Railroad Reorganization

by Stuart Daggett

Fortunately for the small Terminal holders it so happened that men of large wealth and resourcefulness were interested with them. Under the leadership of these capitalists the Terminal Company began in its turn the purchase of Danville stock. It may have been that the East Tennessee group who had acquired a majority in 1883 had meantime parted with their holdings, or members of that syndicate may have sold in 1886 to take advantage of a favorable price.[325] At any rate, 25,000 shares were rapidly acquired, and the control of the company obtained. This done the new Terminal interests turned to the East Tennessee, Virginia & Georgia. Negotiations were at once begun, and culminated in an agreement in 1887 by which the Brice-Thomas group sold 65,000 shares of East Tennessee first preferred for $4,000,000 in cash and 50,000 shares of new Terminal common. Since the Tennessee first preferred elected a majority of the directors this ensured control. At the same time the Richmond Terminal provided for its floating debt, and for the purchase of the balance of the Richmond & Danville shares outstanding.[326]

Thus was the Richmond & West Point Terminal Company saved, and the principal railroads east and west of the southern Appalachians still kept under common control. The new grouping was weaker than the old, however, in that it did not include the Coast Line railroads. It was also imperfect as regards the nature of the control possessed over the East Tennessee, Virginia & Georgia. It has been said that the Richmond Terminal held a majority of the first preferred stock of this latter road.[327] By the terms of the Tennessee reorganization of 1886 this stock was to have the right for five years to elect a majority of the directors, unless before that time it should have received 5 per cent dividends for two successive years. This gave control to the Terminal Company; but it plainly made a control precarious which rested, as this did, on ownership of first preferred alone. In 1887 4 per cent was paid in dividends, and in 1888 5 per cent. In 1888, accordingly, a lease was drawn up, and the Richmond & Danville took the operation of the road for ninety-nine years. For four years it agreed to pay over 33⅓ per cent of the gross earnings; for five years more 35 per cent; and so on until 37 per cent should be reached. And, further, it guaranteed that the percentage allowed should be sufficient to pay all the East Tennessee’s fixed charges, including 5 per cent annually on the first preferred shares outstanding.[328]

It cannot be denied that the ethics of the Tennessee’s lease were questionable. The East Tennessee reorganization had invested the first preferred stock of that company with temporary authority. To use this to bind the property for years to come was neither fair to the other stockholders, nor in accordance with the spirit of the reorganization plan. We need not, therefore, be surprised at the prompt application for an injunction and for the appointment of a receiver which occurred.[329] In a circular to the second preferred and junior stockholders the opponents of the lease urged that its consummation would constitute an abuse of power on the part of the existing board; that it was entirely in the interests of the first preferred stockholders; that under no circumstances could the junior stockholders derive any income from the lease; that it failed to provide other safeguards and was in many respects improvident and imperfect. In one suit before State Chancellor Gibson at Knoxville, Tennessee, emphasis was laid on the statutory prohibition of the consolidation of competing lines. In another, petition was even made that the holders of the first preferred stock be enjoined from electing a majority of the board of directors at the approaching meeting.[330] Chancellor Gibson handed down two vigorous opinions. He refused to enjoin the voting of the first preferred stock, on the ground that the plaintiffs had been in possession for two years of stock certificates which bore on their face the conditions and agreements under which they were issued, and that the complaint was not justified, either in law or equity.[331] But he held that the East Tennessee had no power under its charter to lease its road as it had done; that the combination of the East Tennessee and the Richmond & Danville was forbidden by the law of Tennessee against the consolidation of competing lines; and that similar prohibitions in the laws and constitution of Georgia were so stringent as to imperil the East Tennessee’s charter in case the lease should be carried through.[332] This effectually checked the lease. After Chancellor Gibson’s first opinion the East Tennessee election had been held and the arrangement with the Richmond & Danville approved.[333] After his second the lease was cancelled, and the management of the East Tennessee restored to its own officers.[334] The Richmond Terminal was still left in control of the property. It was forced, however, to secure a majority of all the East Tennessee stock outstanding if it wished to make its control permanent, and it was prevented from using the power temporarily given a section of the stock to bring about a ninety-nine-year arrangement distasteful to the majority.

Master of the Richmond & Danville, the East Tennessee, and their allied lines, the Richmond Terminal now took one step further; it acquired the Central Railroad & Banking Company of Georgia. The importance of this was very great. The Central Company owned the most considerable of the lines in Georgia and Eastern Alabama. It stretched from Savannah and Port Royal on the Atlantic coast to Spartanburg, South Carolina, on the north; to Atlanta, Birmingham, and Montgomery on the west; and to Albany, Georgia, and to Columbia on the south. Its system had been formed by a consolidation in 1872 of the Central Railroad from Savannah to Macon with the Macon & Western from Macon to Atlanta,[335] and was compact, ably managed, and profitable. Previous to June, 1847, the Central Railroad Company had paid seven dividends aggregating 10.68 per cent. From June, 1847, to June, 1889, the Central Railroad and the Central Railroad & Banking Company which succeeded it, had paid seventy-five dividends aggregating 337.5 per cent,[336] besides stock dividends of 8 per cent in 1854 and 12 per cent in 1861, and a dividend of 40 per cent in certificates of indebtedness in 1881. It was paying 8 per cent in 1888 when the Richmond & Danville was paying 5, and the East Tennessee was congratulating itself on the 5 per cent which it was able to turn over to its first preferred stock.[337]

So fruitful a piece of railroad property was naturally looked on as desirable, especially since its acquisition was to free the East Tennessee from one of its most dangerous competitors. From a traffic point of view, nevertheless, the advantages of a consolidation were doubtful. The local business of the Central was likely to be little increased by a merger. The through business was in danger of being decreased. The Central lines ran on the whole east and west. It was to their interest to carry freight from Georgia, Alabama, and the West to Savannah, and thence to send it north by way of the Ocean Steamship Company which they controlled, and from which they obtained in 1889 one-fifth of their total net earnings; while the Richmond Terminal’s interest was to send this traffic north by land so as to secure for its own railroads the long haul. The advantages to the Terminal of a union depended on the price at which the Central Railroad could be acquired. The purchase was made, and the price was a high one. And this price was paid, it was freely charged, not in pursuance of an honest though mistaken judgment, but in order to allow a large personal gain to individual capitalists who were interested in both the Central and the Terminal Companies.

Among the most prominent owners of Central of Georgia stock at this time were members of the Logan-Rice group of financiers, who had begun to accumulate holdings at least as early as 1886. The average price which these parties paid was later estimated at 130, and their holdings were apparently secured with a view to resale at a higher figure. At any rate, when 40,000 shares had been purchased, a double operation was put through. The shares bought were turned over, with $400,000 cash, to a newly formed “Georgia Company,” and for them $4,000,000 in 5 per cent trust bonds and $12,000,000 in Georgia Company stock were received in exchange. And, second, a vigorous campaign was entered upon to secure control of the Richmond Terminal. Sully resigned the Terminal presidency in April. For his vacant place the Logan-Rice people offered General Alexander of the Central of Georgia, and the Terminal management supported John H. Inman. The struggle which ensued was most extraordinary. The existing board of directors charged the Central group with trying to unload their Georgia Company’s stock upon the Terminal system; and the Logan-Rice party insinuated that the purchase of the East Tennessee Railroad had been the occasion of fraudulent profits to the Terminal directors.[338]

“We understand,” declared the directors, “that a majority of the names thus far proposed by the parties soliciting proxies to be cast for directors and president of this company are gentlemen who are well known to be the owners of a majority of the stock of the Georgia Company, which owns railroads whose business and interests are at all points of our system in competition with and antagonistic to the business and interests of this Company; any diversion of traffic, or exercise of influence favorable to the Georgia Company at the numerous competitive points would work incalculable injury to your prosperity.... If on the other hand the preponderance of the Georgia Company’s interest in this Company should result in a sale to and purchase by your Company of the Georgia Company stock owned by these gentlemen, it would necessitate the issue of many millions of your common stock, or some kind of obligation taking precedence of that stock, the effect of which upon the value of your property you are fully competent to judge.”[339]

The general election of the Terminal was held on May 31, and Mr. Inman was elected president for the remainder of the unexpired term.[340] The Rice party was apparently overwhelmingly defeated. In reality its activity and the presence of its friends in the councils of the victors resulted in the successful sale of the Georgia Company securities. In October, 1888, little over five months after the directors’ circular of April 6, the Richmond Terminal took over the Georgia Company stock at $35 a share and allowed its owners to withdraw successfully from their speculation. Subsequently it also took the Georgia Company bonds from the bankers who had purchased them.[341] This left Inman, Hollins, and the rest a profit of $60 a share on their original investment. It meant for the Richmond Terminal a direct annual loss which there was very little prospect of making good. To provide for the $4,000,000 in bonds and the 120,000 shares of stock acquired, this latter issued approximately $8,200,000 of 5 per cent collateral bonds bearing an annual interest charge of $410,000. Now both the stock and the $4,000,000 of bonds were a lien on 40,000 shares of Central of Georgia stock and depended altogether upon the dividends declared on these by the Central Company. The Central never paid over 8 per cent, or a total of $320,000 on 40,000 shares. The difference between this and $410,000, or $90,000, constituted a direct loss which the Terminal pledged itself to meet each year. If the victory of the friends of the company in May is to be considered a genuine one, one wonders what price the owners of the Georgia Company would have charged had the election gone the other way.

With the Central of Georgia, the East Tennessee, and the Richmond & Danville under its control the Richmond Terminal could look for still further extension. In 1890 it acquired control of the Erlanger group of roads from Cincinnati in the north to Chattanooga, thence to Meridian, Mississippi, thence to Vicksburg, Mississippi, and to Shreveport, Louisiana. At the same time it took in the Louisville Southern, which joined Louisville with the Cincinnati lines.[342] In 1888 the Richmond & Danville had concluded a close alliance with the Atlantic Coast Line,[343] and arrangements had been made for terminal facilities at Norfolk.[344] In 1889 it leased the Georgia Pacific, and two years later, when this road reached Arkansas City, it executed a traffic agreement with the Missouri Pacific.[345] In 1891 the Georgia Pacific leased the Central Railroad & Banking Company of Georgia for ninety-nine years at 7 per cent on its capital stock.[346] This immensely improved the connection of the East Tennessee with the North and West, did away with the competition of a parallel line, and afforded another outlet upon the Mississippi.

Here, then, was the Richmond Terminal system in 1890. Three great north and south lines: one from Cincinnati through Birmingham to York, over the Erlanger system; one from Bristol through Rome to Selma, over the East Tennessee, Virginia & Georgia; and one from Alexandria and West Point through Danville, Charlotte, and Atlanta to Montgomery. One of these took business from Indiana, Illinois, and the North and Central West; one from Baltimore, Philadelphia, and the East; one from both West and East; and all three opened upon the Gulf over the Mobile & Birmingham to Mobile. In addition, three parallel east and west lines: from Chattanooga to Memphis, from Birmingham to Arkansas City, and from Meridian to Shreveport in Alabama; outlets on the Atlantic coast at Charleston, Port Royal, Savannah, and Brunswick; and dominance of the local traffic of the whole territory east of Alabama, south of Kentucky and Tennessee, and north of Florida. It was by all odds the leading system in the South. It had a mileage of 8558.5 as compared with the 2383.4 of the Louisville & Nashville, and gross earnings, exclusive of the Erlanger lines, of $41,361,095, or more than twice those of its greatest competitor.