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(9) The committee should consider carefully the profit and loss” and the “expense” accounts, with a view of determining whether the charges against those accounts are proper, whether the earnings of the bank warrant the expense charges, and whether the bank is making a legitimate profit.

(10) The examining committee should inquire carefully into the arrangement of the working affairs of the bank and ascertain whether any employee who keeps the individual ledger receives deposits or balances pass books; and whether the employees are properly bonded, and in whose custody the bonds are lodged.

(11) Any liability of the bank for borrowed money should be listed, and the proper authority and the necessity for such borrowing -ascertained. The total amount of the present liabilities of that nature should be reported to the board, including money borrowed from other banks on certificates of deposit.

The report of the directors or the examining committee should show that these points have been covered, and should recite any deficiencies discovered.

The report should also contain a complete statement of the total assets and liabilities of the bank, with any additions or deductions that in the judgment of the directors should be made as a result of their investigation. There should also be included a detailed statement of the loans which the directors estimate as worthless, doubtful, or insufficiently secured, giving reasons therefor, and as nearly as possible the real value.

A statement should also be made of any matters which in the opinion of the committee affect in any way the bank's solvency, stability, or prosperity.

It is believed that there are few instances where the examining committee can not, if they will take the necessary time, cover these points fully and satisfactorily.

An examination twice a year, along the lines indicated, by a committee of the directors who will give sufficient time to the work to make it thorough and complete, can not fail to be of great benefit to all concerned, and this the directors owe to the shareholders who have placed them in their positions of trust.

A complete report of each examination should be preserved in the files of the bank and be accessible to the bank examiner when examining the bank. 53. LIABILITY OF DIRECTORS FOR MAKING AND PUBLISHING FALSE

REPORT. Under the decisions of the Supreme Court of the United States in Thomas v. Taylor (224 U. S., 73) and of the United States Circuit Court of Appeals in Chesbrough et al. v. Woodworth (195 Fed. Rep.,

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875), when the Comptroller of the Currency has notified directors to collect or charge off certain assets it is a warning that those assets are doubtful, and to disregard such a notice and represent the assets in a statement to be good is a violation of law and renders the directors making the statement liable for damages to one deceived thereby.

The Circuit Court of Appeals in the latter case held that while the duty of charging off such worthless paper was that of the board of directors as an entity, and in such matter the board had a reasonable discretion, yet when the duty existed and was wholly unperformed an individual director who is engaged generally in the performance of his functions may be personally liable because of his participation in the failure to act by failing to make reasonable personal efforts to induce the proper action.

In the case referred to (Chesbrough et al. v. Woodworth) the plaintiff bought stock in the bank in reliance upon a false report of its condition and had suffered damage thereby. He was held to have a right of action against any officer or director who knowing its falsity had authorized such a report. The court held that the measure of the plaintiff's recovery would be the difference in the fair valuation of his stock if all of the paper had been of a character entitling it to be reported as assets and that sum which would have been a fair minimum valuation if the directors in the exercise of due care and good faith had charged off the books and not reported so much of the paper as they knew or had good reason to believe was not good and collectible.

54. LIABILITY OF DIRECTORS FOR MISMANAGEMENT-DEGREE OF CARE

REQUIRED OF DIRECTORS.

a

The Supreme Court of the United States has held (Briggs v. Spaulding, 141 U. S., 132) that directors of a national bank must exercise ordinary care and prudence in the administration of the affairs of a bank, and this includes something more than officiating as figureheads. They are entitled under the law to commit the banking business, as defined, to their duly authorized officers; but this does not absolve them from the duty of reasonable supervision nor ought they to be permitted to be shielded from liability because of want of knowledge of wrongdoing, if that ignorance is the result of gross inattention.

It was further held in the same case that the degree of care required of directors of corporations depends upon the subject to which it is to be applied, and each case is to be determined in view of all the circumstances; that the directors of a corporation are not insurers of the fidelity of the agents whom they appoint and they can not be held responsible for losses resulting from the wrongful acts or omissions of other directors or agents unless the loss is a consequence of their own neglect of duty.

The United States Supreme Court in a decision rendered June 9, 1919, in the case of Bowerman 4. Hamner, held that a director who had never attended a meeting during five years' connection with the bank, and who lived 200 miles from the place where the bank was located, was liable for mismanagement because he did not exercise the diligence which a prudent man would usually exercise in ascertaining the condition of the business of the bank or a reasonable control and supervision over its affairs, and that he could not be shielded from liability because of want of knowledge of wrongdoing on his part, since that ignorance was the result of gross inattention in the discharge of his voluntarily assumed and sworn duty.

55. LIABILITY OF DIRECTORS FOR ASSENTING TO EXCESSIVE Loaxs.

a

The United States Circuit Court held (Rankin %. Cooper et al., 119 Fed. Rep., 1010) that it is the duty of directors of a national bank to exercise reasonable control and supervision over its affairs, and to use ordinary care and diligence in ascertaining the condition of its business, which is such care as an ordinarily prudent and diligent man would exercise in view of all the circumstances; and that where the directors of a national bank became aware through the report of a committee of their number, and also by notices sent them individually by the Comptroller of the Currency, that the bank had been making excessive loans to its president and to other persons, firms, and corporations with which he was associated, but took no effective steps to reduce such loans, or to prevent their increase, which continued until the bank became insolvent, they will be held jointly and severally liable for all losses which the bank sustained through subsequent transactions, and which could have been prevented by a proper discharge of their duties.

The United States Circuit Court has held (Witters, Receiver, etc., 7. Sowles et al., 31 Fed. Rep., 1) that under Revised Statutes, section 5200, directors of a national bank who make or assent to the making of a loan to any one person of a sum exceeding the legal limit become personally and individually liable for all loss sustained thereby; but where the borrower in such a case is also one of the directors he is not so liable, but simply as a debtor to the bank.

The United States Circuit Court of Appeals in McCormick v. King et al, 241 Fed. Rep., 737, held that directors responsible for excess loans were liable not only for the excess of such loans above the legal limit, but for the entire loss thereon with interest, and this case was affirmed by the Supreme Cout of the United States on June 9, 1919, in Bowerman 2. Hamner.

CHAPTER 5.

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CHANGES IN CAPITAL EXTENSION AND REEXTENSION OF CHARTER CHANGE OF NAME AND LOCATION AMENDMENTS TO ARTICLES - MEETINGS OF SHARE

HOLDERS.

56. Increase of capital stock-Instruc

tions. 57. Rights of shareholders in connec

tion with increase of capital. 58. Form of resolution shareholders

providing for increase of capital. 59. Form of certificate of increase of

capital. 60. Reduction of capital stock. 61. Resolution providing for reduction

of capital stock.

62–66. Restoration of impaired capital. 67. Extension of corporate existence. 68. Withdrawal of dissenting share

holders. 69. Reextension of corporate exist

ence.
70. Change of name or of name and

location.
71. Amendments to articles.
72. Meetings of shareholders.
73–77. Reports to Comptroller.

56. INCREASE OF CAPITAL STOCK-INSTRUCTIONS.

A national banking association may, with the consent of the Comptroller of the Currency and by a vote of shareholders owning twothirds of the shares, increase its capital stock to any sum approved by the Comptroller.

An association that contemplates increasing its capital stock should advise the Comptroller before formally submitting the question to the shareholders, and if the proposition is approved he will furnish necessary blanks and instructions.

The application to increase capital should be made on the following form, which will be furnished on request:

APPLICATION TO INCREASE CAPITAL.

19To the COMPTROLLER OF THE CURRENCY,

Washington, 1), ('. SIR:

Acting under the authority of a resolution of the board of directors, I request approval of this application to increase the capital stock of The

National Bank of from $ to $

and that the proper blanks and instructions be furnished.

The stock is to be sold at $- per share, and the present shareholders will be permitted to subscribe for new stock in proportion to the amount of stock now held by them. It is proposed to declare a dividend of

per cent to enable shareholders to make payment on the new stock.

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The purchase of the business of the

Bank is
connection with this increase.
On this date the books of this bank show the following:

Capital
Surplus
Undivided profits
Total deposits
Total resources.

President or Cashier. When the Comptroller has advised the bank that the proposition to increase meets with his approval, a meeting of the shareholders should be called after giving the notice required by the articles of association of the national bank; this period is usually 30 days. This notice must state specifically the business to come before the meeting, and should be made in the following form:

You are hereby notified that a special meeting of the stockholders of theBank will be held at its banking rooms in

o'clock to consider and vote upon the question of increasing the capital stock of the bank from $

to $ -, and for the transaction of such other business as may properly come before the meeting.

Cashier. Shareholders who are unable to be present at the meeting may be represented by proxy, but no officer, director, or employee of the association can act as proxy. The following form of proxy may be

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used:

PROXY FOR SPECIAL MEETING OF STOCKHOLDERS.

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Know all men by these presents, that I, the undersigned stockholder in the do hereby constitute and appoint

my true and lawful attorney with power of substitution for and in my name to vote upon all the stock of said

standing in my name, at the special meeting of the stockholders of said bank, to be held at its banking rooms in

at or at any adjournment thereof, on the question of the proposed increase in capital stock of said national bank, with all the powers the undersigned should possess if present personally at said meeting, or any adjournment thereof, hereby revoking all previous proxies. In witness whereof, I hereunto set my hand this day of

19Witness to signature:

o'clock

Number of shares

After the resolution has been adopted by the shareholders, it is suggested that it would be advisable to adjourn the meeting to a fixed date, or to meet at call of the officers of the bank, so that, if upon examination of the resolution it is found to be in any way informal, a new resolution can be adopted without the necessity of again giving the 30 days' notice.

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