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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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X-7455-a

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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2

i

X-7455-a

- 2 -

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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2 9 2

X-7455-a

- 3 -

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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2 9 3

X-7455-a

- 4 -

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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9 4

X-7455-b

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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X-7455-b

- 2 - /

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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X-7455-b

- 3 -

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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VH7

X-7455-0

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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2

X-7455-d

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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2 9 9

X-7455-d

- 2 -

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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X-7455-d

- 3 -

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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X-7455.~e

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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302

X-7455-e

- 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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X-7455-e

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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X-7455-e

• 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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X-7455-e S A ) b

- 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.

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