Railroad Reorganization

by Stuart Daggett

On March 12 the Court of Common Pleas issued a decree regulating the conditions under which the election should be held, providing for the separate count of votes of shares transferred three months before the election, and for the ultimate reference of all disputed points to the Court. By this time Mr. Gowen had become alarmed at the apparent strength of the McCalmonts, and had come to realize that a possible disenfranchisement of a part of his own holdings on the ground of too recent transference might lessen his chances of retaining control. He recalled, however, that the annual meeting had been postponed from January 10 to March 7, and finally to March 14. This, it occurred to him, might transform it from a regular to a special meeting, and might, according to the terms of the company’s charter, make necessary the presence and vote of a majority of all the shares outstanding, instead of a simple majority of all the shares on hand. If this should be true a disenfranchisement of his holdings would be of less importance; for whether disenfranchised or not, these would form part of the total shares outstanding, of which an absolute majority would be required.

On March 12, two days before the appointed date, Mr. Gowen issued a letter to the shareholders. “I hold,” said he, “up to the present time, the proxies of 1921 shareholders of the company, owning 359,500 shares of the capital stock, being very considerably more than a majority of all the shares.... Of the shares for which I hold proxies, so large a proportion, however, may possibly be disenfranchised by failure to register, that if the legal meeting of the stockholders is held on Monday next, and it should subsequently be determined by the Court that three months’ prior registry is essential to confer the right of voting, it may be possible that the wishes of the great majority of bona fide shareholders may be overruled by a minority.... I have determined to abstain from attending the meeting, and I earnestly request all shareholders who support the present management to absent themselves from the meeting on Monday, and thus to give legal effect to their wishes by making it impossible for the minority to secure the attendance of a quorum....”[183]

Mr. Gowen’s friends, English and American, followed his suggestion; and at the meeting on Monday but 211,095 out of 687,663 registered shares appeared to vote. The immediate result was the almost unanimous election of Mr. Bond, the candidate of the McCalmonts, which was followed by litigation on the part of Mr. Gowen, disputing the legality of the election. By the terms of the decree under which the election had been held, the matter came first before the Court of Common Pleas, which, on April 9, decided that the meeting had been a legal one, and that the officers then voted for by the McCalmonts had been duly elected. With the above court ranged against him, Mr. Gowen took appeal to the Supreme Court of the state, and meanwhile declined to surrender his position. On April 11 the new board proceeded to the Reading offices in Philadelphia, made formal demand for admittance, and were refused. On April 22 President Bond issued formal notice of his election. An injunction was asked against Mr. Gowen, but was held back until the Supreme Court should have taken action. Meanwhile the old board of managers announced that if a decree supporting the decision of the Court of Common Pleas should be rendered they would make no further opposition; and the transfer agents of the company in Philadelphia and New York refused to transfer any stock until the dispute should have been settled. On April 19 an order of the United States Court interfered with Mr. Gowen’s exclusive possession, and compelled him to furnish to Messrs. Frank S. Bond, etc., suitable accommodations in the offices of the Philadelphia & Reading Railroad Company, with free access to all books and papers. In May the Supreme Court rendered its decision, holding the meeting of March 14 to have been a regular meeting, and a majority of all the stock outstanding not to have been required for a quorum. Gowen asked for a rehearing, which was denied, and in June, nearly four months after the election, he grudgingly acknowledged Mr. Bond and his associates as the legally elected president and board of managers.

During all this time the deferred income bond scheme had not remained untouched. In April, 1881, on application of the McCalmonts, the United States Circuit Court at Philadelphia had granted a preliminary injunction against it. “Whatever power the defendant has in the premises can only be found in the general authority to borrow money,” said Judge McKennan, and went on to state that the issue did not constitute a loan, because a loan implied reimbursement, and the income bonds were redeemable at no special time.[184] Mr. Gowen promptly proposed to make them redeemable, and insisted that this made them still more desirable. A week later the $150,000,000 general mortgage was also enjoined.[185]

Once out of the presidency Mr. Gowen endeavored to induce the McCalmonts to accept his plan. If they would adopt the deferred income bond scheme, he said in an address to shareholders, he would resign the receivership of the road at once, give bonds never to stand for the presidency again, and further coöperate with them in selecting a new board of directors. As an alternative he offered to buy the McCalmont shares at $40 each, and threatened to beat that party at the next election if it refused.[186] In September he assured the stockholders that he could without difficulty put the road upon its feet. “If Bond and his colleagues will resign and reinstate the old management,” he cabled from London, “and advise me by cable of the change, I can, before sailing on Saturday, procure sufficient advances against the proceeds of preferred [deferred?] income bonds and new 5 per cent consols to pay the floating debt, receivers’ certificates, and all arrears of interest.”[187] Finally, appealing to Mr. Bond direct, Gowen made formal application that the new board should adopt his plan after changing the form of the proposed obligations by making them payable in 100 or 200 years.[188] Bond refused. He pointed out that the deferred income bondholders would be in constant conflict with the management in their endeavor to secure dividends on their holdings, and would attempt to prevent proper and necessary expenditures upon the property from current net revenues. He declared that it was questionable whether the company had authority to sell its unsecured obligations below par, and that in any case the process would be enormously expensive; and, further, that the language of the obligation did not limit the payment of interest to the source of net revenue only, but might be construed to compel the declaration of 6 per cent on the income bonds whenever 6 per cent should be paid on the common stock.[189] Failing in his attempts to win over his opponents, Gowen turned his energies toward securing their defeat.

Meanwhile President Bond brought forward a plan of his own. He had grasped three points of weakness in Gowen’s scheme, namely,—

(1) The issue of a mass of worthless obligations in the deferred income bonds;

(2) The high level of fixed charges which a $150,000,000 5 per cent mortgage entailed;

(3) The lack of any security which had a right to interest only when earned, and which might be given to the bondholders in return for sacrifices which they would otherwise refuse to make.

He proposed, therefore, to create a general consolidated mortgage to cover all the property of the Reading Railroad and Coal & Iron Companies, together with the interest of both companies in all other corporations and property, whether owned or controlled by lease or otherwise. This mortgage was to be junior to the consolidated and to the improvement mortgages only, but was to contain a provision by which, as bonds under these senior mortgages should be retired, additional bonds might be issued under the new mortgage, which was eventually to become a first lien upon all the properties of both companies.[190] The total was to be $150,000,000, to be divided into two series: of which series A, for $90,000,000, was to run for fifty years, and was to have a prior lien over series B upon the revenues for interest at the rate of 4½ per cent, with a right to enforce foreclosure in case of a twelve months’ default; and series B was to run sixty years, and was to carry interest at 3 per cent, with a right to enforce foreclosure in case of a three years’ default. In prosperous years series B might receive more than 3 per cent: thus the mortgage provided that from current net revenue applicable to dividends it should get 1½ per cent additional interest before any dividend should be paid on the stock of the company; after that 3 per cent might be paid on the capital stock, and then 1½ per cent additional might be paid on series B; it being understood that the interest in excess of 3 per cent should not be cumulative, but was to be paid only from current net revenues of the company otherwise applicable to dividends. These two issues of unequal worth were to be used for different purposes. Series A was to be in part reserved to retire the senior obligations, and in part to be sold to pay off the general mortgage bonds, the general mortgage scrip, the income bonds, the floating debt of the Railroad and Coal & Iron Companies secured by collateral, the receivers’ obligations, and the mortgages on real estate that could be paid off. Series B was to be exchanged for the junior obligations, such as the debenture or convertible loans, or was to be held in reserve for subsequent acquisition of the guaranteed stock or obligations of affiliated corporations of the Railroad and Coal & Iron Companies.