A somewhat similar exchange offer was made to the holders of the 5% debentures of the Eastern Utilities Investing Corporation. This corporation was an affiliated investment company whose assets had been invested largely in junior securities of the Associated Gas and Electric Company and class A stock of the General Gas & Electric Corporation.185 Holders of the Investing Corporation debentures were offered an exchange for a like face amount of Associated Gas and Electric Company debentures, subject to the obligation to exchange the latter under the plan. It was pointed out that the quoted market value offered was substantially in excess of the asset value of the Investing Corporation debentures. 186 In issuing statements from time to time summarizing the number of debentures exchanged under the plan, no mention appears to have been made of the sources of these exchanges or of the part other companies of the system may have played either in making exchanges under the plan or in making open market purchases of debentures issued pursuant to the plan. Registration statements on file with this Commission indicate that the two companies affiliated with the Associated system, Utilities Employees Securities Company and Associated General Utilities Company, have acquired substantial amounts of the Company's debentures at various times and have subsequently held, in lieu thereof, debentures issued pursuant to the plan.187 The source of information used in both cases is not in sufficient detail to support any definite conclusions that this practice was employed to support the market or create market differentials to make it attractive for traders in the financial marts to expedite exchanges under the ReCap Plan. Again complete information is not available as to the aggregate amounts and percentages of exchanges under the ReCap Plan, which were accompanied by some special inducement, or which involved an absence of arm's length bargaining. The Company has conceded that at one time the single 185 See Moody's Banks (1936), at 1596. 188 See letter dated August 22, 1934, from The General Finance Corporation to the Holders of Eastern Utilities Investing Corporation 5% debentures, due 1954. 187 Securities Registration Statement. Form A-2, Associated General Utilities Co., filed with the Securities and Exchange Commission November 20, 1935, at 41-44; Securities Registration Statement, Form A-2, Utilities Employees Securities Co., filed with the Securities and Exchange Commission August 28, 1935, amended statement of September 17, 1935, at 24. From January 1, 1932 to August 31, 1936, the Utilities Employees Securities Co. acquired $11,596,450, par amount, of the Company's debentures. During this same period $11,485.050 were exchanged or deposited leaving a balance on August 31, 1936, of $111,400 undeposited debentures. In this same period Utilities Employees Securities Co. acquired either as a result of exchanges listed above or in the open market $18.936,780 bonds arising from the ReCap Plan and sold $2,967,700 leaving a balance on August 31, 1936, of $15,969,080. Of this amount $5,822,730 were Option 2 bonds; $7,339.800 were Option 1 bonds (convertible into twice the amount of either Option 2 or Option 3); $2,806,550 were Option 3 bonds. factor of exchanges by companies of the system accounted for approximately 20 percent of the total exchanges to that date.† 188 Preferential treatment of a single large debenture holder or the purchase of exchanges (if they took place as Judge Mack found that petitioners had reasonable ground to fear), and the use of control over subsidiaries and affiliated companies to induce acceptances of a plan may be unfair to other security holders as well as having the tendency to mislead them as to the extent of the support for the plan which has been expressed by security holders at large.† 189 Only in connection with a voluntary reorganization would the proponents of a plan be free to indulge in such practices. It is hardly likely that they would be countenanced where there was adequate judicial or administrative supervision over the proceedings. +F. ATTITUDE OF INVESTMENT BANKERS TOWARD THE RECAP PLAN 190 It is pertinent to observe the role played by the investment bankers in this reorganization. In large measure, this is revealed in material to be found in various published sources. We have stated that the plan was a "management plan". It was not a "bankers plan", in the sense that it was prepared or sponsored by the investment bankers who had distributed the Company's debentures. To what extent the management may have sounded out bankers' sentiment with reference to the possibility of reorganization in advance of promulgation of the plan does not appear.' 191 When the plan was announced it was opposed by many of the leading firms which had been identified with public offerings of the debentures.192 However, the opposition offered by the bankers was not sufficiently vigorous to make much headway against the aggressive campaign carried on by the management in support of the plan. †188 See Appendix A, II, infra. This concession is implicit in the Company's comment on our characterization of various exchanges as involving special circumstances.† +1 Originally read: "Such transactions as these (if they took place as Judge Mack found that the petitioners had reasonable grounds to fear) are, of course, to be condemned. Certainly, preferential freatment to a single large debenture holder, the purchase of exchanges, is unfair to the other debenture holders. The deposit under the plan of the debentures purchased from the Chase, moreover, increased the number of debentures which the management in its solicitation drive could point to as having already assented. Apparently, the source of these exchanges was not revealed." The Company commented with respect to this paragraph of the report, as follows: "The statement with respect to preferential treatment of a single large debenture holder is, as heretofore stated, not justified by the facts. Nor, as above stated, is the criticism of failure to disclose the source of exchanges justified in view of the small percentage of debentures represented by inter-company holdings." t A preliminary draft of this subsection was not submitted either to the Company, as in the case of the preceding subsections, or to the bankers.† +1 Various letters hereinafter cited, which were issued by investment banking firms immediately after public announcement of the plan, referred to the necessity for further study before any definite recommendations could be made with respect to the plan.† The attitude of one is expressed in the affidavit set out in Appendix A, V, a, infra. This affidavit was an exhibit in the 77B proceedings before Judge Mack.† Such opposition did not prevent the exchange of the full $100,000,000 limit of debentures under Option 1. At the most it may have slowed up the process, and have affected the amount of exchanges which have been obtained under other options. Of course, a really vigorous opposition might have required an expenditure of funds comparable to the huge sums which were being expended by the management. It would have involved some responsibility for judgment as to the future, risk of criticism for guessing wrong, and of being charged with responsibility for any financial collapse that might ensue. following guarded instructions (which we have previously quoted) given to salesmen soliciting acceptances of the ReCap Plan indicates the Company's attitude towards the bankers and some issues which might have become acute had open warfare developed between the Company and its bankers: "Why don't the bankers recommend the plan? (We must not disparage the banker.) The "We should recognize, however, that the banker (or the banking element, or at least certain banking interests) have a selfish interest to protect. "If the $264,000,000 of Company funded debt outstanding were held by one holder, his right to sit on the directorate (in the event of a reorganization) is absolutely right--BUT, the actual situation in regard to the ownership of this $264,000,000 outstanding is entirely different-there are thousands of individual holders. Although the average individual holder cannot hope for the right to a place on the directorate, the interest of the individual holder is the big thing. If his interest can best be protected under the Recap Plan and under the present Management, he should give no consideration to the selfish interest of a large banking institution who may hope for an important place on the directorate in the event the Management is changed or a reorganization is necessary. "The Associated Gas and Electric Company is the only public utility holding company in the country that is not tied up by bankers." 193 The bankers did not undertake the formation of a protective committee to represent the debenture holders, but confined their opposition to the publication of a few cautiously worded letters advising against making exchanges under the plan. This opposition included the Chase Harris Forbes Corporation,194 whose predecessor Harris, Forbes & Company had taken the leading part in distributing the debentures. At the time the ReCap Plan was announced Chase Harris Forbes Corporation was an affiliate of the Chase National Bank, but owing to the enactment of the Banking Act of 1933, the † 193 See "Today's Message" from the Home Office, No. 479, dated September 6, 1933.+ +184 The following letters from the Chase Harris Forbes Corporation appear in the Commercial & Financial Chronicle as noted below: Letter dated May 27, 1933, tentatively advising against exchanges pending further study (Vol. 136. at 3905); letter dated August, 1933, definitely advising against exchanges (Vol. 137, at 1048); letter dated December, 1933, stating that the corporation had not changed its attitude (Vol. 137, at 4528).† liquidation of its investment banking business was in process. Opposition was also publicly expressed by Brown Brothers Harriman & Co. of New York, Halsey, Stuart & Co. of Chicago, Central Republic Company of Chicago, J. G. White & Company of New York and by Parsly Bros. & Co., Inc., of Philadelphia.195 The position of bankers and financial advisers opposed to the plan became more embarrassing as an increasing number of exchanges were made pursuant to Option 1, and the Company was able to point to the prospect of early exhaustion of the amount of bonds available under this option. If the earnings decline should continue, or if the real situation of the debtor should turn out to be more desperate than publicly admitted, and if the ReCap Plan should not be set aside, those who had failed to take advantage of Option 1 might be substantially prejudiced. Under these circumstances the Central Republic Company which had originally advised against acceptance of the plan advised either acceptance of Option 1 or sale of the debentures. Central Republic said it had been forced to consider the position of those who do not exchange in view of the fact that the only option with any appeal was limited and was fast being exhausted.196 About the same time, Brown Brothers Harriman & Co. made a similar shift in their advice. On August 1, 1933, they had stated: "In our opinion the resulting financial structure leaves much to be desired and the plan is open to the criticism that it appears to call on the debenture holders alone to make sacrifices, leaving the stockholders and control not only undisturbed but actually, as the result of the reduction in compulsory debt service, in a more favorable position than they have heretofore enjoyed." 1o On December 27, 1933, they made the following recommendation: "We continue of the opinion that the Plan is inequitable to Debentureholders. However, because of the amount of Debentures that have been deposited, we now feel that little is to be gained by withholding deposit under Option 1 and recommend that this Option be accepted. The generally held opinion is that, although a waiver of 50% of the capital amount of the Debentures is necessary, holders accepting the first Option will receive a security which has a materially better position with respect to assets and earning power. "We wish to point out that the Associated Gas & Electric Securities Company has limited the amount of the security to be issued under Option 1 to $50,000,000 principal amount, subject to the possibility of enlarging this amount. + The letter of Parsly Bros. & Co., Inc. was published in the May 27, 1933 issue of Commercial & Financial Chronicle (Vol. 136, at 3599).† Letter dated December, 1933, appearing in Commercial & Financial Chronicle (Vol. 137, at 4699).† + Excerpts from circular letters to customers known to be interested in Company debentures.† 44532-38-8 "A fee is being allowed to security dealers who deposit Debentures for clients under the offer of exchange, but we will not accept this concession in the case of Debentures deposited through us.' 198 About this time a guarded letter was issued by The First of Boston Corporation of Massachusetts which made no definite recommendations but pointed out the embarrassing character of the choice. The text of the letter follows: "To the holders: "THE FIRST OF BOSTON CORPORATION OF MASSACHUSETTS, ASSOCIATED GAS & ELECTRIC COMPANY DEBENTURES "During recent months we have received many inquiries concerning the Plan of Reorganization and Capitalization submitted by the Associated Gas & Electric Company to its debenture holders. "Conditions are conceivable under which any option originally selected may prove less favorable than others. A decision appears to involve prediction not only of the future course of earnings and the amount of bonds likely to be deposited under the various options, but also of the future acts of the management. We have, therefore, felt obliged to refrain from expressing any opinion as to the most favorable course of action. We continue to feel that the ultimate decision must rest entirely with the individual holder. "If, however, unsatisfactory earnings, rate reductions, increased taxation, or other occurrences should result in receivership of Associated Gas & Electric Company, one who had selected an option entitling him to receive securities of Associated Gas & Electric Corporation would, in our opinion, seem likely to be in a more favorable position than one who had done nothing or had selected other options. Of the various options to receive securities of the Corporation, Option 1 appears to be the least objectionable. The amount of securities to be issued under that option has been declared limited by the Company. "This option may also prove to be advantageous if the escrow agents obtain control of a very large percentage of Associated Gas & Electric Company debentures through deposit. "In event that there is no receivership, however, and that no inequitable pressure is brought against non-depositors through control of deposited debentures by the escrow agents, the non-depositor may in our opinion find his position improved without the necessity of accepting any scale down. The plan does not call for any scaling down of the interests of stockholders of Associated Gas & Electric Company. "Sale of the debentures would avoid many of the uncertainties involved, but would recover only a small part of the principal originally invested. Current prices range from 11 to 14, varying with the coupon rate. "We assume that you are familiar with the terms of the various options, but if not, we shall be glad to obtain for you copies of the Company literature describing the plan. "The Company has offered to pay dealers through whom deposits are made a commission varying from 4 of 1% to 14%, according to the amount of debentures deposited. We shall not accept compensation in this connection. "The above opinions are based upon such information as has been made public by the Company. We can assume no responsibility for the accuracy +198 Ibid.t |