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mission that everything is all right, that the plan is 0. K'd and guaranteed.

Suppose it wishes to consolidate with its subsidiaries and in doing so to issue new preferred and common stocks for the stocks of its subsidiaries, and to call the four bonds of its operating subsidiaries and issue in their place a new first-mortgage bond on all the property of the new and consolidated company. What will it have to do?

(1) The holding company will have to file its plan with the Securities and Exchange Commission and have the plan approved under the Public Utilities Act.

(2) The declarations will have to be filed by the committees or committee soliciting proxies under this bill. It is possible that there may have to be a committee for each class of stock-six in all.

(3) Information will have to be filed under the Trust Indenture Act in regard to the indenture of the new bond issue.

(4) If the new bond issue is to be sold to the public it must then be registered under the Securities Act.

All this information must be filed with the same Commission and much of it will be a duplication of information filed in other papers. I call your attention to the fact that the expense and the delay may in many cases make it impossible through changing markets, or just through the item of expense, for that simplification to take place.

Mr. MAPES. As I recall the provision relating to the prospectus, it does not contemplate stating all that is in the plan.

Mr. Wood. No; not all. That prospectus text, if I may quote it in brief to you, simply says that the prospectus shall include such information in the declaration as the Commission may prescribe and such additional information as the Commission may require.

There is no thought in my mind that the Commission will ever require that exhibit A and all of the other things in the registration statement should be in a prospectus; but my point is that I hope the prospectus will be simple. After all, what we want is for the investor to understand what he is doing.

Mr. Mapes. You would not object to the Commission exercising its judgment as to what should appear in the prospectus?

Mr. Wood. I would hope that they would consult, not necessarily investment bankers, (of course I hope that they will do that); but certainly experienced investors, and see what information they want in the prospectus.

Mr. CROSSER. Is that all?
Mr Wood. Yes, sir. Thank you.
Mr. CROSSER. Mr. Woods.



Mr. CROSSER. Mr. Woods, will you give your full name and connection, for the record?

Mr. Woods. My name is George D. Woods. I am a vice president and director of the First Boston Corporation, an investment banking concern.

I am here as a representative of the Investment Bankers' Association.

I have read the committee act of 1937, and I have read the remarks of Chairman Lea in the Congressional Record in connection with it. I have read parts of the Securities and Exchange Commission report on the practices of the protective committees.

Mr. Wood, who has just completed making a statement, has suggested that I confine my remarks to those sections of the bill that have to do with voluntary adjustments rather than treat with the bill in a broad sense.

In connection with the question of voluntary adjustments, it seems to me there are several categories. All of them are treated with in the legislation that you gentlemen are considering.

The first one that I want to mention has to do with the desire of a solvent corporation that has a long and satisfactory record, to make some quite usual and orderly change or adjustment in its capitalization. For instance, asking its common or voting-stock holders for the right to get out a new issue of preferred stock or the right to get out an issue of mortgage bonds that is, to place a mortgage on its property. A corporation wishing to take such an action, which might well be in the best interest of all security holders, would be under the terms of the act as it is now drafted, obligated to file a declaration which would be of considerable length with the Securities and Exchange Commission and furthermore, having filed the declaration, the management of that corporation, all bankers connected with the corporation; all counsel connected with those bankers, would be barred from going to the security holders; that is, the common voting stockholders, and asking for approval of any such an orderly business transaction.

It is my thought, and I wish to make the suggestion, that the committee give consideration to the elimination entirely from this bill of all provisions relating to any such routine operations, by a solvent, going concern.

The second category of voluntary adjustment that I want to touch on, has to do with mergers and consolidations.

Again assume solvent going concerns, with sound and satisfactory records of earnings and business history; if two or three or more such business concerns, whether they are manufacturing or public utility concerns doesn't particularly matter, wish to merge or consolidate, it seems to me that it is making them go to too great a length entirely to subject them to the same rules and regulations and requirements that a bankrupt concern in court proceedings in a reorganization plan is subject to. I would like to suggest to the committee that in connection with mergers and consolidations if there is a feeling, and I believe there is such a feeling, that complete information is not furnished to stockholders, that the committee amend the Securities Act or change the act now under consideration in such a fashion that full disclosure—I should say the same full disclosure—is made in connection with mergers and consolidations as is made in connection with original issues of securities.

It is my very definite feeling that mergers and consolidations of solvent, going concerns which may well be in the interest of all of the security holders involved would, as a practical matter be impossible if nobody connected with the management; nobody connected with the underwriters who originally purchased and distributed the securigies, were permitted to solicit proxies to bring about such mergers and consolidations.


The third category of voluntary readjustments, has to do with a somewhat different set of facts. I think it is the only remaining category.

That is, corporations which for one reason or another have come on hard times. They are solvent under the strictest sense of that word; but they may have some interest payments to make which they are not quite up to making. They may have some maturities which they are not quite able to meet. They may be corporations that over a period of years have had to trim their sails and have been unable to pay cumulative preferred stock dividends, and times being better would like to resume the payment of dividends, but would like to ask the cooperation of their preferred-stock holders in connection with a settlement of the accumulated unpaid dividends.

Corporations that I refer to in this category are, in other words, those which are not by any manner or means in the bankruptcy courts but on the other hand wish to go to their creditors or some class of their stockholders and retrade the deal, so to speak.

It seems to me that such corporations, which unless their affairs are properly and carefully handled will go into bankruptcy, should have an opportunity to work out the difficulties with the cooperation of those people who are most intimately familiar with the affairs of the corporation. In other words, they should have the cooperation of the management and they should have the cooperation of anybody who wants to step forward and explain what the situation is to the security holders of the corporation.

I feel, in other words, that in this last category of possibilities under voluntary readjustments, it is a great mistake for this bill to prohibit the participation of the management in the solicitation of proxies or deposits or exchanges.

Do not misunderstand me. I think that the management in soliciting its creditors or its preferred-stock holders should be required to make full disclosures of the affairs of the corporation and the facts of its business, and all phases of their personal interest in the different categories of securities.

My understanding of the Securities Act of 1933 with its amendments is that it provides where any commissions are payable to any underwriter, that is, any investment banker, full disclosure must be made.

My understanding is that management which wishes to make a rearrangement of their debts, who wish to permanently capitalize a rearrangement of preferred stock dividends, but who do not pay commissions to underwriters do not have to file the same voluminous papers with the Securities and Exchange Commission.

Perhaps this committee will want to reconsider that portion of the Securities Act.

Certainly I think it is a great mistake for a corporation which has been through hard times and is, through the effort of its management and friends of the management and some of the security holders, endeavoring to get its capitalization on such a basis that it will be able to weather the storm and keep out of the bankruptcy courts to be handicapped in its efforts. In such cases, I think it is penalizing rather than helping the security holder to prohibit the participation of the management in any such undertaking.

Mr. MARTIN. May I ask a question there?
The CHAIRMAN. Mr. Martin.

Mr. MARTIN. Is it your view that the application of the act should be limited to insolvent or bankrupt corporations, or is it just your view that the categories you have in mind, management, underwriters, and so forth, should be permitted to act, before the Commission under the law requires them to make disclosure? Just what are your ideas as to the scope that the law ought to take in?

Mr. Woods. My view, Mr. Martin, is that this particular law should not treat with in any fashion the normal activities of management of solvent concerns in approaching its securities holders in connection with the concern's normal business practice. Furthermore I do not believe this bill should concern itself with the efforts of the management to obtain the cooperation of its security holders for an extension, for a funding, or a capitalizing, of back preferred stock dividends, or anything of that sort.

I believe there should be full disclosure in connection with those things and that it should be treated with in the Securities Act of 1933.

The reason I do not believe that it should be treated with in this bill which this committee is considering, is because the bill is drafted in such fashion that it would be difficult to the point of impossibility to get anybody that really understands the situation to go out and go to work under it.

The management is disbarred.
The investment bankers are disbarred.

Because of the prohibition in the bill with respect to the purchase or sale of securities during the pendency of the declaration, I am advised that trustees of trust funds would be disbarred because a trustee of a trust fund could not formally agree not to dispose of any securities under his supervision.

Furthermore, I understand that large insurance companies in New York State would be disbarred, because under the laws of New York State, it is illegal for an insurance company to make any agreement respecting its right to sell its securities.

Therefore, in all of those categories, answering your question in a word after all of those words, I believe this bill should not be effective.

The CHAIRMAN. Should not be effective?
Mr. Woods. No.

Mr. MARTIN. You mean they should be excluded from the operation of the law?

Mr. Woods. Definitely excluded from the operation of the law. Mr. MARTIN. I want to reask the question.

You mentioned three specific categories. Now, they come under the bill as it is drafted, do they not, those categories come under the bill?

Mr. Woods. I believe so; yes.
Mr. MARTIN. And management would be excluded?
Mr. WOODs. From soliciting proxies.
Mr. MARTIN. From soliciting proxies.
Mr. WOODs. Yes.

Mr. MARTIN. And it would virtually be handled the same as an insolvent concern?

Mr. Woods. That is correct.

The CHAIRMAN. Mr. Woods, in legislation of this kind, I take it that you would

agree that it has to be drawn on the theory that some managements, at least, you will find, will take charge of reorganizations.

Mr. Woods. Yes; I agree with that.

The CHAIRMAN. Now, that being true, somebody would have to make the choice. How would you determine that choice, assuming that the Government is going to take regulatory powers?

Mr. Woods. Mr. Lea, let me answer you in this fashion: The bill under consideration sets up a set of rules with respect to concerns that are in judicial reorganization. Those concerns are really in trouble. They are in the courts.

With respect to those situations, I agree with you wholly, there ought to be some umpire. I would assume it was the court having jurisdiction.

The second category of concerns treated with under this proposed legislation are concerns that are not in the courts. They are not in serious trouble. Their management perhaps has done an excellent job.

I believe that such concerns should have their management approved or disapproved, as they do, at regular annual meetings of stockholders.

The CHAIRMAN. But, in many cases, the stockholders have no effective means of controlling the selection; the stockholders are scattered all over the country and are unable to cooperate with each other, which makes it impossible for them to exercise the rights which perhaps ought to be asserted even to that second class to which you refer. From the standpoint of drafting a law, I take it that you would admit there may be managements that are unfit to take charge of reorganizations.

Mr. Woods. Well, there may be; but I would say they would be in a few isolated cases, Mr. Lea, because after all-perhaps you were out of the room when I mentioned the first category, which I would like to have in your mind.

The CHAIRMAN. Then, do not repeat it. I will try to look it over in the record.

Mr. Woods. All right. The managements, by and large, of these concerns which are going to their security holders and asking for cooperation on readjustments of some sort, have paid their interest and if they had not, they would be in the courts. If they have taken advantage of their right to postpone the payment of preferred stock dividends, and those dividends are accumulating, then the stockholders have an opportunity to approve any plan, and there is no way of forcing them to approve it.

These concerns which are treated with under the broad heading of voluntary readjustments, are not in any particular difficulties.

The stockholders have their regular right to vote the management out.

Now, if you say they do not exercise that right-I do not believe that it is going to be possible to pass legislation to force them to exercise it. They have the right and if the management is too bad, it can be replaced and in many instances it has been replaced.

But, I would not be in favor of the Federal Government getting itself in the position of deciding whether a given management is good or bag.

The CHAIRMAN. We are glad to have the criticism of the bill. It is helpful.

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