Memo re Proposed Bonds N.A.P. Co
The form of this bond is unusual. It is not a first mortgage or a mortgage of any kind upon the property of the company. An attempt is made to give security seemingly equivalent to a mortgage by agreeing in clause 4 not to incur any obligations or give any mortgage failing which a majority in interest of the Bond holders can declare the principal and interest of the bonds payable. But this is in no sense a mortgage since if an actual mortgage were subsequently given large enough to absorb all assets it would cutout the bonds. The Bondholders could then declare the bonds payable but would have to whistle for their money.
The value of this proposed bond is simply that of a promissory note, nothing more.
When a corporation converts a floating debt into a bounded debt is customary to protect the creditors i.e the bondholders by executing a mortgage upon its property in favor of a trustee. The bonds are issued against this mortgage they should recite the mortgage name the trustee and provide for being countersigned by him before becoming valid.
In the event of the company failing to carry out any of the covenants of the bond, the trustee can take proceedings under the mortgage for the benefit of the bondholders. The mortgage is recorded as a first [illegible] upon all the company's property and, its priority cannot be affected by any subsequent debt.
So far as being a first [illegible] or a mortgage upon the Company's property the proposed bonds is entirely inadequate and ineffective. The provision under which the Company has the right to redeem these bonds at any time gives them in effect an option on the bonds at par. Should the Company become prosperous its 6% bond might be worth $125 if this right of redemption were not conceded. If they reclaim the right the bonds never can be worth more than par. This point is important bearing in mind that 20 years is a long period of time.
As to the covenant to pay debts, taxes for example might not be held to be an obligation within this paragraph. Better protection would be afforded if the Company would undertake not to encumber any of its property by mortgage or otherwise or permit the same to be encumbered In regard to the provision that no recourse shall be had for the payment of the bonds to the individual liability of any stockholder, under the law a stockholder is either liability of any stockholder is either liable, depending upon the conditions of the situation. His liability in this respect is determined by statute and precedent and the value of the bond, would be increased by permitting the law to operate.
Re last clause; If it he admitted that the company should not have the right to redeem all the bonds at any time, or a larger number than 20 in any one year the words "not less than" should be erased and a sentence added to the effect that the company cannot pay off prior to maturity any of the bonds in excess of $20,000 per annum.
The sentence commencing with "but" and ending with "years" would, permit the Company to default in the redemption of bonds every other year. The intention probably was that no default should be deemed to have occurred unless the company should twice fail to make redemption as provided. This clause should all be rewritten so as to render its real meaning clear. In fact the whole form of bond should be revised and rewritten. It is inadequate in almost every respect.
A.O. Tate

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