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Harley F Drollinger.

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UC-NRLF




GIFT OF





f ln Witness Whereof



By
Harley F. Drollinger

Manager, New Business Department

The Fidelity Trust Company

of Buffalo




The Fidelity Trust Company

of Buffalo



". ::*

/ '




Copyright, 1922, by
THE FIDELITY TRUST COMPANY OF BUFFALO









TABLE OF CONTENTS

Brenton & Company 7

Depositary Under Reorganization Plan 97

Disbursing Agent 105

Escrows 115

Fiscal Agent Under Municipal Bond Issue 61

Receiver Assignee 121

Registrar 55

Safe Keeping Agent 91

Transfer Agent 35

Protecting the Stockholder 40

Problems in Connection with the Transfer of

Stock 44

Trustee Under Corporate Bond Issue 69

Corporation Bonds Secured by Mortgages on

Real Property 76

Equipment Trust Bonds 78

Collateral Trust Bonds 83

Debenture Bonds 85

Voting Trustee . Ill



NOTE

THE business romance of Brenton &
Company has been made a part of
this booklet in order to set forth some of
the many problems actually encountered
by every corporation at one time or
another during its corporate existence.
The solution as well as the problem has
been included in the story in the hope
that it may be of some value to officers of
corporations when these exigencies arise.

The extent to which a trust company
may economically serve and promote the
best interests of corporations is but little
recognized and appreciated by many
executives.

Believing that an exposition and an
understanding of the mutual relations
between corporations and trust com-
panies will result in simplifying many
complicated and onerous corporate
activities we have dedicated our booklet
to this cause.

Attention is called to the many points
of law that may arise in connection with
the corporate problems discussed in this
booklet. Corporate executives should dis-
cuss all such matters in detail with the
corporation's attorneys.




BRENTON & COMPANY

ALFRED BRENTON was a jobber who for Alfred
twelve years had confined his business Brenton
activity to the sale of woolen goods. He
had visited several large mills in the New
England States on many occasions and had
become greatly interested in the various
manufacturing methods employed by the
larger mills. In some of the smaller ones he
noticed a total indifference to modern
methods of manufacture. If the improved
and more economic methods of the larger
mills could be installed in one of the smaller
ones, Brenton felt that such a mill would be
extremely profitable.

One of these mills could be found in Cor-
dona, a city having a population of 90,000.
Brenton had bought some of their goods and
found them of very high quality. He was
unable to obtain the supply he needed,
however, and no satisfaction could be ob-
tained as to possible future shipments, so
he discontinued the line.

On one of his Eastern trips he stopped off
at Cordona and went to the mill. They had
an excellent building, some very good ma-
chinery, looms, water power and everything

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V ,' ;.;. {'The Fidelity Trust Company of Buffalo

to make a first class mill from a mechani-
cal standpoint. Morale and spirit among
the employees, however, were utterly lack-
ing. The indifference of the management
was reflected in the general personnel and
Brenton soon realized why he could ob-
tain no service from the mill. A call at
the Cordona Trust Company and an inter-
view with John Strutts, the president, con-
firmed the general appraisal Brenton had
The Empire made of the situation. Mr. Strutts said
that indifference and negligence had resulted
in the loss of most of the Empire mill's
customers. Strutts prophesied a liquidation
of the Empire in the near future unless
their policy was radically changed. Bren-
ton frankly told the bank president he was
interested in the mill and asked that a tele-
gram be sent him if a liquidation of the
Empire seemed imminent.

Seven months later Brenton received a
wire from Strutts advising him to come at
once to Cordona. Upon arrival Brenton
learned that the Empire mill was finan-
cially involved and that the stockholders
had consented to a liquidation of its affairs.

After negotiations, covering a period of
several days, Brenton secured an option
on the Empire property for $85,000. He

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"In Witness Whereof



unfolded his plans to Mr. Strutts, President
of the Cordona Trust Company, who offered
his support in the undertaking. This was
just the chance Brenton had been seeking.
He had a large number of customers whom
he had been serving for twelve years to their
entire satisfaction. The Empire mill had an
excellent reputation for quality of manu-
factured goods, but their service had been
indifferent and most unsatisfactory. When
he returned to his home Brenton had little
difficulty in gaining the support of several
friends who advanced sufficient money to
pay for the mill. A Corporation was formed organization
known as Brenton & Company. Alfred fB r enton&
Brenton was elected President and General ompany
Manager of the Company.

A meeting of the employees was called
and Brenton gave an extended talk to a
group of workers who totally lacked enthu-
siasm and spirit. He told them he had
built up a large trade during the past twelve
years as a jobber and that he had now de-
cided to become a manufacturer. It was
his desire to retain the services of all em-
ployees who had formerly been connected
with the Empire provided they took a new
lease on life, manifested some enthusiasm
and did an honest day's work. Further, it

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The Fidelity Trust Company of Buffalo

was his intention to allow his employees to
become stockholders in the corporation
after they had been connected with the com-
pany continuously for eighteen months.
Special consideration would be given to
employees who discovered methods of pro-
ducing goods more economically, and for
this purpose a Suggestion Box would be
placed in the office where it would be easily
accessible to all employees.

Two weeks later Brenton & Company
became an actual entity when at eight
o'clock on Monday morning the factory
whistle called the former employees back to
their respective positions. Brenton & Com-
pany was a vastly different organization
from what the Empire mill had been.

The employees liked the frankness of
their employer and decided to do their part,
feeling confident Brenton would live up to
his promises. The looms hummed in the
mill during the next three years, production
was greatly increased and it became a prob-
lem to sell all the goods produced.

Brenton needed more salesmen, so he
decided to pick from his employees five men
who could learn the selling end of the busi-
ness. Within a week ten men had been
chosen from whom Brenton picked five of

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"In Witness Whereof



the most promising. Six weeks 1 training
under Brenton's personal supervision pre-
pared them for their task. They started on
the road much better qualified to interview
prospective customers on a business basis
than most salesmen of competitive lines, for
they all had practical factory experience and
knew their line from the time the wool left
the sheep's back until it was woven into the
various patterns and boxed for shipment.

It was at this time that Brenton & Com- The
pany experienced their first difficulty. Four-
teen months previous, John Kraver, Bren- Di ffi cu i ty
ton's friend and business associate, had
died. He was the owner of 150 shares of the
company's stock. The executor of the
estate decided to sell all of Kraver's holdings
and convert them into cash. A purchaser
was readily found. The certificates were
endorsed by the executor of Kraver's
estate. His endorsement was properly
witnessed and the certificates were pre-
sented to Brenton for transfer into the
name of the purchaser. The transfer had
been made and entered on the books of the
company. When the executor was making
final distribution of the estate it was dis-
covered that Kraver had, by his will, spe-
cifically bequeathed the shares of stock in

[ 11 1



The Fidelity Trust Company of Buffalo

The Brenton & Company equally to his three

FhS Pany ' S children - The value of the stock had in -
Difficuity creased materially since the organization of

the company. Furthermore, it had been
very closely held and this had been the first
sale and transfer. The three children de-
manded the 150 shares of stock which had
been bequeathed to them.

Kraver's executor had not been required
to give a bond though he personally pos-
sessed very limited means. Therefore, be-
ing unable to recover the shares from the
executor of the estate, Kraver's children
subsequently made a demand on Brenton &
Company for 150 shares of stock.

Brenton replied that the executor was
responsible and that they must look to him
for relief. They became so insistent that
Brenton decided to consult his attorney
regarding the situation. He was very much
surprised, and shocked as well, to learn that
the corporation was liable to the beneficia-
ries for the stock transferred. It was neces-
sary, therefore, for the corporation to pro-
vide Kraver's heirs with the stock which had
been transferred. Owing to the fact that the
executor was not required to give bond, and
also that he was not financially able to make
good, a loss to the corporation resulted.

: 12 :



"In Witness Whereof



He related his experience to Strutts,
his banker friend, and was told that the
law required a corporation to protect the
interests of bona fide stockholders in the
event that certificates were improperly
transferred, stolen or forged. He was fur-
ther informed that these were only a few
of the many intricate problems to be met
in handling stock transfers.

Having had this experience Brenton was Future
anxious to learn whether there was some
way by which his company's interests might
be safeguarded. Strutts replied that the
Cordona Trust Company acted as trans-
fer agent for many large corporations which
did not consider themselves qualified to
pass upon the many questions that arose
in connection with the transfer of their
securities. After thoroughly investigating
the facilities of a trust company for this
purpose, Brenton decided to have the Cor-
dona Trust Company act as transfer agent
for the stock of Brenton & Company. The
necessary formalities were complied with
and all transfers thereafter were passed
upon by the trust company which spe-
cialized in that class of work, and no fur-
ther financial loss in this connection was
experienced.

E 13 n



The Fidelity Trust Company of Buffalo

The sales force had been exceedingly ener-
getic, and the quality of Brenton's woolens
was so satisfactory that he became deluged
with orders and as a result, delivery be-
came a serious problem. The situation
became so acute that Brenton had to plan
an expansion of the factory. He was con-
f ron t e d with considerable difficulty in
financing the proposition. Together with
his bankers he went over the problem in
detail, and after some discussion Strutts
advised him not to sell the readily market-
able securities in which their reserve and
surplus had been invested, but if possible to
meet the situation by selling an issue of
preferred stock. The surplus and reserve
could be held as an emergency fund and the
company could maintain a strong position
with which to meet any sudden and un-
expected financial demand, which proved to
be a valuable precaution. Strutts was able
to be of considerable assistance to Brenton.
The sale of the preferred stock was author-
ized by the stockholders, who subscribed for
part of the issue, and the balance was sold
largely to their customers in small blocks.
It was promptly subscribed and Brenton had
thereby accomplished a three-fold purpose;
he had financed the expansion of the factory;

L 14 1



"In Witness Whereof



he still held the company's surplus and
reserve fund intact; and finally, he had tied
his customers to Brenton & Company with
the bond of ownership.

In order to safeguard equally the interests PI
of the preferred and common stockholders, ^ toc ^"
the Cordona Trust Company was appointed interests
transfer agent of the preferred stock as well
as of the common. As an additional pre-
caution the Soverill Trust Company of the
same city was appointed registrar of the
preferred stock. As registrar, the Soverill
Trust Company countersigned each cer-
tificate, vouched for the fact that it was one
of the duly authorized issue and thereby
certified that the amount legally authorized
was not over-issued.

In differentiating between the duties of a
transfer agent and a registrar, Strutts ex-
plained that the transfer agent passed upon
the title to the property and that the regis-
trar recorded the transfer. No man would
buy a piece of real estate until a search was
made to assure the purchaser that the title
was clear, nor would the same man fail to
have his deed properly recorded. Likewise,
no transfer of stock should be made where
the title is irregular or in doubt. The title
having been approved and the transfer

C 15 ]



The Fidelity Trust Company of Buffalo

made, it should become a matter of record
on the registrar's books.

On the following dividend date Brenton

complained of the details and additional

work imposed upon his cashier in mailing

dividend checks. Mr. Strutts explained

Avoiding that the trust company assumed details of



clerical ft s nature for other large corporations and
relieved them of this burden. Acting as a
disbursing or financial agent the trust com-
pany received one check from the corpo-
ration to cover the total amount of divi-
dends. This ended the matter so far as the
corporation was concerned. The trust com-
pany made out individual dividend checks,
addressed, stamped and mailed the en-
velopes. In the event of an inaccurate
address a search was made for the correct
one. With its large clerical force and special
organization such a matter was compara-
tively easy for the trust company whereas
it would be somewhat burdensome for a
corporation not organized for such pur-
poses.

After an interview with the heads of
other corporations who had made such
arrangements with the trust company Bren-
ton immediately adopted a similar plan and
appointed the Cordona Trust Company

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"In Witness Whereof



financial agent for his corporation. There-
after the treasurer mailed a single check to
the trust company prior to the dividend
date, covering the entire amount of the
preferred and common stock dividends.
It was then up to the trust company to
make out and mail separate dividend
checks to individual stockholders and to
see that these checks reached the proper
hands.

During the next six years Brenton & Building a
Company with its new factory greatly ex-
panded its business. The earnings were
large and the net profits, in excess of divi-
dend requirements, were placed in a reserve
account to cover future contingencies. The
reserve was invested in high grade bonds,
carrying an interest rate of 5%. Being
well known listed bonds they were readily
marketable and could be converted into
cash on very short notice. Thus, if the
company were in need of additional funds
they could easily turn to their reserve
fund. A line of credit had been estab-
lished at the bank, but Brenton had never
used more than one-half the amount to
which he was entitled because his business
had been excellent and collections very
prompt.

E IT n



The Fidelity Trust Company of Buffalo



Export
Markets



Clouds on
the Horizon



Brenton & Company established a coun-
try-wide reputation for the quality of their
product which soon found its way to South
American countries, and eventually a de-
mand for Brenton's woolens became very
brisk in Brazil, Argentina and Uruguay. In
order to promote relations with his cus-
tomers in South America Brenton person-
ally made a trip to the several countries,
which required six months absence from the
factory. In addition to getting a line on the
possibilities of South American markets,
Brenton also studied the habits of the
people, their banking methods, as well as the
general credit situation. He personally
booked a large volume of business in addi-
tion to making a general appraisal of the
business conditions. The latter was of con-
siderable value to his Export Department.

Upon his return Brenton was confronted
with a serious situation. A large corpora-
tion, owning considerable properties in
various sections of the country including
silk, cotton and woolen mills, had been
watching the progress and expansion of
Brenton & Company and decided to obtain
control of the mill. Through various indi-
viduals they had accumulated 40% of the
stock in Brenton & Company, which would

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"In Witness Whereof



virtually control the company unless Bren- Trouble
ton could in some way tie up the other 35%, Brewing
as he personally owned but 25% of the
stock. Brenton called on Strutts to obtain
a personal loan for the purpose of buying
a majority of the outstanding stock. The
other crowd were just as eager and the
price rose so rapidly that Brenton's loan
was soon exhausted and he had secured but
10% more of the stock. His adversaries had
accumulated an additional 5% and the odds
were badly against Brenton, for they had
unlimited funds for the operation while
Brenton had reached the limit of his per-
sonal resources. He now controlled 35% of
the company's stock and his adversaries
controlled 45%. The situation was very
critical and seemed hopeless. Brenton
decided to call upon Strutts to save the
situation, if possible. It so happened that
the other 20% of stock was held by
several of Brenton's friends who were lo-
cated in the city where Brentcn formerly
resided. Up to this time his adversaries
had not succeeded in locating these stock-
holders. Brenton was financially unable
to purchase the stock, so Strutts advised
him to call upon the holders at once
to discuss the situation with them. Both

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The Fidelity Trust Company of Buffalo

Brenton and Strutts left for the West that
night. On the following day they called the
stockholders together and explained exist-
ing conditions. Brenton's friends were very
much alarmed and explained that they had
originally gone into the company because
of their knowledge of Brenton's ability and
integrity. They did not want to sell their
stock because of the attractive dividend
return, nor did they care to remain in the
company if Brenton's absolute control was
to be jeopardized in any manner. Therefore,
to safeguard their mutual interests, their
stock and that of Brenton, which together
constituted 55% of the amount outstanding,
was tied up in a voting trust for five years.
The Cordona Trust Company was made
trustee to vote the stock for the election of
The storm directors in accordance with the terms of
the trust agreement, and the control of
Brenton & Company was therefore guaran-
teed throughout the term of the voting
trust. Under the conditions of the agree-
ment any individual desiring to sell his
stock during that period, was obliged to
give the other parties to the agreement two
weeks' option to purchase it. The stock
affected by the voting trust was endorsed
over to the Cordona Trust Company,

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"In Witness Whereof 1



which in turn issued trustees' certificates
as receipts for stock so deposited. When
the voting trust terminated, the several
parties who had worked so closely together
during the past five years continued their
relationship on substantially the same terms
and conditions as outlined in the voting
trust agreement.

For nearly eight years business had been
prosperous, money rates were low and the 8ion
greatest optimism prevailed. During the
last eighteen months of this period, while
all business was booming, expansion seemed
the day's order and money values became
greatly inflated. Brenton & Company, like
all others, was inoculated with the germ.
Its foreign business had developed and
grown to a surprising degree; domestic
business had greatly increased, and Brenton
& Company was using its full line of credit
at the bank. The company could not make
prompt delivery of all the orders booked,
and it became necessary to expand the plant.
Brenton consulted his banker, Mr. Strutts,
who advised him to finance the expansion
program by an issue of bonds secured by a
first mortgage on the property. Interest
rates had been rising and were at that time
high, so that any liquidation of bonds in the

21



The Fidelity Trust Company of Buffalo



Overexpan-



sion



Inflation



reserve fund would necessitate considerable
loss as they were then quoted at about 80.
Strutts advised that the company issue
short term first mortgage bonds bearing
7%. The Cordona Trust Company held the
mortgage to the property as trustee of the
bond issue since individual mortgages to
each purchaser would be out of the question.
Brenton & Company had an excellent
financial standing and the issue was soon
absorbed by the investing public. The
additions to the plant were completed and
the machinery installed within six months
and production was greatly stimulated.
Practically all of the increased production
was exported to South America, and for a
time it seemed that even the accelerated
production would be insufficient to meet the
export demand. At this point, however,
war broke out between three South Ameri-
can countries, which utterly demoralized the
export market. Goods which had been
shipped were refused at the ports, letters of
credit were revoked, and Brenton & Com-
pany was in a sad plight indeed.

Domestic business had been repeatedly
warned that inflation had reached such
proportions that curtailment was necessary
if an actual crisis was to be prevented, and

: 22 3



"In Witness Whereof



that emergency brakes must be applied to
the wheels of expansion. Optimism was so sta s nation
rampant, however, that only a sudden rise
of the rediscount rates could bring about a
sane and conservative program. With the
readjustment there came a severe business
depression. This, coupled with the situation
in Brenton's export market, presented a
very acute problem. His purchases, labor,
raw materials, etc., had to be paid for; his
export goods were tied up in foreign ports;
domestic demand struck the snag of a buy-
ers' strike; money rates were high, and he
had used up his entire banking line. How
could the situation be met? Strutts, his
banker, went over every detail of the com-
pany's affairs with him. He still had the
reserve to fall back on, but liquidation
would mean a serious loss, as the securities
had fallen to approximately 74. Strutts
advised him to issue three-year collateral
trust bonds at 8%. All of the bonds in the
reserve fund were deposited with the Cor-
dona Trust Company which held them as
trustee, to safeguard the investment of the
bondholders. With some difficulty the issue
was floated and the company's affairs were
tided over.

The dissension in South America was of

E 23 3



The Fidelity Trust Company of Buffalo

Revival of short duration. Fourteen months later the
war had ceased and they were on a sane
constructive basis. Brenton had stored his
merchandise in warehouses when the trouble
broke out; therefore, when conditions again
became normal he was the only manufac-
turer who could make immediate delivery.
Business having been at a standstill for
months, an active demand for woolens
arose when the clouds of war were blown
aside. Brenton received high prices for his
merchandise because he could make im-
mediate delivery. He promptly prepared to
keep up a constant supply by setting his
factory again in motion. Having been
ready for instant delivery when the demand
arose, he occupied a premier position with
respect to future orders. His large export
business, together with the high prices
received for merchandise, compensated for
the domestic depression which lasted for
nearly three years. Profits from this large
export business enabled him to build up
substantial reserves with which to pay the
collateral trust bonds when they became
due.

All coupons and bonds were carefully
checked by the Cordona Trust Company
and destroyed. The company's collateral

n 24 :



"In Witness Whereof



was returned to it; thus the reserve fund
still remained intact and the company was
in a strong financial position again.

By the close of the business depression


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