“(6) Proper provision must be made for securing to the syndicate the refunding of the money they may advance on account of interest not exceeding 4 per cent per annum on the general mortgage bonds during reconstruction, and also for the substitution of the syndicate in the place of any creditor or stockholder who may abandon his holding and refuse to pay his assessment, it being the purpose of the syndicate to pay 4 per cent per annum interest on the general mortgage bonds during reconstruction, and also to pay the assessments of such parties as may abandon their holdings or right to take the securities to which they may be entitled under the plan.”[221]
The correspondence with Mr. Roberts referred to contained the assurance that the Pennsylvania Company would not hold aloof from an understanding with the Reading either in respect to the coal or transportation business, and would, moreover, “cordially unite in the arbitration of all differences.”[222] This could not, of course, force distasteful terms upon the Reading bondholders, but it could and did supply sufficient capital to ensure the success of any plan adopted, and it infused confidence and vigor into the action of the nearly discouraged reorganization trustees. The executive committee which they were to name was perhaps a useful tool, but the suggestion of a voting trust was a genuine contribution, and aided powerfully in securing necessary backing for future schemes.
It is to be remarked that the syndicate appeared with no panacea, was without a plan of its own, and at first merely adopted that of the trustees, with a few modifications which it thought advisable; but that by March, 1886, it had so worked over the proposals of the reorganization trustees as to make in many respects a new plan; which retained the assessments, likewise the combination of fixed and optional charges and the use of preferred stock, but reserved 4 per cent bonds against prior liens, gave 4 per cent bonds with preferred stock in exchange for the general mortgage instead of 3 per cents, and created four classes of stock instead of three. Somewhat more in detail this plan was as follows: The Reading was to issue a new 4 per cent general mortgage for $100,000,000, and four kinds of stock: a preferred, income, consolidated, and common. Of the general mortgage $9,792,000 were to be for future use in the improvement of the railway; of the remainder $38,422,000 were to be reserved against prior liens; $24,686,000 were to exchange for the general mortgage if such should not be paid off in cash; $15,000,000 were to take up shares or bonds of leased lines, and $10,000,000 were to exchange for or to redeem Coal & Iron Company divisional mortgages. The total amount issued was to be $90,208,000, and no mortgage in addition was to be placed on the Reading properties for five years after the reorganization without the consent of a majority of the preferred stockholders. Of the different classes of new stock the preferred was to be given dividends up to 5 per cent non-cumulative, and then the income and consolidated stocks were to have up to 5 per cent non-cumulative. Generally speaking, the preferred stock was to go for assessments; the income stock for the income mortgage and convertible adjustment scrip; the consolidated stock for the first series 5s and one-quarter of the principal of the second series 5s; the common stock for the rest of the second series 5s, for the convertible debentures, deferred income bonds, and for old preferred and common stock. New fixed charges were estimated at $6,971,687, which dividends on the preferred stock would raise to $8,198,636. There was to be a voting trust for five years, consisting of J. Lowber Welsh, J. P. Morgan, Henry Lewis, George F. Baer, and Robert H. Sayre; and a syndicate was to advance necessary expenditures and disbursements pending reorganization, including unpaid assessments. The syndicate compensation was to be 6 per cent on its advances, plus a commission of 5 per cent upon its $15,000,000 of subscribed capital. The property was to be sold at foreclosure sale, and a new company was to be organized.[223]
A comparison of this with the plan of the reorganization trustees at first announced will show the changes made. Nothing of value which previous reorganizations had worked out was cast aside. The fixed interest allowed the general mortgage bondholders was raised in the hope that they might support the plan, and more care was taken to follow the order of priority in the advantages offered to the various classes of junior securityholders; an end to which the four classes of stock were admirably adapted. The voting trust was altogether new, and was doubtless intended to ensure a policy in accord with the syndicate’s wishes for a series of years, and to prevent a renewal of the vagaries of Mr. Gowen’s administration. The provision for foreclosure was to be expected in view of the extreme difficulty of obtaining the assents of so many conflicting interests; but with a net revenue of $12,026,309 (both companies) and fixed charges of $6,971,687, the task of maintaining the solvency of the companies in future did not seem an impossible one.
In opposition to the plan the Lockwood Committee urged that the scheme was unjust to certain classes of bonds; that it was cumbersome, expensive, conferred power on the trustees which should have been reserved for the direction of the new company, and that the reserved powers to change any part of the plan, and the uncertainties connected with the settlements under it, involved risks which creditors should not accept.[224] The objections were not weighty. If the Lockwood or any other committee had proved itself able to formulate and carry through a plan, or if the syndicate arrangement had been proposed at the very beginning of the receivership, bondholders might fairly have criticised its expense. In point of fact numerous attempts to reconcile divergent interests had failed, and what with Messrs. Lockwood, Bartol, Whelen, Gowen, and their respective followings, the future offered no more promising result. Meanwhile bondholders were going without their interest, and costs of the receivership were mounting up; so that a greater expense than that of which Mr. Lockwood complained was being incurred by delay. As for the general mortgage bondholders, they were given a chance at their old interest whenever the road should earn it, and could fairly ask no more; while that it was inequitable to ask income bondholders to accept a reduction to $50 in their annual interest, or holders of the first series 5s to wait for their interest until liens before theirs had been satisfied, are conclusions to which few will agree.
In April Messrs. Whelen and William H. Kemble, representing the Reading consolidated mortgage bondholders, announced that they had determined not to accept the syndicate plan. Even before this Mr. Gowen announced that he was organizing a syndicate and would soon be able to pay off overdue coupons on the general mortgage bonds, and to prevent any foreclosure under that mortgage.[225] It is scarcely necessary to say that he had a plan of his own. He proposed to issue $100,000,000 4 per cent 70-year consolidated mortgage bonds much as did the syndicate, part of which should go to redeem the general mortgage and the floating debt; but second to this he suggested a cumulative 4 per cent first preferred income bond, to take the place of the income and consolidated stock under the syndicate plan, and to be exchanged for the first series 5s, a portion of the second series 5s, and some of the leased canal securities; while finally he planned a second preferred cumulative 4 per cent income bond, to be exchanged for those securities down to the deferred income bonds, which under the syndicate scheme were to receive common stock. The surplus of income offered by the old general mortgage was to be made good by first preference bonds. The existing preferred and common stocks were to remain as they were, and the deferred income obligations were to remain untouched. Finally, the New Jersey Central was to be retained in friendly alliance, either under a modified lease at a rental equal to earnings, or under a special traffic contract.
A comparison of this with the syndicate plan shows that Mr. Gowen gave up the idea of an assessment; provided for the floating debt through first preference bonds; swept away three of the four classes of stock, replacing them by two kinds of income bonds; and retained the deferred income bonds which the syndicate proposed to retire. His plan was to be carried through without foreclosure, but outside of this its advantages are rather difficult to ascertain. The abandonment of the assessment was distinctly bad; the retention of the deferred income issue was also bad; the reduction in the number of kinds of securities tended towards simplicity, but made impossible the nice distinction of priority on which the syndicate had relied; while even the replacement of stock by income bonds must be condemned, substituting as it did an obligation without any very distinct character of its own for a stock which represented frankly only a share in the profits of the enterprise. These things were realized, and the plan received no serious support; but as every plan so far proposed contributed something to the final product, so Mr. Gowen’s income bonds and his aversion to foreclosure were not without influence upon the scheme which ultimately attained success.
The next few months saw active hostilities between Mr. Gowen and the syndicate; the former taking the position that he would never consent to foreclosure, nor to the placing of the property for five years under the management of a board of trustees named by his adversaries.[226] To Mr. Garrett, chairman of the reconstruction trustees, he wrote suggesting that the board should substitute his plan for that of the syndicate, and that seven reconstruction trustees should be appointed by the managers of the company to carry it through. “Upon this being done,” said he, “I will engage that the plan shall be underwritten by an association of capital sufficient for the purpose of paying off all the general mortgage bonds which do not voluntarily accept the new securities provided by the plan, and I will agree that the financial responsibility of these subscribers to this fund shall be determined by the presidents of the Bank of North America, the Farmers’ & Mechanics’ National Bank, the Pennsylvania Company for Insurance of Lives, etc., and the Union Trust Company....”[227] Mr. Garrett naturally refused.
As in many cases before, the struggle ended in a compromise. The new agreement was as follows: The syndicate was to be enlarged by $4,000,000 additional subscriptions, and the reconstruction trustees increased to thirteen by the addition of certain friends of Mr. Gowen, one of whom was also to be given place upon the executive committee. The syndicate plan was to be carried through without foreclosure, providing sufficient assents could be obtained, and was to be modified by the substitution of first, second, and third 4 per cent income bonds for preferred, income, and consolidated 5 per cent stock. Dividends on the bonds, like those on the stock, were to be payable from net earnings only; but net earnings were defined as the profits derived from all sources after paying operating expenses, taxes, and existing rentals, guarantees and interest charges, but not fixed charges of the same sort subsequently created. All third preference bonds issued for convertible bonds were to have the right to be converted into common stock; and the company was to have the privilege of increasing the issue, subject for five years to the approval of the voting trustees. As finally worked out, the first preference bonds were to be given for assessments; the second preference for all securities which had been promised income or consolidated stock; and the third preference for the second series 5s, convertible and debenture bonds, and preferred stock to which common stock had before been allotted. Somewhat more emphasis was laid on the possibility of paying off the general mortgage. It was proposed to reduce the aggregate of rentals and guarantees (exclusive of the Central of New Jersey, the Schuylkill Navigation Company, and the Susquehanna Canal Company) to an annual charge of less than $2,350,000 by direct negotiation with the companies affected. And to deal directly with the three companies above named upon the basis of a continuance of their respective leases at rentals involving no fixed liability beyond the earning power of the leased line, or on the basis of a surrender of the said leases, and the cancellation of the traffic agreement with the Schuylkill Navigation Company for a consideration. The voting trust was to be composed of three representatives of the syndicate and one friend of Mr. Gowen, which four should elect a fifth who should be satisfactory both to the syndicate and to the reconstruction trustees. A united effort was to be made by the company, the reconstruction trustees, and the syndicate to secure the immediate appointment of Mr. Austin Corbin as an additional receiver; and, if Mr. Corbin would take the position and legally qualify himself to fill it, it was understood that the presidency of the company would be offered to him. The other provisions of the syndicate plan were to remain unchanged.[228]
The total capital and charges under the plan were to be as follows: