« PreviousContinue »
6. The proxy statement (p. 1) states that the proxies solicited in the proxy statement and proxies theretofore given to the shareholders' committee will be voted in favor of the merger and fails to state that any effective proxy given at any time before the meeting will be voted for the plan unless the member attends and votes or revokes the proxy in writing, as required by section 2(c) of article XV. It should be made clear that this meany any proxy given to, or under the control of, either the management of Long Beach or the shareholders' committee.
7. No determination has been made by me with respect to the Federal and State income and other tax consequences of either plan to Long Beach and its shareholders. It is possible that the two plans may differ in their respective tax consequences to Long Beach and its shareholders.
The question is whether the proxy statement plan is substantially the same as the article XV plan and not whether the proxy statement plan gives as good or even a better deal for Long Beach shareholders and provides as good or even better security for performance of Long Beach's liabilities and duties under the settlement agreement. Any plan for the liquidation of Long Beach must, to the extent of the association's assets, provide for payment of creditors and share accounts, for distribution of surplus, and for security for performance of Long Beach's liabilities under the settlement agreement. There may be many different plans to accomplish these objectives. The fact that different plans may satisfactorily accomplish each objective does not mean the plans are the same. The statement in the second recital of the merger agreement (p. 36) with reference to the "spirit of said settlement agreement" and the enhancing of benefits seeks to obscure the differences between the two plans by an implication that the proxy statement plan is better for the Long Beach shareholders.
Section 2(b) of article XV requires that the notice to shareholders concerning their meeting to vote on the plan, or the accompanying letter or statement, "shall make a full and fair disclosure of such plan including the trust referred to in paragraph (h) of this section 2." I express no opinion as to whether or not the notice and proxy statement make such a full and fair disclosure.
In the course of this opinion I have referred to the California general corporation law with respect to the rights of dissenting shareholders in event of a merger or sale and to the duties and responsibilities imposed upon trustees under the law of California. It is desirable that, before the Board approves any plan providing for compensation for dissenting shareholders or providing for a trust for the benefit of shareholders or to secure Long Beach's liabilities, the Board consider the securing from California counsel of appropriate opinions concerning the relevant California law. Sincerely,
Mr. T. A. GREGORY,
GEORGE E. MONK.
FEDERAL HOME LOAN BANK BOARD,
President, Long Beach Federal Savings & Loan Association,
DEAR MR. GREGORY: In your letter of January 21, 1963, you request to be advised as to the respects in which the plan of dissolution of Long Beach Federal Savings & Loan Association specifically set forth in article XV of the settlement agreement of February 14, 1962 (hereinafter called the "article XV plan"), differs from the plan of dissolution submitted with Mr. Clark's letter of December 3, 1962 (hereinafter called the "proxy statement plan").
The article XV plan provides in general for a dissolution of Long Beach by way of (1) a sale to Equitable Savings & Loan Association of Long Beach assets equal in value to Long Beach share accounts in exchange for the assumption by Equitable of liability for such share accounts and (2) distribution of the remainder of Long Beach assets, after payment or provision for payment of creditor liabilities, to Long Beach shareholders either directly by the association or through a trust to be established for such purpose, among others. The proxy statement plan, on the other hand, provides in general for dissolution of Long Beach by way of merger with Equitable pursuant to which all assets of Long
Beach will be transferred to Equitable, all Long Beach liabilities will be assumed by Equitable and guarantee stock of Equitable, representing in value the net worth of Long Beach, including its good will, will be distributed to Long Beach shareholders. The disposition of Long Beach assets under the two plans is markedly different, not alone in form, but in substance.
A comparison of the two plans in respect of the manner of distributing the net surplus, reserves, and undivided profits (hereinafter called the "net surplus") of Long Beach will further illustrate the marked differences in the two plans. Under article XV, assets equal to the net surplus are to be retained by Long Beach for either (1) conversion "into cash" and distribution to Long Beach shareholders or (2) transfer to a trust for the benefit of Long Beach shareholders as well as for security for the performance by Long Beach of its duties under the settlement agreement. Under the proxy statement plan, Equitable acquires all such assets immediately in exchange for which Long Beach shareholders are to receive 584,784 shares of Equitable guarantee stock. The article XV plan does not provide for the transfer to Equitable of assets representing the net surplus of Long Beach nor for the payment by Equitable for such net surplus by the distribution to Long Beach shareholders of Equitable guarantee stock. Again, under the article XV plan, Long Beach shareholders rely solely upon Long Beach assets for payment in cash installments of the Long Beach net surplus whereas under the proxy statement plan they rely upon the corporate stock of another entity under different management and with different assets and obligations. And the aggregate cash value of the distribution of the net surplus under the two plans could, and probably does, differ substantially.
In this connection, it should be noted that the article XV plan, since it is in essence a plan for the liquidation of Long Beach, makes no provision for the good will or going concern value of Long Beach. The proxy statement plan, since it provides for the merger of Long Beach and Equitable, specifically takes into account Long Beach's good will or going concern value in determining the amount to be distributed to Long Beach shareholders for Long Beach's net surplus. This constitutes an additional difference in the two plans.
It should also be noted that the proxy statement plan expressly provides that any dissenting Long Beach shareholder shall have the right to require Long Beach to purchase his dissenting shares for their fair market value as specified in sections 4300 et seq. of the Corporation Code of the State of California. The article XV plan has no such provision either expressly or by implication.
While the two plans would still be different even if the trusts provided for in each plan were the same, we should like to take this occasion to point out that the trust provisions of the plan differ in the following respects:
(1) The initial assets compromising the article XV trust are to be transferred from Long Beach and to consist primarily of Long Beach real estate loans and cash. Those comprising the proxy statement trust are to be transferred by Equitable and consist of 183,000 shares of Equitable guarantee stock.
(2) The proxy statement trust provides for the substitution of an indemnity bond for the trust assets. There is no such provision in the article XV trust.
(3) The article XV trust must terminate in 10 years. The proxy statement trust may continue for a longer period of time.
(4) The trustee under article XV is completely responsible for the administration of the trust and is subject to all duties and responsibilities customarily imposed upon trustees under California law without any limitation of liability for misconduct or negligence. The proxy statement trust provides for the appointment of a board of paid advisers which is apparently given full and complete powers to administer the trust. There is nothing in the article XV plan which provides for the appointment of a board of advisers or delegates to such board any responsibility for administering the trust estate. There is also a most ambiguous provision in the proxy statement trust which purports to release the trustee from some of his duties and responsibilities and which apparently deprives beneficiaries of legal remedies against the trustee. There is no such provision in the article XV trust.
(5) The proxy statement trust fixes a fiat and permanent 7 percent rate of interest for loans made to the trust by the trustee. The article XV trust does not contemplate that lenders to the trust should receive interest in excess of that customarily and reasonably received by lenders.
(6) The article XV trust provides for periodic accountings to the Insurance Corporation. There is no such provision in the proxy statement trust. The Board does not believe that any useful purpose could be served by further enumeration of other differences in the two plans, including the trust provisions thereof. The specified differences, in our opinion, are more than adequate to establish that the plans are not the same and that those provisions of article XV approving the specific plan there set forth are not applicable to the proxy statement plan. In reaching this conclusion the Board has not and does not express any opinion as to which plan is more equitable for Long Beach shareholders. As it advised you in its letter of January 17, 1963, it is continuing its study of the merits of the proxy statement plan and will communicate further with you in this regard. Sincerely,
JOSEPH P. MCMURRAY, Chairman.
HOGAN & HARTSON, Washington, D.C., April 15, 1963.
Re Long Beach Federal Savings & Loan Association ("Long Beach")-Settlement agreement, dated February 14, 1962.
FEDERAL HOME LOAN BANK BOARD,
DEAR SIRS: I have reviewed the notice of special meeting and letter both dated March 29, 1963, as well as the copy of proposed trust agreement, all mailed by Long Beach to its members.
I have been requested to express an opinion whether said proposed trust agreement conforms to article XV of the settlement agreement dated February 14, 1962, between Federal Home Loan Bank Board (the "Board"), Federal Savings and Loan Insurance Corporation (the "Insurance Corporation") and Long Beach.
In my opinion, the proposed trust agreement does not conform to article XV, or should be modified, in the following respects:
1. The proposed trust agreement (p. 2) identifies the assets to be conveyed to the trustee as those described in subparagraph (vi) of paragraph (h) of section 2 of article XV, "subject to an escrow between" Long Beach and Equitable Savings & Loan Association ("Equitable"). In order to avoid misunderstanding it is suggested that this condition be eliminated or that a copy of the proposed escrow agreement be submitted. As indicated in said subparagraph (vi), such assets may be transferred to the trust after the sale of other assets to Equitable and the payment or the making by Long Beach of provision for payment of all creditor and other liabilities.
2. The proposed trust agreement (p. 2) states as an additional purpose, the facilitation of "the reorganization of Long Beach Federal Savings and Loan Association into Equitable Savings & Loan Association." This additional purpose is not contemplated by article XV. Under that article part of Long Beach's assets equal in value to the aggregate principal amount of all Long Beach share accounts are authorized to be sold to Equitable, and the net surplus remaining after such sale and payment of all Long Beach liabilities is either to be converted into cash and distributed to Long Beach shareholders or to be transferred to a trust for handling and distribution. In either case distribution to shareholders is required to be completed within 10 years after the close of the settlement escrow, and assets of at least $3 million must be retained during that period. Such trust is not related to Equitable, its only purpose being to permit the dissolution of Long Beach under paragraph (k) of said section 2 at an early date, and in any event prior to the end of the 10-year period. The 10 year payout period was designed to permit the normal collection of the loans included in such assets without loss of value resulting from forced sales of such loans. Obviously the loans and other remaining assets cannot be distributed in kind to the shareholders. The required retention of $3 million
in assets for 10 years is to provide security for Long Beach's liabilities and duties under the settlement agreement.
3. The proposed trust agreement (p. 2) states that the list of beneficiaries shall be subject to the approval of the Board selected by the beneficiaries. It is diffi cult to understand the reason why such board, which is not a party to the trust agreement and whose existence is based on the agreement, should have any right to approve the list of beneficiaries who are specifically described in paragraph (h) of said section 2.
4. The first complete paragraph on page 3 states that the "rights, powers, and authority of beneficiaries herein shall be exclusively represented and executed by and through the duly elected board hereinafter named and provided for." Article XV does not contemplate depriving the beneficiaries of their lawful rights under the trust agreement and does not even mention said board. Accordingly, this paragraph should be deleted or made subject to the right of any beneficiary to bring an appropriate legal action against the trustee for breach of its fiduciary duty under the trust agreement.
5. In the second complete paragraph on page 3 is a sentence to the effect that no beneficiary shall "cast more than 50 votes except by proxy." It is believed that this is intended to mean that a beneficiary is entitled to cast up to 50 of his own votes and also to cast the votes of other beneficiaries as their proxy. However, this sentence should be clarified since it could be interpreted to mean that a single beneficiary could cast only up to 50 votes in person but could cast, by proxy, additional of his own votes based on the size of his account.
6. The proposed trust agreement fails to provide that the trust assumes and is subject to all liabilities and duties of Long Beach under the settlement agreement, as required by said subparagraph (vi).
7. The fourth paragraph under "Powers of Trustee" (p. 3) gives the trustee general authority to act in any manner "as could, or may, be done by a private individual." Article XV requires that the trustee "shall be subject to all duties and responsibilities customarily imposed upon trustees under the law of California without limitation of liability for misconduct or negligence." [Emphasis added.] This means that the trustee's duty to use in the handling of the. trust assets the care, skill, prudence, and diligence of an ordinarily prudent man engaged in similar business affairs may not be limited. That part of the fourth paragraph commencing with "and in all other respects" should be eliminated because it purports to give the trustee a discretion broad enough to constitute a substantial limitation of its liability for negligence.
8. In order to avoid any misunderstanding, it would be desirable to include in the section entitled "Accounting" (p. 4) a statement that the trustee shall furnish within a reasonable time such interim uncertified financial statements and information concerning the trust as may be reasonably requested by Insurance Corporation.
9. In order to remove any doubt in the matter, it is recommended that the following be inserted at the commencement of the paragraph under "Duty of Trustee" (p. 4):
Notwithstanding anything herein to the contrary,
10. The proposed trust agreement provides (p. 4) for termination of the trust either 12 years after its creation or upon the last to die of a designated group of persons, whichever event shall first occur, and that the trust may be terminated anytime prior thereto "after making provision for the discharge of all then remaining liabilities hereunder." This is completely contrary to subparagraphs (iv) and (v) of said paragraph (h). It is recommended that this entire section except the last sentence be deleted, and that the following be inserted in lieu thereof:
This trust shall terminate on April 2, 1972.
11. In the first paragraph under "Trustee's Power To Borrow." it is recommended that the words, "including the initial purchase of the trust estate" be deleted or further clarified. Article XV does not contemplate that the trust estate shall be initially acquired by purchase since subparagraph (vi) expressly states that such distribution may be consummated by "the transfer to a trust for the benefit of the Long Beach shareholders of all assets of Long Beach remaining after said sale to Equitable of assets equal to all share accounts ***."
12. Article XV authorizes the establishment of a trust which shall provide for the handling and distribution of the remaining assets to shareholders as such
shareholders shall authorize, subject, however, among other things, to the condition that the trustee "shall be subject to all duties and responsibilities customarily imposed upon trustees under the law of California without any limitation of liability for misconduct or negligence." [Emphasis added.] This condition is a limitation upon the authority of the shareholders and the shareholders are not authorized to change this condition which is designed for their protection. The proposed trust agreement contains several provisions in the sections entitled "Trustee's Power to Convey" and "Actions by Trustee" which require the trustee to take certain actions in conformity with directions from the board. Such provisions definitely relieve the trustee of its duties and responsibilities and definitely limit its liability for negligence. They obviously have the effect of transferring trustee powers to persons with no or doubtful trustee responsibility. If Long Beach management contemplated such a radical change in the trustee's duties and responsibilities, the matter should have been expressly dealt with in article XV. Article XV makes adequate provision for the trustee, but is completely silent with respect to the board which is all important in the proposed trust agreement. The provisions giving the board power to direct the trustee should be eliminated. In fact, the entire section "Trustee's Power to Convey" and the second paragraph of "Actions by Trustee" should be deleted.
13. The first paragraph (p. 8) under "Board" is subject to the comments contained in item 4 of this letter.
14. For reasons stated in item 12 of this letter it is recommended that the second paragraph (p. 8) under "Board" be deleted.
15. Paragraph (f) on page 9 should be clarified to show that the trustee is not relieved of its duty and responsibility to handle and distribute the trust estate. See item 12 of this letter.
16. With regard to "Commencement of Trust" (p. 10), paragraph (h) of article XV provides that after assumption by Equitable of all Long Beach share accounts and payment or making provision for payment of all Long Beach liabilities, the net surplus etc., shall be distributed to Long Beach shareholders. Subparagraph (vi) states that such distribution may be consummated by a transfer to a trust of all the assets remaining after the sale to Equitable. Consequently, the trust imposed upon the remaining assets does not commence until such remaining assets are transferred to the trustee. Accordingly, this "Commencement of Trust" section should be deleted or appropriately modified. However, there is no objection to execution of the trust agreement subject to its becoming effective upon transfer of the remaining assets to the trustee.
17. In order to remove any doubt, it is recommended that the following additional paragraph be added to the proposed trust agreement:
"In event of any inconsistency between this Agreement and said article XV, the provisions of article XV shall control."
I have the following comments concerning the notice of special meeting and letter both dated March 29, 1963:
1. Item 3 of the notice refers to consideration and acting upon "any form of merger, consolidation, conversion, sale of assets, pooling of assets or property, or other transactions between" Long Beach and Equitable "under said article XV or otherwise." Since the only transaction authorized with Equitable is a sale of part of Long Beach's assets under article XV, the other transactions should not be considered or acted upon at the meeting.
2. With reference to the third paragraph on page 2 of the letter, it should be made clear that any proxy given at any time prior to the meeting to or under the control of Long Beach management as well as the shareholders' committee will be voted for the plan and trust under article XV unless the member attends and votes or revokes the proxy in writing, in accordance with section 2(c) of article XV.
GEORGE E. MONK.