Railway F^jSSIRation. THE PROPOSED RAILWAY TRUSTS. BY vr- Charles Fy Beach, Jr. OP THE NEW YORK BAR. • • • • • • • • • •- • • • • •• r • • # % 0 • 0 0 0 0 0 0 0 0 0 00 ♦ • ' • • * , ^UPj ■'/' • • ••.A* • I •r**^*. * • ^ 0^00 • • • 0 \ /I • • • V. ^ /y n 000^00 0^0 *— ■ -A /-•A i\ V /( f iBBKL AJIY, 1890. ' V *. i f4 ' A icA I ’jAn - V A ./ ‘ ' ■ - ■ s . ^ ' * • .a 5- . r o ^ Reprinted from the "^Railway a^d Corporation H Law Journal of p July 27, 1889. o ii THE PROPOSED RAILWAY TRUSTS. The revival of discussion concerning a railroad L trust, or an inter-associatifou yof ^such trusts in the various sections of the country where it ibi sfup^t- , posed they might be useful, is, perhaps, (a natural result of the conceded failure of State and federal legislation, on the one hand, and of the several voluntary associations among rail’ways or railway officials, on the other, to solve satisfactorily all the problems that are involved in railway operation and management in this country. We have tried State statutes and Federal statutes. State boards of railroad commissioners. Interstate Commerce Com¬ missions, Interstate Commerce Railwav Associa- tions, CrangeiTegislation, Trunk-line Pools, Traffic » Associations, Judge Cooley and Mr. Fink, all with¬ out avail, and we begin to perceive either that the railways must contrive some new, effective, stable 1^1 and equitable control of themselves, having due regard to the interests of the public and of the owners of the property involved, or that we shall presently end in absolute governmental ownership and operation. We have learned that railways without reguU-^ tion will not be tolerated in this country*) that 2 I \ legislation of the sort hitherto attempted docs only a little good and a great deal of harm; that associations between rail vTays themselves, or among railway officials, being only palliatives and make¬ shifts, are inherently too weak to serve either the railways or the public efficiently ; that the pro¬ gress of consolidation of lines can neither be swift nor sW'Oeping enough to answer the purpose, and we now discover that^ic midsummer, 1889, having , wasted our substance on many physicians, w’e are kittle better off than we w^eie twenty-five years ago. We have, indeed, made some progress since the early days when the public had no rights that a railroad w-as bound to respect, and since that later time when railroads were pillaged and plundered by the public as though they w^ere a common ene¬ my ; but we are still in a wretched predicament, and very far from a condition of railroad operation which secures to the public all it ought to have and preserves to the railways all the\' are entitled to. The railw^ays must, therefore, set about in good earnest to devise a remedy or we shall presently be face to face with governmental operation. It is idle to ciy peace, peace, wdien there is no peace. This is precisel}^ the turn that railway affairs in the United States are now taking. The proposition to operate railways by means of an association between the shareowmers of con¬ necting, parallel or competing lines—associations between the railways themselves, or their officials, having proved ineffectual—is, in this view of the 1 ? 7 o o ( situation, entitled to the mast intelligent consider¬ ation. It is the purpose of this essay to suggest some things to be avoided in the creation of such an association, and to propose some objects desir¬ able to be attained thereby. If on consideration it be determined that volun¬ tary, unincorporated associations between the share- owners of certain railways are desirable—that is, that railway trusts are desirable—let us begin by not calling them “trusts.” The public are pos¬ sessed of an unreasoning dread of what they call “ trusts,” and the public temper is in a feverish state regarding them. Not one man, indeed, in a thousand, who is in a state of consternation over “ trusts,” knows what a trust really is, or how it is constituted, or what it is designed to effect, or what it actually accomplishes. He has been taught his terror by the newspapers and the poli¬ ticians. Seven hundred and fifty out of the thou- ^nd will, when trusts are explained to them, cease to regard them with alarm. The remaining two hundred and fifty are possibly incorrigible. They are not, however, this time Matthew Arnold’s “re¬ deeming minority,”—on the contrary, quite the reverse. In christening the railway trust it will then be wise to take due account of this condition of the public mind, and it will be a step in the right direction to quit calling it a “ trust.” It may be called anything but that. If it be called an association, or a voluntary association, or a vol¬ untary unincorporated association the public will 4 not be scared. When an organization, not indeed created on the trust theory, but designed, as towards the public at least, to accomplish in some respects very much the same ends contemplated in the creation of trusts, was lately called the ‘‘Inter¬ state Commerce Railway Association,” no one was ^ seriously disturbed, and nobody shouted “ conspir¬ acy ” or “stop thief.’’ The partisan newspapers also who, in one column were bawling out vituper- J ation of “ trusts,” on another page gleefully make ' small jokes over what they called an “ agreement among gentlemen.” They were so taken with their wit that they entirely overlooked what they might have called the “ trust ” iniquity that lurked in it. Witness also the persistence with which they miscall the North American Salt Co. a “ trust.” It will, in this state of the public intelli¬ gence and temper, be wise to throw it a sop in the matter of the name for the railway trust. It may also be well to avoid any attempt at secrecy in the formation of such a trust. It is neither foolish, nor wicked, nor in any degree un- ♦ lawful for stockholders to organize themselves in the way here proposed, and there is, therefore, no motive for any elaborate effort to conceal what is ^ proposed. The commercial trusts, some of them, made a mistake in trying to cover up their organ¬ ization. While, perhaps, it is, strictly speaking, no outsider’s business how or why a trust of this sort is entered into, nevertheless, if any outsider thinks it is, and wants to see the wheels go around, 0 it will rob the “ trust ” of one of its terrors to be entirely open about it. It will be remembered that last winter it was strenuously urged that trusts are “secret,” as if upon the theory that all other business undertakings among men are as open as the day; and there is, it will be conceded, some color of excuse, as people and politicians go, for popular outcry against any such enterprise which is at once novel and ostentatiously secret. Let the railroad trust, therefore, be formed just as other organizations are formed, without, on the one hand, any parade of details, and equally without any pass-words, grips, or countersigns. Another matter to be especially insisted upon is that the trust certificates be not listed or dealt in on the floor of any Exchange here or abroad. If railway managers propose in good faith to organ¬ ize a trust to promote legitimate railway operation, and are willing to conduct their business in the public interest and for the profit of the owners of the property entrusted to them, they will incorpo¬ rate this provision as a cardinal principle in their deed of trust. The functions of a rail wav mana- V ger and of a gambler in railway securities are not compatible, and there should be no possibility and no temptation to unite them in respect of these trust certificates. Legitimate railway management imperatively requires that the manager of a rail¬ way keep out of Wall Street, at least so far as the securities of the road he manages are concerned. It is his sole function to operate his road and to 6 discharge the trust commicted to him as a business man, and not as a bull or a bear on the Stock Ex¬ change. The declaration of trust, then, should arbitrarily prohibit the listing of these certificates on any stock exchange. xVny railway official w’ho opposes this feature of a railway trust is primarily ^ a stock speculator, and only incidentally a railway manager; and such a man is not a safe adviser in regard to railway policy. ^ Approaching the matter of the formal organiza¬ tion of such a trust, account must be taken, first, of the public or semi-public functions imposed by rules of law" and public policy upon common car¬ riers; and, second, of certain particular disabling requirements of law affecting railway corporations, a violation of which must be scrupulously avoided. The association contemiDlated must be entirely be¬ tween the individual stockholders or stock and bondholders, and not at all between the railway corporations themselves. The corporation must be absolutety independent of the trust, and wffiolly separate and apart from it. ^ In formulating the scheme regard must be had to the rule of law that one railwav companv can- not vote on the stock of another railway company. » It may sometimes lawfully acquire the stock of an¬ other road, and it may then lawfully hold it and receive dividends on it; but it is becoming a well settled rule that it cannot vote on it at corporate meetings, either directly or through the medium of trustees. There is already ample authority for 7 this position, and there will be more before there is less. The courts of chancery are setting their face against this form, of control of one railway by an¬ other, and it cannot enter directly or indirectly into any feasible scheme of railway association. Again, the courts have decided that the right to vote on railway shares cannot by proxy be irre¬ vocably separated from the ownership. There can be no such thing as an irrevocable proxy to vote railway stock. This form of control of railway property has been tried over and over again, v/iih all the possible variations, and has uniformly failed. The Cincinnati, Hamilton and Dayton, the Yander- bilt-Hostetter, and the Philadelphia and Reading voting trusts are recent instances of the inutility of such a device. Any scheme, therefore, to succeed, must wholly eliminate any contrivance of this na¬ ture. We must conceive something more enduring than an attempted-irrevocable proxy. It is as of course that any sort of a rope of sand will hold as long as there is no contest. What is now required is some form of association that will cohere in the face of a tempest, that can survive a lawsuit, and withstand the assaults and outlive the dissatisfaction of a minority, in interest. We can¬ not, therefore, look to any scheme of railway con¬ solidation, however plausible it may appear and however gigantic its proportions, as the solution o f our present difficulties. . The country is too large, the railways too numerous, and the legal and tech¬ nical embarrassments too serious for such an under I 8 taking to float Consolidation creates great systems, and is good as far as it goes; but it can never go in this country as far as it is necessary for some¬ thing to go in order to relieve our railways from their present straits. The promoters of the mon¬ strous scheme to consolidate the trans-continental lines by charter from the federal government which has lately been made the subject of some newspaper comment—if it have any substantial existence— will find out, even if they succeed, that their suc¬ cess is only another form of failure. If our ter¬ ritory were no larger than England and Scot¬ land the scheme that furnished relief there might avail here; but railways in the British Islands arc, as compared to our overgrown proportions, scarcely more than a laboratory experiment. We must also avoid any plan of association which, in the dispo¬ sition of earnings, is obnoxious to the objection that it violates the provision of the Interstate Com¬ merce law against pooling. This will possibly be the most difficult point to compass in drafting or devising a trust deed. To specialists in railroad law and to laymen trained in this sort of speculation, these sugges¬ tions, many or all of them, will seem threadbare and commonplace, but there is a much more gen¬ eral lack of precise knowledge upon the matters here considered, even among railway men, than is perhaps generally believed. It is, therefore, safe sometimes to talk elementary principles. The following Associated Press dispatch, which re- 9 cently appeared in the morning papers, suggests the crudeness of many men’s ideas on this sub-' ject:— ‘‘Chicago, July 14.— The attorney for one of the largest railway companies having offices in this city, said to-day in regard to the proposed Railroad Trust:—‘ The injunction obtained against the Ore¬ gon Transcontinental Company, preventing it from voting its controlling stock at the Oregon Naviga¬ tion election a month ago, following the decision refusing to allow the East Tennessee to vote its Memphis and Charleston stock, killed all hopes of a railroad trust ever being formed.’ ” i ( “ Of course “ the attorney for one of the largest railways ” never delivered himself of any such non¬ sense as that, and of course if he did he was the cow-case member of the firm, and might with equal wisdom have included in his citation of authorities the leading case of Bardell v. Pickwick^ which is an excellent—and to the present writing unover¬ ruled—authority against a certain sort of “ trust.” The intent or objects to be attained by the cre¬ ation of a railway trust will amply justify it, and ought to be plainly and specifically declared in the trust deed. Among the substantial inducements to such an organization are economy in the opera¬ tion of the associated lines; the suppression of the competition of reckless and insolvent rivals, in¬ cluding the prevention of rate wars and rate cut¬ ting; the prevention of over-building, involving wholesome restraint upon speculative construction, 10 and recognizing the fact that there is a possible over-production of railways, as well as of sugar or salt; the protection of each road from the encroach¬ ments of its rivals; the protection of all the lines in the construction of necessary branches and feeders, and the protection of the public in the construc¬ tion of new lines; the maintenance of steady rates, leaving the railways to compete in facilities only and not in rates, which is the only healthy compe¬ tition among common carriers when rates are nor¬ mal; the protection of the weaker lines, and an arrest of the present tendency toward their absorp¬ tion by the stronger systems, and finally a stay in the progess now certainly making toward govern¬ mental interference and operation. All this and more may be secured by a railway trust honestly and intelligently organized. If the railways do not control themselves, the federal government will, somehow or other be in control within a dozen years. Our railway man¬ agers have conducted themselves frequently, in the matter of competition, in the most puerile and irresponsible fashion, carrying on, at the expense of the stock and bondholders, railway slugging matches, for stock jobbing purposes or for the mere gratification that comes from a fracas. A railway tmst of the sort here considered will rele* gate such antics to the back-yard, because it will put railway operation on the same plane as other sound business enterprises, and make it possible to operate a railway line with a decent regard both 11 to the interests of the property to be riianaged and the public to be- served. To come more directly to the details of the ar¬ rangement, I suggest that it will not be necessary, or even expedient, to bring into the trust arrange¬ ment at first more than a majority of the stock of any road embraced in the scheme. An outstand¬ ing minority of the stock, a part of which is in friendly hands, will not, even under a system of cumulative voting, interfere with the control'of the property by the trust, and it will serve to secure to the minority such a voice in the management of the road as a minority of right ought to have. The advantages of the trust will probably put a pre¬ mium upon coming in, and th3 outstanding shares will continually tend to conversion into certificates. - If this be so, the trust will justify itself, if it be otherwise, no harm can come of it, and the minority can, as now, exercise all their rights, without blocking the game. ' It will be necessary to divide up the territory to be covered on some natural lines of division, and to create a trust for the railways of each sec¬ tion. Thus, suppose a trust for the trunk lines, another for the territorv west and south of St. %j Louis, another north and west of Chicago, another for the Atlantic seaboard, another for New England and certain of the Canadian lines, another for the south Mississippi valley, another for the territory having its centre at Denver, and finally one for the Pacific coast. These several trusts could all be in- 12 ter-associated and work together to a common end. In each case there might be created a trust board of tw'enty-one members including representatives of the stock and bonded interests of the lines in¬ cluded in the scheme, w’hfch should act as a com¬ mittee of the whole in determining the policy of the trust, but to be subdivided into as many com¬ mittees, of three members each, as there are roads to be operated, no two members to constitute a majority of any two of these subcommittees. A majority at least of the stock of each of the roads should then be conveyed absolutely to the trust, and the title taken in the names of these sub¬ committees, the stock of each road to be in the name of a different committee, to be registered on the books of the corporation in their individual names, and to be held by the trust endorsed in blank, for the purposes declared in the deed of trust. For this stock so conveyed to the trust there should be issued, as usual, trust certificates to the several surrendering shareowners. In other words, the usual provisions of a trust arrangement should be entered into between the stockholders constituting the association. This majority would elect the boards of directors and operate the prop¬ erties pursuant to the provisions of the trust deed and as the interests of the business might dictate. Each road would thus maintain its corporate organ¬ ization, and carry on its business independently, conforming to all the rules of law affecting its ex¬ istence and operation, and performing as a com- 13 moD carrier all its duties to the public, precisely, as to the'public^ as though there were no trust. The public would, therefore, not be heard to chal¬ lenge the trust. Dividends should, in every instance,be declared directly on the stock of each road as earned, and paid over, as usual, directly to each stockholder as the stock books declare. Thus the outstanding stock would receive its dividend directly, and the dividends on the stock included in the trust t would be paid into the trust and be re-distributed on the certificates. This contrivance would entire¬ ly avoid the inhibition of the Interstate Commerce law against pooling, and shut off any possible ob¬ jection to the trust scheme at this point predicated upon the pooling of earnings or the public func¬ tion of the railway as a common carrier. The corporation, qua corporation, thus touches the trust at no point. There is created merely a voluntary, unincorporated association between the owners of a majority of the stock of the allied lines. Such an association, it is hardly necessary to say, is absolutely lawful, both in itself and in its purposes. No legislation, either State or federal, can ever be successfully aimed against it, and no hostile court can ever dissolve it as long as the Con¬ stitution of the United States and of the several States of the Union are the supreme law. The right to do business in partnership with one's neighbors is guaranteed to the people of these United States not only by our written constitutions. 14 but by the rules of the common law, and it will not become unlawful in any civilized community in the near future. Upon the invitation of the editor of The Forum I have emphasized this view of the le¬ gality of trusts in an article entitled Facts about Trusts,”—published in the September number of that periodical—to which reference is here made for a fuller statement of the points involved. ' Two classes only, speaking broadly, will, it is ^ believed, oppose such an association among rail¬ way shareowners; namely, (a) such railway mana¬ gers as combine the character of a railway official and stock speculator, and (&) the politicians and their victims. But the opposition of neither of these classes will be formidable if the owners of railway property can be united in support of the scheme. It should be carefully canvassed and seriously considered before it is abondoned as im¬ practicable. It is, verily, a feasible proposal, and one which, if carried out intelligently and in good faith, under a declaration of trust skillfully devised, promises more for legitimate railroading in the ^ United States than any other form of railway asso¬ ciation and control yet suggested. Reprinted from the Railway and Corporation Law Journal of Jan. II, 1890, II. THE ATCHISON VOTING TRUST. The Atchison re-organization now, happily, cer¬ tain of success beyond a peradventure, includes, by the recent action of the committee in charge, ()ne feature of uttermost importance if the re-or¬ ganization is really to re-organize and reconstitute that great property, and if the management of the road by its owners is to be perpetuated. Messrs. Kidder, Peabody & Co., through whom the fi¬ nancial operations looking to the re-organization have been conducted, in an advertisement in the commercial newspapers, are calling upon the holders of the new stock to enter into a voting trust for the permanent control of the corporation by the present owners of the securities. The bonded indebtedness of the new organization will be about $230,000,000, and the par value of the stock $75,000,000. At the present prices the bonds are worth $150,000,000, while the stock is worth not more than $25,000,000. If the new enterprise prosper the value of the bonds is likely to increase more rapidly than that of the stock, so that the ratio of 1-7 of stock interest in the property to 6-7 of bonded interest is reasonably certain not to grow more favorable to the smaller investment. The stock represents now about one-seventh of IG the value of the corporate property, and is not likely to represent more. Under the ordinary conditions this one-seventh of stock-holding interest, or even a scant majority of it, representing not more than one fourteenth of the value of the property, may elect a board of directors, take absolute and undis¬ turbed possession of the property and manage it for at least a year, without any other than an inci¬ dental regard for the interests represented by the other half of the stock and by all the bonds. This is indeed the ordinary course of business in lailway management in these latter days. In the case of the Atchison security holders it is not, therefore, strange that an effort should be made to place the management and control of the property—of their property—in responsible and friendly hands, and to build some wall of defense for themselves against the danger of having the board fall into the hands of any speculator or syndicate that, two months before election, might put a million or two into margins on the stock, or eight or ten millions into the stock itself. As the matter would stand with¬ out the voting trust, it would be possible to buy or borrow a control of the election in any year, for no greater a price than that, and thus to oust the owners absolutely from the operation of their prop¬ erty. Such financial performances are the amuse¬ ment of every business day in Wall street. The Atchison management have, therefore, wisely de¬ termined to create a voting trust. About these “trusts” as we know, there are 17 many pitfalls. There is the C. H. & D. pitfall, and the Reading pitfall, and the Hostetter-Yanderbilt pitfall, and possibly some other not yet catalogued specimens, into one or other of which the unwary voting-trust maker is in danger of stumbling. The Atchison bondholders under the re-organization plan are also stockholders, and if, instead of selling their stock, they place it in the proposed trust, they may perpetuate a lawful control for themselves of the properiy without sacrificing any advantage incident to the ownership of the shares, except the mere right to vote, which as corporate elections and railway management go is more often a bur¬ den than a benefit. The only practicable voting trust—that is to say the only one yet devised that the courts and the politicians will not undo—is one created by the absolute transfer of the stock to the trustees in exchange for a trustee’s certificate in the nature of a declaration of trust. This may be perpetual or for a term. This trust as between each stockholder and the trustees may be personal, and there need be no other contract between trustee and cestui que trust than that set forth in the trust certificate. Each stockholder enters into the contract for him¬ self alone, without reference to any other stock¬ holder and withot any possible privity with any one else. If one such trust agreement is valid, twenty thousand are equally so, each standing by itself and being the voluntary deed of each stock¬ holder for himself. The legal ownership of the stock bv the trustees would, after the issue of the trust certificates, consist solely in the right to vote, the trust certificate re-conveving to the shareowner all the beneficial interest in the stock. The trans¬ action is, in this view of it, a sort of defloration or emasculation of the stock. The trustees are then subject only to the general rules of equity which govern trusts. They should be chosen because of their fitness for such a stewardship, and should be absolutely beyond the infiuence of the certificate holders. They could not elect themselves to office, nor vote themselves remuneration. They ought to have the power to appoint their successors, possibly with the assent of the certificate owners. They would elect the board of directors, which is all that the stock¬ holders acting for themselves ever can do, and their visitorial power would amount to something while that of stockholders amounts to nothing. The ultimate power to control the corporation must be vested in some bodv of men. This scheme v^csts it in a responsible board of trustees, instead of in an iiresponsible', ignorant and utterly careless body of stockholders. The trustees would be responsible for good management and would be under every motive which actuates men of honor to secure it. No corrupt ‘‘ ring ” of officials could be formed to “ run” the property for their personal emolument, and no tried and competent official would be likely to be removed. The trustees should be men of experience in railroad manage¬ ment, and they ought to be largely interested in 19 the property. Such a plan as is here outlined would place the management of the Atchison in the hands of the men who own it. That is where the control should be in the case of every railroad in the country. The time is coming in the United States, not only when the looting of insolvent railways in fore¬ closure will be at an end, but also when the ex¬ clusive control of elections by the stockholding interest will give place to a control by the owners of the property. The present system of corporate control has in it the seeds, of death. Exclusive stock voting is doomed. With every decade the relative value of railroad stock to railroad bonds declines. The roads are owned more and more by the bonds. It is, therefore, a step in the right direction for the bondholding interest to insist upon a voice in the corporate management, and upon such a renovation of the worn-out machinery now in vogue in corporate elections as to secure it. When the present method of conducting corporate elections was adopted there were no railways, and the corporations then in existence were, in general, small affairs, under the personal management of ^ the owners of their stock. There was no such thing as a bonded debt, nor any such a thing known as liens prior to the stock. We have in fifty years or less created the bonded indebtedness of a thousand railways, and no inconsiderable portion of the entire investment of the country is in railway bonds. But we still go on with our corporate elections just as our fathers did a gene- 0112 062002214 ration and a half ago, and boards of directors of vast systems of railways are elected in the same primitive way in which our grandfathers created a board to manage a cheese factory or a turnpike road between two country towns. Verily, it is a spectacle for gods and men, when a railway worth a dozen or a hundred millions of dollars is seized at a corporate election by a board of sharks whose aggregate personal, Iona fide hold¬ ing of its securities amounts perhaps to seven or eight thousand dollars, and “ run ” in the interest of whom it may concern, until it is bankrupt, or until some more fortunate or more audacious crowd of financiers ’’ get it in hand. The stock¬ holder is essentially an irresponsible creature. He knows no duty to his fellow-stockholders, and none to his corporation. His stock is an invest¬ ment or a “gamble.” If it pays he may keep it. If it does not pay he is sure to sell it—if he can. His proxy is delivered by his broker, for a com¬ mission, to the highest bidder, and his vote is cast without his instruction, or knowledge, or slightest care. It is not strange that few railway stocks pay dividends, that the greater proportion of these corporations are regularly and systematically plun- a dered by their management, that shrewd men grow , rich in Wall street, that railway manipulation and manipulators are in disgrace, and that bondholders J are waking up to the propriety of taking a hand® in the game. fl Charles F. Beach, Jr. I 29 William St., New York.