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These sales, plus sales by other carriers in smaller amounts, caused the shareholdings of the carriers to be reduced to about 42% of the total outstanding shares. As a result, at the request of Comsat, Senator Pastore, for himself and Senator Anderson, in July of last year introduced a bill (S. 3884) in the 90th Congress which would have amended the Satellite act to incorporate a formula for adjusting the number of carrier and noncarrier directors consistently with their relative shareholdings. The urgent business of the Congress at that time did not permit action on that bill. In December, 1968, ITT sold an additional block of 400,000 shares of Comsat stock. This reduced total carrier shareholdings to about 38%.
H.R. 4214 and S. 17, which are in all important respects the same as S. 3884, are endorsed by all Comsat directors, including the carrier directors, as was the earlier bill. Like the earlier bill, these bills would incorporate in the Satellite Act a formula for electing 12 members of the Comsat Board proportionately to the relative shareholdings of carriers and non-carriers. The first adjustment would be made as promptly after enactment of the bill as the Board shall determine to be practicable. Thereafter, representation on the Board would be adjusted annually to reflect the relative shareholdings as of the record date for the annual meeting of stockholders. The total number of members of the Board would always remain at 15. Under the formula, and given the present carrier ownership of about 38%, the carriers would be entitled to elect 4 members and the non-carrier stockholders 8 members. The three Presidential appointees, of course, would remain unaffected. As I say, the formula is heavily based upon the bill that passed the House in 1962.
We recognize that an annual adjustment will not permit the composition of the Board to reflect precisely at all times the changing relative holdings of the two series of stockholders. However, we believe that the high cost of special stockholder meetings and other practical problems created by more frequent adjustments militate against a provision for interim adjustments.
Two other matters, not directly related to the problem of proportionate representation on the Board, but appropriate for legislative action, are covered by the bills. They would also amend the Satellite Act in the following two respects:
(1) They would clarify an ambiguity by specifying that the shareholders may amend the Corporation's Articles of Incorporation by a two-thirds vote of all outstanding shares voting together as a single class.
(2) They would authorize the Corporation, which plays a unique and vital role in international communications, to adopt bylaws to assure its ability to operate in accordance with law in the event of a national emergency. In the event of such an emergency and the unavailability of a majority of the Directors, such a provision would take precedence over Section 36 of the District of Columbia Business Corporation Act which requires that a majority of the directors of a corporation be present to constitute a quorum for the transaction of business. Many states already have adopted, as part of their business codes, emergency provisions granting authority similar to that proposed in H.R. 4214 and S. 17. The Corporation views the proposed amendment as a matter of urgency. The present discrepancy between shareholdings and the Board representation is substantial. It is our hope to recitfy the discrepancy at the annual meeting of the Corporation in May. To enable us to do so, however, Congressional action before the end of February is necessary. For this reason, we will appreciate any efforts which can be made to expedite the enactment of this legislation.
Mr. McCORMACK. The proposed legislation, as you have stated, which was approved by all of our board, including the carrier directors, is, to the best of my knowledge, unopposed by anyone.
It does take the formula for directors, carrier and noncarrier directors, back substantially to the context of the House bill which, as we know, fell by the wayside because the Senate bill came out of a cloture vote. One what I would call minor difference is that the original House bill guaranteed the carriers one position on the board no matter how low their stockholdings fell. If there were more than 8 percent, they would have two; and 15 to 25 percent, three; and so on.
This bill simply leaves it that because the carriers can vote cumulatively as the public shareholders can, the carriers would elect a director based on their holdings from 8 percent on down, and they can easily elect one director by cumulative voting at 8 percent.
The other difference from the House bill is that the House bill, while providing for a reduction in the carrier shareholders, did not call for a corresponding increase in the number of public shareholders. This bill would hold the board at 15 members, three appointed by the President as before and the remaining 12 elected in proportion to the shareholdings by the carriers and by the public.
There are two additional elements in the bill of some significance, neither of the level of importance of this proportion of directors. One is that the present bill provides for emergency procedures in the board of directors in the case of a national emergency, the sort of thing that is provided in most if not all of the State laws. It is not provided for in the laws of the District of Columbia.
Comsat, as the operator of a global communications satellite system, carrying the preponderance of the world traffic in the very near future, would, of all U.S. corporations, be required to operate as best it can in the event transportation is cut off and the things that could happen in a national emergency. This, I suggest, is just a formality, but it could be an important one in this event, which, needless to say, we neither predict nor hope for.
On the other change, about the two classes of stock voting together to amend the articles of incorporation, actually we have only one class of stock but, because the law requires that we treat carrier shareholders differently from public shareholders, we speak of the series 1 shares and the series 2 shares somewhat separately for administrative purposes.
For example, no carrier can vote for more than three directors on the board. There are a number of things that have had to be administered in a different way for the carrier-held shares than for the publicly held shares.
In what the lawyers call an abundance of caution, we suggest that if there is any ambiguity at all on this point, that there really is only one class of shares, and that is the reason for the clause in the legislation that says that all of the shares will be voted together for amending the articles of incorporation.
Those, Mr. Chairman, are the main points in the bill. I would like to say we very much appreciate the willingness of this committee to give this bill the sort of urgent attention you are giving it. It is very important to us from the point of view of the running of the business smoothly and also the cost of the holding of the shareholders' meetings to have this through in time to send the proper slate to the shareholders preceding the annual election, and the closeout date for going to the printer with the proxy materials is about the end of March so that we are short of time.
The CHAIRMAN. Thank you very much, Chairman McCormack. As I understand it, two of the directors have already resigned. Mr. McCORMACK. That is true, sir.
The CHAIRMAN. And the carriers themselves have said that they realize that if this is kept the way it is, that it would be an unfair representation of the carriers or the public.
Mr. McCORMACK. This is certainly what you would draw from their attitude. Actually our carrier directors said, “We think this is right; we vote for it."
The CHAIRMAN. Do you know of any opposition?
The CHAIRMAN. It passed the Senate without opposition on January 31.
Mr. McCORMACK. That is true, sir.
The CHAIRMAN. I would like to say to the committee that we will restrict all questions to the legislation before us. If they want Comsat back to ask questions about their operations, worldwide or otherwise, we will have them back, but I think at this time we will restruct all questions directly to the bills before us.
Are there any questions on the committee about the situation?
Mr. Moss. In the provisions on page 4 of the bill, providing for operation of the corporations by less than a majority of the board of directors in the event of national emergency, are you speaking prospectively in view of the fact that this Nation is and has been in a declared state of national emergency since approximately 1951? Do you mean in the event of a national emergency hereafter declared? I would not want to approve authority to permit you to start operating with a minority of the board at this point.
Mr. McCORMACK. Mr. Moss, I can tell you what we had in mind. I confess that I am not adequate to speak on the present rules under which the country is going, but what we have in mind is conditions that prevent travel which might make it impossible for us to get together a majority of the board at a time when it is extremely important for us to keep the global system operating.
Mr. Moss. Then, Mr. Chairman, that would not contemplate less than a national emergency. You might have a regional emergency that would be rather loose and might be due to the vagaries of weather which might not permit the holding of a meeting on a fixed date.
I think this becomes of some significance when we authorize a board to act with less than a majority.
Mr. McCORMACK. It would be a serious situation, Mr. Moss. I could not conceive of any circumstances where, for our protection, the directors would act with less than a majority unless it had an overwhelmingly persuasive reason for doing so, such as conditions that prohibited travel.
The CHAIRMAN. Would the gentleman yield a moment there?
Mr. Moss. A provision providing in the event of a national emergency hereafter declared.
The CHAIRMAN. Couldn't this be clarified by saying a national emergency declared by the President of the United States?
Mr. Moss. Mr. Chairman, I respectfully point out that the national emergency which has existed for so very many years is a national emergency and has been a national emergency declared by the President of the United States.
Mr. McCORMACK. It may help, Mr. Chairman, to read you a few lines out of the Senate report on this. It goes as follows
The CHAIRMAN. What page is that?
As to the term “national emergency," the committee accepts the observations made by the Chairman of the Federal Communications Commission, Rosel H. Hyde, and the chairman of the Communications Satellite Corp., James McCormack, that this provision will be applicable only in those situations specified in section 606 of the Communications Act of 1934, as amended.
Mr. Moss. What are those provisions?
Mr. McCORMACK. They generally describe the inability to travel that I mentioned. I don't know the words, Mr. Moss.
The CHAIRMAN. Can counsel give us some enlightenment on this?
Mr. ACHESON. The provision of the Communications Act, Mr. Chairman, reads: "Upon proclamation by the President that there exists war or a threat of war, or a state of public peril or disaster or other national emergency, the President if he deems it necessary in the interest of national security, may suspend rules and regulations,” et cetera.
Now, since this was a familiar concept in the regulatory framework in which we live, we thought that this more or less objective standard would be as good a standard as we could possibly write to determine when the quorum provisions that govern our board at the present might be suspended.
Mr. Moss. But wouldn't the gentleman agree that under the declared state of national emergency which now exists and, as I reemphasize, has existed for the entire period since the Korean war, that you would be able, under this language, to operate now with less than a quorum?
Why not have it deal prospectively and deal with any national emergency hereafter declared?
Mr. ACHESON. That is certainly the intention, Mr. Moss and, for that matter, it is clear that the rules and regulations of the FCC are not regarded as suspended in the present state of affairs, so that clearly this language looks to some prospective emergency.
Mr. Moss. I think that brings up another interesting point that we might more throughly explore at a future date. I would not want to intermix it with this subject at this moment.
Thank you, Mr. Chairman.
The CHAIRMAN. I think we can clarify it as the gentleman from California has suggested: that the national emergency provisions would only apply in the future.
Mr. Moss. Mr. Chairman, I think in a statute that is ambiguous on its face; we should make it clear. I think that is in that category, and I think we can appropriately make it clear as to the intent of the committee without distorting it.
The CHAIRMAN. Does anybody else have questions?
Mr. SPRINGER. Mr. Chairman, when you make this reduction and roughly 38 percent of the stock was sold, does that mean that there shall be vacancies immediately at the next meeting of the stockholders?
Mr. McCORMACK. It is our scheme, which we have called rough justice, to correct any inequities only at the annual meeting. This has seemed justified to us rather than trying to keep a very fine division as between directors. In the first instance, shareholdings between 35 and 45 percent justify a given number of carrier directors so that you start within 10 percent of stock ownership as a sort of an inexactness in the formula to begin with.
Counsel reminds me that if this legislation were not to emerge until the meeting, presumably the carriers would go to the annual meeting with a full slate of six directors, and then they would have to hold a special election thereafter to reduce the number from six to four, and we would have to hold a special meeting of the public shareholders in order to increase the number from four to six. The cost and inconvenience would be burdensome.
Mr. SPRINGER. What you are anticipating, then, is something done annually; is that right?
Mr. McCORMACK. Yes, sir; at the regular annual meeting, except that the first implementation of the legislation as stated in the bill will be at the first convenient date for calling a shareholders' meeting, which in this case would be our regular annual meeting which is scheduled for early May.
Mr. SPRINGER. That is all, Mr. Chairman.
Mr. Watson. May I ask, What is your present method of replacing resigned or deceased directors?
Mr. McCORMACK. In a vacancy which occurs when one of an authorized number of directors resigns, as happened in the case of Mr. Kennedy, who became Secretary of the Treasury and therefore went off of our board, the remaining directors of that class can elect his successor. Of course, he has to be reelected at the annual meeting with the shareholders. We are prepared, at the next board meeting this coming Friday, to elect a replacement for Mr. Kennedy.
But vacancies created by this act cannot be filled in that way. They can only be done at the full meeting of the shareholders.
Mr. WATSON. I see. I have one further question, which I may have to ask of your able counsel here. Why has I.T. & T. apparentły sold over a million shares? Are they totally out of it now? Is this a trend to get the common carriers out of this field?
Mr. McCORMACK. I can only report to you what I.T. & T. itself said. I.T. & T. initially bought 1,050,000 shares. This was a very large amount compared to that purchased by any other carrier. General Telephone had 300,000, and RCA bought 250,000. I.T. & T.'s first sale was announced as being for the purpose of bringing their holdings more in line with the other comparable carriers, presumably meaning General Telephone and RCA; in addition to which they said they needed the capital in other parts of their business. Their reasons for the second sale were generally stated to be similar.
The reason for the third sale, which has reduced the amount to 100,000 shares out of the original 1,050,000, was that they were in disagreement with the policies under which Comsat was operating, meaning presumably the policies of management as approved by the board of directors.
But all of the sales by all of the other carriers put together has only amounted to 250,000 shares. All the rest all put together wouldn't even come close to triggering our 45-percent threshold for the six directors,
Mr. Watson. So you do not exempt the communications common carriers from Comsat?
Mr. McCORMACK. We have no reason to believe that, although, I believe there are still 120 carriers owning Comsat stock. With the exception of A.T. & T., which has 2,900,000, and General Telephone