Continental Ins. Co. v. United States, 259 U.S. 156 (1922)
U.S. Supreme CourtContinental Ins. Co. v. United States, 259 U.S. 156 (1922)
Continental Insurance Company v. United States
Nos. 609, 610
Argued January 18, 19, 1922
Restored to docket for reargument February 27, 1922
Reargued April 10, 11, 1922
Decided May 29, 1922
259 U.S. 156
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
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
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.
(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
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
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
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.
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
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
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].