Railroad Reorganization

by Stuart Daggett

(1) Three nominees of the bond- and stockholders’ committee proposed by Watkin were to take seats in the Erie board;

(2) Mr. Morris was to be associated with counsel for the receiver and for the company, and was to be regarded and treated as one of the professional agents and officers of the undertaking;

(3) Mr. Jewett was to transmit a memorandum of his views on reorganization;

(4) Net earnings were to be retained for a while, and bondholders were to have a voice in their expenditure. Thus a vote was to be taken under the charge of the stock- and bondholders’ committee in London on the constitution of a committee of consultation, consisting of representatives of each class of bondholders and of preferred and ordinary stock, and that committee was to designate a special representative whose consent and approval were to be taken by Mr. Jewett in the expenditure of net earnings;

(5) Monthly reports of actual earnings and expenditures, together with reports from the president and receiver, were to be regularly transmitted to the office of the committee in London;

(6) Bond- and stockholders were to be urged to give power of attorney and proxies to Watkin, or to such other person or persons as the above representatives of the bond- and stockholders should designate;

(7) Any scheme of reorganization was to include a provision giving bondholders a voting power.

On the above resolutions Jewett, with his board, and Watkin, with his committee, agreed to coöperate.[101] Under the circumstances the increased power given the bondholders was both a natural and a just demand, and it is probable that Mr. Jewett’s prompt acquiescence in it had something to do with Sir Edward’s advice to the securityholders “to rely on the honor, as I feel you may also upon the anxious labors and full experience of the President and Receiver.”

The report did not go uncriticised. It was pointed out, first, that a majority of English proprietors could not unhesitatingly share the confidence expressed in Mr. Jewett; second, that the first mortgage bondholders were well secured, and would surely refuse to fund their indebtedness; and third, that the payment of the floating debt, according to the Watkin plan, would simply create another debt of equal or greater amount due to the bondholders whose coupons were not paid. The only sound way, said a committee of bondholders in Dundee in a letter to the Watkin Committee, is resolutely to shun an accumulation of mortgage liabilities on the one hand, and on the other to give increased reality to the bonds and stocks of the company already existing as items in capital account, i. e. an assessment on the stock and a sweeping reduction in the interest on the bonds secured by the second mortgage:—the first mortgage bonds are in different case—they represent investment of cash instead of mere water, and even if foreclosure is difficult, they have beyond question an absolutely good security for the ultimate payment of both principal and interest.[102]

In September, 1875, a plan of reorganization was anonymously put forward as follows: Instead of assessment on the shareholders, it suggested the issue of 50 per cent more common stock; one new share for every two shares then existing. If a price of $25 per share could be obtained a total of $10,000,000 cash would be thereby secured. Besides the new stock issued bond- and preference-holders were to capitalize their interest for two years in bonds or shares bearing their present priorities. This funding should yield $8,000,000; and the $18,000,000 in all obtained was to be expended on the road over the next two years, during which period the new shares were to be paid up by half-yearly instalments. With the line furnished and equipped as proposed, continued this optimistic plan, the working expenses could be reduced from 79 per cent to 60 per cent, and the traffic within three years would be at least $24,000,000 per year, affording a net revenue of $9,600,000 per annum, sufficient to meet all bond and preference liabilities and to leave 3 per cent for the ordinary charges.[103] The all sufficient criticism to this plan was that it required too great a combination of favorable circumstances to ensure its success. In some respects, however, it was not unlike the plan ultimately adopted.