Memorandum of agreement between the Manila Railroad Co., a corporation organized under the laws of the State of New Jersey, and duly authorized to do business in the Philippine Islands (herein referred to as the railroad company), the Manila Railroad Co. (1906) (Ltd.), a company incorporated under the English companies' acts as a company limited by shares and also duly authorized to do business within the Philippine Islands (herein referred to as the construction company), and the government of the Philippine Islands (herein referred to as the government); witnesseth that
Whereas under the provisions of Act 1905 of the Philippine Legislature and a contract in accordance therewith-executed between the government and the railroad company the government has guaranteed until maturity the due and punctual payment by the railroad company of interest at the rate of 4 per cent per annum upon first-lien bonds with respect to the lines of railway therein designated as the Southern Lines issued in the amounts and for the purposes specified in paragraph 4 of said contract; and Whereas the government, by reason of said contract of guaranty and under the provisions of law whereby such guaranty is authorized, is compelled, through various agencies created for that purpose, to inspect and supervise the construction and operation of the lines designated in said Act No. 1905 as the Southern Lines of the railroad company in order to protect itself under said contract of guaranty; and
Whereas the railroad company, on the 28th of January, 1910, entered into a contract with the construction company whereby, among other things, it was agreed that the latter company should construct and equip all such portions of the Northern Lines and Southern Lines of the railroad company as said lines are designated in said Act 1905, including telegraph, telephone, and electrical transmission lines thereupon as then remained to be constructed and receive in payment therefor securities of the railroad company as therein specified; and
Whereas under and by virtue of the provisions of Acts 2083 and 2465 of the Philippine Legislature and 2088 of the Philippine Commission the government has loaned to the railroad company from the so-called gold standard fund the sum of 1P5,637,000 in order to assist the railroad company in the construction and equipment of said Southern Lines; and
Whereas the railroad company has re-loaned to the construction company the moneys loaned to it by the Government from the gold standard fund, as herein before recited, in order to assist the construction company to carry out its said contract of the 28th of January, 1910, said loans by the railroad company to the construction company being on the terms and conditions set forth in a contract dated January 14, 1913; and
Whereas the construction company has purchased construction stores and materials and has performed construction work under the said contract of January 28, 1910, in an amount in excess of its indebtedness to the railroad company by reason of said loans and all other loans made by the railroad company to it; and
Whereas the outstanding stock of the railroad company consists of common stock of a par value of $2,130,700 and 7 per cent cumulative preferred stock of a par value of $3,652,800, all of which is owned by the construction company; and
Whereas the funded indebtedness of the railroad company consists of $4,330,000 Northern Lines first mortgage 6 per cent gold bonds, $7,716,000 Northern Lines second mortgage 7 per cent gold bonds, all of which are owned by the construction company, and $10,575,000 Southern Lines first mortgage 4 per cent gold bonds, many of which are also owned by the said construction company; and
Whereas all the outstanding stock of the railroad company, and all its Northern Lines bonds have been pledged by the construction company with the Merchants Trust (Ltd.) of London as security for certain A and B debenture bonds of the construction company; and Whereas by reason of the European war the construction company is unable to proceed further with its contract of January 28, 1910, in the construction and equipment of such portions of the Northern and Southern Lines of the railroad company as remain to be constructed and equipped; and
Whereas it is the desire of all parties hereto that the accounts between the railroad company and the construction company be liquidated, and that the government, through the acquisition of all the outstanding stock of the railroad company, acquire the management and control thereof, and that the payment of the Southern Lines 4 per cent bonds of the railroad company be more fully insured by the establishment and maintenance of a sinking fund sufficient to pay off said bonds at their maturity, all in the manner and upon the terms and conditions outlined in this agreement; and
Whereas it is the desire of the government upon acquiring the stock of the railroad company to make substantial changes in the management and operation thereof in order to effect certain proposed economies therein, and the railroad company and the construction company concede to the government the right so to do; and
Whereas there are no contracts of employment between the railroad company and its officers, general manager, or counsel which can not be canceled forthwith, but there are certain written contracts of employment between the railroad company and certain of its employees in usual and customary forms, a specimen copy of which has been exhibited to all the parties hereto, and others of said employees are now serving or continuing to serve without the formal execution or renewal of such written contracts, to each of which contracts reference is hereby made for the exact terms and conditions therein contained and the rights of the parties thereunder; and
Whereas the negotiations between the parties hereto have resulted in the agreement herein outlined, which his excellency, the Governor General, has accepted subject to the approval of the Legislature of the Philippine Islands, and which Mr. Horace L. Higgins, as president of the railroad company and as attorney in fact of the construction company, has been duly authorized by cables recently transmitted and exhibited to the Governor General, to execute on behalf of the railroad company and the construction company, respectively, but which agreement is to be subject also to the approval and consent of the Merchants Trust (Ltd.), trustees for the holders of said A and B debenture bonds of the construction company, and of the shareholders of the construction company should their consent and approval be necessary or advisable: Now, therefore, in consideration of the premises, and of the mutual promises herein contained, and of the benefits to accrue to each of the parties hereto, and of other valuable considerations the receipt whereof by each is hereby acknowledged, the parties hereto hereby respectively agree:
1.The maturity of the Southern Lines 4 per cent bonds shall be extended for 20 years-that is to say, to May 1, 1959 -as to those holders of said bonds consenting thereto, provided that the consent of Congress to such extension and to the extension for a like term of the guaranty by the government of the interest on said bonds can be secured, in which event the construction company will consent to such extension as to all bonds then held by it.
2.The railroad company will establish a sinking fund from funds available for such purpose, if any, to be deposited with the insular treasurer in annual installments payable on May 1, 1917, and thereafter on May 1 of each succeeding year. Unless and until the parties hereto agree upon a graduated scale of payments, the first three of said annual installments shall be P500,000 each, and thereafter said annual installments shall be sufficient to enable the railroad company to pay off upon their maturity in 1939 all the Southern Lines 4 per cent bonds issued and to be issued, provided that if the consent of Congress to the extension of the maturity of said bonds and of the government's guaranty of interest, as aforesaid, has been or shall at any time be secured then the amount of said annual installments shall be sufficient to pay off upon their maturity in 1959 those Southern Lines 4 per cent bonds the holders of which consent to such extension, and only such consenting bondholders shall thereafter participate in any of the benefits of said sinking fund.
3.All holders of said bonds shall be given an opportunity to signify their consent to such extension and to participate in the benefits of the sinking fund. Such holders as desire to consent to said extension shall surrender their bonds to the railroad company for the endorsement thereon of such extension so as to bind subsequent holders. In case any of such bondholders shall withhold their consent, the railroad company and the government jointly and severally bind themselves to preserve the lien of the mortgage and protect the security of the consenting bondholders, notwithstanding that the bonds of such non-consenting bondholders may become due and payable on the 1st day of May, 1939; and if the railroad company or the government should -fail adequately so to do, any of the consenting bondholders may themselves take such steps as may be necessary to protect their interests. Any expense on the part of the consenting bondholders in so doing shall be a charge on the property of the railroad company of equal priority with said bonds, and said sinking fund shall thereupon be increased by annual payments sufficient to pay off such expense and interest thereon at maturity of said bonds on May 1, 1959.
4.The government, by a continuing annual appropriation or in such other lawful manner as may hereafter be agreed upon, will loan to the railroad company an amount sufficient to maintain the sinking fund at the required figure. All loans so made by the government shall bear interest at the rate of 4 per cent per annum and shall constitute a lien on the property of the railroad company subject only to liens or mortgages existing on said property at the time such loans are made.
5.Such portion of said sinking fund as shall have been deposited by the railroad company shall be invested only in the purchase of said Southern Lines 4 per cent bonds at the market value on the date of purchase, but at a price not above their-par value, provided that funds loaned by the government to the railroad company for the purpose of maintaining said sinking fund may be invested for the benefit of said sinking fund, in the discretion of the Governor General. All bonds purchased by said fund shall be forthwith canceled.
6.Upon the maturity of the 4 per cent bonds for which a sinking fund is created the fund shall be applied in paying off such of the bonds as have not been purchased and canceled. All loans made by the government for the purpose of maintaining said sinking fund and the interest thereon shall thereupon become immediately-due and payable and the lien of the government securing the same shall become immediately enforceable.
7.The government shall purchase all the capital stock of the railroad company now outstanding for the sum of P8,000,000, Philippine currency, in cash payable 51 per cent upon the date of the sale, and the balance within 18 months thereafter with interest thereon at 5 per cent per annum, said balance to be evidenced by paper which can be discounted with banks and shall be issued by such parties as may hereafter be lawfully agreed upon.
8.The construction company will transfer said stock to the government in proper proportion of preferred and common shares as and when the payment therefor is received.
9.The net amount due to the construction company from the railroad company on September 30, 1915, as appears from the books of the two companies, is acknowledged to be approximately 39,730,650, exclusive of moneys advanced and liabilities incurred by the construction company for stores and materials, shipped and unshipped and not yet received, for and on account of the railroad company, which, when properly verified, shall be added thereto, said amount being also subject to the adjustment of exchange, interest, and other items which ordinarily are adjusted at periodic or irregular intervals and which consequently have not yet been entered in the books of the respective companies. It is agreed that all accounts between the railroad company and the construction company shall be adjusted as of the 31st of December, 1915, and entered in the books of the respective companies, that the books of the railroad company shall be closed as of said date, that proper trial balances and balance sheets shall be prepared showing the status of the accounts between the railroad company and the construction company, a certified copy of which shall be furnished to each of the parties hereto, and that the net amount then due to the construction company from the railroad company, including said expenses and liabilities incurred by the construction company for said stores and materials, shall be definitely ascertained. All said accounts and the adjustment thereof and the net amount due to the construction company ascertained therefrom shall be examined, checked, and certified by auditors of the government and of the railroad and construction companies. All disputes regarding these accounts and any addition to be made thereto under this agreement shall be settled by arbitration in the usual manner. The net balance due to the construction company on December 31, 1915, as thus ascertained, shall be accepted by the parties as correct, provided that an inventory shall be made of 10 per cent of those certain construction stores and materials in stock, not issued up to the (late of the sale for construction purposes, which constitute part of said indebtedness of the railroad company to the construction company, to ascertain if said stores and materials are actually on hand on December 31, 1915; if said inventory shows that the stores and materials actually on hand do not vary overage or shortage by more than 10 per cent from the amounts thereof which should be on hand, as shown by the books, then the book figures of such indebtedness shall be accepted, but if such variation indicated by said inventory shall be greater than 10 per cent then a complete inventory shall be taken of all such construction stores and materials, and said net balance shall be increased or diminished as said complete inventory may disclose an overage or shortage in the total amount of said construction stores and materials. Subject to such changes as may occur in the usual course of business between December 31, 1915, and the date of the sale the said net balance due to the construction company, shall without deduction, be paid in the manner hereinafter set forth.
10.The two agreements between the railroad company and the construction company, one dated the 1st day of January, 1907, and the other dated the 28th day of January, 1910, and the further agreement supplementing the same, dated the 14th day of January, 1913, shall be terminated and canceled as of the late of the sale.
11.The railroad company shall refund at par and cancel all its outstanding $4,330,000 first mortgage 6 per cent bonds and $7,716,000 second mortgage 7 per cent bonds and issue in lieu thereof new bonds maturing at the expiration of 40 years from the date of the sale and bearing interest at 5 per cent per annum, which shall be secured by a first mortgage on the Northern lines and by a mortgage on the Southern Lines subject only to said Southern Lines 4 per cent mortgage and the lien of the government for the payment of interest guaranteed thereunder; provided that said 5 per cent bonds may be divided into classes having different priorities or may be divided into two issues secured by first and second mortgages, or may be issued under the existing first and second mortgages, modified accordingly, as the construction company may elect. The construction company shall surrender for cancellation all said first 6s and second 7s, and shall accept in exchange therefor said new 5 per cent bonds of an equal par value. The issue of new 5 per cent bonds shall not exceed in the aggregate the principal amount of $13,236,000.
12.The net balance due to the construction company on the date of the sale, ascertained as above provided, shall be paid by bonds of the railroad company of an equal par value as follows: $1,190,000 by said new 5 per cent bonds and $1,740,000 by Southern Lines 4 per cent bonds, all (including $690,000 of said Southern Lines 4 per cent bonds now held by the government as security for certain loans heretofore made by the government to the railroad company) to be issued and certified and delivered to the construction company upon the date of the sale, the remainder by Southern Lines 4 per cent bonds as and when first issued. The construction company agrees to accept said bonds in lieu of the stock and bonds which it is or would be entitled to receive under said agreements of January 1, 1907, and January 28, 1910. Interest up to the date of the sale due the construction company as holder of the first mortgage 6 per cent bonds and second mortgage 7 per cent bonds of the railroad company, although included in the net balance, shall, however, be paid in cash.
13.Until fully paid the net balance due the construction company shall be evidenced by notes of the railroad company bearing interest at 4 per cent, which, principal and interest, shall be paid off and canceled by the delivery to the construction company of an equal par value of Southern Lines 4 per cent bonds as and when first issued. All of such bonds hereafter issued by the railroad company shall be delivered to the construction company until said balance and notes are paid off, notwithstanding the right of the government under certain existing contracts between it and the railroad company to hold said bonds as additional security for loans to the railroad company.
14.The construction company shall upon the date of the sale be released from all liability to the railroad company or to the government except as herein otherwise provided, and particularly from all claims or liabilities based on or arising out of said agreements and supplementary agreement dated, respectively, January 1, 1907; January 28, 1910; and January 14, 1913.
15.The government agrees to waive any defaults existing on the date of the sale on the part of the railroad company in complying with any of the conditions or requirements of the various concessions granted to it by the government, and the government agrees that thereafter it will take no steps to forfeit any concession or franchise because of any default thereunder on the part of the railroad company. All bonds heretofore executed as a guaranty for the performance of the obligations of the concessions shall be canceled and returned.
16.The government and the railroad company shall be released from all claims on the part of the construction company except those hereby continued or created, and excepting, always, the obligations set forth in the various bonds and mortgages, it being expressly understood and agreed that the construction company does not waive any rights which it may have as holder of any of the bonds of the railroad company.
17.Immediately upon acquiring a majority of the stock of the railroad company, the government, as majority stockholder, shall have the right to change the personnel of the board of directors and to nominate new directors and officers of the railroad company, including its general manager and counsel, and the construction company, as present majority stockholder, agrees to procure the resignation of said officials if requested by the government so to do, and will undertake to hold the railroad company harmless from any such change, provided that so long as the construction company shall continue to hold any of the stock of the railroad company it shall be entitled to have a substantial minority representation on the board of directors and executive committee, if any, of the railroad company. In order more fully to insure to the government the foregoing rights, the railroad company and the construction company jointly and severally represent that there are no existing contracts of employment between the railroad company and its officers, agents, or employees, other than those herein before referred to, which will hinder or prevent the government from effecting such changes in management or operation as it may desire; but nothing herein contained shall affect any of the said contracts of employment between the railroad company and its employees, it being the intention of the parties hereto that the railroad company shall continue to have the same discretionary rights with respect thereto under the new management as it now has. The construction company will consent to the transfer of the principal office of the railroad company to Manila in any lawful manner which the government may elect.
18.The government agrees that the time for completing the construction of the lines of railway of the railroad company shall be extended for such time as may be prudently necessary, and the time for payment of the loans made by the government to the railroad company from the gold-standard fund of the Philippine Islands shall be extended for as long a time as the Governor General may lawfully extend the same, and in case legislative permission can be secured the time for the payment of said loans shall be further extended for such time as may be prudently necessary.
19.The points herein outlined shall be embodied in an agreement of sale the execution of which shall be dependent upon legislative action necessary or proper to enable the government and the railroad company to carry out the agreement, and it is understood that the agreement herein set forth shall be subject to the assent of the trustees of the A and B debenture bonds of the construction company and of its shareholders should their consent be necessary or advisable. In said agreement of sale the parties shall fix a date when the accounts between the railroad company and the construction company shall be finally liquidated, when all payments and transfers provided for shall be made, and which shall be considered as the date of the sale for the purposes of this agreement.
20.The parties will execute such further instruments as may be necessary to carry out this agreement.
In witness whereof, this memorandum of agreement is executed in triplicate on the 18th day of December, 1915. Witness the hand of Francis Burton Harrison, Governor General, and the great seal of the government of the Philippine Islands, and that of Horace L. Higgins, president of the Manila Railroad Co., with the corporate seal of the latter, and attorney in fact of the Manila Railway Co. (1906) (Ltd.), thereunto duly authorized.
THE GOVERNMENT OF THE PHILIPPINE ISLANDS,
(Sgd.) By FRANCIS BURTON HARRISON,
Governor General of the Philippine Islands.
Attest: (Sgd.) S. FERGUSON,
Acting Executive Secretary.
MANILA RAILROAD COMPANY,
(Sgd.) By HORACE L. HIGGINS,
As its President.
Attest: (Sgd.) P. A. ALEXANDER,
MANILA RAILWAY COMPANY (1906) (LTD.),
(Sgd.) By HORACE L. HIGGINS, As its Attorney in fact.
Attest: (Sgd.). P. A. ALEXANDER.
PHILIPPINE ISLANDS, City of Manila, ss:
In the city of Manila, Philippine Islands, on this 18th day of December, 1915, personally appeared before me Francis Burton Harrison, Governor General of the Philippine Islands, and Horace L. Higgins, to me known to be the persons who executed the foregoing instrument, and acknowledged that they executed the same in their respective official capacities. The cedula certificates of the parties were exhibited to me, being numbered, respectively, F-1, issued at Manila, dated January 2, 1915, and F-1797660, issued at Caloocan, Rizal, dated February 1, 1915.
(Sgd.) M. DE YRIARTE, Ex Oflcio Notary Public. Reg. 48, page 57.
I, Samuel Ferguson, acting executive secretary for the Philippine Islands, do hereby certify that M. de Yriarte, who took the annexed acknowledgment, was at the time of taking the same a duly qualified notary public in and for the city of Manila, P. I., and authorized to take the same; that the same is executed in accordance with the laws of the Philippine Islands; that I am acquainted with the signature and seal of said notary, and that the signature and seal affixed to the said acknowledgment are his genuine signature and seal.