Chapter X · CONCLUSION (continued 2)

It is not true that voting trusts are always used for the purposes indicated. In 1892 certain stockholders of the Baltimore & Ohio agreed to deposit their certificates in a trust for one year and five months. The stock deposited amounted to $8,975,000 out of a total outstanding of $25,000,000, and a limit of $11,000,000 was set to the amount to be so placed, the object of the arrangement apparently being to increase the influence of the stockholders concerned by concentration of their holdings.725 Again, in 1895, to take an outside example, the stock of the Oregon Railway & Navigation Company was placed in trust with the Central Trust Company in order better to protect the preferred stock. It was provided that during the continuance of the trust the Central Trust Company should vote all the stock: first, against any increase in the preferred stock unless the holders of all the voting trust certificates of both classes should give their unanimous consent at general meetings; second, against all propositions relating to the mortgaging, selling, or leasing of the railroad and telegraph lines of the company, or to the consolidation thereof, unless a majority of each class of certificates should consent; third, on all other questions as directed by the holders of a majority of the aggregate of all voting trust certificates of both classes represented at general meetings.726 Further provisions gave to the preferred stock control of a majority of the board of directors. These instances are of interest; but the principal purpose of the voting trusts in the reorganizations which we have considered has been nevertheless the securing of stability of control for a definite period after the rehabilitation of the bankrupt companies.

The duration of the voting trust varies from company to company. The most usual provision is for five years. Frequently the voting trustees may terminate the trust earlier at their discretion, as in the case of the Baltimore & Ohio trust of 1898, the Richmond Terminal trust of 1894, or the Northern Pacific trust of 1896. Frequently, also, certain conditions must be fulfilled before termination. In the case of the Erie in 1895 no stock certificates were to be due or deliverable before December 1, 1900, nor until the expiration of such further period, if any, as should elapse before the Erie Railroad Company in one year should have paid 4 per cent cash dividend on the first preferred stock.727 In the case of the Reading in 1896 4 per cent cash dividends on the first preferred stock were required for two consecutive years, and this delayed dissolution three years beyond the time originally contemplated.728 The Richmond Terminal trust had provisions similar to those of the Erie.

The number of trustees also varies. The scheme proposed for the Atchison in 1889 contemplated a trust of seven; the Baltimore & Ohio in 1898 and the Richmond Terminal in 1894 provided for five; and the Erie in 1896 for three; but this point is not material. When the reorganization plan requires the consent of stockholders to an increase in the issue of securities the consent of holders of trust certificates is apt to be required on similar occasions during the existence of the trust. Thus the Northern Pacific agreement of 1896 forbade the trustees to increase the preferred stock or to issue any new mortgage, except with the consent of the holders of a majority of the whole amount of preferred stock trust certificates, and of the holders of a majority of the common stock trust certificates represented at the meeting.

This ends the present treatment of the subject of railroad reorganization. The results of the discussion may be briefly summed up as follows:

First. Reorganization is most frequently an attempt to extricate an embarrassed company from its difficulties.

Second. These difficulties can generally be traced either to an unrestricted freedom of capitalization, or to destructive competition.

Third. The shape in which trouble appears is likely to be that of a large floating debt or of excessive fixed charges; either or both of which may have brought the corporation to a critical condition some time before the actual collapse.

Fourth. The best practice favors the retirement of floating debt by assessments on securityholders, though sales of securities are sometimes resorted to, or a combination of sales and assessments is employed.

Fifth. Fixed charges are composed chiefly of interest and rentals. Interest payments are reduced by the retirement of outstanding bonds by new bonds which bear a lower rate of interest, or by income bonds or stock, or by a combination of securities with a fixed rate of interest with securities upon which payment of interest is optional. Rentals may be reduced by direct negotiation, or the leased roads may be absorbed into the main system, and their securityholders receive new stocks and bonds as above.

Sixth. The new bonds are of fewer kinds and have longer terms to run than the bonds which they displace.

Seventh. This reduction in fixed charges imposes a loss on the greater part of securityholders, both in respect to the annual interest which they can claim, and in respect to the selling price of their holdings. A similar loss is suffered by those securityholders who pay the required assessments.

Eighth. The loss falls on securityholders according to the seniority of their holdings,—those bonds escaping which can expect to satisfy their claims from the selling price of the railroad at foreclosure sale.

Ninth. The most important development in reorganization practice has been the increasing use of new securities bearing a fixed rate of interest with new securities bearing a conditional rate of interest; a use which may make the losses of junior securityholders temporary instead of permanent, and yet safeguard the interests of the corporation. In this connection preferred stock has gained in popularity over income bonds.

Tenth. This development, and the issue of new securities for floating debt and for other purposes, have caused the capitalization after reorganization in all but one of the cases which we have examined to exceed the capitalization before.

Eleventh. In order to perfect a reorganization additional provisions are often inserted, which protect junior securityholders against the reckless issue of new bonds, supply the corporation with ability to make necessary betterments from capital account, protect the corporation from sudden changes in control, and similarly supplement the main clauses.