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Case Study of Balloting Regulation by Masson The Boston & Maine recapitalizes
A Case Study of Balloting Regulation by Robert L Masson The Boston & Maine recapitalizes 1948-1953
Hard Cover
373 pages
Copyright 1956
CONTENTS
CHAPTERPAGE
I. INTRODUCTION 3
Why Study an Unusual Situation? ... The Objectives of the Study ... Some Conclusions on Administration Drawn from the Study . . . The Relation of Administrative and Legal Problems - The Businessman and the Lawyer
II. THE PARTIES 15
Parties Directly Concerned with the Balloting: Boston and Maine Railroad; The Interstate Commerce Commission; Old Colony Trust Company; Georgeson & Co.... Plaintiffs in the Balloting Litigation: The Sakis Group; The Department of Justice . . . The Court Proceedings and Parties in Subsequent Developments: The Court; The Banking Houses; Negotiators of the Settlement; Special Investigation by Chief Counsel for the Senate Committee on Interstate and Foreign Commerce
III. THE CHANGES IN THE STOCK STRUCTURE 31
Stages in Added Complexities of Stock Structure: System-Building to 1900; The Second Period, 1900 to 1919, Ending in Receivership and Subsequent Consolidation with the Principal Leased Lines; The Second Voluntary Capital Readjustment - 1926; Financial Record After the 1926 Readjustment; The Voluntary Bond Adjustment of 1940; The New Haven Interest in Boston and Maine Stock; The Pennroad Corporation's Holdings in Boston and Maine Stock . . . Planning for Stock Modification: Section lob of the Interstate Commerce Act; The First Boston and Maine Plan - All Common Stock; The Two-Stock Plan as Finally Voted Upon
IV. THE COURSE OF EVENTS 54
The Plaintiffs' Case - Significant Events in its Course: April 1950 to February 1951; The Year of Court Action; The Department of Justice Becomes Active in the Proceedings; The Final Year: February 1952-April 1953 . . . The Commission's Final Report, April 21, 1953
V. ASSENT PROCEDURES UNDER SECTION 20b 74
The Statute's Requirements ... Assurances of Assent at the Time of Application: The Commission's Regulations; Communication with Security Holders During the Preapplication Stage; The Commission's Control of Solicitation During the Preapplication Stage; Conclusions ... Assent Procedures in the Final Voting on the Plan: Regulations Governing Assent Procedures in the Boston and Maine Balloting; The Depositary's Function; Preview of the Department's Charges; The Higher Percentage of Assents Imposed on the Noncumulative Preferred Stock ... Questions of Principle Involved in the Rule that Assents Carry Through Transfers Until Revoked ... Summary and Conclusions
VI. PROBLEMS IN THE DETERMINATION OF CLASSES 113
Voting by Classes of Stock - What is a Class?: The Railroad's Change of View from Eight to Four Classes; The Examiner's Summary and Recommendations on Number of Classes; The Commission's Conclusions ... Problems Caused by Cross-Holdings of Stock: The Facts on Cross-Holdings of Boston and Maine Stock; The Bearing of Cross-Holdings on the Problem of Classes ... Some Precedents in Classification for Voting.... The Brief of the Department of Justice Against Four Classes: A Critique of the Department's Interpretation of the Statute . . . The Railroad's Argument for Four Classes ... Conclusions
VII. THE DEPOSITARY: THE SYSTEM FOR RECORDING ASSENTS 146
The Importance of the Charges to the Depositary. . . The System for Recording Assents: What the Depositary was Required to Certify to; Old Colony's Records for Receiving and Counting Assents; Problems that Came up During the Submission Period ... Special Cases of Alleged Invalid Ascents: The Bianco Assent; The Zucker Assent . . . Is There a Tolerance Limit in Certifying the Assent Total?
VIII. THE DEPOSITARY: LIMITS OF RESPONSIBILITY 181
The Note on the Letter of Assent: The Facts; The Department's Charge that the Note was Ignored; Responsibility of Depositary in the Absence of a Note; The Purpose Served by the Note in Section 20b Situations; The Meaning of "Fiduciary or Representative"; Proper Evidence of Authority - Timeliness; Proper Evidence of Authority - Substance; The Figures on Shares Assented by Fiduciaries and Representatives . . . Independence of the Depositary . . . Summary and Conclusions: Conclusions on the Recording System; Conclusions on the Note on the Letter of Assent; Conclusions on Administrative Procedures
IX. CHARGES AGAINST THE RAILROAD: SOLICITATION PROCEDURES 217
Contracts with Paid Solicitors: Two Specialists in Solicitation Hired ... The Charges of Improper Representations by Solicitors ... The Items Included in the Solicitation Material . . . Understanding the Solicitation Process . . . The Affidavits to Support the Charges: Alleged Improper Representations as to Value of the Common Stock; Other Allegedly Improper Representations . . . Commission Control Includes the Solicitation of Rejections . . . The Commission's Findings as to Improper Representations
X. CHARGES OF CONTROLLED ASSENTS 247
The Statutory Ban on Controlled Assents: The Meaning of the Provision Against Controlled Assents; Questions of Controlled Stock in This Case; The Procedure for Designating Controlled Stock The Pennroad-PizziniTransaction Stock Purchases by a Director: The Department's Charges; The Commission's Finding; Conclusions on the Commission's Finding . . . Assents Given by a Professional Solicitor: Description of the Transactions; The Charge that Through the Borrowing Process a Dissent Became an Assent; The Charges and the Commission's Finding; Some Questions of Principle Raised in the Stock-Borrowing Episode . . . Commentary on the Commission's Finding of Controlled Assents: Considerations in Determining Proper Assenting Practice; Effects of Disqualified Ballots on the Required Percentage; A Problem for the Statute or for Rules?
XI. POLICIES IN RETROSPECT 285
Coordination a Primary Need ... Necessity for Prestudy of Procedures . . . Policy Questions for Government Agencies: The Value of the Examiner's Report . . . Policy Questions on the Settlement
XII. RECOMMENDED CHANGES IN STATUTE AND PROCEDURE 306
Proposed Amendments to Section 20b: Percentage of Assents Required; Holdings Disqualified from Voting; Clear Definition of the Commission's Powers and Responsibilities: (a) Assurances of Assent; (b) Matters of Solicitation; (c) The Use of a Depositary; (d) Determination of Classes; (e) Responsibility for Supervision; Clarification of the Status of Committees . . . Changes in Procedures: Importance of Initial Organization for the Balloting Job; Record-Day Procedure Recommended; Fiduciary Signatures as in Usual Corporate Practice . . . Some General Procedural Questions ... Conclusions of General Application to Administrative Agencies
APPENDIX A: Section 20b of the Interstate Commerce Act 337
APPENDIX B: Rules Pertinent to Balloting Procedures, from Rules and Regulations of the Interstate Commerce Commission Governing Applications under Section 20b of the Interstate Commerce Act 346
APPENDIX C: Order of the Interstate Commerce Commission in Boston and Maine Railroad Securities Modification, April 19, 1950349
APPENDIX D: Further Details on the Capital Readjustments of 1926 and 1940 353
INDEX 357
Preface
THE Boston and Maine case challenged the validity of balloting procedures at so many points that it has taken a sizable book to consider them. In the usual case of capital readjustment, the battle comes mainly on the plan itself. In the Boston and Maine case not only was there controversy on the plan at every stage but the battleground shifted to the voting procedures. The issues were so broad and deep as to engage the Department of Justice and the courts, and to carry into another round of public hearings before the Interstate Commerce Commission.
I have long believed that for real understanding of the factors bearing on any major financial problem one needs the background story not revealed in the final decision. This is particularly true of financial reorganizations. Back of the final plan lie the realities that explain it - the initial steps, the false starts, the backstage maneuvers and negotiations, the conflicts of interest, and the ultimate compromises. Oftentimes the working papers or the preliminary drafts are more revealing of a party's motive or a point of view than the finished document itself.
Those best able to describe the developments in proceedings would naturally be the participants themselves, who as eyewitnesses could place the whole action in perspective. Their recollections would give added meaning to the briefs, memoranda, correspondence, and documents. They could tell of the unpublished moves, mostly lost to the outside observer.
When big events are taking place in the political scene, it is not uncommon for the participants to keep diaries of their personal impressions. These firsthand observations later give new interpretations to the final outcome. In major financial developments, such as promotions, mergers, and reorganizations, the operators are not usually so history minded. The realities along the way are seldom preserved to explain the final document.
To supply this lack in financial writings I began looking for some likely episode where I could try my hand at reconstructing the action to get its full financial meaning. I found one at my very door. Boston and Maine Railroad had been working since early i 948 on a stock modification plan under the new section lob of the Interstate Commerce Act. Here was a situation made to order for following the working of a new statute. I was fortunate in getting assurance from Mr. E. S. French, then president of the Railroad, that its records of the undertaking would be made available to me. This was in March 1951.
During the previous year I had prepared for class discussion the plan as presented and the official explanation of its rationale. Mr. Everett W. Smith, who as assistant to the financial vice president had been working on the plan since April 1948, not only helped to assemble the material but led one class discussion to bring to it the realities that never appear in print. The success with this short case, together with assurance of cooperation by the Railroad officials, made more extensive research on the plan appear feasible and valuable.
The recapitalization had been stalled early in 1951 by a challenge by a minority group to the validity of the stockholders' vote accepting the plan. Later the Department of Justice entered on a full-scale inquiry into the charges. The effect of these developments on my research came abruptly on September 7, when representatives of the Department of Justice appeared at the Railroad's office and requisitioned all files and records relating to the plan and the solicitation of votes. I was then at work on documents from the files; I placed a marker at the page I had reached and hoped for an early end to the interruption.
Events moved fast. It became clear that the balloting dispute ran deep. The ICC, the Railroad's officers, and all concerned with the balloting and its aftermath were giving first attention to the instant controversy. In these circumstances it would have been highly unrealistic for one interested in financial realities to take only casual interest in the all-absorbing current action. The paramount issue had shifted to the merits of the challenge to balloting procedures. It took all my time to follow the fast-moving controversy; further study of the plan itself was of necessity held in abeyance.
Hence came this book, an analytical account of balloting problems in an actual case. The primary source materials were the extensive public record, which afforded background and analysis of unusual breadth. They were supplemented by interviews with most of the participants and my attendance at the hearings and court proceedings. This personal observation throughout the succession of events provided overtones not to be caught from the printed records.
New transactions in Boston and Maine stock lately have made headlines under conditions that indicate there are still unsolved problems in the area of corporate elections and control. Proxy fights have been the order in recent years, notably in railroads. Some of the technical aspects of corporate voting, particularly for stock in "street names," still pose questions as they did in the vote on the Boston and Maine plan.
At one point or another as the case developed, three government agencies played a part, with the ICC in the major role because of its primary regulating responsibility. Access to operating files in the government agencies is not available to an outsider, however, even though his objective is known to be only a study in the public interest. Although the ICC's public dockets contain all official papers and releases, the researcher cannot explore the veritable mine of relevant material in interoffice files. Just as legislative hearings throw necessary light on the intent of Congress in a statute, so the first drafts and office memoranda would reflect meanings not fully seen in the Commission's final reports. As will appear many times throughout the book, there remain unexplained questions about the participation of the Department of Justice. Much of importance to an understanding of its administrative decisions in this case must be left to surmise. The Securities and Exchange Commission came into the case only briefly in its investigation of broker participation in the balloting. Here, also, the results are sealed to the outsider as such investigations of private matters must necessarily be until they emerge in formal charges and action. Nothing has been released by the SEC in the way of findings from its study of alleged irregularities.
A case study of this sort, holding the spotlight as it does on a prolonged dispute over procedures in a narrow area of agency regulation, carries a danger of distorting the whole picture of regulatory operations by emphasis on one aspect only. It is important to keep a dear perspective. The Boston and Maine case was one of many types on the operating agenda of the ICC at the time. There is constant pressure on the Commission to get things settled. This necessity for action within a reasonable time is reflected in its approach to the task of establishing a practicable procedure. Procedural problems must be viewed in the setting of ever-widening responsibilities of an agency with limited staff, budget, and time. The new statute, section lob, was seized upon by many carriers as a feasible way of solving problems and it had to be applied in a variety of situations. The challenge to regulation is to determine what is needed for a workable statute. It is for Congress to provide the necessary means.
To make the study more than a mere bookish review of the printed record, it was especially important that the Commission's operations be understood. Commissioner Charles D. Mahaffie was from the start sympathetic with the project and permitted me to talk over procedural matters with officials in the Bureau of Finance - its Director, Mr. C. E. Boles, now retired; Mr. R. T. Boyden, his successor; Mr. Vernon V. Baker, Assistant Director; and Mr. Homer H. Kirby, the Hearing Examiner on the case. While the text of the study may not be construed as expressing their views, I owe much to their patience and helpfulness in responding to this extra demand on their time in connection with the case that of itself provided troubles enough.
The Railroad made available its files on the case. To these were added the personal interest of the Railroad officers who were close to the action in all stages. They gave ready attention to my many requests for explanation and interpretation. In particular, Mr. Richard Jackson, general attorney of the Railroad, read closely and commented on an entire preliminary draft of the manuscript. Mr. Everett W. Smith also discussed with me many aspects of the procedures.
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