Corporate reorganization

“ Not every corporate broker, promoter, or agent which enters into a written agreement effectuating a reorganization, as defined in the Revenue Act, thereby becomes a party to the reorganization. And, if it is not a party, its stock received in exchange, pursuant to the plan, is'other property' mentioned in section 112 (c) (1) and must be reckoned in computing gain or loss to the recipient. Glidden was, in the transaction in question, no more than the efficient agent in bringing about a reorganization. It was not, in the natural meaning of the term, a party to the reorganization. ”

“ No gain or loss shall be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization. ”

“ Giving the matter in parenthesis the most liberal construction, it is only when there is an acquisition of substantially all the property of another corporation in connection with a merger or consolidation that a reorganization takes place. ”

“ For much the same reason their influence is a wholesome one. We shall see that the primary conflict which takes place in any reorganization is between the interests of the corporation which needs a lessening of its burdens, and the interests of the securityholders which is opposed to any reduction in their claims.693 The degree to which the former interest prevails determines the strength of the reorganized company. ”

“ Manufacturing, mercantile, and banking companies have all tended to combine in large corporations, partly for greater economy, partly for an increase of profits through manipulating reorganization of stock companies, and partly for centralization of control. ”

“ Bondholders are more ready to deposit their securities with a well-known house than with an obscure one; and are to some extent influenced by the implied approval of the reorganization plan which acceptance of deposits by such houses involves.
At the beginning of the ordinary reorganization, then, creditors, stockholders, syndicate, and corporation find themselves face to face. The interests of the syndicate and of the corporation most nearly coincide except in so far as the syndicate is an owner of stocks or bonds. The syndicate desires a radical reorganization,—the corporation requires it. ”

“ But to do so would be to ignore the purpose of the reorganization sections of the statute, which, as we have said, is that where, pursuant to a plan, the interest of the stockholders of a corporation continues to be definitely represented in substantial measure in a new or different one, then to the extent, but only to the extent, of that continuity of interest, the exchange is to be treated as one not giving rise to present gain or loss. ”

“ Whether such be the effect or not must depend upon the statute under which the consolidation takes place, and of the intention therein manifested. If, in the statute, there be no words of grant of corporate powers, it is difficult to see how a new corporation is created. ”

“ The exchange of new securities for old on a large scale usually takes place when a railroad is unable to meet maturing obligations.337 Of 18 reorganizations and 42 plans, 15 reorganizations and 39 plans have had to do with the extrication of companies from financial embarrassment. But though impending insolvency is the usual occasion it is not the only one. Reorganization sometimes occurs when prosperity is too great as well as when it is too little. Or a management may desire to get rid of hampering restrictions, or it may desire to manipulate the conditions of control. ”

“ Reorganizations concerned with manipulation of control are therefore closely allied with reorganizations due to too great prosperity. These latter may, however, take place independently, and are likely to occur whenever profits are extraordinarily large, and a simple stock dividend is deemed inadvisable. An example was the reorganization of the Chicago, Rock Island & Pacific in 1880, when the formation of a new company and the exchange of new stock for old was deemed wise, in view of the large earnings which were to be distributed. ”

“ In any considerable change of personnel, the partnership rights of the factors will have to be considered; and one of the gravest and most difficult subjects of consideration will be, how to reconcile the rights of these gentlemen in a share of profit with that reorganization which the commercial interests of the Company evidently require. ”

“ Of course, when, as in the Sansome case, all the stockholders of the old corporation swap all their old stock for identical proportions of the new, there can be no doubt that the earnings and profits of the old have not been distribued and are passed on to the successor corporation. But if the predecessors' earnings and profits are not distributed in the course of the reorganization, they do not disappear simply because the successor corporation has some assets and owners in addition to those of the old corporation or corporations. ”

“ This is, that they practically do away with the whole law regulating corporations, with all the safeguards regulating their corporate management, the control of their stock, and the exercise of their franchises, besides evading all the laws regulating their capitalization and consolidations. ”

“ Now, as a matter of morals or of law the only thing that made the proposed reorganization unethical or inequitable was the single trifling fact that those responsible for it were the only ones who knew of the existence and proximity of the Amphalula vein. When a mining company, a railroad, an oil well or any other enterprise is down and out it is only fair that the majority stockholders, who are obliged to protect their investment, should have the right to call upon the rest to come forward and do their share or else drop out. ”

“ Probably a majority of the attempts that are made to radically change the organization of manufacturing companies result in a loss of money to the company, failure to bring about the change sought for, and a return to practically the original organization. ”

“ The congressional purpose in allowing consolidated returns was to eliminate exactly this kind of dependence on corporate form and leave corporations free to continue business in whatever corporate form best suited them. ”

“ Corporations, insolvent or financially embarrassed, often find it necessary to scale their debts and readjust stock issues with an agreement to conduct the same business with the same property under a reorganization. This may be done in pursuance of a private contract between bondholders and stockholders. ”

“ The Commission preferred, instead, to carry out the consolidation under the authority of § 77, sub. b (5) of the Bankruptcy Act, which provides that the plan of reorganization may include 'the merger or consolidation of the debtor with another corporation or corporations'. That power flows from a different source than the power over consolidations under the Interstate Commerce Act. ”

“ That generally the effect of consolidation, as distinguished from a union by merger of one company into another, is to work a dissolution of the companies consolidating, and to create a new corporation out of the elements of the former, is asserted in many cases, and it seems to be a necessary result. ”

“ In carrying out reorganization schemes, a transfer of assets must be fair and bonâ fide, or the sale will either be set aside as fraudulent, or the new organization will be deemed a continuation of the old, and liable for its debts.
98. Consolidation of Corporations. The right to exist as a corporation does not carry with it the right to combine or consolidate with other corporations. Where two or more corporations combine or consolidate, the resulting corporation is distinct from the combining corporations. ”

“ And, as ownership of the shares is becoming continually more dispersed, the power which formerly accompanied ownership is becoming increasingly concentrated in the hands of a few. The changes thereby wrought in the lives of the workers, of the owners and of the general public, are so fundamental and far-reaching as to lead these scholars to compare the evolving 'corporate system' with the feudal system ”

“ The proposed reorganization of labor, like the proposed system of institutional reform, and like the proposed constructive regulation of large industrial corporations, simply takes advantage of those tendencies in our current methods which look in a formative direction; and in so far as these several tendencies prevail, they will severally supplement and strengthen one another. The more independent, responsible, and vigorous political authority will be the readier to seek some formative solution of the problem of the distribution of wealth and that of the organization of labor. ”

“ The sole ground of their retention appears to be an unreflecting deferential concession to the usages of corporate organization and control, such as have been found advantageous for the pursuit of private gain by businessmen banded together in the exploitation of joint-stock companies with limited liability. ”

“ It is true that in their plan of reorganization they offer to permit any stockholder in the old corporation to subscribe for stock in the new at par—thus at first glance placing all upon what seems to be an equality; but any stockholder who does not see fit to subscribe or cannot afford to do so is wiped out, for there will be nothing left in the way of assets in Horse's Neck after the transfer is completed. ”

“ Furthermore, any such reorganization should aim at keeping the benefits of the then existing private organization—whatever they might be. It should remain true to the principle that, so far as economic authority and power is delegated in the form of terminable leases to private corporations, such power should be complete within certain defined limits. If agents of the national economic interest cannot be trusted to fulfill their responsibilities without some system of detailed censure and supervision they should be entirely dispensed with. ”

“ A constitutional amendment was adopted in 1889, authorizing the legislature to provide by general laws for one or more extensions of the term of such corporations, and also for the reorganization 'for a further period, not exceeding thirty years, of such corporations whose terms have expired by limitation, on the consent of not less than four fifths of the capital.' Pursuant to this authority the legislature in 1889 passed an act authorizing such reorganization. ”

“ Looking thus at the legislative intent appearing in the consolidation act, we are constrained to the conclusion that a new corporation was created by the consolidation effected thereunder in the place and in lieu of the two companies previously existing, and that whatever franchises, immunities, or privileges it possesses, it holds them solely by virtue of the grant that act made. ”

“ The ready vendibility of corporate capital has in great measure dissociated the business interest of the directorate from that of the corporation whose affairs they direct and whose business policy they dictate, and has led them to centre their endeavors upon the discrepancy between the actual and the putative earning-capacity rather than upon the permanent efficiency of the concern. ”

“ Louis and Des Moines companies, became the property of these respective companies, and these corporations did not cease to exist, as would be the necessary result of a consolidation, but still continued in existence as corporate entities. ”

“ We have already referred to the manner in which the centralization of undertakings in a few hands, the road to which was prepared by the advance of the great industry, has received a powerful impetus by the entrance of the corporation. It furthers the expropriation of the small properties that have been invested in shares of stock by the masters of "high finance," who generally know how to navigate the deep waters of modern economic life much better than the little "savers." ”

“ Fifty years before, the consolidation of the industries of the country under national control would have seemed a very daring experiment to the most sanguine. But by a series of object lessons, seen and studied by all men, the great corporations had taught the people an entirely new set of ideas on this subject. They had seen for many years syndicates handling revenues greater than those of states, and directing the labors of hundreds of thousands of men with an efficiency and economy unattainable in smaller operations. ”

“ Without the factor of stock ownership the very foundation and framework of holding company systems would be gone and the amount of their interstate activity would be at a minimum; centralized management and control of widely scattered utility properties would be difficult if not impossible. ”

“ The reason for setting up these different classes is almost always to secure additional capital from outside sources by making the investment as attractive as possible. Upon a reorganization, an adjustment of the various interests concerned may require a grading of ownership, a differentiation by classes in order equitably to satisfy the claims of all interested parties. ”

“ Spheres of the ministries' activities have been reshuffled, and their internal structures have been modified—all in the interest of improving socialist industrial organization and raising the efficiency of production. One foreign observer remarked that, whenever something went wrong in the economy, reorganization in one form or another was undertaken in an effort to solve the problem through administrative means. ”

“ The division between the Directors and a large part of the proprietors, and between the authorities of the Company in England and those in India, the private and selfish interests of its servants in India, and of its proprietors at home, the continual oscillation between a policy of conquest and a policy of trade, and the great want in the whole organisation of any adequate power of command and of restraint, had fatally weakened the great corporation. ”