"And no person shall be appointed a proxy unless he is one of the Bondholders or a Trustee hereof or when the Trustee is a corporation, an officer of such corporation, or a Director or an officer of the Company *." In other Canadian indentures the only provision as respects proxy holders is that they need not be bondholders. The danger of course is that control over the proxy machine would gravitate into the hands of those who had the lists of names and addresses of the bondholders-most commonly the issuers and the underwriters and that they would proceed to put on a campaign for proxies so that the reorganization could be effected in the manner best suited to their own objectives. Conflicts of interests arising out of that situation and the resultant inadequate representation of the bondholders create substantially the same problems as do solicitation of deposits or powers of attorney by protective committees. For that reason we defer further discussion of that problem until later portions of our report. But it is clear that the proxy problem in this situation occupies a prominent place in the program of control over the newer procedure of reorganization by contract. C. SELECTION OF MEMBERS OF PROTECTIVE COMMITTEES AT BONDHOLDERS' MEETINGS In this report we have discussed the affiliations of the trustee with the committee. In concluding that discussion we said: "It may however be essential for the trustee to be the focal point for organiZation of bondholders in times of trouble and for formation of a protective vmmittee. This may mean that the trustee should act as chairman of a bondholders' meeting where a committee is selected or that it should undertake directly to have a committee formed. But further than that its identification with the committee should not go.” In the latter connection it is interesting to note the extent to which the trustee has participated in the selection of members of protective committees. From the returns to the questionnaire sent by this Commission to corporate trustees the following data have been compiled: Participation of trustee in selection of members of protective committee: (a) Number of issues involving trustee's participation— If this is a fair sample, the trustee in the past has been relatively inactive in forming protective committees. Yet trust officers themselves not infrequently express the view that this is one of the functions of the trustee. As one has stated: "Upon default under a trust deed it is the trustee's duty to notify all bondholders of the default as coupons or bonds are presented for payment and at the same time make a record of the names and addresses of all bondholders as obtained. If the bonds were originally underwritten or marketed through a bond house or syndicate, the bond house or the originating member of the syndicate should also be notified as they have no doubt made a study of the security before the bonds were sold and considered the possibilities of realiza tion in just such an event. The trustee should also make a close study of the security and its options of procedure to realize on the property for the benefit of the bondholders first and the obligor as well. Steps should be taken to have a meeting called of all the bondholders that they may organize for their common protection and appoint a committee authorized to protect their interests, which committee should be clothed with proper authority to act as adviser to the trustee for as large a number of bondholders as possible."" But under the newer type of indenture provision which provides for bondholders meetings, machinery for the selection of committees under the aegis of the trustee is afforded. By reason of that machinery the trustee may be able to act more frequently as the focal point for organization of bondholders in times of trouble, either by calling meetings or by acting as chairman of meetings called for that purpose.25 In this country the members of a protective committee are, on rare occasions, selected at a meeting of security holders called by the corporate trustee. An illustration of this practice appears in 24 A. L. Grutze, Trust Officer, Title & Trust Co., Portland, Oregon, writing in 41 Trust Companies (1925) 183, 185. 25 Canadian indentures frequently include such purpose in the indenture provisions governing these meetings. Thus the indenture dated as of June 1, 1928, from Abitibi Power & Paper Company, Limited, in favor of Montreal Trust Co. and The National City Bank of New York, Trustees, securing first mortgage bonds provides in Art. 45, Clause 11 (c): "Power from time to time to appoint a committee with power and authority (subject to such limitations, if any, as may be prescribed in the resolution) to exercise, and to direct the Trustees to exercise, on behalf of the Bondholders such of the powers of the Bondholders that are exercisable by extraordinary or other resolution as shall be provided in any extraordinary resolution appointing such committee or subsequently from time to time adopted. Any such extraordinary resolution making such appointment may provide for payment of the expenses and disbursements of and compensation to such committee. Such committee shall consist of such number of persons as shall be prescribed in the resolution appointing it and the members need not be themselves holders of Bonds. Every such committee may elect its chairman and may make regulations respecting its quorum, the calling of its meetings, the filling of vacancies occurring in its number and its procedure generally. Such regulations may provide that the committee may act at a meeting at which a quorum is present or may act by minutes signed by the number of members thereof necessary to constitute a quorum. All acts of any such committee within the authority delegated to it shall be binding upon all Bondholders;" connection with the External Secured Sinking Fund 7 percent Gold Bonds of 1928 of the State of Maranhao, Brazil.26 1927 The issue in the amount of $1,750,000, of which $1,682,000 was outstanding at the time of default, was distributed in 1928 by a banking group headed by Baker, Kellogg & Co. It was secured by a "number of taxes, including the revenues of the water and electric light and power works, which are collected by an American engineering company. The Bankers Trust Company was designated trustee. Because of exchange restrictions imposed by the Federal Government of Brazil, the interest payment due on May 1, 1932, and those subsequently falling due were not met. Defaults occurred in sinking fund payments as well. Protests, by both the Bankers Trust Company and the Ulen Management Company (the American engineering concern referred to above) were successful to a limited extent: deposits to the account of the Bankers Trust Company in the Bank of Brazil of the amount of Brazilian currency approximately equivalent to the debt service due in dollars were made from August 4, 1932 until March 22, 1934. On February 5, 1934, the Federal Brazilian Government issued decree number 23,829 which regulated the payments that were to be made on external federal, state and municipal loans. This decree, covering the four-year period from April 1, 1934 to March 31, 1938, classified external loans in eight grades.28 Loans in the first grade received service in full; in the remaining grades, bond service was scaled in varying amounts until the eighth grade was reached which received no bond service. The Maranhao loan was placed in the seventh grade with interest payments ranging from 172 percent, in the first year, to 322 percent in the fourth year of the full amount of the interest requirement, but with no payments for amortization. Shortly after the promulgation of the decree Bankers Trust Company, trustee for the loan, decided that the formation of a bondholders' protective committee would be advisable. Factors which were said to have prompted this decision were the trustee's inability to obtain a transfer of its deposited funds into dollars, the pro The Information on which the account of this meeting of Maranhao bondholders is based, except where otherwise indicated, has been obtained from various documents, letters and memoranda, copies of which have been furnished this Commission by Bankers Trust Company, Baker, Kellogg & Co., Ulen Management Company, and the committee under consideration. Institute of International Finance, Bulletin No. 49, Dec. 31, 1931, at 25. Foreign Bondholders Protective Council, Inc., Annual Report 1984, introduced as Commission's Exhibit No. 19 in Proceedings Before the Securities and Exchange Commission In the Matter of Foreign Bondholders Protective Council, Inc (1935), at 36-43. nouncement of the federal decree and the proposal of an officer of the obligor state "to withdraw or reduce certain taxes pledged as security for the bonds."29 The trust agreement between the State of Maranhao and the Bankers Trust Company, dated April 14, 1928, made provision for the calling of bondholders' meetings by the trustee in the following terms: * at the "Meetings of the bondholders may be convened in The City of New York, State of New York, by the Trustee and shall be called by the Trustee upon request in writing of the State or upon a request in writing signed by the holders of twenty-five percent (25%) in principal amount of bonds at the time outstanding. Notice of the time and place and purpose of such meeting or meetings shall be given by the Trustee expense of the State, and shall be published in at least one daily newspaper in the City of New York, for at least four consecutive weeks, the last publication to be not less than twenty days before the date fixed for said meeting. Adjourned and subsequent meetings may be called in such manner as may be prescribed by the bondholders at any meeting. The bondholders may vote at such meetings in person or by proxy; and regulations or by-laws in respect of such meetings may from time to time be established, altered or repealed by the bondholders acting by seventy-five percent (75%) in principal amount of the bonds outstanding; and until the bondholders shall make such regulations or by-laws, such powers may be exercised by the Trustee." " Bankers Trust Company decided to call a meeting of the bondholders, pursuant to the above provision, "to consider (1) the formation of a Bondholders' Committee, (2) the proposed partial interest payments under the Presidential Decree No. 23829 and the other matters affecting their interests." A circular letter, dated May 16, 1934, was sent by Bankers Trust Company, as trustee, to all bondholders whose addresses it had and to members of the underwriting and selling group, announcing a meeting for June 6, 1934. This letter is printed as Exhibit A to this Appendix. An advertisement of the meeting inserted in two New York newspapers is printed as Exhibit B. Bondholders who could not attend in person were requested to sign a printed form of proxy, running to "Mr. Henry W. Lieber, a substantial bondholder, and Mr. George O. Castell, one of See circular letter from Bankers Trust Company to bondholders annexed to this appendix as Exhibit A. 30 Art. Seventh, sec. 2. It does not appear whether the trustee adopted regulations or by-laws in respect to the meeting. Section 1 of the same article provides for the modification of the trust agreement, except with respect of the obligation of the issues to pay principal and interest, by the affirmative vote of seventy-five percent (75%) in principal amount of the bonds outstanding at a meeting of bondholders held as provided in the section quoted in the text. It may be, therefore, that the provision for the calling of a meeting was intended only for the purpose of permitting bondholders to vote on an amendment to the agreement. In that event the meeting herein referred to would be an informal one called on the initiative of the trustee and of interest from that aspect. his associates," or if they so desired, to strike these two names and insert the name of a proxy of their own choice.31 affixed as Exhibit C. The proxy form is The meeting, conducted at the offices of the Bankers Trust Company, was poorly attended. Holders of not more than $114,500 of bonds, 6.8 percent of the $1,682,000 outstanding, appeared in person. Approximately 15 percent of the bonds outstanding were represented at the meeting altogether by their owners or by proxies. The minutes of the meeting, presided over by Mr. Nohl, a corporate trust officer of the Bankers Trust Company, described the election of the committee: "Mr. Nohl then said that the Trustee thought that bondholders should form a protective committee and that the meeting should be turned over to the bondholders. Mr. Frederick [the proxy for a holder of $6000 of bonds] suggested that Mr. Kellogg [Vice-President of Baker, Kellogg & Co., the principal underwriter] head the Committee. Mr. Kellogg hesitated and suggested that Mr. McQueen be named as Temporary Chairman. "Mr. McQueen took the chair. "Mr. Sexton [Vice-President of Baker, Kellogg & Co.] suggested that Messrs. Kellogg, McQueen and Byfield be named by the bondholders as a Committee. These three, including Mr. E. B. L. Babcock, were nominated, seconded and appointed members of the Committee by the bondholders. "A resolution was made by Mr. Byfield that the Committee should be limited to five members-the fifth member to be appointed at some later time." The committee was constituted as follows: Charles A. McQueen, Chairman Robert S. Byfield Ralph D. Kellogg E. C. Babcock Lew B. Clark, Secretary Mr. Kellogg, as noted above, was of the firm of Baker, Kellogg & Co., the principal underwriter of the bonds. Mr. Byfield was president, Mr. McQueen and Mr. Clark were vice-presidents of Foreign Bond Associates, Inc., a company engaged in dealing in foreign bonds. The nature of the business of Foreign Bond Asso "In order to permit holders of unregistered bonds and their proxies to attend and vote without producing their bonds, the trustee required each such holder to exhibit his bonds to a New York City bank or trust company, a member bank or trust company of the Federal Reserve System, a bank or trust company having a correspondent in New York City or a member of the New York Stock Exchange, and obtain a certificate (affixed hereto as Exhibit D), attesting to his bondholdings. Art. Seventh, sec. 3 of the trust indenture specifies the obtaining of such certificate and such further proof of bondholdings as the trustee deems desirable. The bondholder was not, however, required, as in the case heretofore set forth of the Donnacona Paper Company, Ltd., to leave his bonds on deposit until the final adjournment of the meeting. 75957-36—11 |