I agree, for myself, my heirs, executors, and assigns, to indemnify and save you harmless at any and all times thereafter from actions, proceedings, claims and demands which may be made or brought against you in respect of such original check on your issuing to me such dupli- cate check. I agree to deliver or cause to be delivered to you such original check now lost or destroyed for cancellation and destruction if the same shall be found, and to reimburse you for all expenses incurred by you by reason of the issue of such duplicate check. Very truly yours, (Sign here) STATE OF COUNTY OF sd: —, being duly sworn deposes and says that affiant was, on the first day of 19—, the owner of shares of the stock of Company, and as such was entitled to the dividend accruing on such stock on that date. Affiant further says that any dividend check issued to afhant by Bankers Trust Company as Agent for said Company for the above mentioned dividend, is to afhant’s best knowledge and belief, lost or destroyed and that afhant has not at any time endorsed, transferred or otherwise negotiated any such check, but that affiant believes that if the same was sent by the Company it has been lost or destroyed. This affidavit is made to induce Bankers Trust Company to issue a duplicate check in lieu of said check so lost. (Sign here) day of Subscribed and sworn to before me this , 19—. NOTE.—The stockholder’s signature to this request must be came toate wn by a Notary Public, and if acknowledged outside of the State of New York, a certification of the attesting officer’s authority must be attached. 266 WORK OF CORPORATE TRUST DEPARTMENTS properly signed, a duplicate dividend check will be issued and mailed to the stockholder. As a precautionary measure, many transfer agents quite properly insist upon the elapse of a spec- ified period, say 30 days, before issuing the duplicate check. It is surprising how many checks which are reported lost will turn up during such a period. On the other hand, if the ex- amination reveals that the check has been returned by the post office because of incorrect or insuficient address, the check will be remailed to the stockholder and there will be enclosed with the check a form on which the stockholder will be re- quested to indicate the address to which he desires subsequent dividends mailed. This should be carefully noted on the stock records. Stock dividends.—At times a corporation will distribute to its stockholders a dividend payable in its own stock, there- tofore unissued, or perhaps in its own stock previously issued but held in its treasury, or even in the securities of another corporation.” Such a distribution payable in stock of the com- pany itself is practically always handled by the transfer agent. The transfer agent should receive a certified copy of resolu- tions of the directors, declaring the dividend, fully setting forth the terms of the distribution, and directing the issuance of the new stock. Under some circumstances the transfer agent might require evidence of appropriate action by the corporation’s stockholders, but this is a question to be de- cided by the transfer agent’s counsel. For convenience in handling such a distribution the stockholders’ list is prepared HOBSON MOTOR CAR COMPANY SHEET No... 357. Record, of 10% Stock ‘Dividend payable April 15, 1924, to Stockholders of record at the close of business April 10, 1924. The shares represented by certificates hereon described constitute an es issue. sr | sreckmousem Form 62.—Stock Dividend Record. 18 A distribution of this kind might be made either by the Reorganization or the Transfer Department. STOCK TRANSFER 267 on a form somewhat different from the form used for cash dividends or meetings. Form 62 (in three parts) illustrates a good type of stockholders’ list for use in the distribution of a stock dividend. Form 62, the first sheet, is ordinarily used as a report to the principal office of the corporation; if there are co-transfer agents, additional copies may be made and used as reports to them. Form 62-A constitutes the original issue record of the transfer agent itself and postings to the HOBSON MOTOR CAR COMPANY ‘SHEET No. Combined Record of 10% Stock Dividend and Registered Mail Record. Stock Dividend payable April 15, 1924, to Stockholders of record at the close of business April 10, 1924. The shares represented by the co hereon described constitute an original issue. Shipment of 1... COUNTED ANO Geuvenne +6 Figured By Seaceo Post Orrica sy D B SEE si ge rawn By Audited By \ Examined By Enclosed By Form 62A.—Stock Dividend, Original Issue Record. Paceron-tal aa et oe et eee Post Office at CITY HALL STATION, N. Y. Received APRIL 14, (924, from. BANKERS TRUST CO., the following described pieces of registered mail (Letters) numbered from. Sto inclusive, making a total of ______—=ESipiecees. ee Peter tle st forlPostmaster: (im worps) REGISTRY AME OF ADDRESSEE NUMBERS STREET *AND POST OFFICE ADDRESS Ste Nay ee Page of Bill__-"" "ts Total of__._-_=—=—=s——s«RReegistered Pieces on Bill. ES AILING OFFICE | Received from BANKERS TRUST CO., the above described Registered Pieces, | nambered from__.____to inclusive. ANO OaTE for Postmaster. seinveeury Form 62B.—Stock Dividend, Post Office Receipt. 268 WORK OF CORPORATE TRUST DEPARTMENTS stock ledgers are made direct from these sheets, a single summary entry referring to these sheets for details being made on the transfer record. ‘The spaces at the foot of each sheet are used to record the departmental checking of the issue and mailing of the dividend. By arrangement with the post office (which is glad to enter into such an arrangement with any re- sponsible transfer agent) Form 62-B is used as a post office registered mail transmittal sheet and receipt. In the case of a stock dividend involving thousands of separate shipments, the saving of detail to both the post office and the transfer agent is apparent, to say nothing of the elimination of the pos- sibility of errors due to the likelihood of discrepancies between the three records if separately prepared. Perhaps a word of explanation as to the headings of the columns covering the issue of the new certificates is advisable. In the parlance of “‘the Street’”’ stock certificates are generally divided into two classes—‘100’s” and “fractions,” namely, certificates for an even 100 shares and certificates for less than 100 shares, but not certificates for a fraction of a share, the latter being termed “‘scrip’”. If a stock is listed on the New York Stock Exchange, certificates for more than 100 shares are not a “good delivery,” but, if such certificates are issued, they are treated, from the transfer agent’s point of view, as fractions. Form 62 has been prepared to cover a stock divi- dend at the rate of 10 per cent. Consequently, in the case of each stockholder owning a number of shares not evenly divisible by 10, it was necessary to issue scrip to cover the odd number of tenths. In the column headed “Certificate Num- bers” “‘C”’ indicates 100 share certificates, ‘‘Fr.”, certificates for less than 100 shares, and “‘S’’, scrip certificates for from one tenth to nine tenths of a share. With this explanation the corresponding subheadings under “Certificates Issued” will be more easily understood. Lost or destroyed stock certificates.— In regard to notices of the loss, theft, or destruction of stock certificates, and requests to stop transfer thereof and to issue duplicate certifi- cates, the trust’company as transfer agent confronts the same general problem as it does when acting as trustee in respect of lost, stolen, or destroyed bonds. The latter situation is STOCK TRANSFER 269 discussed in Chapter V, page 85. An important difference is that under the law of some States bonds and stocks are not on the same footing as regards their transferability. Here, again, is a strictly legal problem and one as to which the transfer agent should, for its own protection and that of its principal, rely only on competent legal advice. A further point to consider is that, in the case of bonds, the amount of obligation is fixed, and usually the market value is subject to comparatively little fluctuation, while in the case of stock there is no fixed obligation and the possibilities of market fluctuation, especially of common stock, are almost limitless. Consequently, the question of the amount of proper indemnity assumes greater importance and the margin of safety in the case of stock should be greater than is generally deemed necessary for bonds. A bond of indemnity given in connec- tion with the issuance of a duplicate stock certificate should be executed in 3 counterparts, for the corporation, transfer agent and registrar respectively. Form 63 is well adapted for use in following through the necessary operations of a transfer department, on receipt of a ‘“‘stop transfer’’ notice and its final withdrawal. Destruction of canceled stock certificates—Transfer agents are continually faced with the problem of disposing of the steadily increasing accumulation of. canceled stock certi- ficates. The question arises: What period must elapse be- fore canceled certificates safely may be destroyed? The primary purpose of keeping stock certificates is to pro- tect the transfer agent against possible suits based on charges of forgeries of endorsements, guaranties, etc. Such suits would be difficult to defend in the absence of the certificates in question. ‘The statute of limitations in this state [New York | on such an action is ten years from the date of the forgery. This period, however, would not necessarily apply in all cases, as the running of the statute may be suspended by reason of incompetency, infancy, absence from the state, and certain other events. Therefore, it cannot be said with certainty that such an action would be barred in ten years from the date of the forgery. The forging of an endorsement on a stock certificate would, in most cases, imply a theft from, or loss by, an owner. It 270 WORK OF CORPORATE TRUST DEPARTMENTS IMPORTANT Stop Transfer Record Name Company Stock Certificate No. No. of Shares Stop Acknowledged S. T. Form Sent Noted on Stop Board *? — Register Stock Ledger in Certificate Department Registrar Advised Transfer Agent in Stop Removed on Board a dg Register 99 9 Ledger 9 i ; Cté. Dept. ; Advised Registrar ’* Transfer Agent Form 63.—Stop Transfer. is the general experience of transfer departments that in such cases the owners lose little time in notifying them of the loss. It seems, therefore, that it would be rather improbable for the transfer agent not to receive notice or claim of forgery within ten years, or even within five years, after the forgery. STOCK TRANSFER 271 As a practical matter, then, the risk involved is very slight if the period provided by the statute of limitations has elapsed from the date of transfer. Earlier destruction of the certi- ficates would mean that the transfer agent is willing to ac- cept, as a practical business matter, whatever risk may be in- volved. As stock certificates are not the property of the transfer agent they should be destroyed only on instructions, or at least with the written consent, of the issuing corporation. Some transfer agents are now solving the problem of canceled stock certificates by delivering them to the issuing corpora- tions after a period of several years has elapsed. General.—As explained in the preface, this book is written from the practical trust company point of view, and with no attempt to cover the many legal questions involved. In numer- ous places the reader is cautioned to seek the advice of coun- sel rather than to attempt, personally, to pass on questions of law. CHAPTER XVIII STOCK REGISTRATION, BOND REGISTRATION, AND COUPON PAYING DEPARTMENTS Stock registration — The appointment of an independent registrar is the almost invariable custom of companies whose stocks are publicly distributed. Such an appointment is a listing requirement of the New York Stock Exchange and many other exchanges. As heretofore explained, the prime duty of a registrar of stock is to check the issuance and cancellation of stock certif- cates so as to guard against any overissue. Appointment.—As a basis of its appointment as registrar of the capital stock of a corporation a trust company will require: 1. A certified copy of resolutions of the directors of the company appointing the trust company and defining its duties. Form 64 is the form of resolution used for this purpose by a trust company in New York.’ 2. Papers in form similar to those described on page 233 et seq. (items 1, 2, 4 and 5) in regard to the appointment of a transfer agent. Form 64.—Resolution Appointing Registrar (Stock Out- standing Prior to Appointment). CERTIFIED COPY OF RESOLUTIONS of the BOARD OF DIRECTORS of On motion duly seconded, it was RESOLVED: First: That Bankers Trust Company, of New York, N. Y., be and it is hereby appointed agent of this Company, with the title “Registrar”, for the registration of certificates for the capital stock of this Company, of which there are now outstanding shares of said preferred stock and shares of said com- mon stock. 1 This form is reprinted by permission of Bankers Trust Company, New York. 272 i STOCK AND BOND REGISTRATION 273 SEcoND: That for the purpose of an additional original issue of cer- tificates representing such stock, the Registrar is hereby directed: To register and countersign as Registrar certificates for not exceeding shares of such stock, of the par value of $ each shares of such stock, of the par value of $ each shares of such stock, of the par value of $ each when ‘presented to it for that purpose and countersigned by the ‘Transfer Agent, and signed by* the and the of this Company. TuirD: That the Registrar be and it is hereby authorized and directed to register transfers from time to time of certificates for such capital stock, and of the certificates for shares of the preferred and shares of the common stock of this Company now outstanding, upon the cancellation of certificates for a like amount of stock of the same class, signed by the proper officers of this Company, and, as to certificates registered by said Registrar, countersigned by the Transfer Agent and the Registrar, and to register and countersign new certificates accordingly when they shall have been signed by the proper officers of this Company, and countersigned by the Transfer Agent; Provided, however, that the Registrar shall be under no duty whatever in connection with the names in which certificates are issued or the correctness of any transfer from one name to another. FourTH: That specimen signatures of the officers of this Company author- ized to sign certificates of stock as aforesaid, and of the officers of the Transfer Agent authorized to sign for the Transfer Agent, and specimen stock certificates, be lodged forthwith with the Registrar, to be used by it for pur- poses of comparison; and that the Registrar shall be protected and held harm- less in recognizing and acting upon any signature or certificate believed by it in good faith to be genuine. When any officer of this Company or of the Transfer Agent shall no longer be vested with authority to sign for this Com- pany or for the Transfer Agent, as the case may be, written notice thereof shall immediately be given to the Registrar, and until receipt of such notice the Registrar shall be fully protected and held harmless in recognizing and acting upon certificates bearing the signature of such officer or a signature believed by it in good faith to be such genuine signature. FirTH: That from time to time additional officers may be appointed by resolutions of the Board of Directors of this Company not inconsistent with its by-laws, to sign certificates of stock on behalf of this Company, and in like manner additional officers may be appointed to sign on behalf of the Transfer Agent, and in every such case certified copies of the resolutions effect- ing the appointments and specimen signature of such officers shall forthwith be lodged with the Registrar. SixTH: That when the Registrar deems it expedient, it may apply to , City of State of , counsel for this Company, or to its own counsel for instructions or advice, and for any action in accordance with such instructions or advice this Company will fully protect and hold the Registrar harmless from any and all liability. SEVENTH: In the event that any such certificate shall become lost or destroyed, before any new certificate or certificates shall be registered in lieu thereof, a sat- isfactory bond shall be required in such amount as may be provided by the by- * These resolutions should correspond to the provisions of the charter or certificate of incorporation, and by-laws, 274 WORK OF CORPORATE TRUST DEPARTMENTS laws of this Company, and in any event not less than the value of such cer- tificate, wherein the Registrar shall be named as one of the obligees. ‘The bond shall be in a form satisfactory to the Registrar. EIGHTH: That the President and the Secretary of this Company be and they hereby are directed to certify a copy of these resolutions under the seal of this Company and to lodge such copy, together with certified specimen certificates of the stock of this Company in the forms duly adopted by it, copies of the charter or certificates of incorporation and all amendments thereto (properly certified by the Secretary of State) and of the by-laws of this Company, with the Registrar and to furnish to the Registrar certified copies of any amendments that may from time to time be made to the charter or certificate of incorporation or by-laws. We, the undersigned, President and Secretary, respectively, of the (hereinafter called “Company’’), do hereby certify that the foregoing is a true and complete copy of resolutions duly adopted at a meeting of the Board of Directors of the Company, duly held at No. in the City of ; State of , on the day of , 19—, at which a quorum was present and voted in favor of an adoption thereof. We further certify that the annexed certificates are true and correct speci- mens of the certificates of the capital stock of the Company which have been duly adopted by the Company, that the annexed schedule or signature card or cards set forth the officers of the Company and of , Transfer Agent, author- ized to sign such certificates, and that the signatures set opposite their respec- tive names are specimens of the genuine signatures of such officers. We further certify that the Company was duly organized under the laws of the State of , and that under the accompanying charter or certificate of incorporation and all amendments thereto, certified by the Secretary of State, the Company has authorized capital stock of $ , subdivided into shares, of the par value of each, of stock, shares, of the par value of each, of stock, shares, of the par value of each, of stock, WITNEss our hands and the seal of the Company this day of , 19—. President. (Corporate Seal) Secretary. Relations with transfer agent.—In New York it is the custom of the transfer agents to deliver to the registrar, in the morning, the new certificates and the canceled certificates representing transfers effected during the preceding business day. ‘The transfer agent will have canceled the signatures of ofhcers of the corporation and the transfer agent, but not the signature of the registrar. he registrar is expected to regis- ter the stock, which includes: (1) the cancellation of its sig- nature on the surrendered certificates; (2) the completion of the necessary entries on its records; and (3) the dating and signing, as registrar, of the new certificates, and to return STOCK AND BOND REGISTRATION 275 both the old and the new certificates to the transfer agent before 1 o'clock, so that, in accordance with custom, the trans- fer agent may make delivery of the new certificates at 1:30 o'clock on the next business day (Saturdays excepted) fol- lowing that on which the stock was accepted for transfer. Records.— The records of the registrar are simple. Forms 65 and 66 are typical “registration sheets.’’ Form 65 is for use in the case of a stock which is transferred and registered in only one city, and Form 66 is for use in the case of stock which is transferred and registered in two or more cities on an interchangeable basis. The only substantial difference be- REGISTRY. OF : STOCK OF | pare | CERTIFICATES CANCELLED CERTIFICATES ISSUED Form 65.—Registration Sheet (One Registrar). tween the two forms is the subdivision of the cancellation columns into divisions for the cities in which the stock is trans- ferable, and the inclusion of balance columns for each city, so that the registrar’s records at any time will indicate the total number of shares issued from each city then outstand- ing. Form 66 is made up in as many copies as there are regis- trars and one carbon copy is mailed daily to each co-reg- istrar. These forms do not contain a column for “dating off” the canceled certificates. For many years it was the general practice of registrars to include on the registry sheet a column to the right of the ‘‘certificates issued’’ columns, headed “‘date of cancellation.’’ Each day the registrar, before returning the canceled certificates to the transfer agent, would go back through its registration record and stamp the date of cancel- lation in this column, opposite the original entry of each certificate canceled. ‘This practice, if accurately carried out, 276 WORK OF CORPORATE TRUST DEPARTMENTS is a very good check against the possibility of registering stock in place of fraudulent or altered certificates, and in the- ory, at least, makes it possible for the registrar to take off a list of certificates at any time outstanding. However, it has been found from experience that it is almost impossible to main- COPPER MINING COMPANY GAPITAL .STOCK) | pate eee BANKERS TRUST COMPANY, NEW YORK, REGISTRAR BALANCE RK DaTEe ER SHARES } UMBER SHARES | jj NUMBER #£=/| SHARES New YorRK BosTON PRES EVRY Oak RS Es ane tain the complete accuracy of such a record and an inaccurate record of this kind is worse than none at all, to say nothing of the detail work involved in its maintenance. As a conse- quence, this system has been discontinued by trust companies handling a considerable volume of registrations. STOCK AND BOND REGISTRATION 277 Original issues.—The registrar as well as the transfer agent should keep a careful record of all original issues of stock. Form 67 is almost identical with the similar form (No. 54) for use by transfer agents and described on page We Signing and audit.—In the case of trust companies where the volume of registrations is light, the officer in charge of the registration department personally will count the number BANKERS TRUST CO. "STATE INCORPORATED — REGISTRAR sath Ste er ee N I e TITLE OF COMPANY i sepa one PREFERRED _____. COMMON AUTHORIZED CAPITAL SHARES AUTHORIZED E: TO REGISTER TOTAL SHRS. REGISTERED REMARKS BY By i SORsTANDING COMPANY N. Y, STOCK EXCH. PAR VALUE CLASS OF STOCK Form 67.—Record of Original Issue. of shares represented by the old certificates and verify that total with the total shares represented by the new certificates. If the totals balance, he will cancel the registrar’s signature on the old certificates, and sign the new ones on behalf of the registrar. In companies where the volume is too heavy for this practice, auditors independent of the staff of the depart- ment will be assigned to the department to make this veri- fication. Certificates of deposit, etc.— As explained on page 198, it is an increasing practice, and a requirement of the New York Stock Exchange,’ to have a registrar appointed for certificates of deposit and voting trust certificates. The duties of the registrar under such an appointment are essentially the same as in the registration of stock certificates, except that its appointment comes from the protective or reorganization committee or voting trustees, and its dealings are with the 2 See New York Stock Exchange requirements, pages 446 and 449, 278 WORK OF CORPORATE TRUST DEPARTMENTS depositary for the committee or the agent for the voting trustees instead. of with a transfer agent. Stop transfers and duplicate certificates.—Stop transfer notices usually are filed with the registrar by the transfer agent. While the prevention of the transfer of certificates against which “stops” have been filed is not a part of the duty of the registrar, it ordinarily will cooperate with the transfer agent to the extent of filing such information and endeavor- ing, without assuming responsibility, to call the transfer agent’s attention to any certificate presented for cancellation against which a stop notice has been filed. oe Duplicate certificates must, of course, be registered, and the registrar will sign a duplicate against a certificate claimed to have been lost, stolen, or destroyed only if it receives: (1) satisfactory documentary evidence of the authorization of the issue of the duplicate certificate by the corporation; (2) evidence of due compliance with the regulations of any stock exchange on which the stock may be listed; and (3) a counter- part of the bond of indemnity filed in connection with the application for a duplicate certificate. Such indemnity should be given in favor of the registrar as well as the corporation and the transfer agent, and should be in form and amount satisfactory to the registrar. Bond registration.— While the great majority of bonds and other corporate obligations are payable to bearer and have interest coupons attached, also payable to bearer, it is pro- vided in most bond issues that the holder of a bearer bond may have his bond registered in his name at the office of the corporation or its agent. An appointment of this kind may be made by resolution as indicated in Form 68. Form 68.—Appointment of Bond Registrar. COMPANY CERTIFIED Copy OF RESOLUTIONS RESOLVED THAT BANKERS ‘TRUST COMPANY, of New York City, be and it f *Transfer Agent . Registrar, *Principal and Interest : Principal Bonds of this , issued or to be issued under the mortgage or hereby is appointed the Agent of this Company, with the title o for the registration of the of the due Company dated *Strike out designation not desired. STOCK AND BOND REGISTRATION 279 deed of trust from this Company to 2 OL , as Trustee, dated , when presented to it for registration purporting to have been duly certified by said Trustee; and FuRTHER RESOLVED, that said Agent be and it hereby is authorized and di- rected from time to time, as any of such bonds shall be presented to it for that purpose, accompanied by instruments of assignment thereof executed by the registered holder, to transfer or discharge the registration thereof; and FURTHER RESOLVED, that this Company lodge with said Agent (1) specimen signatures of the officers of this Company authorized to sign or who shall have signed such bonds, (2) specimen signatures of the officers of said Trustee who shall be authorized to certify or who shall have certified said bonds, (3) speci- mens of said bonds, and (4) a copy of said mortgage or deed of trust and of all amendments thereof and supplements thereto, for use by said Agent for purposes of comparison, and in such action and in relying upon bonds purporting to be bonds of such issue and to bear the signatures of such officers this Company will protect such Agent until written notice to said Agent that any or all of said officers respectively are no longer authorized so to sign; and FURTHER RESOLVED, that when said Agent deems it expedient it may apply to , of mCity of , State of , counsel for this Company, or to its own counsel, for advice or instructions, and for its action in good faith in reli- ance thereon this Company shall fully protect and hold said Agent harmless from and against all liability; and FURTHER RESOLVED, that the President and the Secretary of this Company be and they hereby are authorized and directed to certify these resolu- tions under the seal of this Company and to lodge the same with said Agent. We, the undersigned, President and Secretary, respectively of Company, a corporation duly organized and existing under the laws of the State of , do hereby certify that the foregoing are true and complete copies of resolutions duly adopted at a meeting of the Board of Directors of said Company, duly held in the City of , State of , on the day of ; 19—, at which a quorum was at all times present and voted in favor of the adoption thereof, and that said resolutions are still in full force and effect. We further certify that the specimen or specimens presented herewith of the bonds of said Company referred to in the foregoing resolutions is or are a true and correct specimen or specimens of such bonds, that the signatures of the officers of this Company and of the Trustee mentioned in the foregoing resolutions, as set forth on the accompanying sheets or lists, are the true and genuine signatures of the officers of this Company and of said Trustee author- ized to sign and to certify or who have heretofore signed or certified respec- tively, the bonds of this Company mentioned in said -resolutions, and that the accompanying copy of the mortgage or deed of trust mentioned in said resolu- tions and the accompanying copies of the amendments thereof and supplements thereto is or are a true copy or copies of the same. WITNEss our hands and the seal of said Company this day of , 19—. , President ——, Secretary In this discussion the agent of a corporation to register its bonds is referred to as “bond registrar,’ although the less common title of “bond transfer agent’’ is really more nearly accurate. The duties of a bond registrar are to record, as the 280 WORK OF CORPORATE TRUST DEPARTMENTS agent of the corporation, changes in the ownership of bonds, (1) from bearer to a designated owner, (2) from one desig- nated owner to another, or (3) from a designated owner to bearer. As used in this chapter, the title “bond registrar”. should not be confused with the title “‘registrar for identifica- tion” discussed in Chapter XIII (page 184). Bonds, by their terms, may be “fully registerable ”? that 4s registerable both as to principal and interest, or they may be registerable as to principal only. Many issues, particularly long-term bonds, provide for both forms of registration. Full registration—Full registration usually is accom- plished by the surrender and cancellation of outstanding coupon bonds and the issuance in their place of a bond or bonds without coupons, both principal and interest of which are payable only to the registered owner. ‘The text of a fully registered bond is set forth in the ‘“Telephone” mort- gage (page 335). Ownership of a fully registered bond may be transferred on the books of the company only by due assignment and upon the issuance of a new registered bond issued in the name of the transferee. As in the case of stock, each transfer involves the cancellation of the existing bond and issuance of a new bond.’ Many mortgages authorizing fully registered bonds also provide that the holder of a fully registered bond may, at his option, surrender his bona for conversion into a like principal amount of coupon bonds and that the mortgagor will provide sufficient coupon bonds to exchange all outstanding fully registered bonds. Of re- cent years corporations generally have adopted the practice of placing on the back of fully registered bonds a legend (see page 454) referring to this privilege and specifying by serial number the coupon bond or bonds into which each fully reg- istered bond is exchangeable. ‘This practice is recommended by the New York Stock Exchange.* 8 There are exceptions to this statement. Some of the older mortgages pro- vide that a bondholder may secure full registration by surrender of his bonds for detachment and cancellation of all unmatured coupons, and registration on the back of the existing bond, in the space ordinarily used for registration as to principal only. Once fully registered such bonds cannot be reconverted into coupon bonds. ‘This practice is not common except under old mortgages. 4See New York Stock Exchange requirements, page 453. STOCK AND BOND REGISTRATION 281 Registration as to principal only.— Registration as to principal only does not affect the payment to bearer of the interest coupons as they mature, and is accomplished by in- scribing the date of registration and the name of the regis- tered owner, on the form provided for that purpose on the back of the bond (see page 82). Transfers are made on the books of the company kept by it or its bond registrar only upon presentation of the bond with an appropriate assign- ment. However, instead of the issuance of a new bond, as in the case of fully registered bonds, the date of registration and the name of transferee are inscribed by the company or registrar on the line below that used for the last previous registration of the bond. Each registration, of course, is signed by the company or its registrar, and no registration entered on the bond by other persons is valid.’ ‘Transfer- ability by delivery of a bond registered as to principal may be restored by registration to “bearer” and thereafter the same bond, from time to time, may again be registered and, subsequently, released by transfer to ‘‘bearer.”’ The mechanics of bond registration and transfer are sim- ilar to stock transfer, but as bearer bonds are more readily negotiable than stock (because no endorsement is required) the work of bond registration and transfer is usually assigned to a separate division rather than to the stock transfer de- partment. Practice differs as to whether this division should be grouped with the corporate trust department or with the stock transfer department. The work is closely allied to that of the stock transfer department; on the other hand, a trust company, in nearly every instance, will be trustee for most, possibly all, of the issues for which it is bond registrar. | Records.—Because of the similarity in the work involved, the records used by a bond registration division are modeled more or less after the records of the stock transfer depart- ment. 5 This is not intended as a complete statement of the legal aspects of the case. Bonds ordinarily are negotiable instruments and subject to the law of negotiable instruments. ‘There are cases on the effect of a bondholder himself endorsing the fact of his ownership upon a bearer bond. 282 WORK OF CORPORATE TRUST DEPARTMENTS Form 69 is the ‘“‘counter or window receipt” issued for bonds presented for registration. It isin two parts: (1) the left-hand portion is attached to the bonds as a means of iden- tification during the process of registration and is attached to the new or registered bond when registration is completed; (2) the right-hand portion is delivered to the person present- ing the bonds for registration and must be filled in, signed, and presented in order to secure delivery of the bonds on com- pletion of registration. No. 22139 Bond Registration Dept: psa ha ey ge Rese om BANKERS TRUST COMPANY ———Company (reste ne nie Sein Eg : « * , F Principal on! $ of the To be registered as "© Principal ara Interest ‘ registered’ as to Pricciodl pos fillet as per statement below. Address Dated THE OWNER OR OWNERS OF SECURITIES REPRESENTED BY} THIS RECEIPT AGREE WITH THE BANKERG TRUST COMPANY’ THAT SUCH SECURITIES MAY BE DELIVERED TO THE BEARER HEREOF WITHOUT IDENTIFICATION Form 69.—Counter Receipt. The “bond registers” (Forms 70 and 71) correspond to the transfer records of the stock transfer department. Form 70 is used for entries of bonds registered as to principal only, and Form 71 is used for recording changes in respect to fully registered bonds. Form 72 is the registered bond ledger sheet. It is posted from sheets 70 or 71 as the case may be. The use of Form 73 is confined to issues where the institu- tion acting as trustee has not been named as registrar of the bonds. For example, the issuing company may register its own bonds; but, as all newly issued bonds must be certified, it is necessary for the issuing company to turn over the new bonds to the trustee for certification and at the same time to surrender the canceled bonds for notation on the trustee’s records. Reports of changes between coupon and fully registered bonds are made to the issuing company on Form 74. Frequently corporations leave with the bond registrar a supply of fully registered bonds signed in blank, which the 283 STOCK AND BOND REGISTRATION sequinyy qdis22yy *(qso1oJU] pure jediouitg) p1osey uoneijsis9y— TL WI0 jo auITy UT Jo amex 109g aanssiay saxog NO.1n09 _ ANTITAONVOS SALVOMMILNED SLLST OAM AANSSI SHLVOISILAAN TGUALSIONY *4S9J0]U! pue jedioutid 0} se poso}siso1 spuog “mo[aq payeudisap suosiod 30 uosiad ay) 01 ‘saweu aanoadsas sno ausoddo yas qnowe ayi sgysuen puke usisse Aqasay op ‘Auedwos jo spuog aSeSyo0u JO sI9pjoy pasaiside1 pausisispun ayy om *QIA19IISUL ILA 10L "(ATU [edioulg) ploday uoneljsisay— os Woy P54 OL CIYALSIOVN “SON GNOd persed -jedjoutad 03 sv poJaqs}Je1 spuog “mo}2q paieuSisep suosiod 10 uosiad ay. 0} ‘soureu eansadses ino* azisoddo 32s qunoule ay? Jojsues} pue uSisse Aqo1zsy op. ‘Auedwoz : ac spuog a8e8210 Jo s19pioy pasorsifos pousissopun on 2m “QIQIDIOYY INR IOL 284 WORK OF CORPORATE TRUST DEPARTMENTS registrar may use when needed simply by having the bonds authenticated. It is essential that such bonds be kept under control. For that purpose the records and methods of the stock transfer department (Form 55, page 259) are applicable to bonds. Bonds are carried in the control at their face values, if expressed, and at one unit each if they are “in blank.” Registered as to Form 72.—Ledger Sheet. Forms 75 and 76 are respectively the list and check used in payment of interest on fully registered bonds, if interest is paid by the bond registrar as the agent of the debtor company. In the case of many bond issues, the books for the transfer of fully registered bonds close for a short period, say, two weeks, preceding each interest payment date, to give the pay- ing agent opportunity to prepare from the bond ledger a list of the bondholders on Form 74 from which the interest checks are drawn. ‘The payment of registered interest involves practically the same amount of work as the payment of divi- dends on stock. If the number of registered bonds is large, the paying agent probably will use a set of stencils, each stencil bearing the name and address of a bondholder. This greatly reduces the amount of detail and eliminates many typographical errors. It has become the practice of many cor- porations to mail registered interest checks on the afternoon of the day immediately preceding the interest date. By so doing, a large number of security-holders are enabled to re- ceive their interest on the due date. A paying agent should follow this practice only if it meets with the approval of the debtor corporation and provided, always, that funds are on deposit for the full amount of maturing interest. As in the payment of coupons (which we shall discuss pres- ently); the paying agent is required, in certain cases, to secure 285 STOCK AND BOND REGISTRATION jo aiyAy uy payne spnog praysiFay SONOG J39DVOLYOW "J99G UOT}BIYIED pue UoNEo.ueD— ¢Z WLIO PIyAwD spuoy uadnoy ANVdWOD paypourRD spuog paiaasiday pe|jao2aeD spuog vodno:) S3DV1d YISHL NI GalsILYsD SGNOG GNV aatnaoNnv> AO GYOD3Y WORK OF CORPORATE TRUST DEPARTMENTS 286 *Aueduios Sulnssy 0} 1oday—'p/, WOLF "AN¥YdNOD LSNUL SYANNYE ‘sinof Ajniy As3A 8 Aueduioy anok JO. uorzeiqstSaI oY} Ul epeur Ueeq sAeY soSury> BuIMo]]Oy BL], 41335ULS TIVM OF ANAWLYNVdS0 NOLLVHLSIOSY STOCK AND BOND REGISTRATION 287 from the owner of registered bonds income tax ownership certificates in respect to the interest paid. If such certificates, when required, are not filed with the paying agent prior to the date for mailing checks, it is customary to attach ownership certificates to the interest checks and stamp the checks with an endorsement reading: ‘This check not payable or collectible unless accompanied by certificate of ownership of owner of bonds.” BANKERS TRUST CO ENT Form 75.—Registered Interest List. REGISTERED INTEREST TO THE ORDER OF PITTSBURG COMPANY. BANKERS TRUST COMPANY. acent BY ASSISTANT SECRETARY PAVANLK THR OUCH THE NPWYONK CLEARING HOUSE Form 76.—Registered Interest Check. Coupon paying.—The work of this department of a bank- ing institution involves (1) payment of coupons, (2) account- ing to its principal for coupons paid, and (3) services with respect to the Federal income tax. Normally, its relations with the debtor corporation® are those of agent to principal, but it is possible to impress with a trust, funds deposited to 6TIt should be kept in mind that the coupon paying department does not always act for the debtor corporation; it frequently makes payments as agent for correspondent banks, ~ 288 WORK OF CORPORATE TRUST DEPARTMENTS pay coupons. In the case of insolvency of the debtor cor- poration or the service of a writ of attachment upon the pay- ing agent, the question of whether the funds are deposited with the trust company as paying agent or as trustee would be of prime importance. In such a contingency, action by the trust company should be taken only after a review, in consul- tation with counsel, of all of the facts of the specific case. Receipt of funds.—One of the first duties of the officer in charge of the department is to see that funds are received to cover, as they mature, all interest payable at his department. It is good practice to prepare, say, ten days before each ma- turity, a list of the issues to be paid and the amount of each. As remittances are received, they can be verified as to amount and checked off the list. A day or so before maturity the matter should be taken up with companies which have not remitted, so that on the day of maturity all necessary funds may be on hand. This practice not only goes far to avoid the confusion during a busy day resulting from withholding payment for certain issues, funds for which have not been received, but sometimes will save the debtor corporation the embarrassment which would follow an oversight in supplying funds to pay coupons at maturity. Relations with corporate trust department.— Usually the coupon-paying division of a trust company will pay the cou- pons from many issues for which the trust company is not trustee, and probably it will not pay all of the issues for which it is trustee. However, in the case of issues for which a trust company is both trustee and paying agent, it is advisable for the corporate trust department to secure from this division, at each interest maturity, a statement of the amount deposited and to compare this with the amount of bonds shown by their records to be outstanding. At the time that satisfaction of a mortgage is required, it will be helpful if a record has been maintained showing that at each interest maturity date funds were deposited with the trust company to pay interest in full on all bonds at the time outstanding. Often the amount deposited to cover an interest maturity will be less than the amount indicated by the trustee’s records to be required. Such a difference probably will be caused by one or more of the following factors: COUPON PAYING 289 1. The amount of interest on fully registered bonds paid directly by the company or its bond registrar. 2. Bonds held in the treasury of the company from which coupons are not collected. 3. Bonds pledged by the company under other mortgages or to secure loans, and from which coupons are not collected. If, the size of the issue is sufficient to justify the trouble, and the debtor corporation is willing to codperate to the necessary extent, it is often advisable to arrange with the corporation to make a complete accounting to the trustee at each interest maturity by submitting for inspection the re- ceipts for registered interest or canceled checks covering such payments (unless the coupon-paying agent is also agent for payment of registered interest, in which case its records will suffice) and the canceled coupons from treasury or pledged bonds. ‘These items, together with the amount of funds de- posited to pay coupons in the hands of the public, should, of course, equal the amount of interest due on the total amount of bonds shown by the trustee’s records to be outstanding. While all debtor corporations are not willing to undertake such a complete periodical accounting of interest, it is a wise precaution for the trustee to make such a recommendation. Generally speaking, the trustee is not in a position to enforce such a request, for a claim of default under the mortgage based on non-payment of interest could not be set up until coupons had been presented for payment and payment refused. Federal tax law.—The provisions of the various Revenue Acts imposing the Federal Income Tax have added consider- ably to the duties of this division, by requiring the submission of income tax ownership certificates with coupons presented for payment. Ownership certificates have never been required in the case of issues by the United States Government, states, and other political subdivisions thereof, and in the case of cer- tain quasi-governmental issues such as Federal Farm Loan Bonds. Under the Federal Revenue Act of 1926 and the Treasury regulations thereunder, ownership certificates are not required in the case of bonds which do not contain the so- called “‘tax-free-covenant,’’’ or on any coupons which are 7 There is an exception to this statement in the case of non-resident aliens. See page 104 for a statement regarding “tax-free-covenant” bonds, 290 WORK OF CORPORATE TRUST DEPARTMENTS owned by a corporation. As both the law and the regula- tions relating to ownership certificates are frequently changed, no attempt is made here to discuss the subject, but the reader is referred to the several services on the Federal Revenue Tax.’ Under the law and regulations as they now stand (1926), the debtor corporation, or its duly appointed fiscal agent, is required to file the ownership certificates, accom- panied by a monthly list return, with the Commissioner of Internal Revenue at Washington, D. C., on or before the 20th day of the month following the month of payment, and to file an annual return and pay the amount of tax withheld during the preceding calendar year, on or before March 15 of each year. ‘The annual return and payment are made to the collector of internal revenue of the district in which the fiscal agent is located. Some corporations handle these re- turns themselves, and, in that event, the agent delivers the ownership certificates to the corporations with the monthly statements of the coupon accounts. In many cases, however, a corporation desires to be relieved of this duty and appoints the trust company which acts as its paying agent, as fiscal agent for this purpose. The following is a form used by a New York trust company to cover such an appointment. Figure 15.—Appointment as Fiscal Agent National Trust Company, 200 Wall Street, New York, N. Y. Dear Sirs: The undersigned, —————, a corporation organized under the laws of the State of New York, with its principal office at ————— in the County of State of New York, has appointed and does hereby appoint National ‘Trust Company, a New York corporation, with its principal office at No. 200 Wall Street, New York City, the Fiscal and Paying Agent of the undersigned, for the purpose of paying and with full power to pay at the office of said National Trust Company in the City of New York, State of New York, the interest upon the Mortgage Gold Bonds, Series —, due of the undersigned corporation, dated , and issued under a mortgage to National Trust Com- pany, Trustee, New York City, dated as such interest from time to time matures. The said National Trust Company is hereby further constituted the agent and attorney of the undersigned for the purpose of collecting any and all income 8 Among the authoritative services are those of (a) Prentice-Hall, Inc., (b) Corporation ‘Trust Company. COUPON PAYING 291 taxes required to be collected under the Revenue Act of 1926, or any amend- ment thereof, and the Treasury Department regulations pertaining thereto upon the interest so paid from time to time on the above-mentioned obliga- tions of the undersigned corporation, and is hereby authorized and empowered to make any and all payments and reports to, and to file any and all returns and accompanying certificates with the Federal Government, which, as such agent, it may be permitted or required to make or file under the Revenue Act of 1926 or any amendment thereof, and the Treasury Department regulations pertaining thereto. Copy of this appointment is being contemporaneously filed with the Collector of Internal Revenue for the District in which the undersigned is located. In consideration of your acceptance of this appointment, and of the per- formance on behalf of the undersigned of its duties in connection with the above-described obligations under the withholding provisions of the Revenue Act of 1926, or any amendment thereof, and of the Treasury Department reg- ulations pertaining thereto, the undersigned hereby agrees to indemnify and hold harmless your company from any and all costs, expenses, attorneys’ fees, and other disbursements or liabilities which may or can accrue or be incurred from acting in such capacity of Fiscal and Paying Agent under the Revenue Act of 1926, or any amendment thereof, and the Treasury Department regula- tions pertaining thereto. It is understood that this appointment may be revoked at any time by the undersigned, and that the Fiscal and Paying Agent appointed hereunder may resign the appointment at its option. Very truly yours, FP 206 Description COUPONS DUE COUPONS. RETURNED FOR REASON MARKED COUPONS AT__ f Coupons not paid by us Name and Address of owner COUPONS AT Required 3 COUPONS AT_—~__. | Coupons not due Present again TOTAL No funds Bonds have been called. ical Zz At =| {0 Uy: Real Fe ben oe fei ng 2: CHECK TO ORDER OF.__ aan aw PLEASE USE SEPARATE ENVELOPE FOR EACH CLASS OF COUPON Form 77.—Coupon Envelope. Records.—As coupons are presented for payment, most paying agencies will insist that they be enclosed in a standard form of coupon envelope, illustrated in Form 77, and that a separate envelope be used for each class of coupons. The requirement that all coupons be presented in envelopes uni- 292 WORK OF CORPORATE TRUST DEPARTMENTS form in size and marking, greatly facilitates the detail work of handling coupons and is a factor in insuring accuracy. While the large majority of coupons are presented for payment over the counter, some will reach the paying agent by mail, and it is the usual practice of the department to prepare its own envelopes for all mail items, thus securing complete uniformity on all coupon payments passing through the de- partment. RETURN tTo__ TAX DEDUCTIONS Aq pearesey bs) 3 & = J a ° ¢£ 3 ea 3 aq oe ° ” TOTAL $ oS TAX DEDUCTIONS FROY BANKERS TRUST COMPANY ®uR CHECK COUPON DEPT. TOTAL (AS PER LIST) Form 78.—Return Envelope. As each lot of coupons is received for payment, they are carefully examined and counted at the counter, the clerk mak- ing the verification initialing the envelope. If it is found that coupons have been presented which, for some reason, are not payable, notation is made in the space at the left of the envelope, and such coupons are enclosed in a return envelope (Form 78), for return to the presentor with the check issued in payment of the remainder of the coupons. Upon completion of the verification the coupons are can- celed, and the initialed envelopes containing the canceled cou- pons delivered to clerks who draw the checks in payment. 4: Withheld Form 79.—-Check Register. COUPON PAYING 293 The checks, as drawn, are entered on a “check register’’ (Form 79). ‘The serial number of the check is entered in the column to the left, the payee’s name is entered on the same line in the column headed “Description,” and on the succeed- ing lines of this column are entered separately the description of each class of coupons included in the payment. The amount of each class of coupons is entered on the corresponding line of the next column, and the amount, if any, of tax to be withheld on the corresponding lines in the column headed ‘Tax Withheld.” On the last line of the entry under the headings ‘‘Total ‘Tax’ and ‘Amount of Checks” is entered, respectively, the total amount of tax to be withheld and the amount of the check drawn in full payment of the block of coupons covered by the entry. The right-hand column headed ‘‘Remarks’’ may be used to note the return of coupons im- properly presented and for other purposes. Coupons are seldom presented for payment by the actual owner, who usually finds it more convenient to collect them through his bank. For example, in the case of coupons pay- able in New York, the actual bondholders scattered through- out the country will, at or just before, the maturity date, deposit their coupons for collection with their local banks. Each local bank will assemble its New York coupons and ship them to New York for collection, or perhaps forward them for collection to its banking correspondent in the nearest large city which, in turn, will assemble all New York coupons and send them for collection to its correspondent in New York. As a consequence, coupons for payment are received by the paying agents in the financial centers largely through the other banks in the same city and in substantial amounts. Thus, many of the entries on the check register will include several different issues of coupons, and each issue will be composed, perhaps, of several small lots of coupons originating in differ- ent sources. At the end of the day the coupon envelopes are sorted into issues and again totaled and the aggregate proved to the total of the check register. ‘The total payment of each issue is en- tered in the cash journal of the department (which is similar to the corporate trust journal illustrated on page 68) and subsequently posted to the various accounts in the ledger 294 WORK OF CORPORATE TRUST DEPARTMENTS (Form 80). ‘The tax withheld as shown by the check reg- ister is entered on tickets (Form 81), and from these tickets posted to the ledger in separate tax accounts carried on Form 80. ‘The total taxes withheld in respect to each issue are later paid over to the debtor corporation, or directly to the collector of internal revenue, if the paying agent acts also as fiscal agent. Bankers Trust Ca Until recently it has been the custom of paying agents to carry a separate ledger account of each maturity as well as each issue of coupons. As a number of coupons of each maturity normally remain outstanding for considerable pe- riods, sometimes years after maturity, the number of accounts on the ledgers of the active paying agents became a burden, and many of the larger agents have now discontinued carrying a separate account for each maturity and, instead, carry simply one account for each issue. TAX DEDUCTIONS & CHECKS Date CREDIT ACCOUNT OUTSTANDING CHECKS RECAPITULATION Form 81.—Tax Deduction Ticket. COUPON PAYING 295 If the paying agent does not act as fiscal agent under the Federal Income Tax Law, the ownership certificates are per- mitted to remain with the canceled coupons in the payment envelopes. If, however, the paying agent acts as fiscal agent, the ownership certificates are removed on the second count of the coupons and are filed for listing on the monthly list returns to the Commissioner of Internal Revenue at Wash- ington, D. C. | We are today forwarding you, accompanied by certificates of ownership, the following cancelled coupons which have-been paid and charged against your account, and we would request that they be counted and examined as soon as possible, advising us promptly of any differences. If no notice of any discrepancy is réceived within thirty days from the date hereof, this statement of account will be considered correct. Balance. Received from BANKERS-TRUST COMPANY the coupons described. in its statement aggregating $_—_________accompanied ‘by certificates of ownership, said’ coupons having been paid out of funds deposited for that purpose. The balanee of $. remaining to the credit of this coupon account as per statement rendered; i SP in Cher needs Paes correct, Please sign officially and return in enclosed envelope. Form 82.—Coupon Account, Statement and Verification. 296 WORK OF CORPORATE TRUST DEPARTMENTS Statements on coupon accounts are rendered periodically, usually monthly, and the canceled coupons returned to the debtor corporation as vouchers. Form 82 illustrates a cou- pon account ‘‘statement and verification.” Audit.—As coupons are bearer instruments, and readily negotiable at maturity, it is most important to maintain a current audit of the work of the coupon-paying division. In many companies this is accomplished by a force of auditors assigned to a separate cage, attached to the cou- pon-paying division. Upon proof of each day’s work, the canceled coupons are delivered to the auditors, who verify them with the total cash disbursed during the day and retain the canceled coupons until the monthly statements are pre- pared by the paying division. ‘These statements are then delivered to the auditors who verify the total debits shown thereon with the aggregate of canceled coupons of the issue in question, which are in their possession. If the two totals agree, the canceled coupons and statement are sent to the debtor corporation. ‘The return envelope enclosed with the statement is addressed to the audit department. When the customer’s verification is received and reconciled to the ledger account, it is delivered to the coupon-paying division for filing. Payments for correspondents.—In the larger cities espe- cially, coupons often are paid for the account of banks in other cities acting as paying agent for the same issue. For example, an issue of bonds is sold in Chicago. ‘The bonds provide that the interest thereon shall be payable at the hold- er’s option at, let us say, the Tenth National Bank of Chicago or the Fifth Trust Company of New York. Normally the debtor corporation will deposit funds for the payment of the interest, as it matures, on the entire issue, with whichever of the two banks it considers the principal paying agent, and will request that bank to arrange with the other to honor such coupons as may be presented to it. Assuming that the deposit was made with the Tenth National Bank of Chicago, that bank would then advise the Fifth Trust Company in New York of the full details of the issue and request it, after receipt of advice that the funds necessary to cover the pay- ment have been deposited with it (the Chicago bank), to pay P _—" COUPON PAYING 297 FIFTH AVENUE OFFICE [ie i j © Weal rievy-seventH st. OFFice STH AVE. AT 42ND ST ‘ mis i) MADISON AVE. AT 37TH ST. NEW YORK ’ CO. MPANY. - NEW YORK PARIS OFFICE-3 & S PLACE VENDOME LONDON OFFICE -26 OLD BROAD sT E, Cc. 2 WALL STREET OFFICE 16 WALL STREET COUPON DEPARTMENT NEW YORK, WE CHARGE YOUR ACCOUNT FOR COUPONS PAID AS LISTED, YOURS VERY TRULY. ASST. SECRETARY. Description Amount Form 83.—Daily Advice. 298 WORK OF CORPORATE TRUST DEPARTMENTS ic) Se, We have this day forwarded you a package of properly cancelled coupons as stated below, accompanied by certificates of ownership, the Bid coupons having been paid and charged to your = = ee L ot Received from BANKERS TRUST COMPANY the coupons described in its statement, dated__t_ageregating $C accompanied by certificates of ownership, said coupons having been'paid and charged to our account. Please sign officially and return in enclosed envelope. Form 84.—Monthly Statement and Receipt. such coupons of the issue and maturity as might be presented, charging the amount thereof to the draft account of the Tenth National Bank. Under such an arrangement it would be usual for the Fifth Trust Company to send daily advices of payments to the Tenth National Bank and to return the canceled coupons monthly. Form 83 illustrates the daily “advice’’ and Form 84 the monthly “statement and receipt”’ for canceled coupons. Coupons from called bonds.—In the case of coupons from bonds which have been called for redemption prior to matur- ity, it is important for the coupon department to prevent the encashment of coupons maturing after the date of redemp- tion. In the case of a partial call, where numbers have been COUPON PAYING 299 selected by lot, this requires an examination of the serial num- bers of all coupons presented from such issues. While it is not a part of the duty of the paying agent, it is the usual practice, in the case of coupons detached from called bonds and maturing on the redemption date, if unac- companied by the bonds themselves, for the paying agent to NOTICE OF BONDS CALLED FOR REDEMPTION The bonds to which the coupons covered by this check pertain have been called for redemption, or have otherwise become due. To avoid loss of interest to bondholder, the bonds (if not already paid) should be prompt- ly presented for payment to our Corporate Trust Department. Please see that this notice is returned to the party from whom the coupons were received by you. BANKERS TRUST COMPANY NEW YORK CITY F.3096 2473 Form 85.—Redeemed Bond Notice. make an effort to bring to the bondholder’s attention, the fact that the bonds to which the coupons pertain have been called for redemption. The usual method is to attach to the check issued in payment of the coupons, a notice along the lines of Form 85, or, where bonds have been selected by lot, a copy of the redemption notice giving numbers of the bonds so drawn. Unfortunately, it is most difficult to be sure that the notice will reach the actual bondholder. As previously explained, coupons normally pass through a chain of collect- ing banks before reaching the paying agent and, as no record of the serial numbers of the coupons ordinarily is kept by the collecting banks, it is frequently impossible for the collecting banks properly to pass the notice back. To draw the attention of bondholders to the fact that their bonds have been called for redemption, some paying agents return coupons maturing on the date of redemption (if pre- sented apart from the bonds) and notify the holders thereof that both bonds and coupons will be paid if presented simulta- neously. While done for the protection of bondholders and 300 WORK OF CORPORATE TRUST DEPARTMENTS to prevent loss of interest on their part, this practice meets with frequent objection from bondholders, particularly in cases where the bonds and coupons have been sent separately and reach the paying agent through different channels. Retention of canceled coupons.— Of recent years a number of corporations, to relieve themselves of the detail of hand- ling canceled coupons have requested the paying agent to re- tain the canceled coupons, to cremate them periodically, and to furnish the company with proper cremation certificates. The theoretical objection to this plan is that the debtor cor- poration receives no vouchers for the funds which are dis- bursed on its behalf. If the trust company which is paying agent is also trustee for the issue, the debtor corporation may advance the argument that its obligation is ended when it has paid to the trustee, on behalf of the bondholders, funds sufficient to care for the matured interest. As a matter of fact, this is not strictly true, as the coupon is the company’s © obligation and, if unpaid, may be the basis of a suit by the holder against the company, although the company in turn probably would have recourse against the trust company as paying agent. Another factor from the trust company’s point of view is that in dealing with coupons which are practically the equivalent of cash, it is most desirable to have a monthly verification which is secured through the practice of rendering monthly statements and returning canceled coupons. Stop payments.—Coupons against which “stop payments” have been filed are even more difficult to detect than “‘stopped” bonds. Paying agents, generally, take the position that they will not assume any responsibility for preventing the payment of coupons against which ‘‘stop’’ notices have been filed; but they do undertake to use their best efforts to withhold payment, at least until they have communicated with the per- son who has filed the “‘stop” notice. If, in such a situation, the latter insists that his ‘‘stop”’ notice be enforced, the proper procedure on the part of the paying agent is far from clear. In some cases the presentor of the coupons is requested to furnish evidence of the fact that he is a holder in due course for value. If satisfactory evidence on this point is received, the paying agent probably will make payment of the coupons (which are bearer obligations) despite the “‘stop” notice and COUPON PAYING 301 so notify the person who filed the “stop,” at the same time offering to furnish him with such information as may be available regarding the facts surrounding the payment. In any case where conflicting claims arise it is always advisable to consult counsel before making payment, as the particular circumstances of the case in hand may have an important bearing on the legal aspects of the situation. “Stop’’ notices relating to coupons should be acknowledged with a letter following the general form suggested on page 87 with such changes in detail as may seem appropriate. Return of coupon money.—As stated earlier in this discus- sion, funds for the payment of coupons ordinarily are deposited with a trust company as paying agent and, if this is so, the debtor corporation as principal has the right to withdraw the balance of the funds at any time. ‘This, of course, would not hold true if the funds on deposit had been impressed with a trust for the benefit of the coupon-holders. In the case of a mortgage for which a trust company is trustee as well as paying agent, the corporate trust department, upon satisfaction of the mortgage, should notify the coupon de- partment and the coupon department should thereafter con- sult the corporate trust department before releasing any of the funds to the debtor corporation. This is for the reason that, through the satisfaction of the mortgage the trust company has given up its lien and, consequently, may be held liable to the bondholders for the payment of sums remaining due on account of principal and interest. Before releasing the mortgage the trustee would have satisfied itself that funds were on deposit for the full payment of principal and interest due, and it would object, of course, to the return of any of these funds to the debtor corporation until the obligations which the funds were intended to meet had been properly canceled and surrendered to it. CHAPTER XIX FEES Fees.—In recent years many banking institutions have been carefully analyzing the relation between income and expense. The result, in so far as it relates to the work of the corporate trust and agency group, has been, in many cases, a distinct shock. The executive of a successful department should al- ways have available full information as to the expenses of his department both direct and indirect, so that he can readily determine the current margin of profit. A condition produc- ing unsatisfactory results must be corrected if the department is to justify its existence to the organization as a whole. Such a condition may be improved in one of three ways: 1. Increased volume of business.—Because of the ex- tremely technical nature of fiduciary business, any department to operate efficiently, must be organized on a basis which involves a substantial expense. Consequently, many trust departments, particularly during the earlier years of their existence, fail to show a satisfactory profit, because the volume of business handled has not reached the point required to carry the minimum efficient organization. In such a situation the entire organization of the institution should codperate with the trust officer in his effort to increase the volume of business. 2. Decreased expenses.—The possibility of decreasing the expense of operation should, as in all lines of business, never be lost to sight; but the desire for increased profits should not be permitted to result in decreasing expenses to the detriment of service. 3. Increased compensation.—Assuming that a careful an- alysis of the situation indicates that the trust department, as compared with competitors, is doing a satisfactory volume of business, and its expenses are reasonable, the one remain- ing method of improving conditions, and the natural and proper one, is through an increase in the scale of fees. 302 FEES 303 More important, however, than a mere increase in rates is standardization on a proper and equitable basis. Competi- tion in rates is, in the long run, bound to react unfavorably on trust profits; and it also is likely, through the necessary effort to cut expenses to meet reduced income, to affect ad- versely the quality of trust service. The question of standard rates has been carefully studied by the rust Company Section of the American Bankers As- sociation, by the Corporate Fiduciaries Association of New York City, and by similar organizations of trust officers in some of the larger cities. Varying conditions in the different financial centers have made it difficult to adopt standard rates applicable to the country as a whole, but real progress along these lines has been made recently in some cities. The following schedules covering corporate trusts and cor- porate agencies are those in general use in New York City. The fees quoted are intended to be minimum rates and, ac- cordingly, are subject to increase if the features of a particular account so warrant.’ Corporate Trusts. Initial fee—If preliminary negotiations are involved, if there is collateral to be received, if the trust indenture is executed in a large number of counterparts, if the ‘‘closing” involves the satisfaction of prior mortgages, the payment of prior issues, or the receipt and payment of outstanding obligations, such as promissory notes, etc., and/or the deliv- ery of certain bonds of the issue against cash or otherwise in accordance with the instructions of the obligor, or, in other words, wherever the opening of the trust has resulted in more work to the trustee than the mere execution of the trust instrument in a small number of counterparts, there should be charged an initial fee of $100 or more, the exact amount to be arrived at by an appraisal of the services rendered. Certification charges.—For the authentication of tempo- rary bonds in large denominations against which trust receipts or interim receipts are issued, or for the authentication of large temporary bonds which are to be used as collateral to 1 The rates published herein are based on the schedule of fees approved by the Corporate Fiduciaries Association of New York City (1926). 304 WORK OF CORPORATE TRUST DEPARTMENTS a note issue, a parent company bond issue, for bank loans, or which are to be held in the treasury of the Company, or other- wise: $100 for the first $1,000,000 principal amount; $50 for each $1,000,000 in excess thereof, with a maximum fee of $1,000. For the authentication of temporary bonds of.other denom- inations: $2 per $10,000 bond; $1 per $5,000 bond; 30 cents per $1,000 bond; 20 cents per $500 bond; 10 cents per $100 bond. For the authentication of definitive bonds: $3 per $10,000 bond; $1.50 per $5,000 bond; 50 cents per $1,000 bond; 30 cents per $500 bond; 20 cents per $100 bond. The minimum charge for the certification of an entire issue of bonds or notes should be $250 except for so-called “real estate’ mortgages on single parcels for which the minimum is $100. For signing definitive trust certificates under Philadelphia plan: Requiring two signatures of officials of the bank or trust company—75 cents per $1,000 certificate. For the countersignature or registration (for identification as to issuance) of temporary or definite bonds, in denomina- tions of $1,000, $500 or $100, 25 cents per signature. For the issuance of bankers’ receipts, interim receipts, or trust receipts: against the deposit of bonds, 50 cents each; against cash, 25 cents each, if cash remains on deposit 10 days or more, otherwise 50 cents. For sorting, listing, and cremating bankers’ receipts, interim receipts, and trust re- ceipts, and interest warrants detached therefrom: regular cre- mation rates (see page 307). Annual fees.— (a) For ordinary services as Trustee of unsecured note or debenture issues, where there are no periodic duties other than general to be performed by the Trustee: NoTeE.—The fees quoted above for the certification or countersignature of temporary bonds and for the issuance of bankers, interim, or trust receipts cover also the exchange of the temporary bonds or receipts for definitive bonds, but not out-of-pocket expenses in connection with the exchange, such as postage and insurance on shipments of definitive obligations to out-of-town holders. FEES 305 On authorized issues up to 1,000,000 principal amount ...... $100 per annum On authorized issues, 1,000,000 to 3,000,000 .................. 150 per annum On authorized issues, 3,000,000 to 5,000,000 ............ee000% 250 per annum Overs 5;000,000 to. ec te kl aie mis aden proportionately (b) For ordinary services as Trustee of unsecured note or debenture issues, collateral trust or equipment trust inden- tures, or real estate mortgages, where there are specific duties to be performed each year by the Trustee: On authorized issues up to $1,000,000 principal amount ...... $150 per annum On authorized issues, 1,000,000 to 2,000,000 ................4.. 200 per annum On authorized issues, 2,000,000 to 3,000,000 .................. 250 per annum On ‘authorized issues, 3,000,000 to, 5,000,000 -........00.00cse0e 300 per annum _ On authorized issues, 5,000,000 to 7,500,000 ...............48. 400 per annum On authorized issues, 7,500,000 to 10,000,000 ...............00. 500 per annum Ovesmig, QUO. U00N ete tu. heloesa «ls proportionately When the bonds are issued in two or more series, the an- nual fee is based on the aggregate principal amount of all series of securities outstanding. For holding stock as collateral.— Minimum annual charge of $25. BLOD RDS CANIN fOr fNGs YSPY ecie baw ccie tars css ve ele oo oe $1,000,000 par value S0' per annum each on) the next es). ik ee ee 4,000,000 par value ee Perea SAC ON THECREXt, 4), csc tees cis ee able eee s 5,000,000 par value tee0sper annum each, on all) above... /.0. 006.065 ee ane 10,000,000 par value Possible services—Statements to Company and its auditors, vault space, substitutions, collections and disbursements, proxies. Nore.—If the collateral is all in one piece or very few pieces, or if there is no activity or very little activity in connection with collateral, the above schedule should be cut in half, with a minimum annual fee of $25. For holding bonds as collateral.— Minimum annual charge of $25—1/40 of 1 per cent per annum on the first $5,000,000 principal amount. $200 per annum for each million on next ........ $5,000,000 principal amount 150 per annum for each million on next ........ 5,000,000 principal amount 100 per annum for each million on next ........ 5,000,000 principal amount 50 per annum for each million over ........... 20,000,000 principal amount Possible services—Statements to Company and its auditors, cutting and collection of coupons, or cutting, cancellation and delivery of coupons, substi- tutions, vault space. Notr.—If the collateral consists of bonds which have been refunded and are stamped or canceled — one-half of the above charge should be made, except that the minimum annual charge is to be not less than $25. For “holding alive’ in the Sinking Fund, the above fees should be charged if the coupons are to be cut semi-annually; if the coupons are not to be cut, one-half of the above charge 306 WORK OF CORPORATE TRUST DEPARTMENTS should be made, except that the minimum annual charge should be not less than $25. Temporary bonds and registered bonds in large denomina- tions are to be classed as stock and the charge for holding same to be one-half of regular stock collateral charge. Mixed collateral of bonds and stock to be charged at rate quoted on each class. For holding uncertified bonds.—Bonds held for future certification and delivery, except bonds held for purpose of exchange for bonds of other denominations, a charge of $50 per annum for each 500 pieces so held. Purchases and redemption.—At maturity, or by call as a whole of the entire amount outstanding: T/10' of (396 ot Bretig a ie GG Seem ee $500,000 principal amount 1720: 08° 1%. con meet Ul us by cl aaie soso eae ee ne 500,000 principal amount L/30. OF (196 ON TEX hates chs ca Spleen ee 4,000,000 principal amount 1/40 of) 19> (on exeess (Over 42. Gone ae ea 5,000,000 principal amount For the purchase of bonds or notes for account of the sinking fund by advertising for sealed offerings, or in the open market without advertisement, for each operation, 1/8 of 1 per cent of the principal amount of the bonds or notes so redeemed on the first $100,000 principal amount. 1/16 of 1 per cent on the next $100,000 principal amount. 1/32 of 1 per cent on all over $200,000 principal amount, with a minimum fee of $25 per operation. For the redemption of bonds or notes through call of part of the issue outstanding, 1/10 of 1 per cent of the principal amount of the bonds or notes so redeemed, with a minimum fee of $25 per operation. In lieu of the above fees, funds so to be used in the pur- chase or redemption of bonds may be deposited with the Trustee without interest from one week to two weeks in advance of the date upon which they will first be subject to use, depending upon the character of the operation involved. Conversion of bonds or notes.—For the conversion of bonds into other securities, 1/20 of 1 per cent of the par value of bonds or notes converted, with a minimum of $25 per annum, to start from the date of the first conversion. FEES 307 Cremation.—For cremating bonds; interim or trust re- ceipts, and coupons, interest or dividend warrants: $15 per 1,000 bonds, etc., if sorted and listed by the trustee. $8 per 1,000 bonds, etc., if sorted and listed by the corporation. $8 per 1,000 coupons, etc., if sorted and listed by the trustee. $4 per 1,000 coupons, etc., if sorted and listed by the corporation. Minimum fee for a single cremation $10. Partial releases.—For each release of property, a minimum charge of $25, the exact charge being determined by the value of the property involved and the amount of work involved. Refunds of state taxes.—If the trustee is called upon to handle tax refunds there will be a special annual fee dependent upon the amount of work involved. Supplemental indentures.—For executing supplemental in- dentures, a fee by appraisal of the services rendered, with a minimum of $50 per indenture. Extraordinary services.— For performing any services not contemplated at the time of the execution of the indenture, a fee to be determined by appraisal in an amount to fit the service. Execution of satisfaction pieces.—For this service the exact charge depends on the value of final services rendered at the closing of the trust, the minimum fee being $25. Exchange of temporary for definitive securities as agent for another corporation Twenty cents for each bond de- livered, with a minimum of $50 for any one account. Trustee of foreign insurance companies.—For holding se- curities of such companies, an annual charge of 1/10 of 1 per cent of the average principal amount held during the year. Industrial note issues.—For acting as Trustee or Registrar (as to issuance) of issues secured by large numbers of prom- issory notes, % of 1 per cent per annum of the total face amount of collateral received during each year. ‘This charge covers all services, including certification and delivery of bonds, payment of bonds and coupons, registration of bonds, custody and withdrawal of collateral, cremations, and all other services. Nore.—These fees do not include counsel fees nor any other expenses or dis- bursements which may be incurred on account of the obligor. 308 WORK OF CORPORATE TRUST DEPARTMENTS Fiscal or Paying Agency Services under Foreign Corporation | or Foreign Governmental Issues. Authentications.—For countersignature of temporary re- ceipts or certificates and definitive bonds or notes, 50 cents per signature. Paying agent of coupons.— For acting as Paying Agent and Fiscal Agent of coupons or registered interest, 1% of 1 per cent of the interest moneys disbursed: minimum annual fee $10. For all other services, including the handling of the Sink- ing Fund, if any, optional redemptions, redemption at matur- ity, annual fees for ordinary services as Paying or Fiscal Agent, cremation services, etc., — per cent of the principal amount of bonds redeemed. (In the blank space there should be inserted the percentage of the principal amount of the issue which will be equivalent to the aggregate fees for the services included, at the rates given in the corporate trust schedule. ) Corporate Agencies. TRANSFER AGENT (STOCK) Minimum Charge (Per Annum). Charges are based on A. Number of accounts. B. Number of certificates. C. Number of agencies. For the issuance of 500 certificates and maintenance of 500 accounts, or any. part ‘thereoé? 00 i Wil Ak Wetnete nleteoe alae ae ee $500.00 For issuance of additional certificates, each ..........ccceeceeececs 25 For the maintenance of additional accounts, each ............eeeee. 50 For furnishing reports of daily transfers to co-transfer agencies, additional charge per agency per annum .........0.e5e0nsesusen 200.00 For each out-of-town certificate posted, debit or credit ............ 10 For posting out certificates on the closing of a transfer agency or the retiring of stock — per:certificate ..... es sk. esren see tem aoe 12% STOCKHOLDERS’ LISTS One list is furnished without charge for each class of stock; for additional lists; for each 1,000 accounts fice ste. sleuin ieee 25.00 For additional copies of lists, for each 1,000 accounts ............6- 12.50 REGISTRAR (STOCK) Minimum Charge (Per Annum). For registration of 500 certificates .........c..eeeeees Lee sor eee $250.00 For registering each certificate in excess of 500 ..........ecceceees Re For each co-registrar..in other cities) (ya ssi cs aioe asta cies ete ere 125.00 For posting out certificates on the closing of a registrar agency or retiring of, stock, for each, certificate |... ss. ¢tekles s vey soles 07% FEES 309 DIVIDEND DISBURSING AGENT For each dividend— Mate LIC TCC Wane PI cra 31d Hes sary) e910 Ghat BSP eT Ute hte alcatel ahh ae. 's 62.50 Pea MERC MAUS CHOGRSS ci Wy tn o Nos. glen als io. 6 418 Che where MeN lave aie Hie Hl soe 100.00 DARE ROUT CHECKS fitch Mannie tvne «Gi disbn Slave. Cie nein ine MEN AUeeMp ee aah ite thal 131.25 Pes TLE SY UORCHERCKSU Rr I SoM co Al ed o.eg oi vial Uae it RRRBER MN RL aedly Moe ae lees 150.00 Barrmmeach cuece Over 1,000 (415020 hak Sian eac’s w NSAID EITM Sruee Alo TAA x olga 124% SPECIAL WORK Forpacaressing eavelopes,. per: 1,000 oc ene. oe va knee ew} aiele ee ys 10.00 For addressing envelopes, folding and inclosing one report or circular, including stamping envelopes, mailing, etc., per 1,000 ............. 20.00 For addressing envelopes, folding and inclosing more than one enclos- ure, stamping envelopes, mailing, etc., per 1,000 ............... 25.00 If duplicate names of holders of more than one class of stock are to be eliminated, an extra charge of 25 per cent should be made. For preparing and making certificates of distribution required by the Listing Committee of the Stock Exchange, $10 per 1,000 ledger sheets analyzed. Other special services by appraisal. Nore.—The cost of all stationery such as binders and ledger sheets, transfer and registration sheets, window receipts, checks, paper used for lists, etc., and disbursements, such as postage and insurance, are to be added to the regular charges for services as Transfer Agent or Registrar. Registrar and transfer agent of bonds.—For acting as Reg- istrar as to principal only, a minimum annual fee of $100 to cover the registration of 100 bonds; registrations in excess of 100 in any one year, 30 cents each. For acting as Registrar and Transfer Agent of issues reg- isterable as to principal and interest, a minimum annual fee of $150 to cover the registration of 150 bonds in any one year; registrations in excess of that number, 50 cents each. For furnishing reports of registrations to out-of-town agents, additional charge per agency per annum, $50. Paying agent of coupons or registered interest—4 of 1 per cent of the interest moneys received, with the provision that no charge will be made if the Paying Agent is given thirty days free use of the interest moneys. ‘The minimum annual fee for this service is $10. Fiscal agent (making returns to the Collector of Internal Revenue).—1/16 of 1 per cent of the interest moneys re- ceived, in addition to the fee for disbursing interest. For acting both as paying agent and fiscal agent, the mini- mum fee is $25 per annum. 310 WORK OF CORPORATE TRUST DEPARTMENTS Reorganization department fees.—In the arrangement of fees, the work of the reorganization department presents the greatest difficulty. One reorganization differs from another to such an extent that, in New York at least, no standard basis of charges has been adopted by the Corporate Fidu- ciaries Association. The rates mentioned below are gathered from a review of the fees charged by a New York trust company and are presented merely to give an idea of the factors entering into reorganization department fees and to give a suggestion of the rates applying to the various services. Deposit of securities: Bonds 1/16 per cent to 1/10 per cent of the principal amount. Stock — 5 cents per share. Issuance of certificates of deposit: Unlisted Certificates — 50 cents each. Listed Certificates, including exchange of temporary certificates of de- posit and reports to Stock Exchange — $1 each. Transfers of certificates of deposit: 50 cents for each certificate issued. Delivery of new securities: 1/10 per cent to 1/4 per cent of the principal amount. An additional charge may be made for the custody of the deposited securities (particularly if the reorganization ex- tends over a period of several years). If subdepositaries are appointed the main depositary usually charges a commission on the securities taken in by the subdepositaries. Mailing circulars and other special work for the committee also calls for an extra charge. As a matter of practice, it is almost impossible, in most reorganizations, to arrange a basis of charges until the re- organization is completed. ‘The amount is then largely a matter of negotiation between the committee and the deposi- tary; but, except under special circumstances, the basis out- lined above may fairly be used by the depositary in calculating the amount which it suggests as its fee. For services rendered by the reorganization department in connection with capital subscriptions, assuming that there are no unusual circumstances, probably a commission of 4% per cent on the amount of funds handled would be about the aver- age charge by New York trust companies, with an extra charge for transfers of subscription warrants of purchase FEES 311 certificates. [he charge for services of this nature is fre- quently modified if the agent receives free use of the funds for a substantial period. ARRANGEMENT OF FEES ACCOUNT INDENTURE OR MORTGAGE DATED ACCEPTANCE CERTIFICATION TEMPORARY BONDS COUPONS REGISTERED ANNUAL FEE MONTH BILLED CREMATION BONDS COUPONS PAYMENT OR REDEMPTION BONDS COUPONS CONVERSION AGENT FISCAL AGENT Form 86.—Fee Basis. Sheet (Front). Rates in New York City.—It is but fair to point out that, generally speaking, the rates in New York City are lower than those in effect elsewhere in the country. This is to be expected as the volume of business in New York is still larger, by far, than in any other city. While for many years the volume of personal trusts in the larger cities such as Chicago, Philadelphia, Boston, St. Louis, Cleveland and San Francisco, has been considerable, it has been only of recent years that 312 WORK OF CORPORATE TRUST DEPARTMENTS the trust companies and banks in these and other cities have come into real competition with the institutions of New York for the more important pieces of corporate trust and cor- porate agency business. - REGISTRATION S$ ‘PER ANNUM TO COVER REGISTRATIONS. EACH EXCESS IN ANY ONE YEAR PROPOSED SY REVISED BY ACCEPTED BY Form 86.—Fee Basis Sheet (Back). Fee records and billing.—Second in importance only to the charging of adequate fees comes the matter of recording and billing. The following records, in use by the corporate trust department of a large trust company, are typical of the fee records of all of its fiduciary departments. Form 86, known as the “‘fee basis sheet,” is prepared from the letter or official memoranda confirming the fee basis as arranged on each trust. It is inserted in the commission or 9 FEES 313 fee ledger (next discussed) immediately preceding the ac- count of the trust to which it relates. Form 87, the “commission ledger’’ sheet, is largely self- explanatory. The entries in the debit column under “Com- missions’ are made from Form 89 as bills are rendered; the COMMISSION & DISBURSEMENT RECORD | a: _ COMMISSIONS } a; DISBURSEMENTS OR ADVANCES oR. cR BALANCE DR. cr... BALANCE ge i Form 87.—Commission Ledger. entries in the credit column are posted from the trust depart- ment cash tickets as remittances are received. Debit and credit entries under “‘Disbursements or Advances’”’ are made from cash tickets as payments for account of the trust are made by the trustee, or as remittances are received by the trustee in reimbursement therefor. Disbursements are car- ACCOUNT DATE & NO. DOCUMENT EXECUTED a . ren = Form 88.—Commission Work Sheet (Front). ried on the general books as Accounts Receivable and the trust department is required periodically to reconcile the total of its balances with the control account. Some trust com- panies follow the practice of carrying their outstanding bills as accounts receivable. Much may be said in favor of this practice, from an accounting point of view. If this is done, 314 WORK OF CORPORATE TRUST DEPARTMENTS it is necessary to debit ‘‘Accounts Receivable” and make a corresponding credit to ‘“‘Commissions”’ as bills are rendered. Form 88 is the ‘‘work sheet” which is written up currently as services are rendered. ‘The information is obtained from several sources, principally: (a) The bond certification blotter. (b) The documents executed record, as to the execution of new trusts, releases, supplemental indentures, and other in- struments involving a charge. (c) The redemption record, in connection with the pay- ment or redemption of securities. (d) The commission ‘Tickler,” comprising cards indexed by date, for all services calling for annual or periodical charges. These records are described and illustrated in Chapter IV. , ACCOUNT CERTIFICATION AND DELIVERY PAYMENTS AND REDEMPTIONS 3 BILLED EXCHANGE BOOK MATURITY PARTIAL RECORD OF Ss. F. REDEMPTION PURCHASES BONDS ISSUED $100. $500. $1,000. REDEMPTION | Form 88.—Commission Work Sheet (Back). Form 89 illustrates the bill used for fees. It is prepared in triplicate, the original and duplicate being forwarded with the request that the duplicate be returned with the remittance. The triplicate copy is retained in the trust department files. Form 90 is the ‘“‘disbursement voucher”’ retained as a re- ceipt for all payments made by the trust company for account of its corporate trusts. The amount of outstanding disburse- ments are, of course, added to any bill rendered. In addition to this, the commission clerk is required to examine the trial balance of the departmental disbursements monthly, and to FEES 315 render bills for any sizable disbursements, where no commis- sions are billable within a reasonable time. BANKERS TRUST. | COMPANY _| 1G WALL STREET, NEW YORK. Dear Sir We submit our bill for services as specified, and shall appreciate a remittance at your convenience. Very truly yours, N° 3086 Assistant Secretary, Please return the duplicate of this bill with your remittance. Unless requested, no receipt, other than our endorsement on your check will be given Form 89.—Commission Bill. 316 WORK OF CORPORATE TRUST DEPARTMENTS DISBURSEMENT VOUCHER CORPORATE TRUST DEPARTMENT New York, Ne 3114 ENCLOSED FIND CHECK FROM BANKERS, TRUST COMPANY IN SETTLEMENT OF BILL ATTACHES: ACCOUNT { iS Se ee RECEIVED of the BANKERS, TRUST COMPANY, 16. Wall Street, New York City : Leon | ___DOLLARS, in full settlement of account stated above: KINDLY RECE/PT AND RETURN Form 90.—Disbursement Voucher. Transfer, registration and coupon department billing.— Similar records are maintained for other fiduciary depart- ments, except that the information for the purpose of billing is obtained from the appropriate records of the respective departments. In the case of transfers or registrations, the bills are rendered periodically, usually semiannually, the mini- mum annual charge being included in the first bill of each yearly period, and the charge for additional certificates being included in the second bill. For the purpose of keeping track of the number of cer- tificates issued by the transfer department, Form 91 is used. A sheet is opened for each account, or for each class of stock, if there is more than one. ‘The daily totals of certificates issued are entered on these sheets and, when bills are being prepared, the total shown on each sheet is proved against the number of certificates used as indicated on the transfer FEES 317 8 fy 23 a t : aRenOenna ott aay ee FEL 3 ee a t Opry ws Aas} os = ay © BEE EE = B B E E > E E EE — a =| EE QE N,N A NY Se Ny Ny om ” o NEO sty nf ope] D1 Alo] —-| ala a) et KH Kf Kf HK KH KL aI NI NIN oo 3 so a 4 = oh a te ; eal aiid aul ‘| ba MYL OL RL] HALO] —] NI] sm] TIEN OLR] ODI] A] oO] —]| A] Al +] oH sa We ama (i ree) |(atbsapes| Lahasat Yetamarel [ecacead Vinal! (kin A Mas Co DROS WS) ears | BE a a iy TEMP Ol_e! ©] Ali oO] KT NI Al St] HW] oO] mI] DIL alo] —| al al = ALN NT ata = 2 ote] NI at se] AI SC [a] fa] | NTE NP NT NT NS Form 91.—Stock Certificates Issued Sheet. Gr a EBEEB Sycol xT an] tI 4 Si Ss] eo] a SS ANA AV NA] ca] AL A] al al mm St] NIE mt et] a wl wo] Ola s ov oe te Roe ao SB C Sel BEEBE [a] 5] 8] NP wT woleolr ny eo aS Ss] — APN NERA NN ANN NE A os & Alalstpaulelelolalsixsi a} als] Ql el sel al els AQ NT A AL AT A AP A] A Mm] om 8 pa oi] e 3 ALA TI NP ore lTolalol] —I1 ani ati se] oi cl s&s] SI a] ol = Ce le ee ee ee ee oe i 2 od a Ei 8 od ad Maal record by the first and last certificate number for the period covered, less certificates spoiled by errors in preparation. A similar record is kept by the registration department. Entries 318 WORK OF CORPORATE TRUST DEPARTMENTS as to the stockholders’ lists are made as the lists are supplied and the information necessary for bills as dividend disbursing agent is obtained from the dividend payment lists. “The cou- _ pon department also renders bills periodically, based on the amount of funds received to pay each coupon maturity. Care must be exercised not to bill corporations for the payment of coupons if the department has received free use of the funds for 30 days or such other period as may be specified in its arrangement with its principal. Disbursements.—It should be noted that expenses of the trust company, such as postage and registered mail insurance (except when collected from the addressee), telegrams, coun- sel fees, and so on, are chargeable to the company on whose behalf the expenses are incurred. In transfer and registration work the cost of sheets, binders, etc., are also charged against the principal, on the theory that they are the property of the principal and are merely in the custody of the agent who, at some future date, may be called upon to turn them over to another agent. Some satisfactory arrangement should be worked out between the fiduciary departments and the various service groups, purchasing, and other departments where these charges originate, so that all of these expenses eventually will be billed against the respective companies. BIBLIOGRAPHY Campbell, H. Brua, “Legal Aspects of the Transfer of Securities.” Doubleday Page & Co. Chamberlain, Lawrence, “Principles of Bond Investment.”’ Henry Holt & Co. Cushing, Harry A., “Voting Trusts.” The Macmillan Co. Dewing, Arthur S., ‘The Financial Policy of Corporations” (Volume I). Ronald Press. Duncan, Kenneth, “Equipment Obligations.” D. Appleton & Co. Gerstenberg, C. W., “Financial Organization and Management of Business.” Prentice-Hall, Inc. Herrick, Clay, “Trust Departments in Banks and Trust Companies.” McGraw-Hill Book Co., Inc. Jordan, D. F., “Investments.” Prentice-Hall, Inc. Lagerquist, W. E., “Investment Analysis.” The Macmillan Co. Lanier, H. W., “A Century of Banking in New York, 1822-1922.” George H. Doran Co. Lilly, William, “Individual and Corporation Mortgages.” Doubleday, Page & Co. Maraspin, F. L., and Driver, H. B., ‘““Fundamental Principles of Stock Transfers.” Boston Chapter, American Institute of Banking. Stetson, Byrne, Cravath, and others, “Some Legal Phases of Corporate Financing, Reorganization, and Regulation,” including (a) Francis Lynde Stetson, “Preparation of Corporate Bonds, Mortgages, Collateral Trusts and Debenture Indentures.”’ (b) James Byrne, “The Foreclosure of Railroad Mortgages in the United States Courts.” . (c) Paul D. Cravath, “The Reorganization of Corporations; Bondholders’ and Stockholders’ Protective Committee; Re- organization Committees; and the Voluntary Recapitalization of Corporations.” The Macmillan Co. Walker, Roberts, ““The Modern Corporate Mortgage,” a Lecture de- livered at Princeton University. Reprinted by New York Chap- ter, American Institute of Banking, Inc. 319 APPENDICES APPENDIX I Form of Corporate Mortgage er A \ N CONTENTS OF APPENDIX I PAGE [os Ce E80 ay ae RAT eR aa ty Fa MA lac eg SU A 353 Authorization of indenture and issue of bonds ................. 333 ET eCOUDOTE DONUS. nis fect re to ic hen UE de pid Cane hae ka eck 334 PTC ETCOU DOT ie epee eR eee TNC, freuen che let Bette eae Mn, 335 Forma registered bond without coupons... 2.6 iue oaks Hees 333 Pe tere TUSLCO SY CONTLICALe vere eee hed eh oir ein dale aie es ealuiaeanona 337 eT AVICCE WIC LAWS cst eek RRS CT eRe by ee Une ate 337 SOE PU Ga tie) ES a a eae a CN a a yieky| Ce MOTTO tisea 1) ok eet ree Ree IR NS eee Sry eee hd 339 RRPTOU MSE PSty terse apg Wise Meee Weare Rhee ei oi ta whine pote Serer 339 Pee OTE OTOASA ICG re ten gies te a gratin la eh Ula hard aeouaile es 339 If money deposited to pay bonds is not claimed within six years ... 340 Article First. Form, Execution, Delivery, Registry and Exchange of Bonds. ee mee ONC eS IScUADIE TIMGSETICS |... odie je celelaiste C's ee ele ks 340 ’ Designation and terms of bonds of Series A ........ 340 Section 2. Designation and terms of bonds of other series ...... 340 Bere ee UTS OL Dots and COUPONS’ s. o.oo sce ele eb eacale s 341 Execution, authentication and delivery of bonds .... 341 PPreCUNGt Listes SICEITINICATE ou shai ge ARG os ae ak 341 Signatures of former officers to continue valid ...... 341 DL AMECE RNIMCOUOITSY Lis. cee alee tile gave & sfc ol aha aay 341 ‘Trustee to receive copy of resolution creating any series 342 Date from which interest is to accrue .............. 342 Bonds may be with or without coupons .......... 342 Section 4. Denominations, etc., of coupon bonds ............0. 342 Denominations of bonds without coupons .......... 342 Section on Repistration atid transter books). 62 iGiyja. es ale ene 342 Repistration Of COUPON DONS joe hula dines selene 342 Transfer of registered coupon bonds .............. 342 Bier otiabiityrorwcouponiss eee, Sa aad ae des cia wank 343 Exchange of coupon bonds for coupon bonds of other PCOS A MONS ts Mier cart Bees laine Seti oe etal) 343 Transfer of registered bonds without coupons ...... 343 Exchange of registered bonds without coupons for BUR OISays tas novia ten eisai Cele Mates, kL. ay hhG 343 326 Section Section Section Section Section Section Section Section APPENDIX I PAGE Exchange of coupon bonds for registered bonds with- OUL COUPONS eee Ort leisy ietek state 343 Legends on and provisions in coupon and registered Bonds eye eat Ree carte AN. Scr 344 Charges’ for transfers-and exchanges. ...... )\sennes 344 Cancellation ‘of: surrendered! (bonds)... a eee 344 Who to be deemed owners of coupon bonds ........ 344 ——OF “COUDONS Ly aioe cia lausbene aiwie's Savers eis eve 6 sant 344 —of bonds without coupons .............0eeeceee 344 —of registered coupon bonds <0). 5... sa «ce eee 344 Replacing bonds mutilated, destroyed or lost ........ 344 Charges for issuing substitute bonds .............. 345 ‘Temporary; bonds ¢. 002.0208. os 0 sey as ee er 345 Exchange of temporary bonds for definitive bonds .. 345 Bonds may be authenticated before recording of mort- PAE. 2h oe tea ataen aie erate 6 teh gel aa et 345 Article Second. Issue of Bonds. General power to issue bonds from time to time .... 345 Immediate issue of ‘Series’ A |... 4.5 '. cscs esau ie 346 Issue of bonds to refund, etc., bonds of other series .. 347 Conditions of issue without deposit of cash ........ 347 Conditions of issue with deposit of cash ........... 347 Cancellation and return of bonds and coupons ...... 348 Issue of bonds to retire underlying bonds .......... 348 Issue of bonds against cash to retire underlying bonds 349 Resolutions, etc., to be delivered to Trustee ........ 349 Disposition of underlying bonds upon retirement .. 349 Until default no interest to be paid .............. 349 Upon payment of all underlying bonds of any issue, mortgage securing the same shall be discharged.. 350 Future issues of bonds on account of additional prop- CITE V5 ole UAT UTC: Een 350 Issue of bonds upon deposit’ of cash. 0... 0 ee 351 Net earnings in excess of interest requirements ...... 351 Copies of resolutions to be furnished to Trustee .... 351 Certificates to be furnished to Trustee ............ 351 Provisions) as to:real ‘estate )ia(iwaieueial.. .6 eee 352 By whom certificates shall be signed .............. 352 Authentication of bonds upon receipt of certificates, Cty ie BAe TU ai eanane LARP IST OOPS < 353 Section Section Section Section Section Section Section Section Section Section 4. ne 6. — e CONTENTS OF APPENDIX I 327 PAGE No bonds authenticated if “Telephone Company is in eT AUR Ay tok cee VES deeitic ole aha eee 558 ‘Trustee may rely on resolutions, certificates, etc. .... 353 —miay make an independent investigation .......... 353 —at the expense of the Telephone Company......... 354 Article Third. Concerning Securities of Other Corporations. Securities subject to lien of indenture to be deposited AV TLE TCESPee Uo isa a lr.) AOR UE MMe ane wiceunds 354 ‘Trustee may preserve existence of company whose stock Egg rd Peta sal Rly, ey al tate LPR WP Uae eR 9 tn eae a 354 STAY. Ua NV CC RCCLOES oe Mus chs set) Mm mua 354 Until default Telephone Company is to receive divi- CEN GS ANGMNTETESE: eon enenue sites elas legiacaeh Mag eu eee 354 Telephone Company not entitled to principal of len CEGUSeCHTities ingyen eA, aici aha Ys bie, TOT) LOLCADIEAL, CIStTIDULIONS. o)o.u.4(e9hos sche ts une oes 355 mre TO Tat UGE PCA OTIC Sie icles. «sca eal ciel 8 side alee oe 305 —nor to cash dividends on liquidation ............ S00) All coupons and indebtedness to be subject to mort- ee PAU eter oth AM Gite iiss Waite cians 355 Any such moneys to be paid to Trustee ............ 356 Application of moneys paid to Trustee ............ 356 Until default Company may vote pledged stock ..... 356 mELUSECE LONPIVELPEOXICS \. dole eislccee cele saan abies s 356 HM tAtionio Olle VOL DOWEL) io. cbc os eel se eiglh as 356 See Tee CHU 4c) he eo li BL a! ee UR A a 356 hE DECTIC HNO PACING lel bir acane as Nee aah 5 Lames) dine gw 356 ——. 8 % stitution in the premises. Lae Ae iC A Spree aa PLE ey P's cA elas ws % y 19 REN ad et ammaga®,” 2, ace aR Ar ny ER Sep8F ge. suites I Ua ae In presence of oo) Bu ES es eeceoeeee eee ee eee eee ee © 8 ow @ @ *On certificates without nominal or par value the word “capital” may be omitted. Certificates of Deposit, Voting Trust Certificates, Etc. In addition to the General Requirements above outlined, certificates of deposit and voting trust certificates must conform in every particular to the Specific Requirements as to stock certificates, except that the descriptive portion of a certificate of deposit may be typed satisfactorily to the Committee. Temporary Certificates or Receipts. Temporary certificates or receipts must conform to the General Re- quirements above outlined and to the Specific Requirements as to stock certificates, except that the text may be typed satisfactorily to the Com- mittee, and need not bear a vignette. REMOVALS OR SUSPENSIONS IN DEALINGS OF LISTED SECURITIES Whenever it shall appear that the outstanding amount of any security listed upon the Stock Exchange has become so reduced as to make inadvisable further dealings therein, the Committee may direct that such security be removed from the list and further dealings therein prohibited. | The Governing Committee may suspend dealings in the securities of any corporation previously admitted to quotation upon the Exchange, or it may summarily remove any securities from the list. 456 SBA Sia APPENDIX IV. REQUIREMENTS FOR LISTING FOREIGN GOVERNMENT BONDS Data to Be Requested by New York Stock Exchange in Connection with Proposed Listings. (a) Statement of debt, internal and external, and currency in which it is to be paid; statement of external debt to be computed in dollars. (b) Contingent and actual liabilities, and priority. (c) Revenue or assets pledged, if any, under present and other loans, and nature of administration. (d) Summary of such revenue receipts and income from such assets for preceding five years, stated in dollars, if available. (e) Status of the law under which said revenue or assets are pledged. Past debt record with respect to: (a) Defaults. (b) Scaling down interest payments. (c) Suspending sinking fund payments. Where listed. Currency in which interest and principal are to be paid. Tax liability and exemption. Statement of governmental income and expenditure for whatever account in the preceding five years. Statement of the sums required in dollars to meet foreign interest charges in each of the five preceding years. Statement in terms of weight and dollars (converted) of mer- chandise imports and exports in each of the preceding five years. Statement of covenants, if any, with respect to payment of prin- cipal and interest of bonds dependent upon state of Peace or War and nationality of holder. INDEX A Acceptance of trust, 152 Accountants, approval by trustee, 111 Addressograph plates, 57, 63, 65, 261 Administration department, 6 Administrators and transfer of stock, 247, 248 Adoption of plan of reorganization, 207 After-acquired property clause, 77 American share certificate, 178, 179 Analysis of departmental income and expenses, 302 Application for bonds. Issue. Assessments in reorganization, 208 time limit, 211 underwriting of, 208 Assignment of stock, 243 Assumption of mortgage, 158, 159 Attorney for transfer of stock, 243 Audit department, 6 Audit of securities, 45, 255, 277, 296 Authentication. See Certification. “Authorized” issued under mortgages, 90 See Bond B Balance sheet, prerequisite to bond issue, 96 Baltimore & Ohio Railroad Company, 2 Bankers, activities in reorganization, 190, 191 supervision by, 163 Bank. See Trust Company. Bankers’ share certificates, 175, 176, 177 Bankers Trust Company v. Denver Tramway Company, 117 Banking department of trust com- pany, 4 Banking institution, executives of, 7 Bearer certificates, 179 Bibliography, 319 Billing of fees, 312 Blotter for Corporate Trust securities, 47, 48 Bond department, 6 Bondholders’ committee, may consent to change in mortgage, 142 relation with trustee, 146 Bondholders’, reluctance to deposit, 197 rights as to redemption, 123 Bond issue, acquisition of property, 90 acquisition of securities, 92 adjustability, 78, 79 against cash, 97 balance sheet required, 96 capital expenditure reimbursement, 91 certificates of officers, etc., 95 consent of junior trustee, 101 counsel’s opinion, 96, 99 delivery entries, 39, 56 earnings statement required, 96 for immediate needs, 91 indeterminate, 78 initial, 91 in series, reasons for, 78 net earnings as prerequisite, 95 order for delivery, 95 pending construction, 92 percentage of property cost, 94 permanent additions, 91, 93, 94 principal purposes, 91 provided no default, 94 receipt for delivery, 99 refunding, 92-93 resolution to authorize, 95 restrictions, 94 to refund, 91 under corporate mortgage, 90 Bond of indemnity, against duplicate bond, 87 against duplicate stock certificate, 269 as affecting registrar, 277 Bond owner, who is deemed, 85 Bond payment agent, 185 Bond registrar, appointment of, 278 duties, 279 fees, 309 records of, 281 Bond registration. See Registration of bonds. ADS 7 458 Bonds authorized issues, 78 collateral trust, 16 comparison of, 76 convertible, 17 cremation of, 162 described, 75, 76 destroyed, 85 disposition after foreclosure, 151 equipment, 16 exchange of denominations, 84, 85 execution of, 83 foreign currencies, 18 form of, 79, 80, 81 franc, 18 full registration, 280 gold, 18 guaranteed, 18 issuance before recording, 89 joint, 18 limitations to amount issued, 78 lost, 85 mutilated, 35 outstanding, defined, 117 participating, 17 registration as to principal, 281 serial, 17 signatures to, 83 sinking fund, 17 specimen of, 29 stamped after foreclosure sale, 147, 150 sterling, 18 stolen, 85 unsecured, 17 See Mortgage. Bond title, illustration of use, 18 Bond transfer agent. See Bond Reg- istrar. Bookkeeping department, 4 Breach of covenants, trustee’s proced- ure, 112 By-Laws of corporation, 28, 233 Cry Called bonds, affecting coupon-paying department, 298 coupons from, 298 “Calling” bonds. See Redemption. Canceled bonds, audit of, 45 Canceled coupons, retention of, 300 Canceled stock certificates, destruction of, 269 Cancellation memorandum, 60 Cancellation tickets discussed, 55 endorsement on INDEX Capital expenditures, bases for sinking fund withdrawal, 121, 122 reimbursement by bond issue, 91 Capital subscription, 215 discussed, 189 fees, 310 papers required, 219 Cash deposited against bond issue, 97 journal, 68 ledger, 67 records, 66 tickets, 68, 69, 70 under equipment trust, 166 with other banks, 98 Cash deposit for interim receipts, 171 Certificate of deposit, for bonds, 194 for stock, 195 listing of, 197 of other committees, 201 registration of, 198 Certificates of indebtedness, issuance against lost bond, 87, 88 Certification, blotter, 47, 49 charges, 303, 304 essential to validate, 83 slip, 49 trustees’ responsibility, 90 Charter of corporation, certificate of incorporation, 27, 233 Check register, Coupon Department, 292 Classification of stock, 227 “Closed” mortgage, 90 Closing of transfer books, 260 “Closing” transaction explained, 91, 92 Collateral, fees for holding, 305 Collateral to mortgage. See Pledged Securities. Collateral trust indenture, 168 Collection of coupons, discussed, 293 Collection register, 57-58, 64, 66, 68 Commission bill, 315 Commission ledger, 313 Commission. See Fees. Commission work sheet, 313, 314 Committee on Stock List, rules of, 441 Common stock certificate, 228, 231 Compensation, 302 Comptroller, 7 Conditional sale plan of equipment trust, 165 Consolidation, or merger, gagor, 158 of trustee, 158 of mort- INDEX Constitution of United States, Art. IV, Sec. 2, 23 Contract of conditional sale, 165, 167 Controlled companies. See Subsidiary Companies. Control sheet for unissued stock cer- tificates, 259 Control system for Vault Control. Conversion of bonds, fees, 306 Conversion privilege for unsecured is- sues, 169 Conversions, 185 Corporate agencies, fees, 308 scope, 9 services, scope of, 187 Corporate blotter, 48 Corporate Fiduciaries Association of New York, activities and fees, 303 report on lost and stolen securi- ties, 87 Corporate Fiduciaries, early history, 1 Corporate mortgage. See Mortgage. Corporate trust department, fees, 303, 304, 305 functions, 9 records, 34 Corporate trustees, qualifications, 19 Corporate trusts, acceptance of, 22 development, 2 scope, 9 securing business, 22 Corporation, By-laws, 28, 233 charter, 27, 233 transfer of stock, 247 Correspondent banks, payments for, 186 Co-transfer agencies, 251 Counsel for Protective Committee, ad- visability of trustees counsel act- ing, 192 Counsel’s opinion, bond issue, 96, 99 lien of mortgage, 28, 29 recording and filing, 29 Counter receipt, bond 282 exchanges, 41 reorganization, 220 Transfer Department, 252, 253 Coupon account, audit, 296 collection, methods of, 293 statement and verification, 295 securities. See registrations, 459 Coupon, envelope for, 291 ledger, 294 money, return of, 301. Coupon paying, 287 payments for correspondents, 296 receipts of funds, 288 return envelope, 292 statement, monthly statement and re- ceipt, 298 Coupon paying agent, scope, 11 Coupon Paying Department, billing, 316 records of, 291 relations with Corporate Trust De- partment, 288 accounting at each maturity, 289 Coupons, accounting for, 161 cremation of, 162 facsimile signature, 83 form of, 81 from called bonds, 298 on interim receipts, 175 Covenants, appraisal, 111 balance sheet, 110 breach of, 112 earnings statement, 110 equipment statement, 111 Federal Income tax, 104 financial statements, 110 “formal,” 103 insurance, 106, 108 maintenance and renewal, 111 mortgagor’s, 102 net quick assets, 108, 109, 110 railroad equipment trust, 166, 167 reasons for, 102 restricting bond issue, 109 restricting dividends, 109 sales certificate, 111 State taxes, 104 taxes, 104 to be calendared, 112 trustee’s interest in, 102 underlying bonds, 104 value of, 113 Credit Department, 4 Cremation, affidavit certificate of, 163 of bonds, fees, 307 of canceled stock certificates, 269 of coupons, fees, 307 of securities, 162 Custody of securities, 7 Customers’ verifications, 61, 65, 66 460 D Debentures, 17 issues, 169 Declaration of trust by nominee, 130 Decree of foreclosure, 150 Deed of trust, for foreign insurance companies, 180, 181, 182 See Mortgage. Default, bearing on pledged securities, 132 events of, 143 period of grace, 146 procedure of trustee, 145 Defaults and remedies. See Foreclo- sure. Defeasance, 159, 160 Defeasance clause, 77 Deficiency judgment, 148 Definitions of mortgage terms, 162 Delivery record of Reorganization De- partment, 224 Denver Tramway Company case, 117 Deposit agreement, described, 194 expenses and compensation of com- mittee, 196 form of, 423 parties to, 195 provisions governing 196 terms of, 195 Depositary, appointment of, 10 under escrow agreement, 183 Depositary for Protective Committee, acceptance of, 196 action regarding deposited securities, 209 functions prior to reorganization, summarized, 202, 204 relationship with committee’s secre- tary, 199 termination of duties, 211, 212 Deposited securities, withdrawal of, 207 Deposit in trust, for holders of in- terim receipts, 89 of cash, with sub-depositaries, 98 of securities, time limit, 204, 205 of temporary withdrawal ticket, 58, 59 Destroyed bonds, 85 stock certificate, 268 Destruction of canceled 162 Development Department, 4, 32 withdrawal, securities, INDEX Directors of mortgagor, immunity of, 164 resolutions of authorizing mortgage, 28 shares, 131 Disbursements, cipal, 318 voucher, 316 Dissents from 206 Distribution 150, 151 Distribution of new securities follow- ing reorganization, 210 Dividends, check, 263 disbursing agent of, 263 fees, 309 from pledged securities, 131 order, 261, 262 payment of, 261 stock, 266 Warrants on equipment trust cer- tificates, 167 Division between trusts and agencies discussed, 187 Document index, 39 executed slip, 73 Documents supporting mortgage, 27, 31, 52 Dollar control for securities, 54 Duplicate bonds, issue of, 85 Duplicate certificates of stock, affect- ing registrar, 278 affecting transfer agent, 268 chargeable to prin- reorganization plan, after foreclosure sale, appointment, E Earnings statement, bond issue, 96 Eminent domain, power of, 138 Engineers, approval by trustee, 111 Equipment trust, form of, 395 purpose of, 165 Escrows, 183 Exchangeability of bonds, legend for, 82 Exchange of temporary bonds, 42 of temporary securities, 307 record title sheet, 43 record, use of, 42 sheet, 39, 40 ticket, 41, 42 Executors and transfer of stock, 248 Expenses, reimbursement of, 318 prerequisite to INDEX F Farmers’ Fire Insurance & Loan Com- pany, 1 Farmers’ Loan & Trust Company, 1 Federal Reserve Act, 3 amendment, 3 Supreme Court decision, 4 Federal Revenue Act stamp taxes. See Tax. Fee records, 312 Fees, 302 in New York City, 311 Fiduciaries, early history, 1, 2 transfers of stock, 247 Fiduciary group of trust company, 7 Fiscal agent, appointment of, 289 fees, 309 for municipalities, 185 “Follow-up” card, 70, 74 Foreclosure, decree, 150 procedure of trustee, 146 purchase by reorganization commit- tee, 209 sale under, 147 trustee’s activities, 148, 149 trustee’s computation of amount due, 149 Foreign comporation issues, fees, 308 Foreign department, 6 Foreign government issues, fees, 308 Foreign insurance companies, fee of trustee, 307 Foreign insurance trusts, 179, 180 French bearer certificates, 179 G Grace in event of default, 146 Granting clause of mortgage, 77 Guarantee of signatures on transfers, 244 Guardians and transfer of stock, 249 stock H History of trust sheet, 35, 39 supplementary sheet, 36 I Identification of signatures on stock transfers, 245 registration for, 184 Income Tax, Federal. See Tax. 461 Indemnity, Bondholders’ Committee to trustee, 147 letter, covering lost dividend check, 265 See Bond of Indemnity. Indenture. See Mortgage. “Indeterminate” mortgage, 90 Individuals and partnership, transfers of stock, 246 Individual trustees, as co-trustees, 19, 23 appointment of attorney-in-fact, 157 appointment of successor, 157 Individual trusts, 7 Industrial note issues, fees, 307 Inspection of stock records, by stock- holders, 260 Insurance, covenants of, 108 deed of trust, 180, 181, 182 policies, 108 record, 107 trusts of foreign companies, 178, 179 under corporate mortgage, 106 Interest, allowance on cash balances, 156 from pledged securities, 131 loss on bonds called for redemption, 125, 126 payments on deposited bonds, 200 payments on registered bonds, 84 Interim certificates, exchange of, 89 purpose of, 88 receipt, form of, 173, 174 registration of, 89 segregation of proceeds, 89 use of, 170 See Interim Receipts. Interstate Commerce Commission, ap- plication to abandon mileage, 139 approval of bond issue, 98 approval of stock issue, 240 Investment of cash for mortgagor, 97 of sinking fund, 115 trust, 177 Investments in United States, 3 Issue of bonds. See Bond Issue. J Joint facilities, 11 Joint reorganization committee, 207 Junior security holders, treatment of in foreclosure, 147, 148 on reorganization, 208 462 L Large v. small companies, comparison of practice, 187 Lederer v. Fidelity Trust Co., 167 Legend on fully registered bonds, 84 Letter of instructions, escrow, 183 interim receipts, 170, 171 Liability of trustee, reasons for limita- tion, 153 Liens, conflicting, 25 Limitations on bond issues, 90 “Limited open end” mortgage, 90 Loan Department, 4 Loose leaf records, advantages, 34 Loss of securities, acknowledgment of, 87 Lost bonds, 85 Lost dividend check search sheet, 264 Lost stock certificate, 268 M Mailing redemption notice, 125 Maintenance and betterment fund, 122 Management of trust company, 7 Massachusetts income tax covenant, 104 Memoranda tickets for cash, discussed, 66 Merger affecting pledged securities, 134 of mortgagor, 158 of trustee, 157 Miscellaneous provisions of mortgage, 158 trust functions, 170 Mortgage, acknowledgment to, 164 bondholders and change of terms in, 142 counterparts, 27 defeasance clause, 77 defined, 12 examination guide, 30, 31 examination of draft, 25 execution, 27, 164 fees of trustee, 303 first, 14 first and collateral, 15 first and refunding, 14 form of, 333 general, 15 granting clause, 77 habendum, 77 income, 16 INDEX Mortgage (continued ) ‘ “In trust, nevertheless,” 77 leasehold, 15 meaning, as used herein, 18 parties, 75 preamble, 75 prior lien, 15 purchase money, 15 rank of, 13 recording, 27 recording data, 39 refunding, 15 release and discharge, 160 satisfaction of, 160 second, 14 tax, 29 various types, 12, 13, 14, 15, 16 Mortgaged property, abandonment of, 138 Mortgagor, financial standing of, trustee does not warrant, 151 merger or consolidation, 158 rights as to redemption, 123 Mutilated bonds, 85 N Name on stock certificate, 244 Net quick assets covenant, 158 defined, 109, 110 New business, department of. See De- velopment Department. Investigating proposals of corporate trust agencies, 23, 188 solicitation of, 8 New York & Erie Railroad Com- pany, 2 New York Life Insurance & Trust Company, 1 New York Stock Exchange listing re- quirements, 441 requirements for registrar, 10 Nominee, card, 130 for pledged securities, 129 Note issues, 169 Notes. See Bonds. O Obligations. See Bonds. Officers, certificate of election, 28 of mortgagor, immunity of, 164 “Open end” mortgage, 90 Original issues of stock, record of, 259 Ownership of bonds, evidence of, 159 listing and filing of, certificates, 295 INDEX P Partial releases of property. See re- leases of property. Paying agent, for banks and trust companies, 186 for bonds, 185 of coupons, fees, 309 registered interest, fees, 309 Payment of bonds, mechanics of, 45 of coupons for correspondents, 296 of coupons. See Coupon Paying. on deposited bonds during reorgan- ization, 200 Pending card, 70, 74 Pennsylvania Company for Insurance on Lives, etc., 1 “four mills” tax covenant, 104, 105 Personal property taxes, refund of, 104, 105 trusts, 7 Philadelphia plan equipment trust, 165 compared with conditional sale agreement, 167 form of, 395 Plan of reorganization. See Reorgan- ization. Pledged securities, control of, 128 disposition of income, 131 payment on account principal, 132 possession of, 129 registration, 129 relative rights of trustee and mort- gagor, 128, 129 subject to other mortgages, 131 under collateral trust, 168 use of nominee, 129, 130 voting rights discussed, 132, 133 Power of substitution for transfer of stock, 243 Preamble of mortgage, 75 Preferred stock certificate, 232 Prior mortgages, closing, 33 trustees, notice to, 33 Proof sheet of cash transactions, 66, 71 Property cards, 62 discussed, 56, 57 Property covered by mortgage, 77 Protective agreement. See Deposit agreement. Protective clauses. See Trustee Clauses. Protective committee, final instructions to depositary, 212 formation of, 190, 191 463 Protective Committee (continued) form of deposit agreement, 323 form of notice to bondholders, 192, 193 loans against deposited securities, 200 represents one class of securities, 190 secretary’s duties, 191 trustee’s relations with, 191 Proxies for pledged stock, 133 Publication of redemption notice, 125 by protective committee, 192, 198, 199, 206 Public bodies, approval of bond issue, 98, 100 Service Commission and approval of mortgage, 28 Purchase of bonds, fees, 306 certificate for stock, 217, 218 for sinking fund, 116, 118 Q Qualifying shares, 131 R Readjustment and reorganization, com- pared, 213, 214 defined, 189, 213 maintenance of original position by securityholder, 214 Receivership, bearing on release of property, 140 Recitals of mortgage, 75 Reconcilement sheet of Corporate Trust Department, 66, 71 Record of bonds issued, 37 Record of depositors, 222 Record of original issues, by transfer agent, 257 stock registrar, 277 Record of trusts, 36 Redeemed bond notice, Coupon De- partment, 299 Redemption of bonds, affidavit as to mailing notice, 125 afhdavits as to publication, 125 fees, 306 form of notice, 124 for sinking fund, 120 interest loss through non-collecticn, 125, 126 large drawing discussed, 123 rights of bondholder, 123 rights of mortgagor, 123 464 Redemption records, 44, 45, 69 Refunding of underlying bonds, 92, 93 Refund of personal property taxes, 105, 106 fees, 307 Registered interest, payment of, 284 record of, 287 Registrar, appointment of, 10, 273 for identification, 184 of bonds, fees, 309 of stock, 272 records of, 275 relations with transfer agent, 274 scope, 10 Registration of bonds as to principal, 25-8); department billing, 316 fees, 309 full registration, 280 mechanics of, 83, 84 of principal, form for, 82 records of, 284 Release of mortgage, 160 Release of property, 134 application of proceeds, 139 deferred payments, 138 documents required, 137 during receivership, 140 fees, 307 form of application, 136 restrictions imposed, 135 substitution of property, 137 underlying lien, 139 Remedies. See Foreclosure. Rentals, under “Philadelphia Plan,” 167 Reorganization, affecting pledged se- curities, 134 committee, joint, 207 consummation of, 209 counter ticket, 220, 221, 226 defined, 188, 189 department, relations with trustee, 189, 190 distribution of securities, 210 fees, 310 initial steps, 190 organization of new company, 210 plan and agreement, discussed, 211 plan, as to dissenting depositors, 206 presentation of, 206 records, 220-226 scope of activities, 10, 188 INDEX Reorganization (continued) time limit for payment of assess- ments, 211 Research sheet for bond issues, 99, 100 use of, 90 Restrictions on bond issue, 94 Return of coupon money, 301 Return to Collector of Internal Rev- enue, covering interest paid, 289, 290 fees, 309 “Rights” to subscribe to stock, 215 Russian Reinsurance Company v. Stod- dard, 183 S Sale under foreclosure, 147 of mortgaged property. See Release of Property. Satisfaction guide, 160, 161 fees of mortgage, 307 scrip, use of, 268 Securities blotters, discussed, 60, 61 held by American public, 3 ledger, 46, 47 transactions, 47 Security-holders. See Stockholders or Bondholders. Signatures, on bonds, 83 on stock certificates, 233 Sinking Fund, acceptance of tenders, 119 acquisition of bonds, 116 application of, 118 applied to various series, 121 bases for, 115 bonds in lieu of cash, 120, 121 comparison of prices, 119 disposition of bonds acquired, 120 investment of, 115 inviting tenders, 118 measure of payment, 117 notice, 118, 119 operation of, 115 payment of accrucd interest, 120 payment of expenses, 120 redemption of bonds, 120 rejection of tenders, 119 relative to type of business, 114 tender by mortgagor, 120 to amortize debt, 114 withdrawal for capital expenditures, 121,,122 Specimen bond, 29 INDEX Split ticket, 55, 61 Stamping of bonds after sale under foreclosure, 147, 150 Stamp taxes. See Tax. Standardization of fees, 303 Statement and receipt of Coupon De- partment, 298 State statutes, California, 24 Indiana, 24 Missouri, 24 restrictive as to foreign trustees, 24 Statistical Department, 6 Statute of Limitations regarding en- dorsement of stock, 269 Stencils, 57, 63, 65, 261 Stock, assignments of, 243 classifications of, 227 original issues of, 239 Stock certificates, 227, 232 forgery of endorsement, 269 issued sheet, 317 signatures on, 233 Stock dividends, 266 record, 267 Stockholders, certificate of consent to mortgage, 28 list, 261 meetings, 260, 261 of mortgagor, immunity of, 164 reluctance to deposit, 197 resolutions authorizing mortgage, 28 right to inspect records, 260 Stock Registrar. See Registrar. Stock Transfer. See Transfer of stock. Stolen bonds, 85 stock certificate, 268 Stop payments, against bonds, 86 against coupons, 300 Stop transfers, affecting registrar, 278 affecting transfer agent, 270 Sub-depositaries, reorganization of, 196 Subscription record, 225 Subscription to securities, 215216217 without issue of rights, 219 Subsidiary companies, pledged stock of, 133 Substitution of collateral under col- lateral trust, 169 power of, 243 Successor trustee, 157 Summary sheet for bond issues, 38 warrant, 465 Supplemental indentures, fees, 307 purposes of, 141, 142 Supporting documents. See Documents. Supreme Court, Federal Reserve Act decision, 4 Surety bond. See Bond of Indemnity. Switzerland General Insurance Co. v. New York Central, 87 “Symbols” for collection register, 58, 59 2% Tax deduction ticket of Coupon De- partment, 294 Taxes, estate and inheritance, 251 “Tax-free covenant” bonds, 104, 289 ‘Tax, in various states, 250 legend on bonds, 99 on bond issue, 99 on original issues of stock, 240 on stock transfers, Federal, 250 Tax returns by Coupon Paying De- partment, 290 Tellers, 4 Temporary bonds, deposit tickets, 54 exchange of, 89 form of, 88 interest stamp, 99, 100 Temporary deposit ticket, receipt of Reorganization Department, 221 securities, 54, 55 withdrawal ticket of securities, 54, 5Opt5 7, Tenants as to stock transfers, common, 246 joint, 246 Tenders of bonds, acceptance or rejec- tion, 119 for sinking fund, 118 Tickler card, 70, 73 Transfer agent, stock, of, 10, 233 billing, 316 papers for appointment, 233 records, 252 resolution appointing, 234, 326 scope of, 10 Transfer agent of bonds. tration of bonds, Registrar. Transfers of stock, classification, 246 closing of books, 260 corporations, 247 fiduciaries, 247, 248 individuals, 246 appointment See Regis- and Bond 466 Transfer of Stocks (continued) ‘methods of, 255 partnerships, 246 “powers,” 242 records, 252 requirements, estate transfers, 248 tenants, 246 trustees, 249 Trial balance for stock ledger, 257 Trust checks, 68, 72 Trust companies, development of, 2, 3 early history, 1 executives, 7 organization, 4 organization chart, 5 reference includes other financial in- stitutions, 3 supervision in New York, 2 Trustee, and payment of interest, 156 certificate, 81 certificate to identify bond, 83 clauses, 152 corporate, 23 customary provisions, 154, 155 examination of mortgage, 32 individual, 19, 23, 157 liability of, 152 may rely on officers’ certificate, 156 merger of, 157 purpose of, 153 qualification in states, 23 removal of, 156, 157 representation on Protective Com- mittee, 191 resignation of, 156, 157 responsibilities, 20, 90 scope of duties, 19, 20, 99 INDEX Trusteeships, investigation of, 23 Trust indenture. See Mortgage. Trust Investment Committee, 8 U Underlying bonds, canceled, 93 lien, as to release of property, 139 mortgage, satisfaction, 93 stamping, 93 . Underwriting of bond issue, 22 reorganization, 208 Unissued certificates, control sheet, 259 Unit control for securities, 50 Unsecured issues, 169 U. S. Constitution, Art. IV, Sec. 2, 23 Vv Vault control, 50, 51, 52, 53 delivery ticket, 52, 53 deposit ticket, 50, 51 index card, 74 marker, Reorganization Department, 223 . tickets, use of, 56 Voluntary readjustment, 213 Voting dividends on, 241 Voting pledged stock, 132 Voting registration of, 277 Voting transfer agent for, 240 Voting trust certificate, 241 Voting trustees, relations with, 241 WwW Warrants to subscribe to stock, 215, 216, 217 Withdrawal of deposited securities, 207 oo | a r aah ) fiat Beit is. 3 ii URBANA 3 0112 057576404 Ci] (e) 2 all a rs fe) a = = ;z 5