Type of business: Holding company. Purpose of issue: Increase working capital. Amount of issue: Authorized, $10,000,000; offered, $40,000,000. Type of issue: Unsecured. R/S No. 2-3982, effective April 12, 1939. Section 310 (b). Conflicts The indenture contains no provisions prohibiting the possession or acquisition by the trustee of materially conflicting interests of the character prohibited by this section. In fact, article 8, section 1, of the indenture (p. 40) expressly provides : "The trustee, or any paying agent, in its individual capacity may buy, hold, sell, or deal in the debentures and coupons and other securities of the company and may engage or be interested in any financial or other transaction with the company and may act upon, or as depositary, trustee, or agent for, any committee or body of holders of debentures or other securities, whether or not issued hereunder, with the same rights which it would have if it were not the trustee or such paying agent." Section 311. Preferential collections The indenture places no restrictions on the right of the trustee, if it becomes a bank creditor of the issuer, to improve its position as such creditor to the detriment of the bondholders, even in the 4-month period prior to default. Section 312. Bondholders' lists The indenture does not require the maintenance of bondholders' lists, which would provide machinery for transmission of information to the bondholders, and for the organization of the bondholders in their own interests. Section 313. Reports by trustee The indenture contains no provisions with respect to periodic reports by the trustee to the bondholders. (a) To the trustee: Section 314. Reports by obligor Article 2, section 5 (p. 22), requires the company to file with the trustee a consolidated balance sheet, income statement, and surplus statement for each fiscal year, together with a "report by independent certified or public accountants, who may be the auditors of the company." This requirement is subject to the following proviso, however: "Provided, however, That if the rules of the New York Stock Exchange and the rules of the Securities and Exchange Commission (or other Federal governmental authority having substantially similar powers) do not require the company to file such statements certified to by independent certified or public accountants, then the regular published statements of the company as distributed to its stockholders may be furnished in lieu of such certified statements." Section 5 further provides: "All of the financial statements, letters, and other information required by this section to be filed with the trustee shall be open to inspection during business hours by holders of debentures, but the trustee shall have no other duty with respect thereto." The last clause absolves the trustee from any duty to examine the financial statements filed, to determine whether they conform to the requirements of the section, or whether they disclose violations of other covenants contained in the indenture. 142833-39-17 Under section 315 (a) the issuer itself might be required to include in such statements evidence of its compliance with its more important obligations, and the trustee might conceivably be charged with the duty of examining such material with a view to determining whether or not the issuing company was complying with such obligations. (b) to the bondholders: Although, under the indenture provision last quoted, any bondholder is entitled to inspect the financial statements, etc., filed by the issuer with the trustee, there is no requirement that a summary of such statement be transmitted to the bondholders, as would be required by section 314 (a) (2). Section 315. Duties and responsibility of the trustee (a) Before default: (1) Recording. This provision of the bill is inapplicable, because the indenture is unsecured. (2) Application of proceeds.-Article 8, section 1 (p. 40), of the indenture contains the following provision: "Nor shall the trustee be accountable for the use of any debentures authenticated and delivered by the trustee hereunder or for the application of the proceeds of such debentures." This would probably have been permissible even under section 315 (a) (2) of the bill, since the proceeds were to be used for general corporate purposes and it would have been impracticable for the trustee to exercise control over their application. (3) Authentication of bonds, releases, etc.—The release provision is inapplicable, because the indenture is unsecured. Under article 1, section 1 (p. 11), all $40,000,000 of the indentures were to be delivered on execution of the indenture. (4) Performance by obligor.-Article 8, section 1 (p. 40), of the indenture provides as follows: "The trustee may accept as sufficient evidence of any fact (unless otherwise herein expressly provided) the certificate of the chairman of the board of directors, the president, a vice president, the treasurer, or the secretary of the company. "The trustee may receive a certificate under the corporate seal of the company, signed by the secretary or an assistant secretary of the company, as sufficient evidence of the due adoption of any resolution by the board of directors of the executive committee of the company. The trustee may rely upon, and shall incur no liability for any action taken by it in accordance with and in reliance upon, any such resolution so certified; the trustee shall be reimbursed by the company for, and be indemnified by it against, any liability or damages which may be sustained by it in the premses." (b) Notices of default: The indenture contains no provision requiring notice to the bondholders of any default. (c) "Prudent man" standard: The indenture does not require the trustee to observe the standard of ordinary prudence in the period after default; any such requirement is expressly negatived by the indenture provisions referred to in the following subdivision of this analysis. This means that even if ordinary prudence would require action, the trustee may, in the absence of a request from the holders of 25 percent of the bonds, refrain from exercising its power to accelerate the maturity of the bonds in the event of default, or its powers to take action to enforce the indenture, which powers are conferred upon it by sections 2 and 3 of article 4 (pp. 30 and 32). (d) Limitations on responsibility of trustee : The first paragraph of article 8, section 1, of the indenture (p. 39) is as follows [paragraphing supplied]: "SECTION 1. The trustee shall not be answerable for the neglect, default, or misconduct of any agent or attorney if such agent or attorney shall have been selected with reasonable care, nor responsible for anything whatever in connection with this trust except for its willful misconduct or gross negligence. "The trustee shall be under no obligation to take any action toward the execution or enforcement of the trust hereby created, which, in the opinion of the trustee, shall be likely to involve it in expense or liability, unless one or more of the holders of debentures issued hereunder shall, as often as required by the trustee, furnish indemnity satisfactory to the trustee against such expense or liability; nor shall the trustee be required to take any action in respect of any default unless requested to take action in respect thereof by a writing signed by the holders of at least 25 percent in amount of the debentures then outstanding, and tendered indemnity as aforesaid. "The foregoing provisions of this section are intended only for the protection of the trustee, and shall not be construed to affect any discretion or power, by any provision of this indenture given to the trustee, to determine whether or not it shall take action in respect of any default, or any power or discretion of the trustee to take action in respect of any default without such request from debenture holders, or to affect any other discretion or power given to the trustee." This section would contravene section 315 (d) of the bill. Under the first paragraph quoted above, the trustee need not observe the standard of ordinary prudence, even in the period after default. The first clause of that paragraph is the so-called "employment agency" clause, which is susceptible of the construction that it relieves the trustee from responsibility for the acts even of its own employees. The general principles of the law of agency will protect the trustee against liability for the negligence of persons who are "independent contractors" rather than employees of the trustee. And section 315 (d) (2) would expressly protect the trustee from liability where it acts in good faith in reliance on certificates or opinions of attorneys, accountants, and other experts, subject only to requirements (which are to be expressed in the indenture itself) as to the independence and qualifications of such persons, the exercise of due care in their selection, and the nature and scope of the examination or investigation upon which such opinion or certificate is based. Article 8, section 1, contains at a later point (p. 40) an "opinion of counsel" provision which imposes no such restrictions: "The trustee may advise with counsel, and any action under this indenture taken or suffered in good faith by the trustee in accordance with the opinion of counsel, shall be conclusive on all holders of any of the debentures issued hereunder; and the trustee shall be fully protected in respect of any such action." Such restrictions may or may not be necessary, as to particular matters. The second paragraph quoted impinges on the principles that the indenture trustee should conform to the standard of ordinary prudence during the period after default. It expressly exempts the trustee from any obligation to act except upon the request of the holders of 25 percent or more of the bonds, and unless supplied with satisfactory indemnity against expense or liability. This paragraph would not be permissible under sections 315 (c) and (d) of the bill. With an issue of this character, the following provision of section 3 of article 4 would afford adequate protection to the trustee : "Any action, suit, or other proceeding instituted by the trustee shall be brought in its own name, as trustee, and every recovery of judgment, subject to the payment of reasonable compensation to the trustee and its agents and attorneys and its reasonable expenses, shall (subject to the provisions of section 1 of this article and section 6 of article 2) be for the ratable benefit of the holders of the debentures and coupons." The inclusion of such a provision would not be prevented by the bill. The last paragraph quoted does nothing to correct the effect of the first two paragraphs. It merely negatives the possibility that the elimination of any duty to exercise the powers conferred upon the indenture trustee might be regarded as casting some doubt on the existence of the powers themselves. (e) Undertaking for costs: The bill permits the inclusion of this provision, for the protection of the trustee. The indenture does not contain it. Section 316. Directions and waivers by bondholders Paragraph (1) of subsection (a) would permit the inclusion of the last paragraph of article 4, section 3 (p. 33), which permits the holders of the majority of the bonds to direct the enforcement activities of the trustee. Paragraph (2) of subsection (a) would permit the inclusion of the provision contained in article 4. section 2, which authorizes the holders of a majority in amount of the outstanding debentures to rescind a declaration by the trustee accelerating the maturity of the bonds by reason of a default under the indenture. In neither case, however, does this indenture require the exclusion of bouds owned by the company or persons standing in a control relationship with it, in determining whether the required majority have joined in such direction or waiver. Such exclusion would be required by section 316 (a) of the bill. (b) Preservation of holder's right to payment: This requirement is met by the last paragraph of section 6 of article 4 (p. 35), which preserves the right to the individual bondholders to enforce the payment of principal and interest at their respective due dates. Section 317. Special powers of trustee; duties of paying agents (a) Special powers of the trustee: The third paragraph of article 4, section 3 (p. 32), contains the provision which would be required by paragraph (1) of this subsection. The indenture does not contain the provision required by paragraph (2) of this subsection with respect to the filing of proofs of claim by the trustee. (b) Paying agents: The last paragraph of section 1 of article 8 contains a provision of this sort. It does not require the paying agent to notify the trustee of defaults. This is unimportant under this indenture, however, because apparently the trustee is also the paying agent. INDENTURE ANALYSIS NO. 2.-PITTSBURGH COKE & IRON CO. Type of business: Manufacture and sale of pig iron, coke, cement, etc. Amount of issue: Authorized, $6,000,000; offered, $3,000,000. Type of issue: Secured. R/S No. 2-2863, effective March 2, 1937. Section 310 (b). Conflicts The indenture contains no provisions prohibiting the possession or acquisition by the trustee of materially conflicting interests of the character prohibited by this section. In fact, article XII, section 1 (o), of the indenture (p. 99) expressly provides: "The trustee may acquire and hold bonds and coupons issued hereunder, or may engage in or be interested in any financial or other transaction with the company or any corporation in which the company may be interested, and may act as depositary, trustee, transfer agent, registrar, or agent for the company or for any committee or other body in respect of any bonds, notes, or other securities, whether or not issued pursuant hereto." Section 311. Preferential collections The indenture places no restrictions on the right of the trustee, if it becomes a bank creditor of the issuer, to improve its position as such creditor to the detriment of the bondholders, even in the 4-month period prior to default. Section 312. Bondholders' lists The indenture does not require the maintenance of bondholders' lists, which would provide machinery for transmission of communications to the bondholders, and for the organization of the bondholders in their own interests. Scetion 313. Reports by trustee The indenture contains no provisions with respect to periodic reports by the trustee to the bondholders. (a) To the trustee : Section 314. Reports by obligor Article VIII, section 12 (p. 56) requires the company to file with the trustee a consolidated balance sheet, consolidated profit-and-loss statement, and analysis of surplus for each fiscal year, all certified by public accountants satisfactory to the trustee. This requirement is subject to the following provision, however: "The trustee shall be under no duty to demand or request any statement required by this section or to examine any statement filed pursuant to this section, or to take any action in respect thereof except to exhibit the same at reasonable times to any bondholder upon his request." This clause absolves the trustee from any duty to examine the financial statements filed, to determine whether they conform to the requirements of the section or whether they disclose violations of other requirements contained in the indenture. Under section 315 (a), the trustee might conceivably be charged with the duty to examine such material with a view to determining whether or not the issuing company was complying with its more important obligations under the indenture, and the issuer itself might be required to include in such statements evidence of its compliance with such obligations. (b) To the bondholders: Although under the indenture provisions last quoted, any bondholder is entitled to inspect the financial statements, etc., filed by the issuer with the trustee, there is no requirement that a summary of such statements be transmitted to the bondholders, as would be required by section 314 (a) (2). Section 315. Duties and responsibility of the trustee (a) Before default: (1) Recording.-Subsection (a) of section 1. article XII relieves the trustee from any duty as to recording, filing, or registration of the mortgage. The language is as follows: "It shall be no part of the duty of the trustee to see to any recording, filing, or registration of this mortgage or of any supplemental indenture or instrument of further assurance (and the trustee may authenticate and deliver bonds and pay out deposited moneys without regard thereto) or to give any notice thereof. * * (2) Application of proceeds.-The trustee is also relieved from any obligation to see to the application of the proceeds of the bonds under subsection (g) of section 1, article XII which provides in part as follows: "The trustee shall be under no obligation to give notice to any person of the making of this mortgage or of any supplemental indenture or instrument of further assurance, or to see to the application of the proceeds of the sale or disposition of any bonds at any time authenticated by the trustee hereunder." Whether this provision would have been permissible under section 315 (a) (2) of the bill would depend upon whether it conformed to the "prudent-man" standard, in the light of the particular purposes to which the proceeds were to be applied, the nature of the issuer, and the type of issue. (3) Releases; additional issue, etc.-Under article VII (p. 40-49) additional bonds may be issued upon the basis of property additions; or upon deposit of cash with the trustee; or upon the retirement of bonds previously outstanding under the indenture. All of these sections elaborately prescribe the conditions upon which additional bonds may be issued thereunder. Of course, section 315 (a) (3) of the bill has nothing to do with what conditions shall be prescribed in the indenture. It deals only with the question of how the existence of such conditions shall be established, and the trustee's responsibility with respect to determining their existence. A detailed study of the provisions in question, from the point of view of the present bill, would be beyond the scope of this analysis. As respects the provisions relating to the manner in which the existence of the prescribed conditions shall be established, the test is whether they conform to the "prudentman" standard, and the principal question would be whether, as to particularly important matters, the opinions or certificates provided for should not be furnished by independent counsel, engineers, appraisers, or accountants. The same question arises with respect to the provisions of article IX (p. 58) which prescribe the conditions upon which releases may be made, and the provisions of the same article with respect to the application of moneys received by the trustee. (4) Performance by obligor.-The same question is also raised by subsection (j) of section 1 of article XII (p. 96): "Whenever under the provisions of this mortgage the trustee shall be required, or shall deem it necessary, to be informed as to any fact or facts or conditions, preparatory to taking or omitting to take any action under this mortgage, and no provision is contained in this mortgage for proving or evidencing to the trustee such fact or facts or conditions, the existence of such fact or facts or conditions shall be deemed conclusively proved and evidenced to the trustee |