of certain named persons, usually stockholders, as voting trustees. The agreement usually runs for a number of years. This method of handling the affairs of a corporation is adopted where it is desired to continue a definite business policy over a period of time. If the policies of a corporation are subject to the changes that are likely to occur when the directorate is changed, it is sometimes harmful to business success. By creating a voting trusteeship this danger is eliminated.

An agreement of this character provides for the deposit by its stockholders of their stock with a bank or a trust company designated in the agreement. The depositary is instructed to issue voting trust certificates or deposit receipts. These may

be and are bought and sold just as the stock certificates are. The depositary keeps records of all stock certificates deposited and of all transfers of the voting trust certificates or deposit receipts and acts as the transfer agent of them.

Whenever a voting trust certificate is presented for transfer from one owner to a new owner, the stock represented by such voting trust certificate must also be transferred. If the transfer agent of the stock is a different bank or trust company, as often occurs, then the depositary must send the stock to the transfer agent and have it transferred into the name of the new owner. Then the depositary will issue new voting trust certificates to the new owner or owners. The arrangement has the same facility of transfer of title as stock certificates. The new owner without the necessity of physically signing the voting trust agreement automatically agrees to the terms thereof. In this way any change of policy is avoided without hindering any stockholder from disposing of his stock if he can find a purchaser.

§ 514. General Duties of a Depositary

Acting as depositary for bondholders' committees, reorganization committees, and the various other protective com

mittees which spring up the minute a corporation gets into financial difficulties, the duties of the bank or trust company are essentially merely to receive the bonds, notes, stock, or other obligations and to issue receipts there for. The object of depositing the bonds, notes, stock, or other obligations is, of course, to put them under the control of the particular committee so that they may have the strength of many instead of the few. Again, as in the case of the voting trust certificates, these deposit receipts may be traded in if one can find a purchaser, which of course is rather difficult because of the financial condition of the corporation.

Often the duties of the depositary are much more difficult and numerous than as outlined above. Among other things, the depositary is frequently called upon to advance money to defray the expenses of the committee, in which case the depositary insists upon being given a prior lien on the particular securities deposited with it, or to take an active part in devising the reorganization plan.

If the plan is finally adopted, the depositary has the duty of carrying it out. These plans often are complicated and vary with the innumerable circumstances of the different cases. Sometimes the depositor gets back some bonds, some preferred stock, and some common stock. Then he may be called upon to pay an assessment. The holder of a first mortgage bond usually fares the best, although the holder of an equipment trust obligation or a bond issued under a mortgage on a terminal or a particular piece of property, is in an advantageous position. The holder of stock, especially common stock, usually fares the worst. He is the one most likely to be assessed.

Banks and trust companies are best able to act in any of these capacities because they are trained to the work and because of their accessibility and financial responsibility. It is not easy to see how such work could be handled otherwise than by a bank or trust company.

REVIEW QUESTIONS

1. What fiduciary capacities in which a financial institution may act are mentioned in this chapter?

2. What is a custodian? What kind of property do banks and trust companies take charge of? May an individual executor employ a custodian of this kind?

3. To what extent may a bank or a trust company act as an agent? What gives it this power and what limits it? What is the advantage of such an arrangement? What character of duties is delegated to banks and trust companies in this way? What kind of information will such agent secure? How are travelers served? To what extent will such an agent care for real property?

4. What is a fiscal agent? What is a paying agent? Why is a bank or a trust company peculiarly fitted for such duties?

5. What is a depositary? Does a bank or a trust company assume more responsibility than an individual bailee?

6. What is an escrow agreement? Why should escrow agreements be drawn with great care?

7. What is a voting trust agreement? What does the depositary under such agreements have to do? How is stock under such an agreement transferred?

8. What are the general duties of a depositary? If the depositary advances money, how does it protect itself? Why are the duties of a depositary sometimes very difficult?

CHAPTER LX

A BANK OR TRUST COMPANY AS CORPORATE TRUSTEE FOR BONDHOLDERS

§ 515. Corporate Trustee

A corporate trustee is a trustee acting under an agreement between a corporation and the purchasers of its obligations. Generally speaking, the corporate trustee has the same legal obligations that any other trustee has. The obligations of the corporate trustee are defined by the instrument which creates the trust just as in the case of a personal trustee.

The corporate trustee is charged with the legal title to property of which some individual or corporation has the equitable title. The trustee does not always have the immediate custody of the property, as for example, where the corporate trustee is the trustee under a mortgage. In such case, it would hold the mortgage agreement showing that, as trustee, it had the legal title to certain property belonging to the corporation. In some cases it would have the property in its possession, where personal property such as the securities of another corporation were the subject of a trust; but if the property were equipment, such as cars or locomotives, obviously it could not have physical possession. In this case, the cars or locomotives or whatever the object of the trust might be, would have painted thereon words showing that the property was the property of the trustee. The legend would probably be somewhat as follows: "First National Bank, Trustee and Owner."

The corporate trustee must see that the terms of the agreement are carried out. It must, in certain cases explained fur

ther on, act for the holders of the obligations. It certifies as to the genuineness of the instruments issued under the terms of the agreement.

§ 516. Individual and Corporate Trusteeships Compared

In the early days of corporations and the issue of corporate obligations it was the custom to appoint one or more individuals as trustee or trustees. Usually one of the individuals would be a lawyer. Now, however, it very seldom happens that an individual is appointed in this capacity. At first, trust companies were appointed; since the amendment to the Federal Reserve Act both trust companies and banks may be and are appointed. Obviously either the bank or the trust company is better qualified for the position than any individual, no matter how capable. The financial standing, the impartiality, the superior training, the greater facilities, the greater accessibility, all of these and many other reasons make the bank or trust company better qualified.

§ 517. The Purpose of a Trust Agreement

The object of these various trust agreements is the same in all cases, namely: to raise money to carry on some part of the corporate business. Usually the amount desired to be raised is so large that no individual or bank would be able to lend the money, however good the security might be. On the other hand, by inducing a large number of people to participate in a loan, the problem of raising several millions of dollars becomes, in ordinary times, a comparatively simple one. As evidence of the participation of a given person in the loan, a bond or note, depending upon the agreement, is given.

Our Liberty bond issues are an excellent example of how a large sum of money can be readily raised by means of bond issues. In the case of a corporation other than a government, however, it would not be possible to raise such enormous sums.