1. Upon an appeal under the Expedition Act of February 11, 1903,
as modified by Jud.Code, § 291, from a decree entered under a
mandate of this Court directing the dissolution of a combination in
restraint of interstate trade, this Court has jurisdiction, of its
own motion and independently of the assignments of error, to
determine whether the mandate has been properly complied with, and
to require such compliance. P.
259 U. S.
165.
2. A plan decreed by the district court (summarized in the
opinion,
post, 259 U. S. 166)
for dissolving the combination adjudged unlawful in
United
States v. Reading Co., 253 U. S. 26,
approved, insofar as it provides for merging the Philadelphia &
Reading Railway Company in the Reading Company, shorn of corporate
capacity to do other than a railroad business, for separating the
Central Railroad Company of New Jersey from the Reading Company by
sale or disposition of the shares of the former held by the latter
(p.
259 U. S.
175), for separating tho Lehigh & Wilkes-Barre Coal
Company by sale of its stock held by the Central Railroad Company
of New Jersey (p.
259 U. S.
175), and for separating the Reading Company from the
Philadelphia & Reading Coal & Iron Company by transfer of
all the stock of the latter (held by the former) to a new coal
company, to be organized by trustees of the court, the stock of
which shall be issued under conditions assuring that those who
acquire it shall not be interested in the Reading Company, but
disapproved, insofar as it leaves the capital stock and properties
of the Philadelphia & Reading Coal & Iron Company subject
to the lien of an outstanding
Page 259 U. S. 157
general mortgage covering also much of the property of the
Reading Railway Company, payment of which, as between these two, is
assumed by the Reading Company, and insofar as it provides that the
Philadelphia & Reading Coal & Iron Company shall give a new
mortgage of all its property to secure bonds to be delivered by it
to the Reading Company in the adjustment of their financial
relations. P.
259 U. S.
167.
3. The court has power under the Sherman Anti-Trust Act, in
dissolving a combination of two corporations, to disregard the
letter and legal effect of a general mortgage of their properties
and of the bonds secured thereby in order to achieve the purpose of
the act. P.
259 U. S. 171.
United States v. Southern Pacific Co., post, 259 U. S. 214.
4. In this case, the general mortgage of the Reading Company and
the Philadelphia & Reading Coal & Iron Company gave notice
on its face of the unlawful union and purpose of which it was the
necessary instrument, and those who took the bonds thus secured,
although they may have done so innocently, relying on legal advice
and surrendering valid underlying liens created before the Sherman
Act, hold them subject to the judicial power to free the two
properties from the consolidating tendency of the mortgage by
relieving one of them from the lien and substituting a judicial
equivalent in protection of the bondholders. P.
259 U. S.
171.
5. The decree in this case should modify the liability under the
general mortgage and bonds so that the obligation of each mortgagor
company upon the bonds, and the lien upon its property, shall be
reduced to an amount proportionate to the ratio of the value of its
property subject to the mortgage to the value of all the property
so mortgaged, and should make specific provisions for foreclosure
of the resulting separate liens in case of default. P.
259 U. S.
173.
6. Any injury to the security caused by this modification of the
terms of the debt and mortgage may be compensated by such payment
to the bondholders by either or both mortgagor companies, as may
seem equitable and convenient. P.
259 U. S.
174.
7. Authority is given the district court to amend the plan of
dissolution for the purpose of leaving the Reading Company properly
financed, and to make such detailed changes as, after full hearing
of all the parties, it may find practically necessary in following
the general outlines of the modifications here made. P.
259 U. S.
174.
8. The decree should provide not only that all stockholders of
the new coal company, upon receiving and registering their stock,
shall make affidavits that they are not owners or the agents or
representatives of owners of stock in the Reading Company, but
also
Page 259 U. S. 158
should require the merged Reading Company to adopt a bylaw,
effective until the further order of the court, permitting
registration of transfers of its stock only in the names of persons
who make affidavit that they are not stockholders of the new or old
coal companies and have not been and are not holders of proxies to
vote shares therein. P.
259 U. S.
175.
9. The plan of dissolution provides that the stock of the new
coal company shall be disposed of primarily by sale to the
preferred and common stockholders of the Reading Company, share and
share alike, of assignable certificates exchangeable for the new
coal company's shares by holders who prove at the time that they
are not stockholders or representing stockholders of the Reading
Company or in any agreement in its interest for the control of the
coal company.
Held:
(a) That the so-called sale is, in effect, a distribution of
forbidden surplus assets of the Reading Company to its
stockholders, small payments being required for the purpose of
providing the company with additional capital for the operation of
its railway system. P.
259 U. S.
176.
(b) That the distribution as between the preferred and common
stockholders must be determined by the organization agreement of
the Reading Company defining their rights, and must be
pro
rata, whether under that agreement the net profits of any past
year, after paying preferred shareholders their full percentage,
may be divided among the common stockholders or not, since the
declaring of any dividend is left to the honest discretion of the
board of directors, and undivided profits are to be regarded as
capital assets and distributed on liquidation, the board not having
applied them as dividends. P.
259 U. S.
177.
10. It is a general rule that stockholders, common and
preferred, share alike in the assets of a liquidating corporation
if the preference be only as to dividends. P.
259 U. S.
181.
11. Whether, under the federal Commodities Clause and the
Constitution of Pennsylvania, it will be proper and lawful that the
Reading Company, becoming reorganized as a railroad corporation,
continue to own stock of the Reading Iron Company, an iron
manufacturing concern, will be determined, and the plan of
dissolution modified accordingly, by the district court. P.
259 U. S.
181.
273 F. 848 affirmed with modifications.
This case presents the questions, first, whether a decree of the
district court, entered under a mandate from this
Page 259 U. S. 159
Court in
United States v. Reading Co., 253 U. S.
26, is in accordance therewith, and second, whether it
does equity to the appellants.
The original suit was instituted by the United States to
dissolve the relation existing between the Reading Company, the
Philadelphia & Reading Railway Company, the Philadelphia &
Reading Coal & Iron Company, all corporations of Pennsylvania,
the Central Railroad Company of New Jersey, a corporation of New
Jersey, and the Lehigh & Wilkes-Barre Coal Company, a
corporation of Pennsylvania, as a combination to restrain and
monopolize interstate commerce in anthracite coal, and to violate
the commodities clause of the Act of June 29, 1906, 34 Stat.
585.
This Court found that, by a scheme of reorganization, adopted in
December, 1895, the Philadelphia & Reading Railway Company and
the Philadelphia & Reading Coal & Iron Company combined to
deliver into the complete control of the board of directors of a
holding company, the Reading Company, all of the property of much
the largest single coal company operating in the Schuylkill field,
and almost 1,000 miles of railway over which its coal must find its
access to interstate markets, and that this constituted a
combination unduly to restrain and monopolize interstate commerce
in anthracite coal; that the Philadelphia & Reading Railway
Company and the Philadelphia & Reading Coal Company had
thereafter but one stockholder, the Reading Company, and that thus
the Reading Company served to pool the property, the activities,
and the profits of the three companies. The Court further found
that, through the acquisition by the Reading Company of a majority
of the stock of the Jersey Central Railroad Company of New Jersey,
which itself owned 90 percent of the stock in the Lehigh &
Wilkes-Barre Coal Company, the illegal power of the combination was
greatly increased, and that the relation of common control
through
Page 259 U. S. 160
stock ownership of the Philadelphia & Reading Railway
Company and the Philadelphia & Reading Coal Company, and that
of the Jersey Central Railroad Company and the Lehigh Valley &
Wilkes-Barre Coal Company were violations of the commodities
clause, requiring dissolution. The court therefore remanded the
case to the district court, directing a decree in conformity to the
opinion dissolving the whole combination of the four companies with
the Reading Company and such disposition of the shares of stocks
and bonds and other property of the Reading Company as might be
necessary to establish the entire independence of each company from
the others, to the end that the affairs of all of them might be
conducted in harmony with law.
For convenience the Philadelphia & Reading Railway Company
will be called the Reading Railway Company, the Philadelphia &
Reading Coal & Iron Company the Reading Coal Company, the
Central Railroad of New Jersey the New Jersey R. Co. Company, and
the Lehigh & Wilkes-Barre Coal Company the Wilkes-Barre Coal
Company.
The situation at the time the district court was directed to
enter its decree, was as follows: the Reading Company, the holding
company, had a special charter under the laws of Pennsylvania
granted prior to the adoption of the Constitution of that state of
1874, with unusually broad powers. It was not engaged directly in
operating a railroad, and was not subject to regulation by federal
or state authorities having jurisdiction over common carriers. It
owned the entire capital stock of the Reading Railway Company,
being $42,481,700, par value, and $20,000,000 of its bonds;
$8,000,000, par value, being the entire capital stock of the
Reading Coal Company; the real estate, rolling stock, and floating
equipment used upon or in connection with the Reading Railway
System; shares of stock and bonds of other railroads and terminal
companies, constituting
Page 259 U. S. 161
a part of the Reading Railway System; $14,504,000, par value,
being more than a majority, of the stock of the New Jersey Railroad
Company, all of which was pledged except 40 shares, under a
collateral trust mortgage to secure $23,000,000 worth of bonds.
These were not all its holdings, but they are all that are
important here.
On January 5, 1897, the Reading Company and the Reading Coal
Company jointly gave a mortgage to the Central, now the Central,
Union Trust Company of New York, trustee, hereafter to be referred
to as the general mortgage. The security under this mortgage was
all the property of the Reading Coal Company and all of its capital
stock, together with all of the capital stock of the Reading
Railway Company and all the railroad equipment and certain real
estate essential to the operation of the Reading Railway Company,
which was held by the Reading Company, together with certain bonds
of the Railway Company. The bonds now outstanding under this
mortgage amount in round figures to $93,000,000.
A combination of the Reading Railway Company and the Reading
Coal Company had been maintained for years, and the property of the
Reading Coal Company had been greatly enlarged by purchases and
improvements, through money advanced by the Reading Railway
Company, resulting in an indebtedness of the Reading Coal Company
to the Reading Railway Company which ultimately amounted to about
$70,000,000. In 1896, when the Reading Company became the holding
company under the then formed combination, this indebtedness of the
Coal Company to the Railway Company appeared as a credit on the
books of the Reading Company, and a debit on the books of the Coal
Company, but it is quite clear that they were mere bookkeeping
entries, and that it had been agreed that they should be cancelled.
They are cancelled in the proposed plan.
Page 259 U. S. 162
Under the plan embodied in the decree of the district court, the
Reading Company is, as between it and the Reading Coal Company, to
assume the whole liability under the general mortgage, and agrees
to save the Coal Company and its property harmless therefrom. The
Reading Company is to receive from the Reading Coal Company
$10,000,000 in cash or current assets, and $25,000,000 in 4 percent
bonds of the Reading Coal Company, secured by mortgage on its
properties its interest, subject to the lien of transfer its
interest, subject to the lien of the general mortgage, in all the
stock of the present Reading Coal Company, amounting to $8,000,000
in par value, but actually worth many times that amount, including
the right to vote and receive dividends thereon, to a new Reading
Coal Company, a corporation to be created under the supervision of
the district court, and over which that court is to retain control,
so as to prevent its being used to thwart the decree.
The new Coal Company agrees to issue as its total capital stock
1,400,000 shares, without par value, to a trustee or trustees
appointed by the district court, who are to transfer to the Reading
Company assignable certificates of interest in the stock of the new
Coal Company, for distribution to its stockholders. The
certificates are to be exchangeable for such stock only when
accompanied by an affidavit, stating, among other things, that the
holder is not an owner of any stock of the Reading Company, and is
not acting for or on behalf of any stockholder of the Reading
Company, or in concert, agreement, or understanding with any other
person, firm, or corporation for the control of the coal company in
the interest of the Reading Company, but in his own behalf in good
faith.
The certificates of interest are to be offered for so-called
sale by the Reading Company to its stockholders, preferred and
common, share and share alike, for $2 for each share of the Reading
Company. Such stockholders
Page 259 U. S. 163
cannot, however, continue as stockholders of the Reading Company
and become stockholders of the new Coal Company during the
conversion period, but each must dispose of his certificates of
interest in the new Coal Company or of his stock in the Reading
Company. If, after July 1, 1924, any of the certificates shall
remain outstanding, the court, in its discretion and after a
hearing, may order the shares covered by such certificates to be
sold, and the proceeds distributed to the owners of such
certificates. The Attorney General is given access to the transfer
books of both companies to enforce compliance with the order. This
secures to the Reading Company in cash $5,600,000.
Second. The Reading Company will merge into itself the Reading
Railway Company, and all the railway property of the Reading
Railway Company is to be made subject to the direct lien of the
general mortgage. The existing charter of the Reading Company
authorizes such a merger. The Reading Company is to accept the
Pennsylvania Constitution of 1874, and to proceed under the
Pennsylvania Act of 1856 to surrender those of its franchises which
are inappropriate for a railroad corporation of Pennsylvania. It
will thus become a railway company, subject in all respects to the
regulation of the state and federal authorities as a common
carrier.
Third. The Reading Company is to transfer to trustees appointed
by the district court, subject to the lien of the collateral trust
mortgage already mentioned, all of its interest in the stock of the
New Jersey R. Co. Company. The final disposition of this stock is
to be deferred in view of the possible groupings of railroads by
the Interstate Commerce Commission under the Transportation Act of
1920 (41 Stat. 456), but is to be subject to an order of sale by
the court in its discretion before that time. The trustees are
directed to select directors and secure a management of the New
Jersey R. Co. Company entirely independent of
Page 259 U. S. 164
the Reading Company, which shall discharge its duties under the
supervision of the court.
Fourth. The stock of the Wilkes-Barre Coal Company, held by the
New Jersey Railroad Company, is by the decree to be sold to persons
not stockholders of the New Jersey Railroad Company, the Reading
Company, the Reading Railroad Company, or the new Reading Coal
Company, and who shall qualify as purchasers of the same by an
affidavit like the one already mentioned. It appears that this
provision of the decree has already been carried out, because not
appealed from, and that the stock of the Wilkes-Barre Coal Company
has been sold, though there is pending an application to set the
sale aside.
The appeals in this case were taken by the insurance companies,
who own 8,400 shares of the common stock of the Reading Company,
less than one percent of the entire common stock, and by the
so-called Prosser committee, also interveners, who represent
407,728 shares of the common stock, which is somewhat less than 30
percent of the total common stock, and less than 15 percent of the
entire capital stock of the Company. Their appeals are based on the
claim that the right to subscribe for the certificates of interest
in the stock of the new Coal Company belong to the common
stockholders of the Reading Company, and to them alone, to the
exclusion of the preferred stockholders.
After the first argument of these appeals, the court directed a
second argument upon the questions (1) whether the plan adopted by
the district court was in conformity with this Court's mandate, in
establishing the entire independence of the companies found in
unlawful combination from each other; (2) whether there was any
legal or practical difficulty in selling the Reading Coal Company's
stock free from the lien of the general mortgage, and (3) what was
the basis of the adjustment of the indebtedness between the Reading
Company and the new and old Reading Coal Companies [257 U.S.
622].
Page 259 U. S. 165
MR. CHIEF JUSTICE TAFT delivered the opinion of the Court.
The appeals which brought this case here were taken under the
Act of Congress approved February 11, 1903, 32 Stat. 823, as
modified by § 291 of the Judicial Code. Ordinarily the scope of our
review of the decree of
Page 259 U. S. 166
the district court would be limited to the assignments of error
of the appellants, but in this case, as the decree which is before
us was entered under a mandate of this Court, we have jurisdiction
to consider on our own motion whether our mandate has been complied
with. We delegated to the district court the duty of formulating a
decree in compliance with the principles announced in our judgment
of reversal, and that gives us plenary power, where the compliance
has been attempted and the decree in any proper way is brought to
our attention, to see that it follows our opinion.
The plan of dissolution of the bond between the four companies
under the control of the holding company is, shortly, as
follows:
1. It merges the Reading Railway Company in the Reading Company
and shears the latter of corporate capacity to do other than a
railroad business.
2. It turns over to trustees of the court for sale or
disposition in accord with the plan of groupings by the Interstate
Commerce Commission to be adopted under the Transportation Act the
majority stock of the New Jersey Railroad Company.
3. It separates the Wilkes-Barre Coal Company from the New
Jersey Railroad Company by directing the sale of that stock to
persons who do not own stock in any of the other companies.
4. It separates the Reading Company from the Reading Coal
Company by a transfer of all the stock in the latter company to a
new coal company to be organized by trustees of the court, and
directs a distribution to the stockholders of the Reading Company,
in proportion to their respective holdings of stock in the latter
company, of valuable rights, evidenced by so-called certificates of
interest, to dispose of the stock in the new Coal Company. The
effect of the decree is to require them either to sell these
certificates to others not stockholders in the Reading
Page 259 U. S. 167
Company or to sell their stock in the Reading Company before
themselves becoming stockholders in the new Coal Company, or doing
neither, and receiving no interest in the interval, to let the
court sell the new stock after July 1, 1924, for their account.
The difficulty in the separation of the interests of the Reading
Company and the Reading Coal Company is that the lien of the
general mortgage covers much of the property of the Reading Company
and all of the stock and property of the Coal Company, and is not
redeemable until 1997. The plan requires the Reading Company to
assume the whole liability of the general mortgage and to save the
old and new Coal Companies harmless therefrom in consideration of
$10,000,000 cash or current assets and $25,000,000 in bonds secured
by mortgage on all its property by the Reading Coal Company,
redeemable at the same time as the general mortgage. This is on the
assumption in which all agree that the respective liabilities of
the Reading Company and the Coal Company under the lien of the
mortgage as between themselves should be regarded as something less
than three to one.
The doubt whether the plan is adequate to secure the object of
this Court has been prompted by the failure to take out from under
the lien of the general mortgage the capital stock and the
properties of the Reading Coal Company and the giving of a new
mortgage by the Reading Coal Company on all its property to secure
bonds to be delivered by it to the Reading Company. The query is
whether this would not leave in the Reading Company some possible
measure of future control over the Coal Company, and enable the
Reading Company later on to reestablish in effect the combination
which, this Court decided, must be ended.
It is further questioned whether the interest which the new Coal
Company, with its properties still subject to the lien of the
general mortgage, will have in preserving the
Page 259 U. S. 168
solvency of the Reading Company, would not create a constant
motive on its part to favor the Reading Company with its tonnage
and discriminate against other carriers reaching its mines. It is
pointed out, too, that the interest of the Reading Company in the
continuing ability of the Coal Company to avoid default on its
proposed mortgage for $25,000,000 to secure bonds to be given to
the Reading Company would prompt a community of operation between
the two companies which it was the object of this Court to end.
All these difficulties, it is said, could be removed if all of
the properties and stock of the Coal Company were sold outright,
and the purchase money applied to the satisfaction
pro
tanto of the general mortgage by depositing with the trustee
cash or current securities equal to one-third of the amount of the
general mortgage debt, as the fair ratio of the Coal Company's
contribution to the security of that company, the remainder of the
proceeds of sale to go to the Reading Company for its proper
disposition as assets of its own.
When the mandate went down, the district court invited the
Reading Company to propose a plan for the dissolution of the
illegal combination for submission to all the parties in interest,
including, of course, the government. The first form of plan
contemplated that the release of the stock and properties of the
Reading Coal Company from the lien of the general mortgage should
be secured by the Reading Company's paying to each bondholder, in
consideration of his release, a cash premium of the percent of the
par value of the bonds he held. This did not meet with the favor of
the bondholders or of the trustee. The common stockholders of the
Reading Company also objected. The Solicitor General, in his
discussion of the plan, put the case thus:
"The Attorney General therefore was confronted with these
alternatives: (1) to insist upon the court's ordering
Page 259 U. S. 169
the release of the stock and properties of the Reading Coal
Company from the lien of the general mortgage without the consent
and over the protest of the trustee and the bondholders; or (2) to
assent to a modification of the plan which while placing in
different hands the stock control of the Reading Company and the
Reading Coal Company and providing effective safeguards against
future corporate relations would leave the stock and properties of
the latter pledged under the general mortgage."
"The following considerations appeared to make the latter course
the wiser, as well as the more expedient:"
"(1) The attitude of the trustee and bondholders made it clear
that the former course would meet with an opposition which
certainly would have resulted in another appeal to this Court, with
consequent delay in effecting a dissolution."
The fourth reason was stated as follows:
"(4) Finally, and most important, the country at that time was
in the midst of a serious financial and industrial depression
accompanying the transition from the artificial stimulations of war
to normal conditions of peace. The condition was regarded as
critical. Grave apprehension was felt that, if the government
should insist upon the disruption of the general mortgage, public
confidence in the restoration of prosperity might be adversely
affected. It seemed the course of wisdom, therefore, to avoid the
possibility of contributing further to an already threatening
situation if it could be done without sacrifice to the
effectiveness of the dissolution. The government was not averse to
any necessary surgery, but it seemed wise not to amputate any more
than was necessary to secure the great policy of the Sherman law.
In this, it followed the admonition of this Court in the
Standard Oil and
Tobacco cases that innocent
interests, as the present holders of the bonds in question were,
should be spared unnecessary injury. "
Page 259 U. S. 170
It is asserted further by the Reading Company, and not denied,
that, when this decree was entered by the district court, the
monetary situation was such that it would have been impossible to
secure a purchaser of the Reading Coal Company properties at any
fair price; that, indeed, the transaction could not have been
financed at all.
The considerations influencing the district court and the
government against a drastic readjustment of the interests of the
bondholders under the general mortgage and the holdings of the two
offending companies were of manifest weight in the then business
and monetary situation. Even now, this Court would hesitate to
order a sale of this kind of property, worth probably $100,000,000,
with confident hope of realizing an adequate amount with the
necessary restrictions as to the purchaser. We agree with the
Attorney General in his disinclination to insist upon such a sale
under the circumstances. Since the time of settling the decree,
however, a change for the better has come in the financial
situation. We think that this justifies us now in making some
modifications in the plan, which were not presented to the parties
or considered by the court, possibly because they might have been
unwise in the critical conditions then existing. They involve a
departure from the contract provisions of the general mortgage and
the bonds it secures.
The petition of the trustee under the general mortgage urges
that a court of equity ought not, by its decree, summarily to
wrench the Coal Company's property from under the pledge of the
mortgage, or to vary its terms in view of the circumstances. It
points out that neither the trustee nor the bondholders were made
parties to the original bill to set aside the combination and
monopoly, and that the trustee was made a party to the proceeding
only after the mandate of this Court went down. The petition avers
the innocence of any wrongdoing on the part of the bondholders, and
alleges that, of the $106,000,000
Page 259 U. S. 171
of bonds issued, $50,000,000 were issued at or about the date of
the mortgage in 1896, $36,000,000 were issued between 1897 and 1920
to take up and in exchange for underlying bonds that were liens
prior to reorganization and for the most part prior to the passage
of the Sherman Act, and $20,000,000 were issued between 1898 and
1911 for betterments. It further alleges that, for twenty years
after this mortgage was executed, its validity, as far as the
bondholders are concerned, has not been questioned by the
government, and these bonds have passed into the hands of numerous
and widely scattered holders; that few of them, if any, are or were
identified at all with the management of the Reading Company or
Coal Company, and many of the bonds are held by fiduciaries.
The power of the court under the Sherman Anti-Trust Law to
disregard the letter and legal effect of the bonds and general
mortgage under the circumstances of this case in order to achieve
the purpose of the law we cannot question. The principles laid down
and followed in the case of
United States v. Southern Pacific
Company, decided today,
post, 259 U. S. 214,
leave no doubt upon this point. Indeed, the case which we there
cite,
Philadelphia, Baltimore & Washington Railroad Co. v.
Schubert, 224 U. S. 603,
224 U. S.
613-614, is a stronger instance of the power of Congress
in regulating interstate commerce to disregard contracts than is
needed in this case, because there it was enforced as to a contract
made before the regulation. It may be conceded, as averred, that
the bondholders in this case were innocent of any actual sense of
wrongdoing, that they relied on the advice of eminent counsel in
assuming that the union of the Railroad and the Coal Companies
under the control of the holding company was not a violation of the
Sherman Law, and that some of them surrendered bonds secured by
underlying liens of unquestioned validity
Page 259 U. S. 172
created before the enactment of the Sherman Law. Nevertheless,
spread all over the face of the general mortgage was the
information and notice of the union of the railway and coal
properties for the very purpose which is the head and front of the
offending under the Anti-Trust Law, and which requires this Court
to dissolve the illegal combination. The general mortgage was the
indispensable instrument of the unlawful conspiracy to restrain
interstate commerce. It was the advantage of the legally improper
relation between the railway and coal interests which made the
security so attractive. In one of the phases of a case, reported as
United States v. Lake Shore & M. S. Ry. Co., 203 F.
295, the Court of Appeals of the Sixth Circuit was obliged to
consider on an intervening petition the question of the power of
the court under the Sherman Act to deal with a mortgage whose lien
if held to be inviolable interfered with the effective dissolution
of the offending combination of a railway company and a coal
company. The opinion is not reported, but we have been furnished a
certified copy of the memorandum opinion, and its language is so
pertinent that we quote it as expressing our view:
"One who takes a mortgage upon several items of property of such
character that their common ownership or operation may offend
against the Anti-Trust Law or the commodities clause, and such that
the mortgage serves practically to aid in tying them together, must
be deemed to hold his mortgage subject to the contingency that, if
the complete and final separation of one item of the mortgage
property from the remainder becomes essential to the due
enforcement of either named law, the court charged with such
enforcement may take control of that item, free it from the
consolidating tendency of the mortgage, and substitute therefor its
judicially ascertained equivalent. Otherwise the mortgage will
stand as the ready means of restoring. or at least tending to
restore,
Page 259 U. S. 173
those conditions which the court's is endeavoring to destroy. It
may well be true that a railroad and a coal company under common
ownership and management are worth more as security under a
mortgage than when independent, and that their effective separation
does impair the mortgage security, but this cannot make the law
helpless."
We have no desire to vary the security of the bondholders more
than seems necessary to effect fully the purpose of the law, and
wish to recognize their equities as against the two companies and
the stockholders, as will later appear.
We think that the plan should be changed in accord with the
following suggestions: the district court should, after a hearing
of all interested parties, determine the respective values of the
properties of the merged Reading Company and the Coal Company which
are subject to lien of the general mortgage. Then the decree should
direct that the liability of each on the bonds and the pledge under
the mortgage shall be modified as between the mortgagee and the
mortgagors, so that the liability of the Reading Company on the
bonds outstanding, and the lien of the mortgage upon that company's
property to secure them, shall be reduced to an amount
proportionate to the ratio of the value of its pledged property to
the value of all the property pledged including that of the Coal
Company. The obligation of the Coal Company upon such bonds and the
lien upon its property to secure them should be reduced in
corresponding proportion. The amount that each company is to pay as
interest should be similarly fixed, and specific provisions for
foreclosure of these separate liens on default and requisite
machinery and other necessary changes to carry out the result will
be made by the district court in its discretion. By this
arrangement, the interests and joint obligations of the Reading
Company and the Coal Company will be completely severed, and the
purpose of this Court carried out.
Page 259 U. S. 174
The Reading Company's first plan contemplated the securing of a
voluntary release of the Coal Company's property by the bondholders
through payment of ten percent of the par value of his bonds to
each bondholder; but the proposal did not meet with favor. We leave
it to the district court to determine what, if any, injury to the
security this modification of the terms of the debt and mortgage
may cause, and to compensate for it by such a payment to the
bondholders by either or both companies as may seem equitable and
convenient.
The changes involved in these suggestions may interfere with, or
make inapplicable, the provisions of the present plan looking to a
proper working capital for the Reading Company. Authority is
therefore given to the district court to amend the plan in any way
which seems wise to leave the Reading Company properly financed to
meet its obligations to the public.
It does not seem necessary to change the general form of that
feature of the plan by which, through the distribution of
certificates of interest to the stockholders of the old Reading
Company in the stock of the new Coal Company, the stock relations
of the old Reading Company and the present Coal Company are to be
ended, though we would not limit the power of the district court in
this regard. It may be found necessary to increase the price of two
dollars per share in the Reading Company which the recipients of
the certificates of interest in the stock of the new Coal Company
are to pay therefor in order to reserve more cash to the Reading
Company in that transaction, but this the district court can
determine. The adopted plan was nicely adjusted to secure a
practical working basis for both companies, and we would not
embarrass the district court, after a full hearing of all the
parties, in the detailed changes which it may find practically
necessary to adopt in following the general outlines of our
modification of the plan.
Page 259 U. S. 175
We think it not unreasonable to accept the suggestion made at
the bar -- namely, that not only shall the stockholders of the Coal
Company upon receiving and registering their stock be required to
make affidavit that they have no stock ownership in the Reading
Company, and are not acting for, or representing, anyone who has,
but also that the merged Reading Company shall be required to adopt
a bylaw, effective till the further order of the court, permitting
registration of transfers of shares of its capital stock in the
names only of persons who shall make affidavit that they are not
stockholders, registered or actual, in either the new or the old
Coal Company, and have not been and are not holders of proxies to
vote shares of stock therein.
As to the New Jersey Railroad Company and the Wilkes-Barre Coal
Company, we have heard no criticism. and the provisions as to them
are approved. By the decree, the new Coal Company, its officers and
directors, are enjoined from voting the Coal Company stock so as to
form a combination between the Coal Company and the Reading
Company. The Reading Company and all persons acting for or in its
interest are perpetually enjoined from acquiring, receiving,
holding, voting, or in any manner acting as the owner of any shares
of the new Coal Company, and the new Coal Company and all persons
acting for it are enjoined from acquiring, or voting, any of the
shares of the Reading Company. The Coal Company will be permanently
enjoined from issuing to the Reading Company, and the Reading
Company from receiving, any stock, bonds, or other evidences of
corporate indebtedness of the Coal Company. On default, the trustee
of the mortgage is required to vote the Coal Company stock so as
not to bring about a recurrence of the conditions condemned in this
cause, and if it shall be necessary to sell the properties, they
are to be sold to different interests. The Attorney General and his
successors in office
Page 259 U. S. 176
are given by the decree full opportunity to keep a watch upon
the relations between the two companies, and to appeal to the court
for prompt enforcement of the injunctions of the decree as they may
be advised. The court retains large control of the decree with
power to assure its continued efficacy by the summary remedy of
contempt. With these restrictive provisions and the modifications
of the plan outlined above, we think that the independence of the
four companies will be fully achieved.
We come now to the issue upon which these appeals were brought
here. It concerns the respective rights of the common stockholders
and the preferred stockholders in the assets of the Reading
Company. They all, under the plan, will receive the benefit of the
difference between the real value of the privilege of disposing of
their distributive certificates of interest in stock in the new
Coal Company, and the payment of $2.00 or such other sum as may be
fixed, per share held by them of the Reading Company stock. Such
difference has already been the subject of sale and quotation on
the market in New York and has varied from $11 to $20. This might
have been expected in view of the disparity between par of the
capital stock of the Reading Coal Company and the far greater
actual value of its properties. The disparity shows that, while the
transfer of certificates of interest in the new Coal Company stock
is denominated a sale, it is only a distribution of the surplus or
assets of the Reading Company to its stockholders made necessary by
the decree of this Court in taking the Reading Company out of the
coal business and restricting it to that of owning and operating a
railroad system. The Reading Company, by merger with the Reading
Railway Company, is made to change its character. Under the plan,
it must comply with the Act of May 3, 1909, Pell.Laws 408, by
which, in merging with the Reading Railway Company, it becomes a
new corporation.
Penn. Utilities Co. v. Public Service
Commission,
Page 259 U. S. 177
69 Pa.Super.Ct. 612;
Lauman v. Lebanon Valley R. Co.,
30 Pa. 42, 45;
Clearwater v.
Meredith, 1 Wall. 25;
Railroad Co. v.
Georgia, 98 U. S. 359;
Yazoo & Miss. Ry. v. Adams, 180 U. S.
1;
Shields v. Ohio, 95 U. S.
319.
What is to be done is in fact and law a liquidation of the
assets of the old Reading Company. Its stockholders receive their
distribution in kind by retention of the stock they held in the old
Reading Company as stock in the reduced new Reading Company, purged
of its offense against the law, together with the distributive
values of that which the old Reading Company has been compelled to
get rid of --
i.e., the ownership of the stock of the Coal
Company. The distribution of certificates of interest in the new
Coal Company shares was evidently given the form of a sale to
enable the new Reading Company to realize out of it $5,600,000 in
cash to give it additional working capital enough properly to
operate the Reading Railway System. But this does not change its
real nature as a mere distribution of forbidden assets in kind to
stockholders.
The rights of the common and preferred stockholders of the
Reading Company
inter sese are to be determined by the
organization agreement of 1896. At that time, under a special
charter of a corporation known as the Excelsior Enterprise Company,
granted by the Pennsylvania legislature in 1871, the Reading
Company, by change of name, came into being. The capital stock was
increased to $140,000,000, divided into 2,800,000 shares of the par
value of $50 each. Half of these were preferred, $28,000,000 first
preferred, and $42,000,000 second preferred. The other half, or
$70,000,000, were common, and the rights of the preferred and
common stock were fixed by agreement. Each share of stock, whether
common or preferred, had a vote. The agreement provided that the
preferred stock should be entitled to noncumulative dividends
"at the
Page 259 U. S. 178
rate of, but not exceeding, four percent per annum in each and
every fiscal year, in preference and priority to any payment in or
for such fiscal year, or any dividend on other stock, but only from
undivided net profits of the company when and as determined by the
board of directors, and only if and when the board shall declare
dividends therefrom. If, after providing for the payment of full
dividends for any fiscal year on the first preferred stock, there
shall remain any surplus undivided net profits, the board, out of
such surplus, may declare and pay dividends for such year upon the
second preferred stock. If, from the business of any particular
fiscal year, excluding undivided net profits remaining from
previous years, after providing out of the net profits of such
particular fiscal year for the payment of the full dividends for
such fiscal year on the first and second preferred stock, there
shall remain surplus net profits, the board of directors may
declare, and out of such surplus net profits of such year may pay,
dividends any other stock of the company. But no dividends shall in
any year be paid upon any such other stock out of net profits of
any previous fiscal year in which the full dividends shall not have
been paid on the first and second preferred stock."
The company was given the right at any time to redeem either or
both classes of its preferred stock at par in cash, if such
redemption should then be allowed by law, and after payment of
dividends of 4 percent for two successive years on the first
preferred stock, to convert the second preferred stock, not
exceeding $42,000,000, par value, one-half into first preferred
stock, and one-half into common stock, and to increase its first
preferred and common stock to the extent necessary to effect such
conversion. The company never exercised the right to convert or
redeem the preferred stock.
It will be observed that the preferred stock and the common
stock with 1,400,000 shares of each were thus
Page 259 U. S. 179
given and equality of voting power which could not be changed
without the consent of the company, and that it has not been
changed, either by conversion or redemption. This would seem to
have been designed to preserve an equilibrium of control, in which
reasonable dividends out of profits when they accrued in sufficient
amount would be voted to the common stockholders, on the one hand,
and proper additions would be made out of earnings to the capital
of the company to increase its future profit-earning capacity, and
create a greater security for a constant payment of dividends to
preferred stockholders. Of course, there would not be block voting
of the two classes of stock, but the division did tend to secure a
fair representation of both interests in the board of
directors.
The effect of the agreement as to dividends upon the preferred
and common stock seems to us clear. It emphasizes that dividends
are to be paid only out of undivided profits, and when and as
determined by the board of directors, and only if and when the
board shall declare them. It leaves to the board to determine in
its discretion whether the undivided profits shall be put in
surplus working capital or in dividends. The limitations on the
discretion of the board are that the first and second preferred
cannot receive more than four percent in any fiscal year, and that
neither the second preferred nor the common stock can receive any
dividend until the first preferred dividend has been paid in full
each year, and the common stock receives nothing until the second
preferred dividends is thus paid. The words describing the
condition upon which the power of the board to declare dividends on
the common stock can be exercised show that each year's profits are
to be considered by themselves in the distribution of dividends
between the stock.
Appellants, however, rely on the final words of the clause to
show that it is intended that net profits in any past year can be
thereafter allowed to the common stock
Page 259 U. S. 180
if, in that past year, the preferred stock had been paid full
dividends. We do not find it necessary to decide that the board of
directors has not such power, but, if so, the power is not one the
exercise of which can be compelled in the absence of fraud or
breach of trust. The failure of the board to exercise it, and the
application of the earnings to surplus determine such earnings to
be assets as of the time of the compulsory winding up and
liquidation of the corporation. The power to declare dividends not
exercised can have no more effect upon the rights of the preferred
stockholders to share in the existing assets of the corporation
when liquidated than the failure of the company to convert
preferred stock into common, or to redeem the preferred stock at
par. The proper interpretation of the agreement is that, after the
declaration of dividends for any current year, the undivided
earnings are to be regarded as capital assets, and to be
distributed on liquidation unless the board of directors has
meantime applied them as dividends. If the argument of appellants
were carried to its logical result, all the net earnings of the
Reading Company in 25 years, no matter how invested or applied to
increasing the earning capital, must, in a liquidation, be treated
as undistributed profits, to go entirely to the common stock
without any action of the board of directors. This is
impossible.
The record discloses that, in 1904, when the Reading Company
made its application to the New York Stock Exchange to have its
stock listed, it contained the following statement:
"The preferred and common stock have equal voting power, and in
liquidation or dissolution of the corporation will share equally in
pro rata distribution of assets."
Coming, as this must have come, from the representatives of both
the preferred and common stockholders, it is significant evidence
of what they then thought of their
Page 259 U. S. 181
respective rights, and has the additional weight of a
representation to future purchasers of the two classes of stock as
to the kind of interests they were buying in the company.
Our conclusion that the claim on behalf of the common
stockholders is invalid is based on the construction of the words
of the agreement itself, and hardly needs authority to sustain it.
It is, however, in accord with the general common law rule that
stockholders, common and preferred, share alike in the assets of a
liquidating corporation if the preference is only as to dividends.
Hamlin v. Toledo, St.L. & K.C. R. Co., 78 F. 664, 672,
opinion by Mr. Justice Lurton, then Circuit Judge;
Toledo,
St.L. & K.C. Ry. Co. v. Continental Trust Co., 95 F. 497,
531;
Guaranty Trust Co. v. Galvestion City R. Co., 107 F.
311, 318;
Birch v. Cropper, L.R. 39 Ch.D. 1:14 Appeal
Cases, 525;
In re Accrington Corporation Steam Tramways
Co., [1909] 2 Ch. 40;
Lloyd v. Pennsylvania Electric
Vehicle Co., 75 N.J.Eq. 263;
Jones v. Concord &
Montreal Railroad Co., 67 N.H. 119; 67 N.H. 234;
Drewry
Hughes Co. v. Throckmorton, 120 Va. 859. This is the rule in
Pennsylvania.
North American Mining Co. v. Clarke, 40 Pa.
432. The cases in which a different conclusion has been reached are
where the contract or law determining the rights of the preferred
stockholders has an express or clearly implied restriction as to
the share which they may take in the assets on liquidation.
Niles v. Ludlow Co., 196 F. 994;
Russell v. American
Gas Co., 152 App.Div. 136.
Counsel for one of the appellants has called attention to the
fact, not appearing in any assignment of error, that among the
assets of the old Reading Company which the new Reading Company
will continue to hold is $1,000,000 par value and of much greater
actual value in the stock of the Reading Iron Company, an iron
manufacturing company, and that, under the Constitution of
Pennsylvania,
Page 259 U. S. 182
it will be unlawful for the new Reading Company as a railroad
company to continue to own it. Questions as to the propriety and
legality of this holding of the Old Reading Company did not arise
when the case was before this Court originally, and do not arise on
the record before us now, in any such way as to enable us to say
whether the federal commodities clause or the Constitution of
Pennsylvania will thus be violated in carrying out the plan by
which the Reading Company is to become a railroad company. This
must be determined by the district court in further hearings and
consideration at the time the final decree comes to be settled in
accordance with our mandate, when it will have authority to modify
the plan in this respect to satisfy the requirements of law.
The decree of the district court is affirmed, with modifications
already indicated, and the case is remanded for further proceedings
in conformity to this opinion.
Affirmed with modifications.
MR. JUSTICE BRANDEIS took no part in the consideration or
decision of this case.
