frsbog_mim_v38_0289.pdf
TRANSCRIPT
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FEDERAL RESERVE BOARD
WASHINGTON
X-7456
T O
T H E FEDERAL RESERVE BOARD
June 20, 1933
Dear Mr.
For your information, there a r e attached copies of
th ree le t te r s , da ted
May 3, May 18 and
June
2 , 1933 ,
respec t ive ly ,
addressed
t o t h e
o f f i c e
o f t h e
Comptroller
of t he
Currency,
o u t -
l i n in g
t h e
Board's views
i n
certain cases which involve proposed
reduct ions i n t h e capi ta l s tock of nat io nal ban ks. There i s
also attached a copy of a le t t e r f rom t h e o f f i c e o f t h e Comptroller
o f t h e Currency, dated May 25 , 193 3, asking that t h e Board reconsider
i t s dec is ion in one of the cases , and a copy of a memorandum from
t h e Board's Assistant Counsel, dated-May 31, 1933.
Very truly yours
Chester Morrill
Secretary.
Inclosures
TO ALL FEDERAL RESERVE AGENTS.
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4
May 3, 19 33 .
Mr. F. G. Await,
Acting Comptroller
o f the
Currency,
Washington,
D. C.
Dear Mr* Await:
Reference
i s
made
t o
your memorandum dated April
17, 1933,
r e l a t i v e t o t h e proposed reduction i n t h e cap i ta l s tock of t h e — —
- - - - - - - - - - — - — - - - - - - - - - - - - - - - - - - — — , f rom $100,000 t o #50,000.
I t i s noted that t h e p lan of reorganizat ion o f t h e - - - - - - - - - -
— — — - - - - , of
which
t h e
reduct ion
i n i t s
capi tal s tock
i s a
pa r t , a l s o
involves t h e increase o f i t s common c a p i t a l stock a n d t h e issuance o f
preferred stock*
I t
appears th at immediately a f t e r
t h e
proposed
r e -
duction t h e common c a p i t a l stock o f the bark would be increased t o
§60,000 b y t h e sa l e f o r $45,000 of new common stock having an aggregate
p a r value o f $10,000 and t h a t pref er re d stock having a n aggregate pa r
value of $40,000 would b e issued t o deposi to rs who waived 30%, or
$135,000,
of
t h e i r de pos its which t o t a l $450,000*
I t i s
provided
i n
t h e proposed amended articles o f assoc ia t ion o f t h e bank t h a t such p r e -
ferred stock shal l b e r e t i r e d ou t o f ne t earnings a t t h e aggregate s u b -
scribed price
o f
$135,000 (although holders
o f
such stock
may be
inv i ted
t o tender their s tock a t lower f i gu re s) , and tha t i n t h e e v s i t of any
l i qu ida t ion , d i s so lu t ion , o r winding-up o f t h e associat ion, whether v o l -
untary
o r
involuntary,
t h e
holders
o f t h e
preferred stock shal l
b e e n -
t i t l e d t o receive a n amount equal t o $33.75 p e r share plus a n amount
equal to a l l unpaid dividends on such preferred stock before a n y p a y -
ment shall b e made t o holders o f t h e common stock. I t appears, therefore,
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tha t , un less i n t h e meantime some o f t h e proposed preferred stock i s r e -
t i r e d a t a lower cost through voluntary action o f t h e preferred s tockholders ,
they wi l l b e e n t i t l e d to an amount aggregating a t le as t $135,000 pr io r t o
an y payment t o t h e holders of the common stock.
I n connection with t h e provision made i n t h e proposed amendments
t o t h e
a r t i c l e s
o f
as soc i a t i on
o f t h e — — —
- - - - - - - — f o r
t h e
r e t i r e -
ment
o f t h e
preferred s tock
ou t o f ne t
earnings
of the
bank,
i t i s
noted
t h a t in 1 9 28 t h e — — — — — — h ad n e t earnings,
a f t e r cha rge -o f f s , o f $2,316,16; in 1929 , had a ne t loss , a f te r charge-
of f s , o f
$4,930«52;
i n
1930*
a n e t
loss , a f t e r charge-of fs ,
of
$3,185.28;
in 1931 , a n e t loss , a f t e r charge-of fs , of $21,973*79; and in 1932 , a ne t
loss , a f t e r charge-of fs , of $12,621.79. I n these circumstances, i t does
n o t seem likely t h e bank will b e able t o r e t i r e any substantial amount of
i t s
pr ef er re d stock from
n e t
earnings
a t any
time
i n t h e
near fu ture .
I t appears from t h e las t repor t of examination o f t h e —
— — — — — — - , a s of January 12, 1933, t h a t i t h a s loans
c l a s s i f i e d a s doubt fu l o r los se s an d deprec ia t ion on securi t ies aggregat ing
$132,411.14, a heavy investment i n banking house, furniture an d f i x t u r e s
and real estate amounting t o $110,128.57, a l i a b i l i t y f o r borrowed money
amounting t o $121,672.37 and t h a t i t s los se s , a s shown b y such report of
examination, a r e s u f f i c i e n t t o impair i t s c a p i t a l t o t h e extent o f
$11,098.76. I t i s proposed, i n connection rnth t h e adjustments of the
bank's capi ta l s tock, t o charge o ff a l l loans c lass i f i ed a s losses o r
doubt fu l and deprec ia t ion on s e c u r i t i e s and reduce t h e carrying
value
o f t h e
banking house, furniture
and
f i x t u r e s
and
r ea l e s t a t e
b y
$35,128.57.
I t
appears, however, that after giving effect
t o
such
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adjustments,
t h e
bank vrould s t i l l have
a n
investment
i n
banking house,
f u r n i t u r e
and
f i x t u r e s
and
real estate amounting
t o
$75,000,
and a
l i a b i l i t y
f o r
borrov/ed money amounting
t o
$121,672.37.
I t
would also have slow
paper aggre ga ting $143,978•41. Moreover,
t h e
l i a b i l i t y
f o r t h e
retirement
o f t h e
proposed preferred stock
a t i t s
subscribed price
o f
$135,000,
a s
provided i n t h e proposed amended articles of assoc ia t ion o f t h e bank,
i s s u f f i c i e n t t o el iminate t h e undivided profi ts and surplus o f t h e bank
and to
impair
i t s
common c a p i t a l st ock
t o t h e
extent
o f
approximately
$57,372, leaving
a n
unimpaired capital stock amounting
t o
only $2,628.00.
I n this connect ion at tent ion i s cal led t o t h e fac t t ha t T i t l e I I I o f
the Act o f
March
9, 1933,
provides
i n
part that
t h e
term cap i ta l
a s
used
i n
provisions
of law
r e l a t i n g
t o t h e
c a p i t a l
of
national banking
ass ocia tion s s hal l mean
t h e
amount
of
unimpaired common stock plus
t h e
amount of preferred stock outstanding and unimpaired . I t should also
be
noted that
i f t h e
preferred stock
i s s e t
upoon
t h e
repo r t s
and pub-
l ished statements o f t h e bank a t only i t s p a r value, aggregating $40,000,
such
a
statement would
be
misleading
and
t h a t ,
i f t h e
amount
of
$135,000
a t
which
t h e
preferred stock must
b e
r e t i r e d
i s s e t o u t i n
such reports
and statements, i t would result in an impairment i n t h e common capital
stock, which should b e shotvn i n t h e statement . I t seems t o t h e Board
tha t t h e r e f l e c t i o n of a d e f i c i t i n i t s statement upon t h e resumption o f
business might result
i n
embarassment
t o t h e
bank
and
ser ious ly af fect
i t s a b i l i t y t o r e t a i n t h e confidence o f t h e community and continue t o
function#
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While t h e Board i s i n sympathy with t h e des i re o n t h e p a r t of
t h e deposi to rs an d o thers in teres ted i n t h e bank t o reorganize i t s a f f a i r s ,
i t f e e l s i n view o f a l l t h e circumstances involved i n th i s mat t e r , i n -
cluding t h e condit ion o f the bank, and the fact that under t h e proposed
plan of reo rgan iza t ion t h e undivided profi ts an d surplus o f t h e bank
would be el iminated a n d i t s capital stock impaired a s noted above, that
i t cannot properly grant i t s approval o f the proposed reduction i n t h e
c a p i t a l o f the bank a s a par t o f t h e contemplated plan o f reorganizat ion .
Very truly yours,
Chester Morrill
Secretary.
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May 18, 19 33 .
Hon. J . F . T . O'Connor,
Comptroller
o f t h e
Currency,
Washington,
D. C.
Dear
M r.
Comptroller;
Reference i s made t o a memorandum of Apri l 12, 1933 from t h e
Acting Comptroller
o f the
Currency,
and to Mr.
Cough's memorandum
of May
10, 1933, r e l a t i v e t o t h e proposed reduction i n t h e capi ta l s tock o f the
, , — ,
from $100,000
t o
$50,000.
I t i s observed that t h e p l a n of reorganiza t ion o f t h e - - —
t
of
which
t h e
reduction
i n
common c a p i t a l st oc k
i s a
par t ,
contemplates also
t h e
sa le
of
preferred stock having
a n
aggregate
pa r
value of $100,000 f o r $250,000. I t i s o u r understanding also that t h e
proposed plan
of
reorganization contemplates
t h e
re t i rement
o f
such
p r e -
ferred s tock ou t o f ne t earnings a t t h e aggregate subscribed price of
$250,000 (although holders
of
such stock
may be
invi ted
t o
tender their
stock
a t a
lower f igure) ,
and
t h a t
i n t h e
event
of
l iquida t ion, d isso-
lu t ion , o r winding up of the association, whether voluntary o r involun*
ta ry ,
t h e
holders
of
preferred s tock shall
be
e n t i t l e d
t o
rece ive
an
amount equal to $25 pe r share plus a n amount equal t o a l l unpaid divi-
dends
on
such preferred stock before
an y
payments shall
b e
made
t o t h e
holders o f t h e common stock. I t appears , therefore, that unless i n t h e
meantime some
o f t h e
proposed preferred stock
i s
r e t i r e d
a t a
lower cost
through voluntary action
of the
preferred s tockholders , they wil l
be e n -
t i t l e d
to a n
amount aggregating
a t
least $250,000 prior
to a ny
payment
t o t h e
holders
o f t h e
common stock.
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From t h e las t repor t of examination of the
as of December 29 , 1932 , i t appears that a t that time i t h a d loans class-
i f i e d a s doubt fu l of $25,469, losses of $34,248, depreciation on secu r i t i e s
n o t
included
i n t h e
foregoing
of
$284,061#
an d
assets c lassed
a s
slow
of
$178,567. The to t a l dep rec i a t ion i n secur i t ies a lone was s u f f i c i e n t t o
el iminate t h e bank 's en t i re cap i ta l accounts, undivided p r o f i t s a nd r e -
serves
. I t i s
proposed
i n
connection with
t h e
adjustments
o f t h e
bank's
capi tal s tock incident t o t h e contemplated reorganization o f t h e bank t o
charge
o ff a l l
losse s, doubtfu l loans,
and
dep rec i a t ion
on
s e c u r i t i e s
a g -
gregating $364,000, a s determined i n March b y t h e Chief National Bank Ex-
aminer 's off ice cooperat ing with representat ives
o f t h e
bank, using there-
f o r funds which would b e made available through t h e reduct ion o f common
stock, no money being returned t o shareholders, cash contr ibut i ons of the
common sha reholde rs, premium on the sale o f preferred stock and present
surplus and p r o f i t s , t h e aggregate of such funds totaling $414,000.
However,
t h e
bank's agreement
t o
re t i r e p re fe r red s tock
a t i t s
subscr ip t ion pr ice of $250,-000. imposes a n obligation which i s $50,000 i n
excess
o f t h e
to t a l cap i t a l s t ruc tu re
o f the
bank after giving effect
t o
t h e proposed adjustments. I n this connect ion at tent ion i s ca l l ed t o t h e
f ac t t ha t T i t l e I I I o f t he Ac t o f March 9 , 1933, provides i n par t that
t h e term cap i ta l a s used i n t h e provisions o f the l a w r e l a t i n g t o t h e
c a p i t a l
of
national banking associations shall mean
t h e
amount
of
unimpaired common stock plus t h e amount of preferred stock outstanding
an d
unimpaired.
I t
should
be
noted also that
a
repor t
o r
statement
p u b -
l i shed b y t h e bank setting o u t preferred stock a t i t s p a r value of $100,000
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xvould be misleading, and tha t t o s e t ou t i n such report o r statement t h e
amount a t which t h e preferred stock must be ret ired,$250,000, would result
i n an ent i r e e l iminat ion o f t he bank's surplus and common capital which
would be shown i n t h e statement.
I t seems t o t h e Board that t h e r e f l e c t i o n of a d e f i c i t i n i t s
statement upon t h e resumption of business might result i n embarrassment
t o t h e bank and s e r i o u s l y a f f e c t i t s a b i l i t y t o r e t a i n t h e confidence o f
t h e community and to continue t o func t ion .
While t h e Board i s i n sympathy with th e des i re o n t h e p a r t of
t h e
depos i tors
and
others in te res ted
i n t h e
bank
t o
reorganize
i t s a f -
f a i r s ,
i t
f e e l s ,
i n
view
o f a l l t h e
circumstances involved
i n
this matter ,
t h a t
i t
cannot properly grant
i t s
approval
o f t he
proposed reduction
i n
t h e
capi ta l s tock
of the
bank
a s a
pa r t
o f t he
contemplated plan
o f r e -
organiza t ion.
Very truly yours,
(S )
Chester Mo rr il l
Secretary.
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June 2 , 1933.
Honorable J.F.T. O'Connor,
Comptroller
o f t h e
Currency,
Washington,
D. C.
Dear
M r.
Comptroller;
The
Federal Reserve Board
h a s
given careful considerat ion
t o your le t ter of May 25 , 1935 , with regard t o t h e Board's disapprov-
a l o f t he
proposed reduction
i n t h e
cap i ta l s tock
o f the
— - - - - - - -
b u t t h e
Board does
n o t
f e e l t h a t
i t c a n
properly approve
t h e
reduction under
t h e
pla n su bmit te d. There
i s
inclosed
f o r
your information
a
memorandum prepared
by an
Ass i s t -
Counsel
o f the
Federal Reserve Board describing
i n
d e t a i l
t h e c o n -
siderations which influenced
t h e
Board's decision
i n
th is mat ter .
Very truly yours,
(S )
CHESTER MORRILL
Chester Morril l ,
Secretary.
Inclosure.
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May 25, 19 33 .
Federal Reserve Board,
Washington, D. C.
Gentlemen:
I have your le t t e r of May 18 r e f e r r i n g t o t h e proposed reduction
i n capi tal s tock o f th e — — — ,
from $100,000 t o $50,000, t h i s redu ct io n being contemplated i n t h e plan
f o r
reorganizat ion
o f the
bank which
was
approved
by
th is o f f i ce shor t ly
a f t e r t h e bank holiday.
The p lan of reorganizat ion contemplates brief ly t h e reduct ion i n
t h e
common stock
t o t h e
amount above stated, which reduced amount would
b e
represented b y cont r ibu t ions o f the o ld stockholders in t h e sum of $50,000
t h e issuance of $100,000 p a r value of preferred stock sold f o r $250,000,
resul t ing according
to ou r
analys is
i n t h e
el iminat ion
o f a l l
doubtful
and worthless as se ts , including a l l bond depreciation and leaving t h e
reorganized bank with t h e fol lowing capi tal s t ructure:
Common stock $50,000
Pr ef er re d stock 100,000
Surplus & Undivided
Profits 50,000
Total 200,000
According t o your analysis o f t h e case , t h e bank being obli-
gated
t o
r e t i r e
t h e
preferred stock
a t t h e
issue price
i f
earned
or i f
placed i n l iqu ida t ion , t h e premium a t which t h e stock i s sold should
appear a s a l i a b i l i t y i n t h e statement o f the bank. Under t h i s an al ys is
t h e proposed capital structure of the new bank, a s above s e t o u t , would
not be
equal
t o t h e
to ta l sa le p r ice
o f the
preferred stock
and
there
would b e a d e f i c i t i n t h e cap i t a l s t ruc tu re of $50,000.
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I t i s t h e
pos i t ion
o f
t h i s o f f i c e t h a t
i n
view
o f t h e
circum-
stances under which
t h e
preferred s tock
was
sold
a t a
premium, t h a t
i s , f o r
t h e purpose o f crea t ing a fund with which t o r e s t o r e t h e bank t o solvency,
there i s no l i a b i l i t y o n t h e par t o f t h e bank f o r t h e premium paid f o r t h e
preferred s tock unt i l a nd i f earned, except i n t h e case of l iqu ida t ion
when
t h e
preferred stockholders would have
a
f i r s t c la im
o n t h e
as se t s
of
t h e
bank after
t h e
depos i tors
and
other c redi tors
had
been paid
i n
f u l l
t o t h e
extent
o f t h e
unre t i red por t ion
o f t h e
preferred s tock originally
issued,
t h e
premium paid
on
such stock
and the
accrued dividends.
The
preference
to the
extent indi cated above wit h ref ere nce
t o a
bank
i n
l i q u i d a t i o n
i s a
mat te r
o f
contract between
t h e
common stockholders
and
t h e
preferred s tockholders
t o
which
any
subsequent purchaser
o f t h e
common
or
preferred stock would
be
bound.
I f i t
were consider ed t h a t
t h e premium a t which t h e preferred s tock i s being sold must appear as a
l i a b i l i t y o f t h e bank i n t h a t t h e holders o f t h e preferred stock would t o
that extent have a claim senior t o t h a t of the common stockholders, i t
would follow that an y accumulated dividends o n t h e preferred s tock no t
paid b y t h e bank when d ue would also have to be included i n t h e s t a t e -
ment o f t h e bank a s a l i ab i l i ty whe the r o r no t said dividends had been
earned
i n
excess
o f the
necessary reserves .
I t i s o u r
opinion that
ne i the r
t h e
premium
a t
which
t h e
preferred s tock
i s
sold
nor
accumulated
unpaid dividends
on
said preferred stock
i s a
l i a b i l i t y
o f t h e
nature
which should appear
i n t h e
published statement
o f t h e
issuing bank
and
tha t
f a i l u r e
t o
include ei ther
of
t h e s e l i a b i l i t i e s
i n t h e
published statement
o f t h e
bank would
n o t
cons t i tu te
a
false statement
o f the
condi t ion
of
said bank.
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I n
t h i s case the re appears
to be no
question
b u t
t h a t
a l l
share-
holders
an d
depos i to r s pa r t i c ipa t ing
i n t h e
plan through
t h e
purchase
of
preferred stock have been in no way misinformed a s t o t h e nature of the
fund created b y t h e premium o n t h e pre fe rre d sto ck. This i s ra ther c lear ly
s e t o u t i n le t ters addressed t o t h e shareholders and deposi to rs by the
Reorganization Group
a id we a re
enclosing
f o r
your fur ther considera t ion
of
th i s mat ter
a
copy
o f th e
minutes
of the
special meeting
o f t h e
shareholders
®f the
bank held April
9 ,
which contains
a
copy
o f th e
le t ter addressed
t o
t h e deposi tors together with a copy of le t ter which was sent t o a l l share-
holders of this bank i n connection with t h e p lan . I n both o f these l e t t e r s
i t i s cl e ar ly shown th at t h e premium paid f o r t h e stock i s t o b e t r e a t e d a s
a
cont r ibu t ion
t o t h e
bank
f o r t h e
purpose
of
r e s t o r i n g
i n
part said bank
t o
solvency.
The
premium
i s no t
considered
a n
inflexible amount which cannot
be used b y t h e bank f o r this purpose.
The plan f o r reorganizat ion o f t h e subject bank h a s been completed
i n every respect , t h e preferred stock having been sold t o approximately two
thousand o f t h e deposi to rs o f the bank and we are informed b y t h e Reorgan-
ization Committee that i t would be pract ica l ly imposs ib le f o r them to go
back t o t h e deposi tors and obtain from them consent t o a change i n t h e plan
which h a s been p u t in to e f fec t .
I t
w i l l
be
great ly appreciated
i f you
w il l reconsi der your dec isio n
i n th is case and approve t h e proposed reduction i n t h e common stock from
$100,000 t o $50,000 under t h e conditions se t ou t i n ou r memorandum of April
12 , i n order that t h e bank may be l icensed t o resume business a t a n early date.
date. Respectful ly ,
(S) J . F . T . O'CONNOR
J . F . T . O'CONNOR
Comptroller
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May 31 , 19 33 .
The Federal Reserve Board
Premium on Preferred Stock
M r. F ing f i e ld - Assistant Counsel of National Banks
There
i s
attached hereto
a
le t ter f rom
t h e
Comptroller
o f t h e
Currency
request ing
t h e
Board
t o
reconsider
i t s
decision whereby
i t
recent ly refused
t o approve t h e reduct ion i n t h e capi tal s tock of the
i n t h e cap i ta l s tock of said bank, which is now closed, i s a p a r t of a
proposed plan of reorganizat ion and reopening of the bank.
I n
add i t ion
t o t h e
reduct ion
i n
cap i ta l s tock ,
t h e
p lan
of
reorgan-
ization contemplates
t h e
el iminat ion
o f
losses aggregating $364,000.
I n
order t o provide f o r such eli min ati on, i t i s proposed, among other things,
that preferred stock of an aggregate p a r value o f $100,000 be issued and
sold f o r $250,000. The proposed amended Articles o f Associa t ion of the
bank would provide f o r t h e retirement of the preferred stock b y t h e bank
out of earnings a t t h e issue price of $250,000, (although hold ers of such
stock may be inv i ted t o tender their s tock a t a lower f igure) ; and in the
event of l i q u i d a t i o n o f the bank t h e holders of preferred stock would b e
e n t i t l e d t o receive a n amount equal t o t h e issue pr ice of such stock, a g -
gregating $250,000, plus
any
unpaid dividends
o n t h e
stock, before
any
payments could b e made t o common st oc kh ol de rs . According t o a n analysis
b y t h e Comptroller, t h e reorganized bank upon consummation o f t h e plan
would have t h e fo l lowing cap i ta l s t ructure :
from #100,000 t o $50,000. The reduct ion
Common stock
Preferred stock
Surplus
an d
undivided profi ts
$
50,000
100,000
50,000
Total
200,000
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- 2 —
As
indicated above,
i t i s
proposed that
t h e
preferred stock
b e
carr ied
o n t h e
books
and
published statements
o f t h e
bank
a t
only
t h e p a r
value, aggregating $100,000, notwithstanding
t h e
fac t t ha t
t h e
bank
i s
under
an
ob l iga t ion
t o
r e t i r e
i t a t t h e
aggregate subscribed price
o f
$250,000- However,
i n i t s
l e t t e r
of May 13, 1933, to t h e
Comptroller
of
t h e
Currency,
t h e
Board took
t h e
posi t ion that
i f t h e
bank should
se t up
i n a
published report
o r
statement
t h e
amount
a t
which
t h e
prefer red
stock must
b e
retired, $250,000,
i t
would result
i n t h e
ent ire el imina-
t i o n
o f t h e
bank's surplus
and
common stock;
and
tha t
i f
such
a
report
o r statement should s e t o u t preferred stock a t i t s p a r value of $100,000,
i t
would
b e
mis lea din g. Accordingly,
t h e
Board advised
t h e
Comptroller
tha t i t could n o t properly grant i t s approval of the proposed reduction
i n t h e
capi tal s tock
o f t h e
bank
a s a
par t
o f t h e
plan
o f i t s
reorgan-
i za t ion an d reopening.
The
Comptroller
of the
Currency
now
requests
t h e
Board
t o
recon-
sider th is decision.
The
Comptroller takes
t h e
posi t ion that
t h e
approval
of the proposed reduction would b e j u s t i f i e d f o r t h e following reasons:
I t i s t h e
posi t ion
of
th i s o f f i ce tha t
i n
view
of the
circumstances under which
t h e
preferred stock
was
sold
a t
a premium,that i s , f o r t h e purpose of creat ing a fund with
which
t o
r e s t o r e
t h e
bank
t o
solvency, there
i s no
l i a b i l i t y
o n t h e
par t
o f t h e
bank
f o r t h e
premium paid
f o r t h e p r e -
ferred stock unt i l
ad i f
earned, except
i n t h e
oase
of
liquidar
t io n when t h e preferred stockholders would have a f i r s t
claim o n t h e asse t s of the bank after t h e deposi tors and other
c red i to r s
had
been paid
i n
f u l l
t o t h e
extent
o f t h o
unret i red
por t ion
o f t h e
preferred stock original ly issued,
t h e
premium
paid
on
such stock
an d t h e
accrued dividends.
The
preference
t o t h e ex te nt in dic at ed above with ref ere nce t o a bank i n
l i qu ida t ion
i s a
matter
o f
contract between
t h e
common stock-
holders
an d t h o
preferred stockholders
t o
which
an y
subsequent
purchaser o f t h e common o r preferred stock would b e bound.
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8 0 3
I f i t were considered that t h e premium a t which the
preferred stock
i s
being sold must appear
a s a
l i a b i l i t y
o f t h e
bank
i n
tha t
t h e
holders
o f t h e
preferred stock
would
t o
that extent have
a
claim senior
t o
tha t
of the
common stockholders, i t would follow that an y accumulated
dividends
o n t h e
preferred stock
n o t
paid
b y t h e
bank when
du e
would also have
to be
included
i n t h e
statement
of the
bank a s a l i ab i l i t y whe ther o r n o t said dividends have
been earned
i n
excess
o f t h e
necessary reserves.
I t i s
o u r
opinion that neither
t h e
premium
a t
which
t h e p r e -
ferred stock i s sold n o r accumulated unpaid dividends on
said preferred stock i s a l i a b i l i t y o f t h e nature which
should appear
i n t h e
published statement
of the
issuing
bank
and
t h a t f a i l u r e
t o
include either
of
t h e s e l i a b i l i t i e s
i n t h e published statement of the bank would n o t cons t i -
t u t e
a
false statement
of the
condit ion
of
said bank.
I n
view
o f t h e
facts involved
i n
th is case
i t i s
clear that under
the
proposed amended Articles
of
Associat ion
o f t h e , r e -
f e r red t o above, t h e bank would assume a d i rect f ixed ob l igat ion t o repay
thepreferred stockholders
t h e p a r
value
o f t h e
preferred stock aggregating
$100,000,
and
also
a
premium
on
such preferred stock aggregating
a n
addi-
tional $150,000, before
an y
d is t r ibu t ion could
be
made
t o
common stockholders
of the
bank, other than possibly some dividends
on the
common stock paid
from time
t o
time
out of
earnings.
I n s o f a r a s
common stockholders
a r e
concerned, i t would n o t seem t o make any sub sta nt i al d i ff er en ce whether
such fixed obligation
of the
bank would
b e
s a t i s f i e d
o u t o f t h e
bank's
earnings
o r o u t o f i t s
asse t s
i n
case
of
l i q u i d a t i o n .
In any
event,
i t
would b e a charge against t h e bank 's assets t o t h e detriment of common
stockholders. Therefore,
any
statement made
b y t h e
bank which
d id n o t
show t h e obl igat ion o f t h e bank to pay the premium o n t h e prefer red
stock might
b e
misleading
t o
persons
who
would he re a f t e r pu rchase common
stock i n t h e bank.
Moreover,
t h e
fact that there
i s n o
ob l iga t ion
o n t h e
par t
o f t h e
bank
t o p a y t h e
premium
o n t h e
preferred stock unt i l
an d i f
earned, except
i n
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X-7455-e
-4- 804
case
of
l iquidat ion, does
n o t
appear
t o
a f f o r d
an y
j u s t i f i c a t i o n
f o r a
f a i l u r e t o show on the bank's published statements i t s l i a b i l i t y f o r t h e
re t i rement of the prefer red s tock a t a premium. Si mi la rl y th er e is no
obl iga t ion o n t h e par t o f t he bank f o r t h e repayment o f t he pa r value of
t h e prefer red s tock unt i l and i f earned, except i n t h e case o f l iqu ida t ion ,
and accordingly, i f t h e Comptroller's position were sound, t h e pre fe r red
stock might be pract ica l ly e l iminated f rom t h e bank's s tatements.
That this i s not an unwarranted extension o f t he arguments made i n
support o f t he Comptrol ler 's posi t ion may be i l l u s t r a t e d by a s l i g h t l y
d i f f e r e n t approach. Assuming t h e Comptroller i s c o r r e c t , i t necessa r i ly
fol lows th a t le ga l l y
t h e p a r
value
o f t he
preferred stock could
b e
f ixed
a t whatever figure p e r share t h e n e c e s s i t i e s o f t he s i tua t ion might s u g -
gest*
I n t h e
ins tant case ,
i f i t had
seemed desirable
to do so ,
there
would have been no legal object ion to the pa r value o f t h e stock having
been fixed a t $1 , ins tead of #10, in which event t h e statement would show
t h e aggregate p a r value o f t he to ta l i s sue in an amount of only $10,000.
If we pursue th i s thought s t i l l f ur th er ther e would be no legal objec t ion
i f t h e p a r
value
o f t h e
preferred stock were fixed
a t
§.0001
i n
which
event t h e aggregate p a r value of the total issue could i n th is case be
ca r r i ed
i n t h e
bank's statement
a t
notwithstanding
t h e
exis tence
of
an absolute obl iga t ion o n t h e p a r t o f t he bank t o r e t i r e t h e pre fe r red
stock
a t $25 p e r
share,
i f and
when earned,
o r
upon
t h e
voluntary
o r i n -
voluntary l iquidat ion o f t h e bank. Clearl y t h e la t t er s i tu a t io n would
be
untenable,
a nd t h e
ob jec t ion
t o t h e
ins tant proposal
i s n o t
obviated
merely because t h e e v i l is of a lesser degree.
Furthermore,
i t
seems clear that
t h e
proposal
is no
less objec t ion-
able because t h e arrangement i s a matter of cont rac t b y which t h e common
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• 305
- 5 -
and preferred s tockholders a r e bound and by tvhich an y subsequent purchas-
e r s o f t h e
common
or
preferred stock would
b e
sound.
The
very vice
i n t h e
s i t ua t i on i s that subsequent purchasers o f t h e common stock will b e bound
although their purchases might be made i n reliance upon t h e bank's p u b -
l ished statement
i n
th i s case showing pr ef er re d stock
a t
§100,000,
and
without knowledge that such stock must be r e t i r e d a t a premium of $150,000
more than
t h e
l i a b i l i t y
a s
shown
o n t h e
books
and
published statements
of
t h e bank. Admitted ly, t h e present stockholders o f t h e bank may execute
such contracts
a s
they deem, proper
and in
t h e i r i n t e r e s t ,
b u t
th i s a f fords
no j u s t i f i c a t i o n f o r t h e Board's approval of a plan which may operate t o
t h e pre judice an d i n j u r y of innocent thi rd par t ies .
I t h a s
been suggested that future purchasers
of
common stock could
determine thei r r ights by an examination o f t h e amended articles of associ-
a t i o n o f t h e ban k. However, t h i s f a c t would n o t seem t o j u s t i f y t h e p u b -
l i c a t i o n o f a misleading statement b y t h e bank on which innocent parties
might rely.
I n conclusion, i t i s i n t e r e s t i n g t o note that t h e Bank Conservation
A ct
under which preferred stock
of
national banks
may be
issued apparently
does n o t contemplate th at such pr ef er re d stock may be made subject t o r e -
t i rement a t a premium. I n connection with th e l i qu ida t i on of na t iona l
banks issuing preferred stock, i t i s s ta ted tha t no payments shall b e
made t o t h e holders of the common stock until t h e holders of the prefer red
stock shall have been paid i n f u l l t h e p a r value of such stock plus a l l
accumulated di vi de nd s . This language ev id en tl y contem plates t h e r e t i r e -
ment
of
preferred s tock
a t p a r
rather than
t h e
re t i rement
a t p a r
plus
a
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- 6 -
prenium. Under oth er pr ov is io ns
o f the
Bank Conservation
A c t i t i s p r o -
vided that preferred stock of national banks shall b e subject t o r e t i r e -
ment i n such manner and on such terns an d conditions as nay be provided
i n t h e Ar t i c l es of Association with t h e approval of the Conptrol lcr of
t h e
Currency.
I t i s
probable, therefore, that
no
legal ob ject ion
can be
made t o t h e re t i rement of preferred stock a t a premium, b u t i n view of
t h e language of the Act r e f e r r e d t o above, i t does n o t appear that p r o -
v i s ion
f o r
re t i rement
a t a
premium
was
contemplated
by
Congress.
I n view o f a l l t h e circumstances involved i n th i s mat t e r i t does no t
appear that t h e Board ca n properly approve t h e proposed reduction i n t h e
capi tal s tock
o f t h e
under
t h e
plan
s u b -
mitted,
and a
l e t t e r
s o
advising
t h e
Comptroller
i s
at tached
f o r t h e
Board 's considerat ion. I t i s suggested that a copy of t h i s memorandum
be forwarded t o t h e Comptroller f o r h i s information.
Respectful ly ,
(S) B. MAGRUDER WINGFIELD
B . Magruder Wingfield,
Assistant Counsel.