SCHEDULE 9.-Certain class I railroads reorganized since 1933 or still in process of reorganization-Cost of acquiring 51 percent of stock of certain roads already reorganized, as of May 1, 1947—Continued 1 Stocks of roads so indicated have been placed under voting trusts or escrow agreements 2 Roads controlled by other corporations prior to reorganization. Companies shown are roads already reorganized whose control is purchasable in the Companies already reorganized not included in above statement: Waterloo, Cedar Falls & Northern-Stock not listed on New York Stock Exchange. statement No. 4142). IF CONTROL IS RESTORED TO PRESENT STOCKS, THE RESULTS ARE FANTASTIC To summarize in the case of roads not yet reorganized, the average market prices of their stocks before bankruptcy would have permitted a speculator to get control of $69,986 of rate-making value for $1,000. During the bankruptcy these stocks fell so low in price that he could have obtained control of an average of $2,225,925 of rate-making value for $1,000. The average prices of these stocks during the bankruptcy period were such that control could have been obtained and undoubtedly was obtained, based on the volume of sales of stocks in question, at prices which gave control of $116,572 of rate-making value for $1,000. Even the companies which have been reorganized, allegedly in drastic fashion, still permit control of $17,672 of rate-making value for an investment of $1,000. Similarly, in the case of employees, the prices before bankruptcy would have enabled a speculator to secure control of the production on one employee for $245.58. During the bankruptcy prices fell so low that on the average, control of the production of one employee could have been secured for an expenditure of $7.72, and on the basis of average prices during the bankruptcy this control could have been secured, and was secured if the proposed amendments become law, at an average cost of $147.44 per employee. Even the reorganizations already effected permit this to be done at an average cost of $981.18 per employee. This poses an important problem of public interest: Should the control of the railroads of the United States be available on the markets for next to nothing or should that control at least have a price which reflects not only the value of control itself, but which also bears a reasonable relation to the value of the equity in the enterprise? The evils of speculative control of this type are discussed more fully under the heading of "Voting trusts.” In view of these facts it is urged that the proposed amendments should not be approved prior to a thorough investigation of the identity of present holders of stock of these bankrupt companies. This investigation should not be satisfied with a mere list of record holders but should find out who the real holders are, what their connections are, when they acquired their stock, through whom, at what price, and what their relations are with individuals who are advocating passage of such legislation. VOTING TRUSTS-INSTITUTIONAL INVESTORS DESIRE PROTECTIONNOT CONTROL Contrary to the suggestions of the reports, the institutional investors have no desire whatever to control railroads. They are protecting investments that represent the savings, of millions of policy holders and depositors. Their interest in railroad reorganization is not to make speculative profits, nor to seize control of railroads. Their interest is, and has been, to protect, now and in the future, the savings of the depositors and policyholders whose trustees they are. Those institutions have proposed voting trusts, not to control railroads, but to prevent the type of speculative control whose practices in the past have shocked the public and the committees of Congress. The institutions believe such speculative control to be inimical to sound investments for trustee institutions and clearly contrary to the public interest in sound transportation policies. RECOGNITION OF NEED FOR VOTING TRUSTS Both committee reports overlook the fact that sound reasons exist for the creation of a voting trust with respect to a common carrier emerging from reorganization. We have already commented on the prices at which control of these bankrupt carriers was purchasable during bankruptcy if the proposed amendments to S. 249 should become law. Senator Two illustrations were given at the hearings on S. 1253. Wheeler, then chairman of the Senate Interstate Commerce Committee, pointed out: I know of one railroad where they had some money in the treasury some years ago, and a group of speculators went in and bought up a lot of the stock and got control of the railroad and then voted the money out of the treasury for the payment of dividends. After they voted the money out of the treasury for dividends, the railroad went broke. * * * The stockholders were benefited by it, because of the fact that they had this money in the treasury for the purpose of paying off some of their obligations, but a group of speculators got control of the railroad and voted dividends. They boosted the stock on the stock market as a result and unloaded the stock, and the treasury of the company was practically depleted, and the result was that the bondholders and the people who put their money into bonds were without any money. We had before us an example in the Alleghany Corp., where they got control of a great group of railroads in this country for practically nothing, because of the fact that they were able to buy up a lot of cheap stock. If you buy a lot of the cheap ones when stocks are selling for almost nothing, speculators can go in and, unless safeguards prevent control passing to them, they can take charge of a railroad with a lot of cheap stock that as the Senator said, can be sold by the pound. They bought it by the pound and got control. Similar views were expressed by Judge Barnes in his opinion approving the plan of reorganization for the Chicago & North Western: It is observed that the life-insurance committee and the savings-bank committee will designate three, and after the Reconstruction Finance Corporation ceases to be a creditor of the reorganized company, four, of the five voting trustees. These two committees together represent the owners of $14,994,000 or 31.4 percent of the $47,822,000 First and Refunding bonds outstanding. The interests of the holders of this 31.4 percent of the First and Refunding bonds are no different from the interests of the holders of the remaining 68.6 percent. So that it cannot be said that any holders of First and Refunding bonds are not represented on the voting trust, and objection No. 4 of the First and Refunding Mortgage Trustee must be overruled. Furthermore, in considering the proper place for the lodgment of the power of appointment of voting trustees the purposes of the voting trust must be considered. A principal purpose is to prevent the divorcement of management from actual ownership during the period immediately after reorganization when stocks, which in the absence of a voting trust would designate and control the management, can be expected to have only a speculative value. A voting trust, whose trustees are appointed by those having the interest of the enterprise at heart, can prevent speculators, who might acquire a majority of the stock for a relatively small sum of money, from managing the enterprise for their own selfish ends. The court finds that the power of appointment of the voting trustees is lodged in proper hands. DANGERS OF SPECULATIVE CONTROL Wholly apart from the acquisition of stock for speculative purposes, control of a corporation of the magnitude of the average interstate carrier may well be sought for purposes wholly unrelated to the development of a sound transportation unit. Control of the flow of traffic may be a matter of very great importance to certain competitors of the reorganized company, to certain industrial or commercial interests, or to other organized groups. Likewise, control of a corporation having such large purchasing power and such great employment capacity may readily be of considerable importance to particular interests which could afford to advance funds sufficient to acquire such control. From a speculative viewpoint, such control might offer the temptation to effect changes in operating methods either through increasing or decreasing maintenance expenses, shifting traffic policies, or adjusting capital expenditures, so as to affect favorably or adversely the earning power of such stock or the equity of such stock in the assets of the corporation. Only a brief consideration of these possibilities is required to demonstrate that the potential effects of such a type of control would be wholly unrelated to the necessities of the transportation industry. It is a matter of prime importance to the public that adequate safeguards be provided against such contingencies. The voting trust is the most adaptable device for this purpose. NECESSITY FOR STABILITY OF MANAGEMENT FOLLOWING REORGANIZATION It is likewise a matter of common knowledge that under ordinary conditions railroad stocks sell at depressed prices immediately following reorganization and until a period of seasoning has elapsed. As a consequence changes in ownership are responsive to slight variations in market prices, thus inviting a shifting control. Such a condition is not conducive to the stability and continuity of management essential to the development of sound policies. During this transitional stage it is essential that a reorganized company have a strong management that can develop sound policies and render them effective. Policies designed to meet competitive influences, develop effective traffic solicitation programs, install efficient operating methods, and evolve comprehensive improvement programs and constant modernization of facilities, require a period of time, and must extend over a sufficient interval to permit not only their development but likewise their fruition, if positive results are to be obtained. Any sound program of rehabilitation and business development must necessarily encompass a period of years. The possibility of a shifting control discourages the development of such a program and encourages a temporary "hand-to-mouth" program of immediate expediency. Experience has shown that the voting trust provides a satisfactory method of accomplishing the foregoing purposes. In order that they not be unnecessarily extended, the plans of reorganization generally provide for their termination at such time as earnings reach a point where the securities should attain a market price that would discourage speculative and shifting control. SENIOR CREDITORS ARE ENTITLED TO PROTECTION OF VOTING TRUST Not only is the creation of a voting trust a matter of profound importance to the public, but it is something to which senior security holders are entitled in the protection of their investment and as a matter of fair and equitable treatment. Senior creditors who become holders of income bonds as a result of reorganization are entitled to protection from the improper diversion of traffic for ulterior motives, the dissipation of revenues through poorly considered or inadvisable operating programs and the making of inappropriate capital expenditures. Likewise, the holders of new fixed interest bonds are entitled to assurance that the policies and programs of the reorganized company will be such as to avoid default. and a recurrence of reorganization. Each of these classes of security holders is therefore vitally interested in having a strong and continuing management after reorganization that will manage the property in the best interests of the entire group of security holders. TREATMENT OF BONDHOLDERS UNDER SECTION 77 IT HAS NOT BEEN POSSIBLE TO SATISFY EVEN BONDHOLDERS' CLAIMS IN FULL Report No. 1170 says: The committee desires to emphasize that the Congress cannot by legislative action pump value into securities which are valueless; it does not do that by the recommended bill nor can that be done by any Congressional fiat. But the committee's investigations and hearings thus far compel it to recognize that forfeitures are taking place or are contemplated, that have no basis in equity or moral right. If this is true, then it must follow that the value to which the old stockholders are entitled was received by someone else, who thereby received more than they were entitled to. However, this is clearly not the case, for the reorganizations approved by the Interstate Commerce Commission under section 77, severe as they have been alleged to be, have frequently failed to produce full market value for any of the claims recognized in full in those plans. Schedule 10 shows one important bond issue of each of the major roads whose reorgani zation has been completed, the new securities received in reorganiza tion, and the market value of those securities as of May 17, 1947. Generally speaking these bond issues are the most junior bond issues which were nominally recognized in full and in nearly every case received a large part of the common stock of the reorganized company. They therefore received "all the equity" which there was to offer. If anything more had been given to issues junior to those shown on schedule 10, it could only have been given at their expense, and it would have reduced the value of the securities they received correspondingly. It will be noted that in only one case, that of the first mortgage bonds of the Western Pacific, does the present market value of securities received equal or even approach the original principal amount of the bond, and even in that case the present market value of securities received was only about 80 percent of the total claim. It will be noted that the average ratio of market value to total claim for all of these securities was 43 percent and the average ratio of market value to total principal amount of claim, excluding any unpaid interest, was only 55 percent. These security holders, ranking in every case senior to securities held by the Commission to be without value in whole or in part, had thus already lost on the average 57 percent of their total claim or 45 percent of their claim for principal. and they would have inevitably lost more if the proposed amendments had been law at the time of reorganization, and something had been taken away from them for more junior issues. (Schedule 10 is as follows:) |