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20 MARINE REVIEW. [July 3 ARGUING THE BOND CONVERSION CASE. The appeal from the order of Vice-Chancellor Emery of New Jersey, enjoining the United States Steel Corporation from carrying out its plan to convert $200,000,000 of its preferred stock into 5 per cent. bonds and to issue an additional $50,000,000 of the bonds to provide cash capital was argued last week before the court of errors and appeals at Trenton, N. )- The plaintiff in the case is Miriam Berger, who owns 116 shares of the preferred stock of the corporation. It is held by the plaintiff that the plan of conversion, which was approved by a vote of 99 83-100 per cent. of the stockholders at the meeting called for the purpose, was void because the statute passed by the New Jersey legislature on March 23, 1902, for the purpose of making legally possible the carrying out of the plan 1s unconstitutional. The plaintiff also objects to a contract entered into_by the board of directors of the Steel Corporation with J. P. Morgan & Co., under which the bankers guaranteed to the Steel Corporation that $100,000,000 face value of the new bonds would be taken, of which | $80,000,000 would represent the purchase of a like amount of preferred stock at par and $20,000,000 represent payments made in cash at par. Vice-Chancellor Emery, in a decision handed down on June i, granted a temporary injunction. The vice-chancellor held, in substance, that the proposed plan called for a preferential distribution of capital, since only those who agreed to take the bonds would share in the distri- bution and'that in so far as the act of March 23, 1902, impaired the vested property rights of the holders of preferred stock, that act was unconsti- tutional, The United States Steel Corporation was represented by William D. Guthrie and Victor Morawetz of New York and R. V. Lindabury of Jersey City. Owing to a recent ruling of the New Jersey courts that New York | lawyers may not be heard in the highest courts of that state, Mr. Lind- abury made the argument. It was conceded by both sides that the only question involved was a question of law, namely, the constitutionality of the act of March 23, 1902. The appellants, however, went over the whole history of the plan and much that has not been known hitherto about it was made public in the course of Mr. Lindabury's argument. After out- lining the appellants' position the argument took up in order the provis- ions of the act of 1896, amended by the act of March 23, 1902, for the purchase and retirement of preferred stock; the purport and effect of the act of 1902; the constitutionality of that act and the agreement with J. P. Morgan & Co. In outlining the position of the Steel Corporation it was pointed out that since the preferred stock of the corporation is entitled in perpetuity to cumulative dividends at the rate of 7 per cent., consti- tuting practically a fixed charge, the corporation, in retiring this stock by means of the issue of an equal amount of 5 per cent. bonds, would save $4,000,000 a year, a saving which would accrue to the benefit of the remaining preferred and common stock. The plan adopted, it was argued, was substantially a purchase of the specified number of preferred shares and the payment therefor in and by bonds. This plan having been decided upon, it had to be determined from whom the purchases of stock should be made. "Obviously," says the brief of Messrs. Francis Lynde Stetson, Guthrie and Morawetz, "a pur- chase of $200,000,000 par value of stock from any banking firm or syndi- cate or designated stockholders might invite criticism. If the preferred stock had been purchased, for example, at par from designated stockhold- ers and there had proved a depreciation in the market to, say, 90 per cent. of par, it cannot-for a moment be doubted that some shareholder would have challenged the propriety, if not the integrity, of the transaction. It would have been argued that the market value of the stock was 90 or less, that the payment of par showed a loss of 10 per cent., $20,000,000, and that this sum had been wasted or squandered, and it would have been charged by the complainant or some similar stockholder that the plan had been a scheme to enable favored directors or stockholders to sell their preferred shares at a loss of over $20,000,000 to the Steel Corporation. It was, therefore, resolved that the privilege of selling to the corporation the whole amount of the shares required to effect the proposed decrease of the company's preferred capital stock should be pro rata to all the holders of .that class in proportion to their holdings. It was also determined that it would be advisable to provide additional cash capital, and so it was decided to make one issue of $250,000,000 of 5 per cent. bonds, so as to cover and include the two purposes, the reduction of the preferred stock and the additional capital requirements." SOME OF THE BENEFITS OF THE BOND ISSUE. The argument proceeds: 'The annual charge of $14,000,000, repre- senting the 7 per cent. cumulative dividend on the $200,000,000 of pre- ferred stock so retired, would provide an amount sufficient to cover the full 5 per cent. interest on the entire issue of $250,000,000 face value of bonds, amounting. to $12,500,000, besides providing a sinking fund of $1,010,000 per year which, invested at 4 per cent. would in sixty years pay off the principal of the bonds at maturity and, in addition, leave a surplus of $490,000 per annum applicable to dividends." In regard to the contract with J. P. Morgan &.Co., it was said: "As compensation for the obligation thus assumed and the risk it involved by this guaranty, the Steel Corporation agreed to pay to the bankers a com- mission of 4 per cent. upon all of the bonds issued; that is, upon all of the bonds taken by the bankers under their guaranty or by the stockholders under their option or right to subscribe. In other words, the syndicate undertook to sell to the corporation $80,000,000 of preferred stock and to provide $20,000,000 in cash for $100,000,000 of the 5 per cent. bonds at par, and in consideration of this undertaking the syndicate was to receive in any event a commission of 4 per cent. on the $100,000,000 and con- tingently a commission of 4 per cent. on any additional amount of bonds that might be taken by the stockholders. Therefore in order to assure this saving of a dividend charge of 2 per cent. in perpetuity, the directors of the Steel Corporation agreed to pay an amount equal to the saving effected in two years, If the preferred stockholders of the Steel Corpora- tion declined to retire their stock the bankers would be compelled to pur- chase $80,000,000 of preferred stock, which would undoubtedly greatly raise the market value thereof, and to cover this risk $80,000,000 of pre- ferred stock was purchased and deposited by the syndicate, and at that time the market value of the preferred stock was 94 per cent. of par. The papers further show that the details of the proposed plan for the purchase and retirement of the preferred stock and the issue of 5 per cent. bonds, together with the contract made with J. P. Morgan & Co., were fully communicated to all the stockholders of the Steel Corporation, and that a special meeting was duly called for the purpose of considering the same. The result of that meeting was the attendance in person or by proxy of over 73 per cent. of the outstanding preferred stock and over (8 per cent. of the outstanding common stock of the corporation, and the vote of more than 99 83-100 per cent. of the stockholders present in person or by proxy in favor and approval of the plan as well as the contract with J: P. Morgan & Co., and only about seventeen one-hundredths of 1 per cent. of the stock in opposition, including the complainant in this suit, who owns 116 shares of preferred stock, or about one nine-hundredth of 1 per cent. of the capital stock of the Steel Corporation. The contract was approved by the holders of a majority of all of the outstanding stock of the corpor- ation, exclusive of the registered holdings. of the syndicate and of J. P. Morgan & Co." : It was further argued that if the directors had sold $100,000,000 of these new bonds at 96 or at 92, and thus secured the proceeds with which to purchase stock for retirement, "it is. inconceivable that any court of equity would have set the transaction aside without the slightest proof of fraud or waste or oppression, when it had been approved by so large a majority of the stockholders. There is no rule in New Jersey which pro- hibits a corporation from disposing of its notes or bonds for less than their face value." : "The agreement with J. P. Morgan & Co.," it was argued for the appellants, "absolutely bound the bankers to take the bonds to the extent of $100,000,000, and to pay for them in the manner specified, namely, in preferred stock at par and in cash, and this obviously involved an enor- mous risk dependent upon the fluctuations of the money market. The directors, anticipating that the stockholders might decide that they needed no bankers and that they themselves would sell their own stock, and thus render a guaranty syndicate unnecessary, resolved that the contract was not finally to become or to be operative until after approval thereof by the stockholders in special meeting assembled. It was, therefore, within the power of the stockholders at the special meeting, if they had seen fit, to have approved the plan effecting a reduction of the preferred stock by means of bonds or out of the proceeds of bonds, and to have disapproved the contract with J. P. Morgan & Co., because they, the preferred stock- holders, elected to reserve the right to sell their stock proportionately to the corporation. They had the power to defeat the payment of the 4 per cent. commission to J. P. Morgan & Co. and the syndicate, had they con- sidered that such a step was for their best interests. The choice of plans was left to them." THE NEW JERSEY LAW IN THE CASE. In discussing the provisions of the act of 1896, counsel said: "It would not be a fair or reasonable construction of the statute to hold that it authorized a purchase of stock only provided such purchase be made ratably from all the stockholders. The statute does not say that the stock shall be purchased equally or ratably from the stockholders; on the con- trary, it expressly authorizes the purchase of 'certain' shares for retire- ment. As above pointed out, the statute makes ample provision for a compulsory ratable decrease of the stock of every stockholder by other methods whenever the holders of the requisite amount of stock shall vote for the decrease as prescribed by law. To hold that the grant of authority to purchase certain shares for retirement is subject to the condition that the requisite amount of shares shall be purchased ratably from all the stockholders would render this- provision practically meaningless, because any stockholder, by refusing to sell his ratable amount of stock, would be enabled to block and defeat any action." Getting down to the constitutionality of the act of 1902, counsel for the Steel Corporation argued that the complainant supported his con- tention that the act was unconstitutional in two cases. He continued: "The principle underlying these cases is that an act violates the con- stitutional provision when it is intended by the legislator to apply only. to one corporation, and never to be applicable to any other, and when it is clearly evident that the attempt at classification was arbitrary or illusory and for the sole purpose of covering a particular case. The mere fact that the United States Steel Corporation may have approved or adopted this legislation cannot make it violative of the constitutional provision unless it was clearly the intention of the legislature, to be gathered from the language it used, that the act should only apply to that one corporation. It may be doubted whether the act of 1902 confers any corporate powers within the meaning of this constitutional inhibition. The essence of its provisions is to regulate and limit the exercise of an existing power. If the power to retire preferred stock at par and to issue bonds or deferred notes therefor previously existed, then the new act but regulates the means or method of the exercise of that pre-existing right. The act applies to every corporation whose conditions meet the requirements of the act. It is unquestionably general in that sense and broad enough to reach many corporations now in existence, as well as to cover every corporation in the future which may develop a condition of assets and earnings such as will enable it to act. But if this were not so, and there were only one corporation now in existence which could avail of the act of 1902, namely, the United States Steel Corporation, the statute would nevertheless not be 'a special act conferring corporate powers' within the settled rule in this state." Coke oven blowers in the Buffalo plant of the Lackawanna Iron & Steel Co, are to be operated by direct connected electric motors. Ten induction motors of 75 H. P. each have recently been purchased by the Lackawanna company for this purpose from the Westinghouse Electric & Mfg. Co. Four induction motors of 100 H.P. each will be used for operating the gas cleaning plant and the machine shop will likewise be driven by induction motors. This company has lately bought in all 151 type C Westinghouse induction motors of from 1 to 100 H. P. each. Mr. Arthur Masters, member of the Society of Naval Architects and Marine Engineers, has opened an office at No. 29 Broadway, New York, and will engage in naval architecture and marine engineering, yacht and steamship brokerage, ship and engine surveying. He announces that he is prepared to furnish designs and estimates for the construction of all descriptions of vessels, engines and boilers, It is not expected that the revenue cutter Tuscarora, building at the works of the Wm. R. Trigg Co., Richmond, Va., for lake service will reach her station at Milwaukee until the advent of the fall season.