UC-NRLF GIFT OF f ln Witness Whereof By Harley F. Drollinger Manager, New Business Department The Fidelity Trust Company of Buffalo The Fidelity Trust Company of Buffalo ". ::* / ' Copyright, 1922, by THE FIDELITY TRUST COMPANY OF BUFFALO TABLE OF CONTENTS Brenton & Company 7 Depositary Under Reorganization Plan 97 Disbursing Agent 105 Escrows 115 Fiscal Agent Under Municipal Bond Issue 61 Receiver Assignee 121 Registrar 55 Safe Keeping Agent 91 Transfer Agent 35 Protecting the Stockholder 40 Problems in Connection with the Transfer of Stock 44 Trustee Under Corporate Bond Issue 69 Corporation Bonds Secured by Mortgages on Real Property 76 Equipment Trust Bonds 78 Collateral Trust Bonds 83 Debenture Bonds 85 Voting Trustee . Ill NOTE THE business romance of Brenton & Company has been made a part of this booklet in order to set forth some of the many problems actually encountered by every corporation at one time or another during its corporate existence. The solution as well as the problem has been included in the story in the hope that it may be of some value to officers of corporations when these exigencies arise. The extent to which a trust company may economically serve and promote the best interests of corporations is but little recognized and appreciated by many executives. Believing that an exposition and an understanding of the mutual relations between corporations and trust com- panies will result in simplifying many complicated and onerous corporate activities we have dedicated our booklet to this cause. Attention is called to the many points of law that may arise in connection with the corporate problems discussed in this booklet. Corporate executives should dis- cuss all such matters in detail with the corporation's attorneys. BRENTON & COMPANY ALFRED BRENTON was a jobber who for Alfred twelve years had confined his business Brenton activity to the sale of woolen goods. He had visited several large mills in the New England States on many occasions and had become greatly interested in the various manufacturing methods employed by the larger mills. In some of the smaller ones he noticed a total indifference to modern methods of manufacture. If the improved and more economic methods of the larger mills could be installed in one of the smaller ones, Brenton felt that such a mill would be extremely profitable. One of these mills could be found in Cor- dona, a city having a population of 90,000. Brenton had bought some of their goods and found them of very high quality. He was unable to obtain the supply he needed, however, and no satisfaction could be ob- tained as to possible future shipments, so he discontinued the line. On one of his Eastern trips he stopped off at Cordona and went to the mill. They had an excellent building, some very good ma- chinery, looms, water power and everything c T : V ,' ;.;. {'The Fidelity Trust Company of Buffalo to make a first class mill from a mechani- cal standpoint. Morale and spirit among the employees, however, were utterly lack- ing. The indifference of the management was reflected in the general personnel and Brenton soon realized why he could ob- tain no service from the mill. A call at the Cordona Trust Company and an inter- view with John Strutts, the president, con- firmed the general appraisal Brenton had The Empire made of the situation. Mr. Strutts said that indifference and negligence had resulted in the loss of most of the Empire mill's customers. Strutts prophesied a liquidation of the Empire in the near future unless their policy was radically changed. Bren- ton frankly told the bank president he was interested in the mill and asked that a tele- gram be sent him if a liquidation of the Empire seemed imminent. Seven months later Brenton received a wire from Strutts advising him to come at once to Cordona. Upon arrival Brenton learned that the Empire mill was finan- cially involved and that the stockholders had consented to a liquidation of its affairs. After negotiations, covering a period of several days, Brenton secured an option on the Empire property for $85,000. He E 8 ] "In Witness Whereof unfolded his plans to Mr. Strutts, President of the Cordona Trust Company, who offered his support in the undertaking. This was just the chance Brenton had been seeking. He had a large number of customers whom he had been serving for twelve years to their entire satisfaction. The Empire mill had an excellent reputation for quality of manu- factured goods, but their service had been indifferent and most unsatisfactory. When he returned to his home Brenton had little difficulty in gaining the support of several friends who advanced sufficient money to pay for the mill. A Corporation was formed organization known as Brenton & Company. Alfred fB r enton& Brenton was elected President and General ompany Manager of the Company. A meeting of the employees was called and Brenton gave an extended talk to a group of workers who totally lacked enthu- siasm and spirit. He told them he had built up a large trade during the past twelve years as a jobber and that he had now de- cided to become a manufacturer. It was his desire to retain the services of all em- ployees who had formerly been connected with the Empire provided they took a new lease on life, manifested some enthusiasm and did an honest day's work. Further, it E 9 ] The Fidelity Trust Company of Buffalo was his intention to allow his employees to become stockholders in the corporation after they had been connected with the com- pany continuously for eighteen months. Special consideration would be given to employees who discovered methods of pro- ducing goods more economically, and for this purpose a Suggestion Box would be placed in the office where it would be easily accessible to all employees. Two weeks later Brenton & Company became an actual entity when at eight o'clock on Monday morning the factory whistle called the former employees back to their respective positions. Brenton & Com- pany was a vastly different organization from what the Empire mill had been. The employees liked the frankness of their employer and decided to do their part, feeling confident Brenton would live up to his promises. The looms hummed in the mill during the next three years, production was greatly increased and it became a prob- lem to sell all the goods produced. Brenton needed more salesmen, so he decided to pick from his employees five men who could learn the selling end of the busi- ness. Within a week ten men had been chosen from whom Brenton picked five of E 10 ] "In Witness Whereof the most promising. Six weeks 1 training under Brenton's personal supervision pre- pared them for their task. They started on the road much better qualified to interview prospective customers on a business basis than most salesmen of competitive lines, for they all had practical factory experience and knew their line from the time the wool left the sheep's back until it was woven into the various patterns and boxed for shipment. It was at this time that Brenton & Com- The pany experienced their first difficulty. Four- teen months previous, John Kraver, Bren- Di ffi cu i ty ton's friend and business associate, had died. He was the owner of 150 shares of the company's stock. The executor of the estate decided to sell all of Kraver's holdings and convert them into cash. A purchaser was readily found. The certificates were endorsed by the executor of Kraver's estate. His endorsement was properly witnessed and the certificates were pre- sented to Brenton for transfer into the name of the purchaser. The transfer had been made and entered on the books of the company. When the executor was making final distribution of the estate it was dis- covered that Kraver had, by his will, spe- cifically bequeathed the shares of stock in [ 11 1 The Fidelity Trust Company of Buffalo The Brenton & Company equally to his three FhS Pany ' S children - The value of the stock had in - Difficuity creased materially since the organization of the company. Furthermore, it had been very closely held and this had been the first sale and transfer. The three children de- manded the 150 shares of stock which had been bequeathed to them. Kraver's executor had not been required to give a bond though he personally pos- sessed very limited means. Therefore, be- ing unable to recover the shares from the executor of the estate, Kraver's children subsequently made a demand on Brenton & Company for 150 shares of stock. Brenton replied that the executor was responsible and that they must look to him for relief. They became so insistent that Brenton decided to consult his attorney regarding the situation. He was very much surprised, and shocked as well, to learn that the corporation was liable to the beneficia- ries for the stock transferred. It was neces- sary, therefore, for the corporation to pro- vide Kraver's heirs with the stock which had been transferred. Owing to the fact that the executor was not required to give bond, and also that he was not financially able to make good, a loss to the corporation resulted. : 12 : "In Witness Whereof He related his experience to Strutts, his banker friend, and was told that the law required a corporation to protect the interests of bona fide stockholders in the event that certificates were improperly transferred, stolen or forged. He was fur- ther informed that these were only a few of the many intricate problems to be met in handling stock transfers. Having had this experience Brenton was Future anxious to learn whether there was some way by which his company's interests might be safeguarded. Strutts replied that the Cordona Trust Company acted as trans- fer agent for many large corporations which did not consider themselves qualified to pass upon the many questions that arose in connection with the transfer of their securities. After thoroughly investigating the facilities of a trust company for this purpose, Brenton decided to have the Cor- dona Trust Company act as transfer agent for the stock of Brenton & Company. The necessary formalities were complied with and all transfers thereafter were passed upon by the trust company which spe- cialized in that class of work, and no fur- ther financial loss in this connection was experienced. E 13 n The Fidelity Trust Company of Buffalo The sales force had been exceedingly ener- getic, and the quality of Brenton's woolens was so satisfactory that he became deluged with orders and as a result, delivery be- came a serious problem. The situation became so acute that Brenton had to plan an expansion of the factory. He was con- f ron t e d with considerable difficulty in financing the proposition. Together with his bankers he went over the problem in detail, and after some discussion Strutts advised him not to sell the readily market- able securities in which their reserve and surplus had been invested, but if possible to meet the situation by selling an issue of preferred stock. The surplus and reserve could be held as an emergency fund and the company could maintain a strong position with which to meet any sudden and un- expected financial demand, which proved to be a valuable precaution. Strutts was able to be of considerable assistance to Brenton. The sale of the preferred stock was author- ized by the stockholders, who subscribed for part of the issue, and the balance was sold largely to their customers in small blocks. It was promptly subscribed and Brenton had thereby accomplished a three-fold purpose; he had financed the expansion of the factory; L 14 1 "In Witness Whereof he still held the company's surplus and reserve fund intact; and finally, he had tied his customers to Brenton & Company with the bond of ownership. In order to safeguard equally the interests PI of the preferred and common stockholders, ^ toc ^" the Cordona Trust Company was appointed interests transfer agent of the preferred stock as well as of the common. As an additional pre- caution the Soverill Trust Company of the same city was appointed registrar of the preferred stock. As registrar, the Soverill Trust Company countersigned each cer- tificate, vouched for the fact that it was one of the duly authorized issue and thereby certified that the amount legally authorized was not over-issued. In differentiating between the duties of a transfer agent and a registrar, Strutts ex- plained that the transfer agent passed upon the title to the property and that the regis- trar recorded the transfer. No man would buy a piece of real estate until a search was made to assure the purchaser that the title was clear, nor would the same man fail to have his deed properly recorded. Likewise, no transfer of stock should be made where the title is irregular or in doubt. The title having been approved and the transfer C 15 ] The Fidelity Trust Company of Buffalo made, it should become a matter of record on the registrar's books. On the following dividend date Brenton complained of the details and additional work imposed upon his cashier in mailing dividend checks. Mr. Strutts explained Avoiding that the trust company assumed details of clerical ft s nature for other large corporations and relieved them of this burden. Acting as a disbursing or financial agent the trust com- pany received one check from the corpo- ration to cover the total amount of divi- dends. This ended the matter so far as the corporation was concerned. The trust com- pany made out individual dividend checks, addressed, stamped and mailed the en- velopes. In the event of an inaccurate address a search was made for the correct one. With its large clerical force and special organization such a matter was compara- tively easy for the trust company whereas it would be somewhat burdensome for a corporation not organized for such pur- poses. After an interview with the heads of other corporations who had made such arrangements with the trust company Bren- ton immediately adopted a similar plan and appointed the Cordona Trust Company L 16 3 "In Witness Whereof financial agent for his corporation. There- after the treasurer mailed a single check to the trust company prior to the dividend date, covering the entire amount of the preferred and common stock dividends. It was then up to the trust company to make out and mail separate dividend checks to individual stockholders and to see that these checks reached the proper hands. During the next six years Brenton & Building a Company with its new factory greatly ex- panded its business. The earnings were large and the net profits, in excess of divi- dend requirements, were placed in a reserve account to cover future contingencies. The reserve was invested in high grade bonds, carrying an interest rate of 5%. Being well known listed bonds they were readily marketable and could be converted into cash on very short notice. Thus, if the company were in need of additional funds they could easily turn to their reserve fund. A line of credit had been estab- lished at the bank, but Brenton had never used more than one-half the amount to which he was entitled because his business had been excellent and collections very prompt. E IT n The Fidelity Trust Company of Buffalo Export Markets Clouds on the Horizon Brenton & Company established a coun- try-wide reputation for the quality of their product which soon found its way to South American countries, and eventually a de- mand for Brenton's woolens became very brisk in Brazil, Argentina and Uruguay. In order to promote relations with his cus- tomers in South America Brenton person- ally made a trip to the several countries, which required six months absence from the factory. In addition to getting a line on the possibilities of South American markets, Brenton also studied the habits of the people, their banking methods, as well as the general credit situation. He personally booked a large volume of business in addi- tion to making a general appraisal of the business conditions. The latter was of con- siderable value to his Export Department. Upon his return Brenton was confronted with a serious situation. A large corpora- tion, owning considerable properties in various sections of the country including silk, cotton and woolen mills, had been watching the progress and expansion of Brenton & Company and decided to obtain control of the mill. Through various indi- viduals they had accumulated 40% of the stock in Brenton & Company, which would L 18 : "In Witness Whereof virtually control the company unless Bren- Trouble ton could in some way tie up the other 35%, Brewing as he personally owned but 25% of the stock. Brenton called on Strutts to obtain a personal loan for the purpose of buying a majority of the outstanding stock. The other crowd were just as eager and the price rose so rapidly that Brenton's loan was soon exhausted and he had secured but 10% more of the stock. His adversaries had accumulated an additional 5% and the odds were badly against Brenton, for they had unlimited funds for the operation while Brenton had reached the limit of his per- sonal resources. He now controlled 35% of the company's stock and his adversaries controlled 45%. The situation was very critical and seemed hopeless. Brenton decided to call upon Strutts to save the situation, if possible. It so happened that the other 20% of stock was held by several of Brenton's friends who were lo- cated in the city where Brentcn formerly resided. Up to this time his adversaries had not succeeded in locating these stock- holders. Brenton was financially unable to purchase the stock, so Strutts advised him to call upon the holders at once to discuss the situation with them. Both E 19 ] The Fidelity Trust Company of Buffalo Brenton and Strutts left for the West that night. On the following day they called the stockholders together and explained exist- ing conditions. Brenton's friends were very much alarmed and explained that they had originally gone into the company because of their knowledge of Brenton's ability and integrity. They did not want to sell their stock because of the attractive dividend return, nor did they care to remain in the company if Brenton's absolute control was to be jeopardized in any manner. Therefore, to safeguard their mutual interests, their stock and that of Brenton, which together constituted 55% of the amount outstanding, was tied up in a voting trust for five years. The Cordona Trust Company was made trustee to vote the stock for the election of The storm directors in accordance with the terms of the trust agreement, and the control of Brenton & Company was therefore guaran- teed throughout the term of the voting trust. Under the conditions of the agree- ment any individual desiring to sell his stock during that period, was obliged to give the other parties to the agreement two weeks' option to purchase it. The stock affected by the voting trust was endorsed over to the Cordona Trust Company, E 20 3 "In Witness Whereof 1 which in turn issued trustees' certificates as receipts for stock so deposited. When the voting trust terminated, the several parties who had worked so closely together during the past five years continued their relationship on substantially the same terms and conditions as outlined in the voting trust agreement. For nearly eight years business had been prosperous, money rates were low and the 8ion greatest optimism prevailed. During the last eighteen months of this period, while all business was booming, expansion seemed the day's order and money values became greatly inflated. Brenton & Company, like all others, was inoculated with the germ. Its foreign business had developed and grown to a surprising degree; domestic business had greatly increased, and Brenton & Company was using its full line of credit at the bank. The company could not make prompt delivery of all the orders booked, and it became necessary to expand the plant. Brenton consulted his banker, Mr. Strutts, who advised him to finance the expansion program by an issue of bonds secured by a first mortgage on the property. Interest rates had been rising and were at that time high, so that any liquidation of bonds in the 21 The Fidelity Trust Company of Buffalo Overexpan- sion Inflation reserve fund would necessitate considerable loss as they were then quoted at about 80. Strutts advised that the company issue short term first mortgage bonds bearing 7%. The Cordona Trust Company held the mortgage to the property as trustee of the bond issue since individual mortgages to each purchaser would be out of the question. Brenton & Company had an excellent financial standing and the issue was soon absorbed by the investing public. The additions to the plant were completed and the machinery installed within six months and production was greatly stimulated. Practically all of the increased production was exported to South America, and for a time it seemed that even the accelerated production would be insufficient to meet the export demand. At this point, however, war broke out between three South Ameri- can countries, which utterly demoralized the export market. Goods which had been shipped were refused at the ports, letters of credit were revoked, and Brenton & Com- pany was in a sad plight indeed. Domestic business had been repeatedly warned that inflation had reached such proportions that curtailment was necessary if an actual crisis was to be prevented, and : 22 3 "In Witness Whereof that emergency brakes must be applied to the wheels of expansion. Optimism was so sta s nation rampant, however, that only a sudden rise of the rediscount rates could bring about a sane and conservative program. With the readjustment there came a severe business depression. This, coupled with the situation in Brenton's export market, presented a very acute problem. His purchases, labor, raw materials, etc., had to be paid for; his export goods were tied up in foreign ports; domestic demand struck the snag of a buy- ers' strike; money rates were high, and he had used up his entire banking line. How could the situation be met? Strutts, his banker, went over every detail of the com- pany's affairs with him. He still had the reserve to fall back on, but liquidation would mean a serious loss, as the securities had fallen to approximately 74. Strutts advised him to issue three-year collateral trust bonds at 8%. All of the bonds in the reserve fund were deposited with the Cor- dona Trust Company which held them as trustee, to safeguard the investment of the bondholders. With some difficulty the issue was floated and the company's affairs were tided over. The dissension in South America was of E 23 3 The Fidelity Trust Company of Buffalo Revival of short duration. Fourteen months later the war had ceased and they were on a sane constructive basis. Brenton had stored his merchandise in warehouses when the trouble broke out; therefore, when conditions again became normal he was the only manufac- turer who could make immediate delivery. Business having been at a standstill for months, an active demand for woolens arose when the clouds of war were blown aside. Brenton received high prices for his merchandise because he could make im- mediate delivery. He promptly prepared to keep up a constant supply by setting his factory again in motion. Having been ready for instant delivery when the demand arose, he occupied a premier position with respect to future orders. His large export business, together with the high prices received for merchandise, compensated for the domestic depression which lasted for nearly three years. Profits from this large export business enabled him to build up substantial reserves with which to pay the collateral trust bonds when they became due. All coupons and bonds were carefully checked by the Cordona Trust Company and destroyed. The company's collateral n 24 : "In Witness Whereof was returned to it; thus the reserve fund still remained intact and the company was in a strong financial position again. By the close of the business depression money had become more plentiful. Re- serves had accumulated in the banks and bonds forming the reserve fund had risen steadily in price to 96, which was a con- siderable recovery from their low point in the early stage of the depression. While the company's bonds were held by investment the Cordona Trust Company it received Safeguards semi-annually a report in detail concerning every security constituting the reserve fund which had been deposited as collateral for the short term bonds. This appealed par- ticularly to the treasurer of Brenton & Com- pany, for he had before him a review of the condition of the securities from financial experts which he could not hope to match since he was unable to spare the time neces- sary for such purposes. Furthermore, his company could not afford to spend the amount of money required for the various financial services, magazines and period- icals used by the bank, as their holdings would not warrant such an expenditure. He approached Strutts to see if arrangements could not be made whereby the trust : 25 n The Fidelity Trust Company of Buffalo company would continue to hold the securi- ties of their reserve fund and give them the same care they had received while deposited as collateral for the short term bonds. Mr. Strutts took him into the huge vault and pointed to a number of large compartments which were securely locked and safeguarded, investment "In there," said Strutts, "are securities safeguards wor th millions of dollars. They belong to individuals and corporations who are too busy to look after them properly. Our safe- keeping department is responsible for their physical safety. We cut the coupons, credit them to the various accounts, sign ownership certificates, and search our finan- cial publications and services for possible information concerning them. If we ob- serve any interesting data concerning any of the securities, such information is promptly forwarded in concise form to the individual or corporation under whose ac- count it is lodged." Brenton & Company transferred its secur- ities to the Cordona Trust Company under a safekeeping account, and found it of such great value that several officials of the company likewise opened safekeeping ac- counts for their personal securities. In certain South American countries the [ 26 3 "In Witness Whereof" company's agents found considerable diffi- The culty in selling their goods. The trade Demand for , , ,. T Cheaper demanded cheaper quality. In some Goods sections of the United States a like demand had grown for cheaper goods. Having inspired the employees of Brenton & Com- pany with a zeal for quality, Brenton decided that cheaper goods, if manufactured at all, must be made at an entirely different mill. He had been seeking such a factory for some time when the secretary of the Cordona Chamber of Commerce called him on the telephone and informed him that the Regis mill at Eureka was in financial diffi- The Regis culties and that he thought a deal could be made with them. Brenton arrived at Eureka the next day and found that the Regis management had made purchases far beyond their capacity to pay. A large consignment of wool had been offered in Boston at a sacrifice price and the Regis mill, being over zealous to gain an advan- tage over certain competitors, bought the entire lot. Business had slackened and they were unable to meet their bills. Brenton had been on the ground studying the situa- tion for several days when he called at the Eureka Trust Company and found that certain parties were determined to force i 27 : The Fidelity Trust Company of Buffalo collection of their accounts by petitioning for a receiver. Brenton was well satisfied with the mill and felt that it could pull out of present financial difficulties if allowed sufficient time to do so. He personally took up the claims of the three firms who were about to force the issue. To prevent similar action by other hostile parties he petitioned the court for a reliable and non-interested receiver. The Eureka Trust Company was appointed. With its special facilities it succeeded in liquidating the debts of the company in five months. Purchase of The working capital of the Regis mill was exhausted and there were no funds with which to carry on the business. Having been in financial straits capital would hesi- tate before coming into the concern. Bren- ton, having agreed to assume all liabilities of the company made a deal, subject to the court's approval, whereby he agreed to buy the mill, paying for it by issuing stock in Brenton & Company on the basis of one share of Brenton & Company for three shares of Regis mill stock. The Cordona Trust Company was appointed depositary to effect the exchange of securities. All shares of the Regis mill stock, properly endorsed, were deposited with the Cordona Trust n 28 3 "In Witness Whereof Company. Temporary trust receipts were Exchange given to the owners thereof until new certi- ficates were engraved. When the certifi- cates were engraved the temporary receipts were called in by the trust company for conversion into permanent certificates rep- resenting the ownership of shares in Bren- ton & Company. In order to put the mill in first class condition considerable improvements were decided upon which involved the con- struction of additions to the factory and a suitable warehouse. When bids were taken it was found that a local contrac- tor's proposal was by far the lowest fig- ure submitted. He was, however, unknown to Brenton who seemed somewhat dubious as to his ability to fulfill the construction contract. A local banker who was acquainted with Financing the contractor agreed to loan him the money * he New to complete the job if Brenton would de- Additions posit a certified check in escrow to be de- livered upon satisfactory completion of the buildings. The check was placed in escrow with the Eureka Trust Company which delivered it to the banker when the contract had been fulfilled. In this manner both time and expense had been saved in the E 29 ] The Fidelity Trust Company of Buffalo erection of buildings by a contractor whose ability was unknown to Brenton. Brenton & Company now had a well rounded organization to produce any quality of goods demanded by either domes- tic or foreign trade; and here we leave them, a large, progressive organization forged by the many tempering fires which usually attend the career of a progressive and prosperous manufacturing organization. Coincident with the evolution and great financial growth of corporations within the last generation there have developed in- numerable duties of a fiduciary or public trust nature. Corporate It was at once apparent that a trustee having the necessary qualifications of con- tinuous existence, responsibility, experience, impartiality, constant application to duty, complete accounting system, freedom from \ sickness, disability and infirmity, could be provided only by a corporation organized for that specific purpose. Laws were therefore enacted authorizing the organization of trust companies. Their development and tremendous growth has E 30 : "In Witness Whereof been little short of phenomenal. It has recently been stated that trust companies are now performing trust duties in connec- tion with corporate securities worth ap- proximately twelve billion dollars. Problems identical with those of Brenton & Company may be encountered by any corporation. The various services rendered by trust companies are merely mentioned in the story without explanation. Each is, however, discussed under separate headings on the following pages of this brochure. For many years The Fidelity Trust The Fidelity Company of Buffalo has been extremely j-. ' 4.1 / i j j Company of active in this neld, and as a consequence is Bu ff a ] eminently qualified and well equipped to perform trust duties of any nature. Further discussion of these services either in person or by correspondence is unreservedly wel- comed. TRANSFER AGENT TRANSFER AGENT IN the State of New York a corporation in Transfer its simplest form may consist of three in- A 2 eitt dividuals, who together subscribe capital stock of $500.00. Three directors are re- quired; therefore these same individuals may constitute the Board of Directors. When the $500.00 of capital stock is all paid in and the organization completed the cor- poration may legally begin to function. Each of the stockholders receives a certi- ficate which is evidence of the ownership of a certain number of shares of the capital stock. Ownership of shares in a corporation is personal property which may be trans- ferred by one individual to another. The stock certificate, like a deed of real estate, is simply evidence of ownership of the prop- erty which it represents; and the loss or destruction of either does not mean that the actual owner loses his equity in the shares of the corporation in the first instance, or the real estate in the latter case. Upon satisfac- tory proof of loss, together with proper guarantee, a new certificate may be issued. If a deed to certain real property is forged it does not follow that the bona fide owner of L 35 ] The Fidelity Trust Company of Buffalo the property loses it. Likewise, the owner of shares in a corporation does not lose his property if a certificate or an endorsement is forged. The stock record of a corporation is somewhat similar to the books of record in which real estate transfers are recorded. Upon the stock records a complete history of the shares of stock may be traced, and in each case the keeper of the records must be sure that the transfer of ownership is absolute and genuine. In the case of stock he must be sure that the endorsement is genuine, not forged, and that the individual seeking the transfer is actually entitled to the stock. Formerly, officers of a corpora- tion kept the stock book, ledger and other books of record and made all stock transfers as well. Because of the responsibilities in- volved, well managed corporations now assign these duties to trust companies, which have departments organized for this specific purpose. In the simplest form of corporation men- tioned above, transfers of stock may not be so numerous, but the duties and responsi- bilities in this respect are as great as those of a corporation having a capital of mil- lions. Each State has adopted its own laws governing corporations, and those of each : 36 "In Witness Whereof State are uniform regardless of whether Transfer such corporations be of the simplest nature Agent having a capital of $500.00, or the largest with a capital of many millions. On the following pages a questionnaire has been introduced to set forth a few of the many problems with which a transfer agent is constantly confronted. By referring to this questionnaire executives of a corporation may be greatly astonished at the numerous intricate problems involved in the transfer of stock under present laws, any one or all of which may occur in any corporation. In the early history of our country cor- porations were few and transfers infrequent. Likewise laws governing corporations were very simple. With the growth and develop- ment of America, however, it became neces- sary to marshal our national resources to develop properly our inherent wealth. Therefore thousands of corporations have been organized and the various States have kept pace with the movement by constant change and development of corporation laws to protect fully the interests of stock- holders. When trading in stocks of various cor- porations became more active it was natural that a considerable proportion of such E 37 ] The Fidelity Trust Company of Buffalo trading should be done in New York City. With thousands of shares changing hands daily it was found both laborious and un- safe to send securities by mail to the various offices of corporations, located throughout the country for transfer. Therefore the New York Stock Exchange adopted a regulation requiring every corporation whose stock was listed on the exchange to appoint as transfer agent a trust company or other duly quali- fied agent in New York City to facilitate the work. Subsequently other large cities adopted similar regulations. It can readily be seen that the trust company was origi- nally chosen transfer agent as a matter of convenience. Fraud, theft and forgeries in connection with stock certificates ultimately became so frequent with consequent losses to stock- holders that the different States were com- pelled constantly to change their corpora- tion laws to meet various emergencies. The full responsibility was placed upon the cor- poration whose stock was being transferred. In this way the loss was passed on to the corporation, making it the duty of officers to see that all rights of stockholders had been properly recognized. This required con- stant vigilance to keep pace with new laws [ 38 1 "In Witness Whereof that might be enacted to safeguard stock- Transfer holders' interests. An arduous task was thus added to the duties of officers whose time could be utilized with greater profit to the corporation when directed in other channels. As a result corporations now appoint trust companies to act as transfer agents for their capital stock, not merely as a matter of con- venience, but for the sake of safety. Hun- dreds of corporations, both large and small, whose stock is not listed on stock exchanges, now use trust companies as their transfer agents in order to take advantage of the superior equipment of the modern trust company, and at the same time avoid the burdensome clerical work involved. With a special department devoted to this work, and with a large volume of this class of business, a trust company can afford to keep constantly in contact with the activi- ties of various State legislatures. Thus it becomes familiar with any changes in cor- poration laws which may be enacted, and is able to prevent considerable loss to the corporation. A few of the many decisions of courts in this respect are here given to show the great risk involved in the transfer of corporate stock. E 39 3 The Fidelity Trust Company of Buffalo Transfer Agent Responsibili- ties Involved in Transfer of Corporate Stock PROTECTING THE STOCKHOLDER (U. S. Supreme Court: Telegraph Com- pany vs. Davenport 97 U. S. 369 at page 371). "The officers of the company are custodians of the stock book, and it is their duty to see that all transfers of shares are properly made either by the stockholders themselves or persons having authority from them. If, upon the presentation of a certificate for transfer, they are at all doubt- ful of the identity of the party offering it as its owner, or if not satisfied of the genuine- ness of a power of attorney produced, they can require the party in the one case and the genuineness of the document in the other, to be satisfactorily established before allowing the transfer to be made. In either case they must act upon their own responsi- bility. In many instances they may be misled without any fault of their own, just as the most careful person may sometimes be induced to purchase property from one who has no title and who may perhaps have acquired its possession by force or larceny. Neither the absence of blame on the part of the officers of the company in allowing unauthorized transfer of stock nor the good faith of the purchaser of stolen E 40 : "In Witness Whereof property will avail as an answer to the de- Transfer mand of the true owner." ,, _ _ /-> V DEPOSITARY UNDER REORGANI- ZATION PLAN w "HEN default of interest is made in con- Depositary nection with a mortgage on improved real estate of modest value, foreclosure proceedings are instituted and the property is sold. Theoretically, a mortgage on a residence is the same as that on the property of a huge industrial concern, a railroad or a public utility corporation. A residence, however, may be readily sold and the mort- gage satisfied; while the value of a mortgage covering the real property and equipment of an industrial corporation, a railroad or pub- lic utility corporation, lies in the continued profitable operation of the company. Any disintegration of its essential elements would jeopardize the value of the property and consequently the obligation secured by it. Therefore, in the event that default of in- terest or principal occurs, a Protective Com- mittee may be formed which is composed of individuals or institutions who are largely interested in the defaulted bonds. The Pro- tective Committee may decide upon a plan for continued operation, or in some cases upon a reorganization of the corporation. E 97 ] Reorganiza- The Fidelity Trust Company of Buffalo The securities are lodged with a respon- s ^ e depositary, usually a trust company, Plan which issues Certificates of Deposit in ex- change for them. If the bonds have been listed, provisions may be made whereby the Certificates of Deposit are also listed on the Stock Exchange. The permanent certifi- cates give a full description of the security deposited, and also specify the terms and conditions under which deposit was made, as well as the conditions attending issue of the Certificates of Deposit. If it is proposed to continue the business every effort will be made to rehabilitate the corporation and increase its earnings to a point where fixed charges on the present or the proposed funded obligations are fully satisfied. When this object is accomplished the property will be turned back to the corporation. If assessments are made or if a distribution of principal or interest is contemplated, the certificates are presented so that proper endorsements may be made thereon. When the property has been restored to the corporation, Certificates of Deposit are recalled and the old securities reissued, or proposed new securities given in exchange therefor. In the dissolution of a corporation the C 98 3 11 In Witness Whereof trust company may be of considerable ser- vice. Let us assume that a committee has {^ r er aniza been appointed to carry into effect a resolu- tion P i an tion to dissolve, and that a trust company has been appointed as depositary. As speed- ily as possible the committee will convert into cash all assets of the corporation, depos- iting the same with the trust company. The committee will give the trust company a list of all creditors of the corporation and the amount due each. When and as the deposits with the trust company reach a specified percentage of the claims, the trust company will ratably make distribution thereof to the creditors until all claims have been paid in full. When the claims of all creditors have been satisfied, deposits thereafter will be held for distribution to stockholders. Stock certificates may be deposited with the trust company in order that any ratable distribution of assets may be endorsed thereon. When the affairs of the corpora- tion have been completely liquidated a certificate of dissolution will be filed with the proper authorities. The committee will thus be relieved of a great amount of clerical work, while creditors and stockholders will be assured that all distributions have been made on an equitable basis. : 99 n The Fidelity Trust Company of Buffalo Depositary A similar service may be performed by a under trust company in the disintegration by a large corporation of its assets into two or more smaller companies. In recent years certain large corporations in obedience to United States Supreme Court decrees or for other purposes have found it advisable to carry out such a program. Certain corporations adopted plans sub- stantially as follows. A committee was appointed to carry into effect the plans agreed upon. A trust company was ap- pointed as depositary. Notices were sent by the committee to stockholders advising them of the program agreed upon and directing all holders of common and pre- ferred stock to deposit their securities, fully and properly endorsed, with the trust com- pany or depositary on or before a specified date. It was also explained that shares of common and preferred stock in the new corporations to be formed would be given in exchange for those deposited. The num- ber of shares to be given in exchange was computed by the depositary, and for all fractional parts of a share warrants were issued to stockholders. Such warrants could be cashed by the depositary, or shares would be given in exchange for sufficient of L 100 n "In Witness Whereof the warrants to equal the par value of Depositary shares thus exchanged. Similar arrange- , . , , Reorgamza- ments were made with respect to the ex- change of bonds. The depositary made proper adjustment on account of accrued interest, where interest dates in the bonds deposited differed from those of bonds given in exchange therefor. This adjustment was paid in cash by the trust company. All redeemed stocks and bonds were cancelled by the depositary and destroyed. In the consolidation of two or more cor- porations we have a situation which is prac- tically the antithesis of that above recited, in that securities of several corporations are deposited in exchange for those of a single corporation. The duties required of the depositary, however, are virtually the same. In some instances the depositary has also performed many services for the committee in the nature of mailing notices and reports to stockholders, bondholders, etc. With its organization these duties can be discharged by the trust company with far less expense to the corporation. All duties of the deposi- tary as well as the terms and conditions incident thereto will be fully defined in the deposit agreement between the corporation and trust company. : 101 : DISBURSING AGENT DISBURSING AGENT UNTIL a few years ago it was the general Disbursing practice for corporations to make out Agent and mail individual dividend checks to the various stockholders. It was also their cus- tom to pay coupons and interest, and to redeem bonds at maturity. The corporation which sent out individual dividend checks encountered numerous obstacles. It was difficult to maintain the correct addresses of individual stockholders. Dividends from certain stocks might be ordered paid to an individual not registered as owner of such stock on the books of record. Frequently stock which is active on the exchange is issued in what are called "street shares/' i. e., in the name of a broker whose firm and official signatures are so well known that transfer of the shares is not required in every sale. If a broker buys such shares for the account of several customers he may hold only one of such certificates to cover several purchasers' accounts. If he should fail to credit one of his clients with interest or dividends when due the customer might write to the corporation and de- mand payment. This would necessitate an i 105 The Fidelity Trust Company of Buffalo investigation. The corporation not accus- tomed to such circumstances would experi- ence considerable difficulty in locating an error. In making out dividend checks, corpora- tions may neglect to take necessary pre- cautions, and the checks may be raised or otherwise fraudulently tampered with. If individuals who check up dividend pay- ments are not accustomed to the various methods of fraud employed by nefarious operators, a corporation may suffer con- siderable loss. In the payment of coupons and in the redemption of called or matured bonds, the amount of clerical work involved is infinitely greater than that required for the payment of dividends. In undertaking work of this nature the corporation must see that all coupons presented are accompanied by the proper ownership certificates, filed by the owner of the security, as required by regu- lations of the Internal Revenue Bureau. Very frequently holders of bonds which are subject to call fail to see the published notice calling certain bondk for redemption. In such instances great care must be exer- cised to prevent the payment of coupons detached from such bonds. Frequently the n 106 3 "In Witness Whereof return of the coupon is the first notice the Disbursing holder may have that one of his bonds Agent has been called. Occasionally interest on registered bonds is payable only on the order of the registered owner, and care must be used to see that an order directing the payment of interest has been received before payment is made. It can easily be understood that a consid- erable amount of clerical help is required to discharge the duties of a paying or disburs- ing agent. When one takes into account the knowledge, caution and diligence that must be exercised by such a department it can be observed that the ordinary clerk cannot qualify for such work. In addition to the skill required, a disbursing agent must have an accurate knowledge of various State and Federal Laws, particularly those which regulate Income Taxes. A complete system of files and records is necessary in order to facilitate the work and at the same time protect the corporation's interests. Where a limited amount of this business is handled, proper care, diligence and talent are usually sacrificed, always of course, at the expense of the corporation concerned. To avoid routine and clerical help, and to safeguard themselves against : 107 : The Fidelity Trust Company of Buffalo Disbursing loss through error, lack of knowledge and Agent the absence of a proper system of records, corporations are assigning these duties to the trust department of a well organized trust company. E 108 VOTING TRUSTEE ' <~">*^V^ -^^ \ r \*\ kf f * *fc IP* ^.^A^ VOTING TRUSTEE IN the reorganization or consolidation of voting corporations it is frequently desirable Trustee that certain management be retained. To insure the continuation of a particular board of directors or managers, stockholders may enter into a Voting Trust Agreement where- by the stock is endorsed over to a trustee during the term of the agreement. When the stockholders surrender their certificates they receive beneficial certificates from the trustee whereby they are entitled to all ben- efits that may arise from the stock while the trust agreement is effective. Aside from the custody of the stock, the trustee's only duty under such an arrangement is the voting of stock deposited in accordance with the terms of the agreement. Such a trust agree- ment is confined to a period of five years in this State. When the trust agreement ex- pires, stockholders surrender their trustee certificates for new certificates representing shares of stock in the corporation concerned. Stockholders may also resort to a similar arrangement when their interests are jeop- ardized by an effort on the part of certain factions to gain control. E in ] The Fidelity Trust Company of Buffalo voting When a preferred stock or bond issue is Trustee about to be placed on the market an ar- rangement of a similar nature may be pro- posed, giving the holders of preferred stock or bonds the right to choose the manage- ment until dividends or interest have been regularly paid for a period of successive years, or giving the security holders the right to choose the management if the company shall fail at any time to pay dividends or interest regularly for a num- ber of consecutive years. Corporations choose trust companies to fulfill these duties because of their responsi- bility and familiarity with the subject. [ 112 1 ESCROWS ESCROWS N escrow has been described as a deed, Escrows bond or other written engagement de- posited with a third party to be delivered by him to the grantee only upon the per- formance or fulfillment of some condition within a specified time. In general practice escrows contemplate comparatively brief periods of time, and instruments so deposited are usually beyond recall during that period. Escrows may be created for various pur- poses, for instance when a piece of real estate is sold on installments the deed may be placed in escrow until all payments have been deposited with the escrow holder. This is particularly convenient when the owner of property lives in a State or country foreign to that in which the real property is located. In the construction of a building or other contract work, funds are frequently de- posited in escrow, payments to be made at various stages of progress in the completion of work under contract. When a corporation proposes an issue of common or preferred stock the securities E H5 3 The Fidelity Trust Company of Buffalo Escrows may be deposited in escrow to be ratably delivered to underwriters when and as they shall have made deposits in payment there- for with the escrow holder. The above are only a few of the many purposes for which escrows may be created. In the custody and delivery of instruments or other property so deposited, holders of escrows are governed by specific directions, and will therefore insist that all conditions be in writing, not verbal, and that said conditions be entirely clear and not subject to more then one possible interpretation. In selecting the holder or depositary of an escrow, the interested parties will select one who is responsible, absolutely trustworthy, free from prejudice, and one who is sure of continued existence in order that the pur- pose of the escrow may be fully realized. The following is a quotation from John H. Sears of the New York Bar. "The organization of the trust company, with its long life, its ability to surrender its contracts to successors upon expiration of its life, its being supervised under strict regulation, and its many other safeguards in respect to the care and custody of property, and espe- cially the making of such care and custody features of business under specific charter L lie 3 "In Witness Whereof provisions, seems not only for the business Escrows world but also for private interests, an agency for the carrying out of escrow agree- ments of a peculiarly fit nature, and also of agreements in the nature of escrow/ ' E H7 3 RECEIVER-ASSIGNEE A CORPORATION sometimes finds itself tern- Re J\. porarily in financial difficulty. It is not a question of insolvency, but a condition which perhaps will become rectified if ample time is allowed. To prevent a forced liquidation under adverse circumstances a friendly receiver is sometimes applied for by a corporation, and the court of proper jurisdiction will usually grant such a request if satisfied as to the justice of such a pro- cedure. Officials of a successful corporation may for some reason become involved in a con- troversy with the stockholders, or members of a partnership may become engaged in an argument which among themselves cannot be amicably settled. In either of these events, the parties interested may seek the appointment of a receiver to make an ad- justment. Or a corporation may actually be in a state of insolvency, and creditors thereof, to prevent further depletion of the company's resources, and also to provide for a fair and equitable distribution of assets among all creditors, may petition the court for the appointment of a receiver E 121 : The Fidelity Trust Company of Buffalo Receiver for the insolvent corporation. The acting receiver may carry on the business, subject of course, to certain legal restrictions. In the conduct of the corporation's affairs, the receiver will naturally avail himself of all possible information and knowledge at the disposal of its officers. If the difficulty has arisen through temporary lack of capital, a trust company is in a position to advance funds, if satisfactory security can be pro- vided, to tide the affairs of the corporation over a short depression. This may enable the corporation to recover. A voluntary assignment of all its property may be made by a corporation for the bene- fit of its creditors, and such an assignment, if general in character, is generally recog- nized by State courts. Frequently such action is taken at the urgent request of the corporation's creditors. In either case, it is accomplished by a deed of assignment. The conveyance is acknowledged and re- corded in the office of the clerk of the county wherein the debtor resides or carries on his business. An assignment is attended by the im- mediate transfer of all property concerned. All claims must be filed and proved if neces- sary by an order of the court. : 122 : "In Witness Whereof' The assignee will be guided by certain Assignee elements of the law and he must give a complete accounting of his activities. He is personally liable for and charged with any irregular payments or disbursements as well as any loss arising through negli- gence on his part. In liquidating a corpora- tion through a general conveyance, the assignee must satisfy all creditors with an equal degree of fairness. Due consideration, however, must be given those who hold prior liens against the property. It is also incumbent upon the assignee to collect all debts owing to the corporation, referring to the court, if necessary, in order that all possible assets of the corporation may be realized upon. The obvious advantages offered by trust companies acting as receiver or assignee were early recognized by courts. The fol- lowing extract is a quotation from Justice Roosevelt of the New York Supreme Court in the matter of the Empire City Bank, year of 1855. "As no mere personal obligation can be equal to the mortgages and public stocks to the amount of one million dollars, pledged as security by the trust company, and as that institution has been created by law, 123 The Fidelity Trust Company of Buffalo among other objects, for the express pur- pose of meeting such requirements, I feel no hesitation in making a selection between the nominees. Private preferences in this as in most other judicial acts, must yield to public considerations. No man, and the counsel of no man, has a right to complain that he or his particular friend is not ap- pointed a receiver; especially where the assets, as in these bank cases, to be entrusted to his responsibility, are counted not by tens, but by hundreds of thousands. There are absent parties interested, minors as well as adults; and those who rely, and have a right to rely, exclusively and without pro- fessional intervention on the care and vigi- lance and unbiased judgment of the court." Again in the same case, "Does not every order appointing a receiver contain by im- plication if not expressly, a direction that all funds, when collected, shall be kept in some safe depository? The law, in requiring as it does, proper security from a receiver in these cases assumes that, although di- rected, he may not do his duty; and it is only in such a contingency that security is of any importance. And it dispenses with this prerequisite in the case of the appoint- ment of the trust company, only because E 124 : "In Witness Whereof its whole capital stock, property and effects Assignee are by law made absolutely liable for such deposits in preference to all other liabili- ties/' C 125 ] THE MATTHEWS-NORTHRUP WORKS, BUFFALO, CLEVELAND AND NEW YORK 14 DAY USE RETURN TO DESK FROM WHICH BORROWED LOAN DEPT. i<>5 slO)476B .General Library Un,versiry pf California Berkeley UNIVERSITY OF CALIFORNIA LIBRARY