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T H E
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DEFEATED CONSPIRACY
OF
LIEN-HOLDERS AND TRUSTEEs
|| To Acquire ownership RIGHTS IN THE ST, PAUL AND DULUTH RAILROAD
COMPANY; TO MAKE THEIR TRIPLE vote. PER-
MANENT; AND SECURE
IRREVOCABLE CONTROL
By A Lavvas
“A Stitch in time saves mine.”
NEW YORK;
Even ING Post JoB PRINTING OFFICE,
1887.

T H E
DE FEATE D CONSPIRA CY
22
LIEN-HOLDERS AND TRUSTEES
TD ACQUIRE OWNERSHIP RIGHTS IN THE ST. PAUL AND DULUTH RAILROAD
COMPANY; To MAKE THEIR TRIPLE VOTE PER-
MANENT; AND SECURE
IRREVOCABLE CONTROL.
BY A LAYMAN.
“A Stitch in time saves mine.”
NEW YORK:
Even ING POST JOB PRINTING OFFICE,
1887.
iransportation
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PREFA CE.
This is the fourth of a series of pamphlets that have been devoted to
the affairs of the St. Paul and Duluth Railroad Company. All of them
have been written with a purpose.
The first was entitled “Minority Rights and Corporate Methods;
as illustrated in the action of the Trustee-Directors and Director-
Trustees of the St. Paul and Duluth Railroad Company. By a Mere
Anonymous Newspaper Scribbler.” This contained the letters origi-
nally printed in the Railroad Record of Philadelphia, under the signature
of “An Old Subscriber,” and referred to by Judge Drake in one of his
letters with an intimation that he had read them. They were reprinted
in this form for the convenience of the Directors, and forwarded to
each one of them in season to be read before the meeting of stock-
holders on June 21, 1886. It seems to have been the purpose of
the writer to give them no excuse for not comprehending perfectly the
effect of the resolution of 12th of May, and ample opportunity of
amending the same so as to divest it of its odious features. It was also
distributed among a few persons interested in the property, and re-
sulted in the combination of the twelve common stockholders for the
purpose of defeating that resolution by a protest.
The second pamphlet was entitled “Crooked By-Ways and Slip-
pery High-Ways traversed by the Directors of the St. Paul and Duluth
Railroad Company, Trustee. By a Common Stockholder.” The object
of it was to preserve in a form for convenient reference, the plan of
sale, purchase and reorganization; and the opinion of Judge Drake that
the plan was very strong in securing seven (7) per cent. forever to the
preferred stockholders, but that it was “fatally defective” as to secur-
ing the common stockholders any consideration for this perpetual
source of enjoyment. The pamphlet also contained the protests of
the common stockholders made at the annual meeting of June 21, 1886,
with the account of it by the Management in the Railroad Record, and
their explanation of the reasons why the common stockholders could not
be paid a dividend this year. It also contained a series of letters from a
gentleman of Brooklyn which had appeared in the Wall Street Daily, * V,
\\ ,
i.
IV
Mews at intervals during the previous twelvemonth. The pamphlet
was sent to all the Directors, and to such members of the gradually
increasing circle of protestants as were sufficiently interested to seek
information.
The third pamphlet was entitled “The Rights and Wrongs of
Helpless Stockholders, and of a Helpless Corporation. By a Layman.”
This furnished, from authentic sources, proofs as to the condition of the
railroad for “many years ” after its reorganization, and of its absolutely
impecunious condition at the time it reissued as net profits the “realized
income" of cancelled preferred stock. It contains also an important
portion of the charter, which provides that the preferred stock con-
verted into lands shall never be reconverted into voting stock. It
shows more in detail than its predecessor pamphlet, the motives with
which the bamboozling resolution had been framed, and the assurance
of advantage with which it was urged by the Trustees on the common
class of their beneficiaries. Of this pamphlet also only a few copies
were circulated outside of the then very considerable number of pro-
teStantS.
A careful perusal by the common stockholders of the answer of
the Corporation to the second bill of Mr. Baring-Wells, in connection
with the statement of facts presented in the following pages, will con-
vince them it is not to their funeral the stockholders are invited on the
20th of June.
No person can be compelled, and no person is invited, to read
this pamphlet; and yet it can be easily calculated how much the
protestants who read the former pamphlets on this subject have
profited by information which they could have derived from no other
source. With them it makes all the difference between buying the
common stock at under fifty, and buying it at over ninety. It some-
times pays to read, for a little knowledge is oftentimes a great advan-
tage. The following pages show the owners how near they came to
being stripped of the property; and shows the lien-holders that it is not
possible for them any longer to evade, pervert, or defeat the execution
of the trust. The common stockholders have waked up, and the
Corporation defendant is in the grip of the law.
NEw York, June 10, 1887. A LAYMAN.
T0 WHOM SHALL WE SEND OUR PROXIES'
A- a -º-
~-w-sy
IT is my purpose in the following pages to communicate
to the stockholders of the St. Paul and Duluth Railroad
Company, the views of a common stockholder as to the
rights and relations of the two classes of stock to the Cor-
poration, in the light of the answer of the Corporation to
the second complaint of Mr. Baring-Wells, and the resolu-
tions adopted by the Directors on the 5th of February, and
published for the first time on or about the 14th of May.
I have before me a certified copy of the answer as it was
filed in the Circuit Court of the United States for the Dis-
trict of Minnesota. It is a voluminous document of some
sixty-four pages of foolscap, and with some aid from other
sources of information I propose to consider the history
furnished by the Corporation itself of the methods it has
adopted in the execution of an important trust of which the
plaintiff is a beneficiary. I wish to present the facts of the
case in statements so perfectly well authenticated by the
Corporation and the Management, as to enable preferred as
well as common stockholders to decide intelligently as to
the disposition to be made of their proxies with reference to
the important questions that will come before the Company
at its annual meeting at St. Paul on the 20th of June.
It seems that Mr. Baring-Wells is the owner of twelve
hundred shares of the St. Paul and Duluth Railroad, which
he purchased at different periods between 1881 and 1886.
He does not state at what price he purchased, nor is it at
all material to his rights in the premises, but we may
assume that the sworn answer of the Corporation is true,
6
and that he must have bought all his stock at prices varying
from $35 to $60 a share. The Corporation swears that his
Stock is now worth a great deal more than that, and as
much as $69.88 a share in the market, and thinks that ought
to satisfy him. This argument of a trustee-defendant in
equity to establish a right to rob a beneficiary of his prop-
erty, on the ground that he has made about as much money
as is good for him, is perhaps one of the most extraordinary
arguments ever made in a court of justice. It is not unlikely
that I may have occasion to refer again to this point before
I get through, but I cannot interrupt the thread of my
narrative by more than this passing allusion to it.
These twelve hundred shares thus acquired, as the
Corporation says at a cost of only $47,000, Mr. Baring-
Wells has held as an investment for the time stated in his
Complaint, never selling the same, nor dealing or trading in
the stock, but simply holding it as an investment on which
he was looking for all the returns to which he might be-
come lawfully entitled. He gave about the same attention
to the subject as the average stockholder gives to the affairs
of a company in which he has a large interest. He looked
occasionally at the stock list perhaps, and he read the
annual reports, and being a good easy Soul no doubt (for
he never took the trouble to register his stock), he was
satisfied with the progress reported and the occasional
intimations in the newspapers about dividend time that
some percentage had been earned on the common stock,
and that a dividend might be looked for with confidence at
an early day. This thing repeated every six months got at
last to be a little monotonous. He saw that the preferred
stockholders had helped themselves to $82O,OOO in preferred
stock, and were getting their three and a half per cent.
semi-annually on the 1st of July and the Ist of January in each
year, but the six per cent. dividend on the common stock
was every time put off to the next year. Then came 1884,
and the Directors promised that as soon as the receipts in-
creased a little more they would pay a dividend on the
7
common stock, sure. The receipts increased in a geomet-
rical ratio, as one of their patent book-keeping Directors
described it. But the more the receipts increased the farther
off was dividend day postponed. The methods of keeping
the accounts were changed, under the fallacious idea that it
was possible to change the actual results of the business by
changing the methods of stating them.
Before the year 1885, the actual operating expenses, and
those only, were deducted from the gross earnings, in order
to ascertain the net earnings from which the preferred
stockholders were to be paid their dividends. There was
no honest reason for changing this method. In view of the
contract existing between the three parties to the plan of re-
organization, it was the only lawful and regular method. It
is the mode adopted by the Government of the United
States, and sanctioned by the Courts of the United States
in the adjustment of the relations of the Government to the
railroads in which it is interested. This was testified to by
Mr. Charles Francis Adams in his recent examination before
the Railroad Commissioners. This was the course always
pursued by the preferred stockholders as long as it was
essential to finding net earnings for their dividends. But
the moment the “net earnings" showed a balance for the
common stockholders, then the method of book-keeping was
changed, for the obviously fraudulent purpose of depriving
the common stockholders of the dividends intended to be
secured to them by the plan, and for no other purpose, and
with no authority whatever from the stockholders. On the
contrary, in 1884 the stockholders adopted a resolution to
the effect that “thereafter the met cash income of the Com-
pany from all sources, shall be set apart and applied first to
the payment of dividends in cash, in accordance with the
plan of reorganization, before being used for improvements
or additions to the road or equipment.” In 1885 the annual
report states the amount applicable to dividends at $765,-
377.97. The report of 1886 states the “net earnings from the
operation of the road $630,790.61.” This sum is more than
8
sufficient to pay the 7 per cent. on the preferred stock and
6 per cent. on the common stock, with a tidy balance in
favor of the Corporation. But the new system of book-
keeping, devised for the purposes to which I have referred
above, which I may style the book-keeping of the Phila-
delphia branch office, figures out on the yearly transactions
a deficit of railroad earnings of $14,529.55. The manage-
ment therefore have jockeyed the common stockholders by
both methods of book-keeping. Under the old system they
made the net earnings larger than they ought to have been
in order to devise an excuse for paying the preferred stock-
holders unearned dividends for cancelled stock; under the
new system they annihilate the net earnings altogether, as
an excuse for withholding from the common stockholders
dividends that have been actually earned. *
An anecdote that has come down to us from war times
illustrates the situation. It was in the days of the Income
Tax. A well known merchant went before the Internal
Revenue Collector and swore down the net income of his
business to a thousand dollars. He was willing to pay the
tax on that, but the grocery business had been very bad,
and really he had actually lost money on the year's transac-
tions. “Are you quite sure of this?” was the inquiry.
“O yes; I will take my oath of it.” “Then, how happens
it that your head clerk reports the income from your busi-
ness at $40,000?” “Why,” was the answer, “that is be-
cause he does not know how to keep the books.” “How
so P’’ “He omits the expenses of the business, the simpleton.
The expenses to offset the profits were $50,000, and I lose
that much money.” On being pressed for an explanation,
he said that his business had increased so much, and had to
be done on such a small margin of profits, that he was Com-
pelled to buy the adjacent store, and paying for it had
diminished his profits to such an extent that he was actually
$IO,OOO in debt.
It is needless to say that the tax-gatherer did not see it
in the same light, and figured on his income, including what
9
had been expended on the store. The grocer had to pay
the bill, but he discharged his head clerk and swore that he
would keep his own books for the future, and that if any
infernal tax-gatherer got the better of him again he'd know
it. Thereafter he kept his accounts in his head or in his
hat—and this method we recommend to all corporations
that find it necessary to swear that they are minus $14,529.55
on “net earnings" reported officially at $630,970.61.
This withholding of dividends from the common stock
in spite of the increased earnings, and this extraordinary
change in the methods of book-keeping excited Mr. Baring-
Wells' suspicions, and he became a little uneasy. But in
the early part of 1886 he obtained information direct from
the Philadelphia branch office that President Fisher had
telegraphed to the Vice-President that if he could have the
proceeds of the lands and stumpage to apply to improve-
ments, he could pay a dividend of six per cent. On the Com-
mon stock. It must have been on this very gratifying as-
surance that Mr. Baring-Wells added to his common stock
by the purchase of a hundred shares at sixty.
Whatever may have been his hopes of finding an honest
interval in the proceedings of the Management, they were
rudely dispelled on the appearance of the insidious resolu-
tion recommended by the Directors on the 12th of May,
1886. That resolution could mean nothing but fraud, Con-
cealed in the most specious and cunningly devised terms.
It is not my purpose to enter again into the discussion of
the bamboozling resolution. In a previous pamphlet” I
have exposed it so fully that there is nothing further to
add, and with a completeness of proof that renders denial
or explanation impossible. When that resolution was thus
recommended, Mr. Baring-Wells saw that its passage would
be fatal to the interests of the common stockholders; that it
broke up the trust entirely; that it established the preferred
stock as ownership stock with its triple vote in perpetuo;
*See “The Rights and Wrongs of Helpless Stockholders and of a Helpless Corporation,”
PPs 33-43.
10
that it gave complete power over accruing funds from all
sources to Directors elected by the preferred stockholdºrs
alone, and to men who had already invested four millions
of dollars in the Corporation from funds furnished exclu-
sively by the common stockholders, without giving them
one dollar to represent the money “due '’ them in divi-
dends, or without withdrawing by the application of the
annual surpluses any portion of the preferred stock.
Before the issue of this resolution, he knew that a dis-
cussion had been going on in the Railroad Record, of Phila-
delphia, in which it had been substantially preshadowed;
and that in the course of this discussion, articles publicly
attributed to two very prominent Eastern Directors, and
never disavowed by them, had denied the power of the
Corporation to carry out the plan of reorganization; had
repeatedly asserted that the plan could not and would not
be carried out; that it was fatally defective; and that there
was no method by which the holders of the preferred stock
could be compelled to submit to its withdrawal and cancel-
lation, notwithstanding the express stipulation engraved
upon every certificate.
When therefore the resolution appeared, he recognized
it at once as an attempt to give power and vitality to the
policy developed in the Record, and to deliver the owners
of the property, stripped and bound, into the hands of the
holders of the lien. He saw that propositions contemplat-
ing the results which that resolution would inevitably
bring about could not be otherwise than fraudulent, and
he went to the annual meeting of stockholders of the 20th
June and joined in the protest against its passage. Fortu-
nately for the common stockholders Mr. James J. Hill was
present with his counsel, Judge Clark, by his side; the
protest answered its purpose, and the contemplated spolia-
tion of the common stockholders was “postponed" to the
next annual meeting. The Management, somewhat crest-
fallen, returned to Philadelphia and assuaged their wounded
feelings by announcing through their private organ, the
11
Railroad Record, that there could be no dividends paid upon
the common stock at present, adding with their usual scru-
º regard to truth: “For this result the common stock-
holders desiring dividends will have to thank Mr. Sargent
and his eleven associates, represented by his attorney, Mr.
Hahn, and holding 3,644 shares out of a total of 94,323
shares.” Then they relieved what purported to be their
“minds” by some chaff, borrowed of the street gamins,
about the “tail wagging the dog,” and about Mr. Sargent's
protest not being “intelligible,” as if he were responsible
for their inability to understand. With a year's study, per-
haps they will comprehend it by the 20th of the present
June.
But it was of the intrepretation of the plan that I was
speaking, and in connection with the effort that has been
made during the past twelve months to create the impres-
sion that the preferred stock could not be retired, and to
lead holders to object to being retired, and the opinion of a
distinguished jurist that the contract could not be enforced.
All this nonsense has been eliminated from the discussion by
the averments of the answer, that will prove a veritable eye-
opener to recalcitrant holders like the Boston correspond-
ent of the Wall Street Daily AVews who signs himself “Jus-
tice,” and says that the common stockholders are a set of
“Shylocks" for standing on the “fine edge of their agree-
ment.” Yes, that's just where they stand and propose to
remain. And now let us see what the answer says about it:
“These defendants aver that each and every allegation charging
or imputing fraud or bad faith, or any intent to evade, pervert or defeat
the provisions of Said plan of Sale, purchase and reorganization, or to
sacrifice the interests of the plaintiff or any holder of the common
stock, or the adoption of any policy to that end; or any acts in that
behalf on the part of or by the Directors of said Corporation, or any of
them, or any Board of Directors of said Corporation, or any of its offi-
cers, are untrue.”
“And these defendants aver that the policy of said Directors and its
officers, and each and every of them has always been and now is, to
12
carry out the terms of said plan of sale, purchase and reorganization,
and to retire said preferred stock as rapidly as the same could or can be
done consistently with the duty of said corporation to the public in the premi-
ses, and the preservation of the property to that end; and have never, had
any other or different policy.”
This is pretty hard swearing even for a Corporation, that
swears only by its seal. But it is extremely gratifying to
know that it now swears to the validity of a plan that pro-
vides for the retirement of the preferred stock; swears that
the retirement is practicable; and swears that the Corpora-
tion will not seek to evade or defeat the retirement, but, on
the contrary, will make it as “rapidly” as it can, consistently
with the public good. In view of all this swearing, what
becomes of the repeated, persistent and unwarrantable
efforts of the Eastern Directors, acting under the inspira-
tions of the Philadelphia branch office, to create the impres-
sion that the preferred stock could not be retired P
They began this creditable work on the 23d of January,
1886, when they announced in the Railroad Record that the
“operation of sinking funds” applies so peculiarly to bonds
that it would seem to be “impracticable with stock,” and
that therefore it was not unlikely that the stockholders “at
their next or some future meeting, would authorize the pur-
chase of preferred stock for cancellation at market prices”
instead of drawing it at par.
A fortnight afterwards they circulated through the same
channel a statement that the provisions for drawing the
shares of preferred stock are so “defective as to be imprac-
ticable,” and that there is no provision compelling share-
holders to relinquish their shares if drawn.
Towards the close of February they broached tenta-
tively the scheme for voting themselves three-fifths of the
property in the most artless and guileless manner possible,
as if it were a happy thought just struck out in the warmth
of discussion. Then it was that they first suggested a
change of the provision for the purchase and cancellation
of preferred stock, and recommended that when the land-
13
grant money should not be required to pay the dividend
on the preferred stock (this was something they never lost
sight of), it should constitute “a fund for improvements and
additions.” Then, in a sort of by-the-way manner they
add : “Indeed, why should not the stockholders agree that
after the 7 per cent. is paid on preferred stock the same
shall also be paid on the common when earned, any excess
of income after that to be divided equally between both
preferred and common stock.”
A bright idea, accidentally suggesting itself as a capital
thing, very much to the advantage of both classes of stock;
it was so perfectly reasonable to provide for the preferred
stockholders, in view of their chronic liberality. In order
to make this more acceptable, and more evidently and ab-
solutely the proper thing to do, the good Eastern Directors
add : “As before stated in these columns, the common
stockholders have received the benefit of the expenditures
upon the property, in its greatly enhanced intrinsic value
and productive power, WITHOUT HAVING CONTRIBUTED A
DOLLAR TOWARDS IT.” f
No. The preferred stockholders were the fellows who
did the “contributing,” but the contents of their contribu-
tion box they divided among themselves. To their own
strong box they contributed certificates that had been
retired and cancelled to the amount of $82O,OOO, to which
they had no more legal, equitable or moral right than they
had to the private pocket-book of the common stockholder.
Cash dividends to the amount of 7 per cent. annually had
also been declared for the preferred stockholders and paid
to them. But the common stockholders it seems in Febru-
ary, 1886, had not contributed a single dollar towards the
expenditures of the Company. The preferred stockholders,
the lien-holders, had contributed all, and the pauper owners
of the property had done nothing at all towards its improve-
ments. How is this?
Who contributed the million of dollars that were bor-
rowed in 1881 2 The common stockholders.
14
Who contributed the $300,000 required to pay the in-
terest on that borrowed money P. The common stock-
holders.
To whom belonged the cancelled preferred certificates,
Originally taken and distributed without authority among
the preferred stockholders ? To the common stockholders.
Who have been paying $57,000 semi-annually for a series
of years on this unlawfully issued stock, that the plan an-
nihilates? The common stockholders.
Who, within the three years reaching from June, 1881, to
June, 1884, paid $668,982.63 for construction, improvement
and equipment,besides $1 II,695.73 on the Grantsburg branch,
and $124,822. II in the purchase of one-half interest in the
Taylor's Fall branch of 21 miles, the whole of which is now
owned by the Company, with the land grant attached of
94,OOO acres of land 2 The common stockholders.
Who contributed the cash, $167,188.88, that was expended
on improvements in 1885 P. The common stockholders.
Who contributed the $568,315.87 that were so expended
in 1886? The common stockholders.
Who contributes the $700,000 that are being expended
this year for the same purpose? The common stock-
holders.
There had been at least three and a half millions of
dollars contributed to the property by the common stock-
holder owners of it, when these Trustees as a reason for rec-
ommending the spoliation of these Owners, declared that
they had never contributed a dollar towards the improvement
of the property.
This, however, is merely a remark in passing. Let me
resume the narrative. In their manifesto of the 9th of
March, in the Record, the Management admit, with reference
to a stock dividend, that the common stockholders are
clearly entitled to one, on the same ground on which a
stock dividend was paid to the preferred stockholders.
“The precedent,” they say, “has been established, and it
may doubtless be settled in the same way.” But still they
15
put forward in a gingerly style their half-matured scheme
for “evading ” the provisions of the plan and preventing the
retirement of the preferred stock, which the corporation
now swears was something they never contemplated for one
moment. After advising the inquiring Stockholder to
“possess his soul in peace” (that being the only possession
they intended to leave him), they say that it is useless to
seek to make any conflict between the two classes of stock-
holders, adding oracularly : “Such advantageous modifica-
tions of the reorganization plan as they have the power to
make, will doubtless be considered by them in the same
harmonious spirit as has heretofore characterized all their
action, and secured such substantial results for the Com-
pany.”
The secret of this wonderful harmony is explained by
the statement of the Management that the Directors chosen
in 1885, and for several years previous, directly represented
and controlled considerably more than one-half of the entire
common stock of the Company. It followed that the two
classes of stock “were too largely in the hands of the same
holders,” to suppose that there could be any conflict of
interest. This is a perfect explanation of the wonderful
“unanimity” with which everything was done for a con-
siderable series of years. Peter's common stock was not
going to vote against a dividend on his preferred Stock, and
as long as all the money that came in was only enough to
pay dividends on his preferred stock, Peter could use his
common stock to sell out at high prices on the promise of
dividends, and buy in at low prices when the promises were
found to be fallacious.
Thus we see how a “large majority of stockholders of
both classes were always represented at the annual meet-
ing,” and how unanimously they might agree to vote every-
thing that the Management desired. Peter, indeed, as a
preferred stockholder could swindle Peter as a common
stockholder without feeling it; but the moment Peter the
preferred stockholder had to deal with Paul as a common
16
stockholder, it is surprising how much discord and unhap-
piness Paul introduced into this unanimous and harmonious
family. It became a regular dog fight, and the good
Directors brought things to such a pass that when there
seemed to be really only one dog left, his tail wagged him.
That phenomenon was actually materialized at the annual
meeting of June, 1886, and is avouched in print by the good
Directors.
But I must not digress from my immediate object.' I
think it has been made sufficiently clear how the preferred
stockholders were able to manage everything without a dis-
senting voice. Outside of the inside ring who owned the
preferred all the time, and owned the common sometimes,
the common stockholders knew little or nothing about the
property, Supposed it to be of little value, had no organiza-
tion to look after interests that in many cases were small
and very widely distributed, and the Directors had every-
thing their own way, doing what they pleased in their
capacity of Directors and then ratifying everything in their
capacity of stockholders. The first time that there was
ever any intelligent and combined action of common stock-
holders to look after their rights and interests, was at the
meeting of June, 1886, and even then the old tradition that
the interests of the two classes of stockholders were the
same, induced a good many ill-informed, or uninformed stock-
holders to send their proxies to the men who were pledged
to betray them.
In the Record of March 24th, the Management ventilated
their proposed changes of plan. Then they boasted of
having a “valuable opinion,” from an “eminent legal au-
thority,” from which it appeared perfectly clear that the
plan might be altered by the stockholders, if the alteration
did not impair vested rights, and that no vested rights
would be impaired by “suspending ” the purchase of pre-
ferred stock when above par, and using the stumpage money
and land receipts in necessary improvements and additions
to the property. This course the Management highly ap-
it
proved, and more particularly because it would enable the
stockholders “to carry out the suggestion of paying seven
per cent. on the preferred stock and seven per cent. On the
common, and dividing the excess on both classes of stock
alike.”
For example, if there should be a hundred thousand dol-
lars excess, which the plan required to be used in extin-
guishing the preferred stock, the whole benefit of which ac-
crued to the common stockholders, it would impair no
“vested rights” for the preferred stockholders to vote
themselves $60,000 of it and leave the owners of the prop-
erty $40,000.
The Management in the same manifesto expressed the
opinion that if they could only get this stumpage money,
and liberty to sell the two million of common stock in the
treasury at par or upwards, and use that too for improve-
ments, then it would require only a small increase of
earnings to insure six per cent. on the common in the ensu-
ing fiscal year. Yes, all the stumpage money so appro-
priated as to render the retirement of the preferred stock
impossible, and the common stock in the treasury ap-
propriated to the uses of the Corporation, the preferred
would indeed have risen to the character of a permanent
seven per cent. Stöck, and the “eminent legal authority”
would have secured a “vested right” beyond all peradven-
ture.
In April the Management ventured on a fuller exposition
of their views. No member of the Board, they swear in
their recent answer, ever thought for a moment of “evad-
ing,” or “defeating ” the plan, or ever made any sort of a
“threat” contemplating anything of the kind,or even squint-
ing in that direction. By this time—it was in the genial April
days—the hearts of the preferred stockholders had yielded to
the melting influence of spring. They were moved by a spirit
of concession. They were “willing to relaar their claims upon
the land grant to the extent of allowing the money arising
from it to be expended upon the property, to the manifest
18
benefit of the common stockholders.” But if they would
not be benefited in this way, then “the prospect of dividends
to the common stockholders would be very remote,” and
“even if drawings of preferred stock at par were practicable
(WHICH THEY ARE NOT), there would be little left for such
drawings.”
This approximates to a threat I should say. But now
hear the Great Mogul in further laying down the law to his
subjects. “Therefore, what the common stockholders have
to consider is, whether they prefer to continue under the ea:-
isting plan or agreement without change, in order that their
posterity may acquire the ultimate ownership of the prop-
erty through the slow process of extinction of the preferred
stock, to be finally accomplished at some remote period in
the dim and distant future; or have such alterations made in
the plan as will put still greater life and vigor into the
enterprise by making such improvements upon the property
as will insure them an immediate return in dividends upon
their stock.”
What is their proposed alteration of the plan that is to give
such wonderful vigor to the enterprise as to work this im-
mediate evolution of dividends ; this sort of spontaneous
eruption of net earnings, to rejoice the hearts of the common
stockholders ? It is to give the stumpage money for im-
provements. That will work the miracle of six per cent.
for the common stockholders right away. Now for the
Management's own comment on it in the same article.
Adopting the editorial phraseology they say: “Our corre-
spondent is bothering himself about the advantage that the
preferred stockholders will receive in the enhanced value
of their stock as an assured 7 per cent. stock, when it is
SETTLED that it cannot be drawn at par, and is also con-
cerned about the larger vote of the preferred stockholders.
He may considerit a fact that the PLAN CANNOT BE CARRIED
OUT as far as such drawings are concerned, and that if it could,
the amount of stock that could be drawn with the available
proceeds from land and stumpage, would be too small a per-
19
centage of the whole issue to materially affect the price one
way or the other after this fact became well known.”
Now it is this inappreciable percentage—these infinitesi-
mally small proceeds from stumpage—whose diversion from
the retirement of preferred stock to improvements and ad-
ditions is warranted to give such vigor to the whole enter-
prise that it will pay full dividends instanter to the common
stockholders. Is not a mere statement of this absurd prop-
osition a demonstration of the fraud that lurks in it?
Just give them this, and thus make the preferred stock
“assured ” and a “full dividend" is promised for the next
fiscal year; but if you don't accede to this demand, then
your dividends will be enjoyed only by your remote
“posterity" in the “dim and distant future.”
But there is more of this, much more, tending to show in
a manner the most conclusive, that the averments in the
bill of Mr. Baring-Wells of bad faith and fraud are entirely
well sustained by the facts. Do not these various proposi-
tions, arguments and suggestions point to only one result,
and do they not establish beyond any question that there
existed in the early part of 1886 a definite and resolute in-
tention of “converting the redeemable preferred stock into a
permanent stock and charge on the property of the said defend.
ant Corporation, and to perpetuate indefinitely the exclusive
control of the holders thereof over the property and affairs of
said defendant Corporation ” to the irreparable injury of the
common stockholders, and their permanent exclusion from
the advantages which the plan of reorganization was de-
signed to Secure to them. This is what the bill of com-
plaint charges, and this is what I am now undertaking to
prove.
In the article which I have last cited, several methods are
suggested by the Management by which “the earnings
upon the common stock may be divided "instead of being
kept in the mortmain of the Corporation. Why was not one
of these several methods adopted to accomplish an object
so manifestly just, and one so likely to allay the dissatis-
20
faction of the common stockholder P Let us examine these
methods. For convenience I will discuss the first two by
themselves. They are thus stated by the Management:
(I.) “The money for improvements may be borrowed
upon bond, Secured by Second mortgage when authorized
by the stockholders. $ •
(2) “The dividends upon common stock may be paid in
common stock, as dividends upon preferred stock were paid
in preferred stock.” -
These were two legitimate methods of raising money to
be put into permanent improvements. They contemplate
borrowing money, first from the public on bonds, and sec-
ondly from the common stockholders by appropriating to
the use of the Corporation the surplus income from the road
and the lands which belonged to the common stockholders.
For assuming the liabilities on the bonds, and surrendering
their claim on the surplus income, the common stockholders
were to be compensated by a distribution of common stock
sufficient to cover all their advances of this nature to the
Corporation.
The comment of the Management on these methods is
something delicious: “The first two propositions would
doubtless be rejected as inexpedient.”
“Inexpedient.” Why inexpedient? For whom inexpe-
dient? It was clearly not inexpedient for the Corporation
to obtain all the money it might want on bonds which its
large credit and resources enable it to negotiate on very
favorable terms. It was clearly not inexpedient for the com-
mon stockholders to receive something to represent the
million of bonds with interest, and the $820,000 of prefer-
red stock with the dividends on it, and the million and a
half of their cash that had been put into the road in the
three years previous. For them this distribution of Com-
mon stock would have been singularly expedient; ex-
tremely “fit and proper under the circumstances,” as
Webster defines the word. “Inexpedient” he defines as
Something “not tending to promote a purpose.” In this
21
sense, of course, as applied to the preferred stockholders,
the word was selected with remarkable perspicuity by the
Management. The adoption of these propositions, or either
of them, would have had no tendency whatever to “pro-
mote the purpose" of the Management to convert their lien
into a permanent ownership stock, or to coerce the common
stockholders to acquiesce in a detrimental change of the
“ plan.” But there remain three other methods to be con-
sidered.
(3) “The purchase or drawing of preferred stock at par
or under, with surplus proceeds of sales of lands and stump-
age or earnings of the railroad, may be suspended or dis-
continued by the authority of the stockholders, and the
surplus proceeds of land and stumpage sales be applied to
necessary improvements.
(4) “Upon its advance to par and upwards, the nearly
two millions unissued common stock may be sold from time
to time, as required, to purchase means for the improve-
ments.” -
(5) “The dividends upon common stock may be ad-
vanced by authority of the stockholders to seven per cent.
per annum whenever the earnings shall warrant, and any
excess of earnings be divided equally upon both classes
of stock.”
There is no “inexpediency" about these last three prop-
ositions; none in the world. The Management are really
quite enthusiastic over them. After rejecting the first two
propositions off-hand, and without asking any consideration
for either of them, the Management continue in the words
following, to wit: “The adoption of the third proposition
would furnish all, the money likely to be required for im-
provements, and leave the entire net earnings of the railroad
for dividends upon the preferred and common stock, which
would enable the Company to continue the seven per cent.
On the preferred stock and pay six per cent. On the common
stock, if the anticipated increase in earnings are [is] real-
ized.”
22
The increase has been realized, and now a dividend is
withheld because it has been realized. A shabby book-keep-
ing device is resorted to with the view of showing that
there are no net earnings. The Management have spent all
the land-grant money on the improvements, and still not a
dollar of the net earnings is applied to the promised divi-
dend, the payment of which they say “would cause the
Common stock to advance to par or upwards, when it could
be sold from time to time as money for improvements were
required, should the proceeds of sales of lands and stump-
age prove insufficient, or it should not be desirable to thus
expend them.” -
This cool proposition of the lien-holders to sell the com-
mon stock in the treasury that belongs to the common
stockholders, and give the proceeds to the Corporation, is
On a par with all their other propositions. If any such stock
remains in the treasury after the present common stock-
holders are paid their deferred dividends, they will prob-
ably be able to make disposition of it by a Board of Direct-
ors chosen by the owners of the property and not by the
quasi-mortgagees. * -
But there is yet more of the same sort. Let us hear
what would be the happy results of the adoption of the
third and fourth propositions. That, the Management say,
“would eventually result in making the fifth proposition
possible. It would seem to be to the interest of both classes
of stockholders that the Management be authorized to pro-
ceed under the third, fourth and fifth propositions at their
discretion.”
By all means. The propositions contemplating a certain
measure of justice to the common stockholders who own
the property, and have put three and a half millions into it,
without receiving even so much as a free pass to represent
it for ten years waiting, during which the preferred stock-
holders have pocketed nearly three millions of dollars, are
to be rejected in a summary style as “inexpedient.” The
fancied “control” of Directors releases them, to be sure,
23
from the necessity of doing anything whatever for the com-
mon stockholders. They may be treated with contempt,
and all their just demands may be superciliously “rejected"
as not entitled even to a decent entertainment. But here
are three propositions, calculated and intended to rob the
common stockholder of important and essential rights in the
property, and the Management are stimulating and encour-
aging the adoption of them. I will cite the final sentence
of this extraordinary article which anticipates the ideas and
sometimes the very language afterwards employed in the
scandalous resolution of the 12th May.
“The adoption of the third proposition,” say the Man-
agement, “is undoubtedly the most important at this time,
as it will at once remove all difficulties and questions in
regard to the practicability of the unnecessary and improvi-
dent retirement of the preferred stock with money that may
infinitely better be used in the establishment of an improvi-
dent [sic] fund.”
- “Impracticable,” “unnecessary,” and “improvident”—
these are the terms which the Management apply to a trust
which they do not intend to “defeat,” “evade,” or “per-
vert.” They recommend and urge the adoption of proposi-
tions which would leave them in effect no trust to execute;
and yet the Corporation is made to swear for them that
they have never had any other policy than that of carrying
out the very terms of the plan, and of retiring the preferred
stock as “rapidly" as they can consistently with the duty
of the Corporation to the public.
The proper judges of the duty the Corporation owes to
the public are the owners of the property, and not the quasi-
mortgagees, scheming to make themselves the owners, to
the lasting detriment of the common stockholders.
. . So much for the scheme of the Management in April.
It had not changed much in May. The threat then held out
was that “both classes of stockholders must work in har-
mony, as they have done heretofore, if they expect to de-
velop the property into a paying one for the common stock-
24
holders.” That is to say, the common stockholders must
keep quiet, and take just what the Directors have a mind
not to give them now, or they will never get anything.
“If,” say the Management, “the common stockholders
choose to insist that the plan cannot be altered, * * then it
follows as a matter of course that the seven per cent. must
all be taken from the earnings of the railroad, if sufficient for
the purpose, and such necessary improvements as shall be
made must be taken from the same source. If this will
leave anything for the common stockholders for some years
to come, we are very much mistaken.” -
There is a view of the case in the same article which we
would recommend to the notice of Counsel who advised the
Corporation that it could swear to the answer without im-
peachment of its veracity. “The plan of reorganization,” I
quote textually, “secures the preferred stockholders in the
control of the property, and in their seven per cent. per annum
so long as the income from all sources will pay it. They
have therefore no need to trouble themselves about im-
proving or extending the property in order to make sure of
their dividends.” That isjust about the size of it. But it is an
awfully long time that they claim to be insured for; they might
almost as well have used the old formula “as long as grass
grows and water runs.” If they could get out a policy to
insure themselves against fire for the same length of time,
I can imagine circumstances under which it might prove
a convenience not easily over-estimated.
In the latter part of May, the Management came to the
front once more in the advocacy of non-retirement. They
are dealing with an unbelieving common stockholder, who
was so unreasonable as to advise an adherence to the plan,
which they now swear they intend to carry out the moment
they can get money enough. Hear how they scold him for
intimating that this would be the fair thing to do. “He
wants the property to come into the hands of the common
stockholders by the slow process of retiring the $5,376,970
preferred stock, which would take forty to fifty years, Sup-
25
posing the lands ever to yield so much, which no one know-
ing anything about them expects.” Very well. The lands
it seems are not worth the money named, and the process
of redeeming them is so slow, that the Management propose,
in the interest of the common stockholders, to make it slower
still by fixing it so that the process should not proceed
at all. If these objections can be removed, the Corporation
swears it would be only too happy to redeem the preferred
stock and always would have been. Put in a mark here
for future reference.
Now listen, common stockholders, to the eulogy the Man-
agement deliver on themselves in their own lifetime. It is
at Once touching in its pathos, conclusive in its argumen-
tation, and pious in its scriptural allusions. It ought to melt
a heart of stone. '
“The stockholders should judge the management by the
results they have achieved. ‘By their fruits ye shall know
them.” ” -
This is certainly an excellent mode of judging, sustained
by the same high authority that underlies the Decalogue.
Well: What are the fruits? Not to put too fine a point on it:
What are the fruits, past, present and to come; accrued, ac-
cruing, or to accrue to the common stockholders ? For
the ten years past nothing. For the present, as the distin-
guished jurist expressed himself in regard to a stock divi-
dend a year ago, “not a dollar, sir, not a dollar.” For the
future, something possible for “remote posterity” “in the
dim and distant future.” Fruits forsooth ? Leaves of the
barren fig-tree and apples of Sodom are all the fruits the
Management vouchsafe to the common stockholders.
After this brag about the fruits they ought to be judged
by, and which the common stockholders fully appreciate,
the Management vouchsafe some oracular warnings about
going to law. “The common stockholders particularly should
beware of any attempt to involve them in costly litigation, in
which they would have everything to lose and nothing to
gain. A comparatively small increase of income from the
26
operation of the railroad means an early dividend to them.”
How does this tally with the threat of postponing all
dividends to the days of posterity? And where is the “early
dividend ’’ which we were told would come from the in-
crease of income P The more the income increases, the
less there is of it to pay the common stockholder.
This threat too about the cost of litigation, though ex-
tremely unbecoming in a trustee towards his beneficiaries,
is one in which members of the Management have indulged
more than once. I have before me a letter from an “eminent
legal authority" in which his correspondent is treated to a
similar suggestion. “You speak about a lawsuit,” says the
trustee to his beneficiary. “Of course those who choose
are at perfect liberty to indulge in that somewhat expensive
luxury. But when the matter comes into the Courts, I
think I can venture to promise that it will be found much
easier to allege, than prove, that in the management of the
affairs of the Company the common stockholders have been
wronged to the amount of a single cent.” It was no wrong
to reissue mortgage stock to the amount of $82O,OOO to pay
dividends that were not earned. It was no wrong to saddle
the common stockholders with a debt of a million of dollars
to enable the preferred stockholders to pay themselves seven
per cent. dividends which they now say ought to have been
paid out of the income of the Company. It was no wrong
to attempt to vote themselves three-fifths of the property
that belonged exclusively to the common stockholders.
There is no difficulty in proving all these wrongs, and
others so numerous, that the main difficulty with the Courts
will be to find any rights whatever that the Management
concede to the common stockholders.
This is an interesting inquiry. What single right do the
Directors recognize as appertaining to the common stock-
holders who are the real owners of the property? They
have no right to a single vote in the Board, absolutely no
right whatever. No one man of all the nine Directors has
ever been conceded to them. They have no right to any
27
efficient vote on any single measure that interests the Com-
pany. They have no right to any money dividends, though
the net earnings are amply sufficent to pay them. They
have no right to any stock dividend, though the whole two
millions of common stock unissued belong to them alone,
and represent but a portion of the now nearly four millions
which the common stockholders alone have contributed to
the property since the reorganization. They have no right
to demand the application of the net income from stumpage
to the retirement of the preferred stock, though the plan
expressly stipulates it shall be so applied. What single
right do the Directors consider them entitled to ? Not
even the right to complain without being insulted. Not
even the privileges of litigation without being taunted with
the charge that they are indulging in a luxury beyond their
means. They are absolutely driven into the Courts not
merely to seek redress for their wrongs, but to ascertain if
they have got any rights whatever.
The Corporation in its answer swears that nobody ever
had any idea of evading the plan, but that they have always
Sought to carry it out and mean to retire the preferred stock
as rapidly as they can. How does this tally with the specu-
lations of the Management in the Record of 11th June, the
last issue before the annual meeting of stockholders? The
Management say that they have not asked in the resolution
of 12th May for a permanent suspension of the plan, but a
temporary one, “wisely leaving the question of permanent
suspension and the practicability or legality of the purchase
or drawing of preferred stock until it shall be better under-
stood.” Here it is held out to the timid or ill-informed
Common Stockholders that serious questions exist as to the
practicability and legality of the plan, a suggestion utterly
unwarrantable and improper in a trustee. This is followed
up by a promise to pay “the proposed seven per cent.” in
a “short time,” during which time the stockholders will
be enabled to ascertain the “legal possibilities.” “The
Directors propose to temporarily take money that can in no
28
event be used to pay dividends upon the common stock and apply
it to improvements,” the money being, every dollar of it,
pledged to the retirement of the preferred stock, which
was the best dividend a common stockholder could possibly
receive. The italics employed to display the inveracity to
the best advantage are those of the Management. They
then go on to express their inability to comprehend how
any intelligent common stockholder could oppose the reso-
lution, unless he disregarded the present market and pro-
ductive value of his stock, “in the vague hope that his poster-
7ty may, long after he is dead and gone, come into his share of
a property of whose value then, in view of certain increas-
ing competition, no one can prophecy.”
Remember that this Record reaches some seven hundred
of the one thousand stockholders of the St. Paul and Duluth
Railroad Company. Here is a menace sent to every one
of the common stockholders, that unless the resolution is
adopted, the Management cannot pay them any dividend
till long after they are dead and buried, and then, I sup-
pose, they would only pay them by jingling the money on
their tombstones, or by remitting in checks payable to their
order. No threat in this No intention to “evade,” “per-
vert” or “defeat '' the trust !
In its answer the Corporation gives no satisfactory ex-
planation of the stock dividends. It shows even more con-
clusively than in its first answer that in the years for which
these dividends were paid it did not have, and could not
have had from all sources together, one dollar of money or
property applicable to the payment of dividends. “For
several years,” it says in one place, “for many years,” in
another place, its business was “unprofitable,” and not suf-
ficient to meet its current expenses, as was undoubtedly
true. The several and many years included certainly as
many as four; and yet for the years 1881 and 1882, as I
will show shortly, it allowed in dividends to its preferred
stockholders, in cash and stock, upwards of a million of
29
dollars. In a previous * pamphlet I have sufficiently
considered the dividend of 1881. The stock dividend
of 1884 stands on a somewhat different footing. It was
made at a time when, if a dividend had been lawfully due,
the Corporation could have paid it in cash, and ought to
have paid it in cash. Not only was the issue of $350,000
preferred stock for purposes of a dividend in 1884 unlaw-
ful, fraudulent and void, for the grounds stated in regard
to the issue of 1881, but it had a cumulative title to fraud,
inasmuch as it was an over-issue beyond the six millions
authorized by the Charter.
Though the annual report of 1884 is entirely silent as to
the reason for making this extraordinary dividend in this
unlawful manner, I have come recently into possession of
a circular from the Secretary and Treasurer of the Company
at that time which throws some light on it. From this
circular, bearing date July 11, 1884, I learn that at the
annual meeting of the stockholders held at St. Paul on the
16th of June of that year, the following resolutions were
adopted by a two-thirds vote of both common and pre-
ferred stock :
Whereas, A large portion of the income of this Company for the
past three years has been devoted to various improvements and addi-
tions to the railroad and equipments, and to the purchase and con-
struction of branch roads connected with the main line, and in the
acquirement of other valuable property, which appears upon the books
of the Company unrepresented by capital stock; and whereas there
remains due to the preferred stockholders out of the income for the fiscal
year ending June 30, 1882, an undeclared dividend of three and one-half
per cent. and a like dividend of three and one half per cent, will be
due on July 1, 1884, out of the income for the fiscal year ending June
30, 1884, therefore;
Resolved, That the Board of Directors be authorized and directed to
declare a dividend to the preferred stockholders of seven per cent.,
payable in the preferred stock of this Company; provided, that after
*See “The Rights and Wrongs of Helpless Stockholders and of a Helpless Corporation,"
pp. 25-30.
30
having submitted the question to competent legal authority, they are
advised of their right under the law to do so. This dividend to be in
full of all amounts due to said preferred stockholders up to and includ-
ing the first day of July, 1884.
The lawfulness of this dividend it seems was questioned,
and the preferred stockholders were obliged to shelter the
Directors under a legal opinion. They were advised, as is
alleged, by “competent legal authority,” in the first place,
that they could pay an “undeclared dividend" alleged to be
“DUE "for the fiscal year ending in June, 1882. That is to
say, the Directors of 1882, who had sole jurisdiction over
the dividend of that year, did not, though they were
authorized to, declare any dividend beyond what they had
already declared, to wit, ten per cent. in preferred stock,
paid some time in November, 1881, and dividends Nos. 1,
2 and 3, paid in 1882. So we have here another curiosity in
law, never before heard of or imagined, to wit, “an unde-
clared dividend" “DUE * the preferred stockholders In
view of the fact that the preferred stockholders had helped
themselves, with signal liberality, to $470,000 in stock and
$358,641.50 in cash in the years 1881–82, it would have been
crowding the mourners a little too aggressively to declare
another dividend in that year of our Lord. So the Directors
of 1882 declined to make any further dividend either in
cash or stock, and there was the end of the matter. No
dividend can possibly be “due " till it is “declared,” and
the Directors of 1882 having exercised their lawful discre-
tion in the premises, and declined to “declare" a dividend,
that discretion could not be lawfully impeached and over-
ridden by a Board of 1884. It was not within the lawful
jurisdiction of the Board of 1884 to review their action, and
to declare a dividend nunc pro tunc, even in cash, much less
in over-issued preferred stock, or in stock that had been
converted into lands and had ceased to have a lawful ex-
istence. -
By this extraordinary and unlawful action of the Direct-
ors it came to pass that from that little road of 155 miles—
31
decayed, dilapidated, struggling to save its life, in danger
of losing its charter for the want of means necessary to en-
able it to fulfill its duties to the public—the preferred stock-
holders extracted for the years 1881–82 the enormous sum
of $1,015,734 (one million fifteen thousand seven hundred and
thirty-four dollars)! And was this the whole story P. By no
means. Besides saddling the Corporation with this large
issue of spurious stock a second time, and paying what is
substantially an enormous interest on it semi-annually for-
ever, they loaded the Corporation with a million of bonded
debt to pay for those very improvements for which they
voted themselves an alleged reimbursement from the Cor-
poration.
...And these are the gentlemen who now deny a dividend
of either stock or cash to the common stockholders who
have looked on patiently and submitted to the absorption by
the Trustees of now quite four millions of dollars without
applying a dollar of the net earnings of the railroad or the
net proceeds of the land grant for ten years' time to the
specified purposes of their trust.
The Trustees could find in the empty treasury of the
Corporation a million of dollars in 1881 and 1882 to apply
to ten per cent. dividends in each year on the preferred
stock, but they swear that they have never yet had one
dollar properly applicable to any provision for the common
stockholders. They swear to this, though if they had
kept their books in 1885 and 1886 as they had always kept
them down to that period, there would have been more
than a million of dollars to do those very things which they
swear they now fail to do “solely " for the want of funds
properly applicable to the purpose.
Fortunately it is a Corporation without any soul to save
that does the swearing in this case. The seal is the culprit,
and the Directors only swear pro forma by the advice of
Counsel.
The gross injustice of the Trustees in withholding
earned dividends to which the common stockholders are
32
entitled is made more gross by the fact that the Trustees
have acquiesced in the claim of the preferred stockholders
that they had an insured dividend of seven per cent. .
whether it was earned or not.
What was provided for in the plan was the payment of
“dividends semi-annually, on the first days of July and
January in each year,” “equal to the net income from all
sources; ” “ said dividends not to exceed seven per cent. per
annum.” When there was no net income there was no
dividend payable under the plan. There was no such thing
contemplated by the plan as an absolute seven per cent. in-
terest to be paid whether earned or not, and involving the
idea of making up arrears for the deficit in years when the
Directors had no means of paying a dividend and did not
declare a dividend. This is too perfectly clear on the face
of the plan to require illustration or argument to sustain it.
But we are fortunately not without judicial authority
on this point, for in the well considered opinion of a very
able Court (Belfast R. R. Co. v. Belfast, 77 Maine R., 449),
the clause of a by-law involving the same provisions as
those of the plan was the subject of interpretation. The
by-law was in the following words:
“Dividends on the preferred stock shall first be made semi-annu-
ally from the earnings of said road, not exceeding six per cent. per
annum, after which dividend, if there shall remain a surplus, a divi-
dend shall be made upon the non-preferred up to a like per cent. per
annum; and should a surplus then remain of net earnings, after both
of said dividends, in any one year, the same shall be divided pro rata
on all the stock.”
On these provisions the Court says, as the Court must
say in the interpretation of the plan: “It was not intended
to guarantee a dividend. If a dividend is prevented in any
one year by a deficit of earnings, it cannot be made up from
the earnings of succeding years. A six per cent. dividend
is not insured by the contract of subscription. It may be
less. The implication is clear that there is to be no surplus
of profits to be carried from year to year. The net earnings
33
are to be wholly distributed each year. The language of
the by-law is really the languáge of the general law. It
promises dividends whenever there are net earnings from
which to make them.” -
In the case of Elkins v. Camden and Atlantic R. R. Co.,
36 AW. J. Eg., 235, the corporation, by a supplement to their
charter, were authorized to issue a million of preferred
stock, the holders whereof should be “entitled to receive
dividends on the same, not to exceed seven per centum per
annum, before any dividend shall be set apart or paid on
the other or ordinary stock of said company.” The Vice-
Chancellor said that calling a stock preferred does not de-
fine its rights, but to determine what the preference is,
resort must be had to the contract under which it is issued.
The meaning of the charter he held to be very clear. If
there were no profits during the current year the preferred
stockholder was not entitled to a dividend; if there were he
was entitled to a preference to the extent of seven per cent. ;
“if the profits were not sufficient to give him seven per
cent; he was entitled to a dividend at such rate as they
were sufficient to pay, but not to carry any deficiency or
arrears over to a subsequent division of profits. In other
words, his rights are to be governed and regulated each
year by the pecuniary condition of the corporation at the
close of the year.”
It was held that the charter neither promised nor secured
a dividend of any amount or at any rate, but simply declared
that the dividend should not exceed a certain sum.
The same rules of interpretation that apply to by-laws
and to statutes, apply of course to charters and contracts.
There is no case in the American Reports that conflicts with
the decisions I have cited. Dividends “guaranteed” at a
fixed rate per annum are entirely different affairs. Of this
description were the dividends guaranteed and declared
Cumulative in Boardman et al., v. Lake Shore and Michigan
R. R., 84 M. Y., 161, and in Prouty v. Michigan Southern, etc.,
I Hun, 655.
34
The cases in the English Courts are in harmony with the
Maine and New Jersey decisions. They are all governed
by the doctrine laid down by the Vice-Chancellor in Henry
v. Great Morthern Ry. Co., 4 Kay & Johnston, I. In that
case the question was with regard to “shares which shall
ôear and receive dividends at the rate of 4% per cent. per annum
in preference to the payment of dividends on the ordinary
shares of the company.” Here was a right to a fixed pay-
ment at a rate certain, payable till paid. It was in its nature
interest at 4% per cent. and was so held to be cumulative.
But the Vice-Chancellor said:
“Had it been ‘half-yearly dividends' or “yearly divi-
dends' or the like * * then indeed the case would have been
the other way; then it would be plain that the division of
profits was to take place half-yearly, and that out of the
half-year's or the year's profits and out of those only the
holders of preference shares were to have the dividend men-
tioned in the act.”
An interesting question then arises as to the rights of the
parties where one stock with a prior right to dividends has
received them for a number of years, during which no divi-
dend has been paid on the junior stock entitled to dividends
when earned. This becomes important in respect to the
rights of the common stockholders of the St. Paul and
Duluth Railroad, in the earnings of the railroad when it
shows a surplus applicable to the retirement of the preferred
stock. When that surplus arises, before it can be used for
zetiring purposes, it must be used in paying the arrears of
six per cent. dividends to the common stock for every seven
per cent. dividend that has been paid to the preferred, either
in stock or money. This principle was distinctly established
in the case of Allen v. Londonderry, etc., Ry. Co., 25 Week R.,
524, and there is not a case in the Reports which Contra-
venes it. In that case the company issued shares entitled
to a preferential dividend of £5 per annum, with a dividend
of £5 to the ordinary shareholder when earned, any surplus
to be divided when accruing between the two classes of
35
stock. The preferred shareholders received their £5 for a
number of years, during which there was nothing earned
for the ordinary stock. When enough was reached to pay
both classes, with a surplus, the Court held that the common
stockholders were entitled to their arrears of dividends be-
fore the preferred shareholders could participate in the sur-
plus. This was equitable, and good law, because it took
away the temptation which has wrecked the reputation
of the Management in the St. Paul and Duluth.
I now propose to consider that portion of the answer
which relates to the reissue of cancelled stock. You remem-
ber that by the articles of incorporation it was provided
that the preferred stock should be receivable, as the mort-
gage bonds were, in payment for lands, and that when SO
received and used in the purchase of land it should lose its
voting power in the election of Directors, and in other pro-
ceedings and meetings of stockholders. Whether kept alive
or cancelled, whether issued or reissued, in whatever form it
might exist or not exist, its voting power was gone forever.
The Management say in the Railroad Record, March 24
1886, that $993,883 of the capital stock of the Company has
been retired and cancelled. If that is so, and the preferred
stock is limited by the charter to $6,000,000, there cannot
possibly be in legal existence more than $5,006, II7, or Some
50,000 shares of preferred stock. This result is arrived at
by deducting from the full amount of the stock authorized
the amount that, by the terms of the plan, has forever lost its
power of voting.
The answer of the Corporation admits and alleges that
its lawful issue was limited to $6,000,000; that prior to July
1, 1881, $844,OOO had been retired by exchanging the same,
at the par value thereof, for land of said Corporation de-
fendant; and admits that the amount of preferred stock of
said Corporation defendant was reduced to $4,706,090; and
denies that any preferred stock of said Corporation defend-
ant, after having been Once retired was “reissued, or divided
to any amount to or among any persons.”
36
Now there was reissued and divided among the pre-
ferred stockholders exactly $820,000 of the cancelled pre-
ferred stock that has no voting power in the election of
Directors, or in the proceedings and meetings of Directors.
It is issued, of course, in new certificates, but it is none
the less the old stock. There is a portion of the $993,883
still figuring in the semi-annual slips with which the Vice-
President illustrates his remarkable power of book-keep-
ing. This is the sum of $146,877.39, as a balance of “re-
alized income from cancelled preferred stock.” It has re-
mained at about that figure ever since 1884, when the
stockholders of record in August of that year had reduced
the “cancelled preferred stock " materially by voting them-
selves seven (7) per cent. of the “realized income "accruing
from cancelled preferred stock. Half of that they voted
themselves on the ground of its being an undeclared divi-
dend. They never thought they were violating the eighth
commandment when the stockholders of record in August,
1884, voted themselves a quantity of preferred stock that
was due, if it was due to anybody, to the stockholders of
record in 1882.
It is not surprising however that men who conspire to
vote themselves other people's property in 1886, should
have conspired to vote themselves other people's property
in 1884. This was paid in the “realized income,” to wit,
from preferred stock cancelled. Now the law deals with
facts and substances, not with shams and shadows. Can
you “evade,” “pervert" and “defeat” the law by saying
we cannot issue this preferred stock again with voting
power, but we can issue new stock to represent the “re-
alized income” we have to distribute, and invest the repre-
Sentative, and mere equivalent of the original with a power
which the original had lost forever?
When the answer admits that the stock originally issued
for specific purposes had fulfilled those purposes, and had
been lawfully reduced to $4,706,090 by cancellation, there
was no lawful way by which the stock which represents the
37
difference between $4,706,090 and $5,376,970.60,the preferred
stock now outstanding, could be lawfully reinvested with
the voting power. Will any one pretend that the cancelled
preferred stock now figuring as a balance of “realized in-
come" could in anybody's hands, by itself or its substitute,
become anything but what it is, a non-voting stock? If you
could not make a voting stock out of that, how could you
make a valid voting stock out of the $82O,OOO that have dis-
appeared from the balance of realized income to swell the
lawful outstanding stock of $4,706,090 to $5,376,970.60. ”
I repeat that whatever else this $82O,OOO of stock may
be—whether issued or reissued, cancelled or uncancelled,
it is the very stock which represents the stock that, having
been once employed in the purchase and payment of land
can never be reinvested with the power of voting.
We could make a fair suggestion to the holders of this
spurious stock, which it would be well for them to accept.
Let them abstain from voting it at the coming election of
Directors, for there is no difficulty in tracing it through
the certificates. Very much of it is in thc hands of the
original holders; very little of it is in the hands of innocent
parties. Let them abstain from voting, and let the plaintiff
in the pending suit enter into a stipulation not to press
for a decree declaring their stock void and fraudulent, but
recognize it as a subsisting lien, entitled to the same Con-
sideration as the preferred stock legally outstanding. I say
that this would be wise, as there is no reason to question
that the provision of the plan depriving it of its voting
power can be enforced in law.
In replication to the general denial in the answer of
fraudulent intent or practice on the part of the Directors, I
might as well here, as in any other connection, recur to the
remarkable change in the book-keeping methods of the
Corporation to escape the payment of dividends to the com-
mon stockholder.
The intention of practicing this book-keeping dodge was
first avowed in a slip issued from the Philadelphia branch
38
office, dated September 1, 1885, in the same covert and
guileless manner which marked the introduction of the
bamboozling resolution in 1886. Observe the language I
have italicised below, and note how readily it might escape
the average stockholder that the only object of the change
was to diddle him out of his dividends and prolong the
life of the preferred stock.
“Of the $140,02O.9 I expenditure for improvement, construction
and equipment for year ending June 30, 1885, $53,794. 27 incurred in
the first six months was charged to cost of road and equipment IN Ac-
coRDANCE WITH PREVIOUS CUSTOM, and the remaining $80,226.84, in-
curred in the last six months, was included in operating expense and
CHARGED AGAINST THE EARNINGS, making a corresponding reduction in
the net income from the operation of the railroad as compared with
previous years; and it is expected that the income from all sources
will hereafter be sufficient to allow such expenditures To BE INCLUDED
IN OPERATING EXPENSES IN FUTURE.”
So boldly had these men been bamboozling the common
stockholders and the public for a series of years without
being called to account for it, that they avow the purpose
of changing an uniform previous custom, which was in ac-
cordance with the rights of parties and the provisions of
the plan (indispensable indeed to the proper carrying out of
the plan), and including all expenditures for improvement,
construction and equipment in operating expenses for all
time to come ! Why? Because by pursuing that course
they could keep the common stockholders out of their
dividends forever. The plan says that the six per cent. of
the common stockholder shall be paid out of the net earnings
of the railroad. The Directors attempt by a book-keeping
expedient to prevent the possibility of any net earnings ever
appearing. And yet the Corporation swear that these good
Directors never, never, contemplated fraud “to any ex-
tent!” Yes, with a grim humor that would be amusing if
it were not exasperating, the Corporation denies that the
defendant had done anything “with any view of carrying
out, to any extent, any fraudulent scheme !” Well, I should
39
say that the intention of the preferred stockholders to vote
themselves a large amount of property that did not belong
to them, was carrying out a fraudulent scheme to an “extent”
quite sufficient to swallow up a good many millions.
This however introduces us to another branch of the
answer in which it treats specifically of the bamboozling
resolution, and not only alleges that the defendants did not
intend to defraud “to any extent,” but adds, with an aver-
ment that to the defendants themselves must have been
somewhat amusing, that “a majority of the holders of the
common stock of said defendant Corporation present at said
meeting in person or by proxy, actually favored the adoption,
then and there, of said proposed change of plan.”
In reply to this last assertion, it is only necessary to say
that the common stockholders did, as they had been for
years in the habit of doing; they sent their proxies to
William H. Rhawn, on his earnest solicitation and request,
and his assurance that the resolution was very important
for their interests, in no wise detrimental, but, on the con-
trary, highly advantageous. These assertions were rein-
forced by his reiterated assurances in the Record that every-
body acquiesced in it, and that if they did not pass the resolu-
tion, the common stockholders could not get any dividend
till they were dead and buried. From the fiduciary relation
in which Mr. Rhawn stood to them, they believed him and
sent him their proxies, because no effort was made by the
protestants on that occasion to procure proxies, for the
reason that their votes could not affect the result. To sup-
pose that any common stockholder, with sense enough to
keep him outside of an idiot asylum, could have read that
resolution understandingly, and “actually favored its adop-
tion ” is something that only a Corporation could swear to,
and that Mr. Rhawn himself cannot believe for a moment.
The resolution is now perfectly well understood, and let us
see how many common stockholders will vote for it at the
meeting in June. !
A question of interest in connection with this resolution
40
of May 12th, arises as to the capacity of the Trustees to
understand it. They are not quick of apprehension. They
had had the plan before them for ten years, and yet thought
it would be a good thing to postpone carrying it out so that
they and others might be better able to judge what it means.
They could not “understand ” Mr. Sargent's protest. It
was not “intelligible” to them, though it is written in the
English language, in a style level to the humblest capacity,
and is just as plain as the nose on a man's face. It is a
singular fact that the preferred stockholders understand it,
and that from the day it was filed investors have never
bought the preferred stock at a price exceeding that of a
perfectly well secured five per cent. bond, in spite of the
bulling articles in the Record, describing it as an assured 7
per cent. Stock with no prospect of redemption. It is
equally singular that since it has been generally circulated,
and a few intelligent common stockholders have satisfied
themselves of the verity of its statements, the market value
of the common stock has constantly increased and is still
increasing.
But let us pursue this very important inquiry. Did
the Trustees understand the effect of their own resolution?
It is very evident that Mr. James J. Hill understood it, for
he did not lose one moment to prove that he understood it
by his actions. The whole thing was disposed of very
shortly at the last annual meeting. Messrs. Hill, Rhawn and
Drake held a conference apart, Judge Clark assisting. In
about five minutes the conference broke up. Mr. Rhawn
returned to the President's chair. Judge Drake, who had
offered the resolution, officiated over its remains. With a
countenance full of pity for the common stockholders who
had stood in their own light, and with a sarcastic remark
on the “astounding revelations” of the protest, Judge
Drake suggested that it should be laid over to the next meet-
ing. For the preservation of their property the common
stockholders, as a body, are entirely and exclusively in-
debted to the prompt, intelligent and honorable action of
41
Mr. James J. Hill, President of the Manitoba road, for Mr.
Rhawn and Judge Drake intended to carry the resolution
by the brute force of the three to one vote of the preferred
stockholders, and by the proxies which had been obtained
from the common stockholders by methods hereinbefore
suggested. If Judge Clark had not differed from Judge
Drake as to the power of a majority to vote themselves the
property of the minority, the resolution would have been
passed.
The very mixed legal notions of Judge Drake and Mr.
Rhawn on this subject may be readily explained. Both of
them had been resident in the West at some portion of their
lives and had heard of a man’s “voting himself a farm.”
They forgot that this is a local custom—purely local—as
much so as gavel-kind was local to Kent. In the wildest West
it was never understood as extending even to town lots, much
less to property like railroad shares. If it is set up against
this that Directors sometimes vote themselves mortgage
bonds, and income bonds, and preferred stock, and the Lord
knows what; that is all very true, but the line must be
drawn somewhere, and I am inclined to draw it right here,
and confine these privileges strictly to Directors. The Courts
may wink at such things when Directors do them, but stock-
holders—No–Never.
It would seem that Messrs. Drake and Rhawn must have
voted for the resolution on some such idea as this, because
they certainly knew what its effect would be, and though it
is a little singular that a man of Judge Drake's intelligence
should have been misled by this vague reminiscence of a
custom prevailing on the border in his early days, yet it is
the only way in which I can account for his advocacy of
the resolution, and for persisting in it after he had been in-
structed as to its inevitable results. Let us see now how
much he knew about it. g
A short time before the last annual meeting, a stock-
holder, of an inquiring turn of mind, addressed a letter to
one of the Trustees, making some suggestions as to the
42
effect of the resolution on the interests of the common
stockholders. I have not been able to obtain a copy of that
letter, but I have succeeded, through the politeness of the
gentleman who wrote it, to obtain a copy of the reply. In
justice to the Hon. Charles D. Drake, formerly Senator
from Missouri, and ex-presiding Judge of the U. S. Court of
Claims, I print this reply at full length, from a typewritten
letter signed with his own hand:
Now I beg pardon for taking the liberty to say that, if I
were Mr. Sargent, I should make on this letter the com-
ments that follow it:
LETTER OF ONE OF THE TRUSTEES.
WASHINGTON, D. C., June 5, 1886.
JoHN O. SARGENT, Esq.,
New York.
DEAR SIR,--I have received your communication of 3d instant, and
answer it with pleasure; though, I confess, not with much confidence
in my ability to remove from your mind views which I deem erro-
neous if it be, as I have heard it is, that you are the writer of certain
letters in the Railroad Record signed “An Old Subscriber.” Never-
theless I'll say my say, whether it will satisfy you or not. (1.)
In the first place, I state the fact—which I think you will feel
bound to admit—that the preferred stockholders of the St. Paul and
Duluth Railroad Company have not a dollar of pecuniary interest in
the adoption by the stockholders of the propositions submitted to their
vote by the Board of Directors, unless their adoption should have the
effect of enhancing the market value of the preferred stock, which I do
not think it would. (2.)
The market value of that stock depends simply on the assured
seven per cent. dividend; and that will certainly continue to be paid
whether those propositions be adopted or not. Hence I have no
interest in the matter of their adoption which can pervert or cloud my
judgment. (3.)
In the second place, you will pardon me for saying that you have
fallen into gravely erroneous conclusions on this subject, because you
have suffered your mind to rest upon erroneous premises. You say:
“As I understand the preamble and resolutions, they appropriate
43
the entire net income, to an indefinite amount, and for an indefinite
period, to additions and improvements to the road.”
How it is possible that a man of your age and intelligence could
have got so wrong about so plain a matter, written down so plainly as
it is in those propositions, I am wholly at a loss to comprehend.
Those propositions make no such appropriation, as you cannot
help seeing if you will read them over again. (4.)
You will see that the “authority to suspend " relates simply and
Solely to “the purchase or drawing of preferred stock;” and that the
authority to apply net proceeds relates simply and solely to “the net
proceeds from Stumpage and the sales of lands.” (5.)
There is not, to my mind, a word there which “appropriates the
entire net income >k >k >k to additions and improvements
to the road;” but only an authority to “apply the net proceeds from
Stumpage and the sales of lands, not required in paying dividends upon
preferred stock, to >k :: >k improvements, additions and
betterments;” instead of applying it, as the plan of reorganization
requires, to buying up preferred stock.
But I think I see what leads your mind to the conclusions you
have expressed. You seem to think that because these propositions do
not pledge or contemplate the use of the net earnings of the railroad
to pay the six per cent. to the common stockholders, therefore those
stockholders will suffer. (6.)
This is an entire mistake. No such pledge was necessary, for the
all-sufficient reason that the plan of reorganization settles the rights of
the common stockholders in the “net earnings of the railroad,” and
these propositions do not attempt to unsettle that matter, except to
authorize a larger dividend to them out of those earnings than the plan
contemplates. (7.) •
But perhaps the fourth proposition may affect your mind by the
use of the words, “Such suspension of the application of the net in-
Come.” If so, let me call your attention to the fact, clear as light,
that “such suspension ” cannot possibly be held to refer to any but
the suspension authorized in the first proposition; and that “the net
income" can by no fair construction be considered to mean anything
but the net income “from stumpage and the sales of lands.” (8.)
But when you say that “it certainly is the effect of these resolutions
to withdraw the common stock entirely from the protection of the plan,”
you seem to have wandered into error almost past recovery. I have
44
been more than fifty years engaged in the study, practice and adminis-
tration of the law, and, speaking judicially, I cannot see how you could
in any fairness have taken up such an idea. (9.)
Please read the propositions again, and observe that their only
effect, adverse to the common stockholders, is the postponement for a
time of the retirement of the preferred stock, (10.)
In every other respect the common stockholders, if the proposition
should be adopted, will stand in precisely the position they do now,
except that they may receive increased dividends. Is that a reason for
them to oppose the propositions 2 (11.)
Now, admitting the slightly adverse effect of that postponement, I
set off against it the immediate benefit to all stockholders of putting the
road at the earliest practicable moment in the best possible condition
for meeting the daily increasing demands of business. The sooner
that is done the Sooner the common stockholders will begin to receive
dividends, and the larger will the dividends be, (12.)
I say, without fear of successful contradiction, that the propositions
to be voted on have not one single element of benefit to the preferred
stockholders, except the hardly appreciable one resulting from the
temporary postponement of the retirement of the preferred stock. (13).
I say further, with equal confidence, that the adoption of the propo-
sitions is most clearly for the benefit of the common stockholders, both
as to the nearness and magnitude of dividends and as to the ultimate
value of the property. (I4.)
If they see fit to coincide in your erroneous views, and reject the
propositions, the result will be that the road must be for years, as it is
now, unfit to meet efficiently the demands of increasing business; and
the inevitable effect of that will be possibly at an early day, to lead to
the construction of a parallel road, and probably more than one. (I 5.)
The result of this must be, in a high degree, injurious to the common
stockholders. They can get no dividends, except “out of the balance
of the net earnings of the railroad, after the payment of seven per cent.
on the preferred stock.” With the railroad crippled by refusing to put
and keep it in a state of full efficiency, and with the proceeds of stump-
age and sales of lands at the same time necessarily and steadily
diminishing, where will the common stockholders' dividends be? I
leave you to work out that problem. (16.)
You speak about a lawsuit. Of course those who choose are at
perfect liberty to indulge in that somewhat expensive luxury. But
45
when the matter comes into the Courts, I think I can venture to
promise that it will be found much easier to allege than prove that, in
the management of the affairs of the Company, the common stock-
holders have been wronged to the amount of a single cent. (17.)
. Yours truly, C. D. DRAKE.
(1) This proves that the Judge had seen and read the
letters signed “An Old Subscriber,” in the Railroad Record,
but it does not prove who wrote them.
(2) I can by no means admit that the preferred stock-
holders “have not a dollar of pecuniary interest” in the
adoption of the propositions. One of the propositions was
in the words following, to wit:
“Third.—Any surplus of net earnings of the railroad which may
remain after paying a dividend of seven (7) per cent, upon preferred
stock and a like dividend upon the common stock, shall be divided
equally upon both classes of Stock.”
By the terms of the plan, the dividend to the preferred
stock can never exceed seven per cent. Suppose that in
1886 the railroad earned ten (IO) per cent., it would be one
and a half per cent, additional. How then can one “feel
bound to admit” that the preferred stockholders have not a
dollar of pecuniary interest in the adoption of the proposi-
tions 2 That is a “bluff” that might mislead the average
stockholder, but was not it presuming a little too much on
the prestige of an ex-judgeship to suppose that it was going
to pose a lawyer so advanced as to be able to say that he
had enjoyed the honor of shaking hands with Chief-Justice
Marshall on an introduction by Mr. Justice Story P
(3.) About market values and the causes that affect them
I do not pretend to know anything ; but my impression is
that if Messrs. Drake and Rhawn had forced the adop-
tion of the proposition above quoted, the property they
thus voted themselves would have been placed in twenty-
four hours—or as soon thereafter as Counsel could be heard
—under the protection of Commissioners appointed by the
Circuit Court of the United States, Minnesota District, sit-
46
ting in equity. This is my opinion. I will not be so un-
courteous as to point out to Judge Drake the precise
amount of pecuniary interest that would have attached to
his own holdings. He can easily calculate it on the figures
I have furnished above.
(4.) Again, I am compelled to differ. I have read the
propositions again, and I can help seeing.
(5.) Again, I must say that I do not see what the Judge
says I will see.
(6.) I not only seem to think, but I do think, that for the
reason that the propositions neither pledge nor contemplate
the use of the net earnings to pay the six per cent. to the
common stockholders, therefore these stockholders would
suffer. Of course they would suffer. The plan it seems is
“all sufficient” for them. The plan secures their interest in
the “net earnings”—and by a change in book-keeping
methods the “net earnings” are absorbed by the Corpora-
tion. * -
(7.) The propositions do not and cannot authorize a
“larger dividend.” Such a claim is merely a device to hood-
wink the average stockholder. All income from all sources
after paying seven per cent. to the lien-holders accrues to
the uses of the common stockholders. What nonsense it is
to talk about giving them a larger dividend than all,
(8.) I certainly opine that by a fair construction of the
fourth proposition it may be held to apply to all the net
income. Think a moment. You say that the “suspension”
spoken of can only refer to the suspension of the applica-
tion of stumpage. Be it so. Then there is no provision for
the suspension of the third clause which provides for giving
the preferred stockholders three-fifths of the surplus earn-
ings of the railroad. That is never to be suspended. The
three to one vote is never to be suspended. It is “clear as
light then” that the Directors are never to be “suspended;”
and that would be the most desirable suspension that I can
imagine. O! Judge, Judge, how could you experiment in
the hope of getting any stockholders but uncommonly
green ones into such a trap as this.
47
(9) If you can tell me what is left of the plan—or of the
common stockholders— after they have made the lien-hold-
ers perpetual stockholders with a vote of three to one, and
an absolute power of disposing as they see fit of all the in-
come of the trust, then I will frankly confess that you have
profited marvellously by your fifty years practice of the law,
and are entitled to speak “judicially” even in a case of your
OWI).
(10.) I have read the propositions again and I don't ob-
serve it—very much to the contrary.
(11.) Heaven knows that the common stockholders
would be very glad to receive any sort of dividends, in-
creased or otherwise. No dividend can be imagined that
would not be an “increase” on what they have been receiv-
ing. No, no, we do not oppose the propositions because
they increase our dividends. That would not be a sensible
reason. Just try us with dividends, and see if we would
oppose them.
(12.) By all means keep the road in a first-rate condi-
tion; pay us what the “net earnings” entitle us to under
any honest system of book-keeping; get your money for
improvements at five per cent. instead of seven; be virtuous
and you will be happy. But don't for mercy's sake imagine
that we are such idiots as to think that we are going to earn
larger dividends by giving away three-fifths of Our prop-
erty.
(13.) If you will read over again what I have written
above, I think you will not reassert this proposition “with-
out fear of successful contradiction.”
(14.) Well, you have expended all the money just the
same as if the propositions had been adopted; just the same
exactly. We ought to have a dividend of nearness and
magnitude, unless you propose to carry out the scheme of
voting yourself three-fifths of the profits of the property.
(15.) If with the four millions of money put up by the
common stockholders the road is in such a condition as you
describe, it is very certain that it can never be resuscitated
by a policy that seeks to perpetuate a seven per cent. in-
Cumbrance.
48
The only hope of the common stockholders must be in
saving the unnecessary hundred thousand dollars paid to
the men who are bamboozling them.
(16.) The common stockholders do not complain that
they can get no dividend except out of “net earnings.”
What exasperates them is that they cannot get any dividend
out of “net earnings.” And to such shabby devices have
the Management resorted to evade our demands, that they
have absolutely changed their methods of book-keeping in
order to cover up the fact that they have money which, un-
der the plan in its honest execution, is pledged to divi-
dends and retirement. We are not so much interested in
the question as to where the common stockholders' divi-
dends will be at some future time; what we want to know
is how to get at them. We know where they are; they
are in the hands of the Corporation. The Corporation has
four millions of our money not represented by anything
that certifies to our interest in them. We want those cer-
tificates, and we want them now ; we do not wish to put
off till to-morrow what ought to be done to-day. We want
a forty per cent. dividend for the two millions of our com-
mon stock in the treasury, and we do not wish to see this
distribution put off to the very remote period contemplated
by the good Directors, when it will be too late for any of
us to profit by it.
(17.) A lawsuit is a very handy thing to have in the
house sometimes. Mr. Baring-Wells has got a lawsuit
pending at St. Paul. The answer is in and the replication
filed. If anybody should happen to be at St. Paul June 20th
representing thirty or forty thousand shares of the common
stock and request to be made a party to Mr. Baring-Wells'
bill, I think it would have a considerable moral effect on
the Directors and on the Court. It is not unlikely that the
Court would tell the Directors that they need not be in a
hurry to pay a dividend on the $820,000 of spurious stock,
or allow it to vote. There is no knowing but what it might
tell them to go back to their old methods of book-keeping;
49
I think it would. “Sauce for goose is sauce for gander,”
has always been good law in Minnesota. Indeed I am not
sure but that a good law-suit is well worth all it costs. I
should hardly consider any luxury expensive that would
enable one to examine the Judge as to his pecuniary inter-
est in the passage of the bamboozling resolution.
The receipt of this judicial letter was immediately ac-
knowledged by Mr. Sargent, with the expression of his in-
tention to make a fuller reply at an early day. This was
anticipated by the following letter from Judge Drake :
WASHINGTON, June 8, 1886.
John O. SARGENT, Esq.
DEAR SIR,--In reply to your favor of yesterday, permit me to say
that it can hardly be worth while for you to take the trouble of
answering my letter in detail when the stockholders' meeting is so near
at hand.
But let me add a few words to what I previously wrote.
The printed slip inclosed by you shows the whole spirit of the
common stockholders' opposition to the propositions to be voted on.
They want dividends now, without stopping to ask what is to be
the effect on the future prosperity of the road of paying out in divi-
dends what is imperatively required to put the road, at an early day,
in a better condition to pay better dividends hereafter.
They seem to be quite willing to sacrifice the future to the mere
present enjoyment of dividends that must, at best, be but small. They
quite forget that the result must be to diminish greatly the capacity of
the road to earn any dividends whatever for the common stockholders;
to keep it in a condition of inability to meet the demands of business;
and thereby to invite the building of another road alongside of it.
If the common stockholders see fit to take this course, be assured
that they alone will suffer. Whether the propositions be adopted or
not, the preferred stockholders will be sure to receive their seven per
Cent. Yours truly, C. D. DRAKE.
The printed slip referred to in the above letter was an
extract from a financial journal that had been engaged in an
intelligent and active effort to depreciate the common stock
by such argumentative suggestions as the following: “What
50
* 9
a fraud is Duluth common,” “Duluth common is a fraud,”
“If these (the preferred stockholders) stand on the letter of
, their contract there is nothing in the common.” I annex
the slip—it is the same that Mr. Ward inclosed to Judge
Drake in his letter printed in the appendix:
[From the Financial Daily Record (N. P.), May 24, 1886.]
The annual meeting of the St. Paul and Duluth will be held on
June 21, when it is proposed to adopt the following resolutions [of 12th
May]. -
The effect of the passage of the above will be to defer indefinitely
all prospect of dividends upon the common stock. The average earn-
ings from the railroad itself for the last seven years have been far below
the amount required to pay dividends on the preferred stock. The
zesolutions will undoubfedly pass, for the preferred stock, amounting to
$5,376,970 out of a total of $9,432,377, has a vote for every share,
while it requires three shares of the common to cast a single vote.
This was no doubt the opinion of a railroad expert, who
desired to give his readers the benefit of his examination of
the resolutions, coupled with his valuable interpretation of
the contract. It should at least have induced Judge Drake
to ask himself the question whether there was not something
to justify Mr. Ward and Mr. Sargent in having arrived at
the same conclusion that was reached by the financial
editor. Singularly enough the same result had been reached
by a legal gentleman in Boston, who drew Mr. Rhawn's
attention to the point, and Mr. Rhawn replied that he
thought the newspaper writer “failed to understand, if he
was not disingenuous.” Here are four different persons,
three of them lawyers, and one of them a financial editor,
Communicating to Messrs. Rhawn and Drake a concurrent
opinion as to their understanding of the resolution, and
their belief that it would “defer indefinitely all prospect of
dividends upon the common stock ’’—and Messrs. Rhawn and
Drake taking the very grave responsibility of voting the
proxies of 20,000 common shares in favor of such a resolution,
which they say they would have done had it not been “for
the action of the twelve protesting stockholders.” And
51
now, only one year afterwards, do you imagine it possible
to scare up any person compos mentis who will read this.
correspondence and doubt that Messrs. Rhawn and Drake
knew this to be the effect of the resolution, and intended
this to be the effect, and were prepared to use the proxies
intrusted to them in a fiduciary capacity, to accomplish this
“ detrimental” result.
And how does Judge Drake meet the opinion of the
financial editor? Does he say that if the resolution is liable
to the objection stated it ought to be amended to obviate
the objection ? Not at all. He merely says that if the com-
mon stockholders see fit to oppose the resolutions to be
voted on, which they honestly believe defer “indefinitely all
prospect of dividend,” “they alone will suffer,” and in sub-
stance that he does not care much if they do as long as the
preferred stockholders will be sure to receive their (7)
seven per cent.
Thus far we have got through with the Judge, and the
Vice-President is next in order. What l should want to
learn of Mr. Rhawn would be about the responsibility of
Mr. Sargent for non-payment of a dividend to the common
stockholders. After the meeting of the stockholders on the
21st June last, a night telegram was dispatched to the
Railroad Record of Philadelphia from St. Paul, stating as
follows:
“The resolutions submitted by the Directors on May 12th were
postponed till the next annual meeting. The effect of this will be
that improvements will have to be made from the railroad's earnings,
and the proceeds of land and stumpage will be required to make up
the dividends upon the preferred stock, so that no dividend can at
present be paid upon the common stock. Mr. John O. Sargent, of
New York, opposed the passage of the resolutions, and although there
was a majority present favoring their passage, it was deemed best to
postpone them.”
It was natural enough that in the course of the summer,
in view of this statement, Mr. Sargent should receive several
52
letters from common stockholders inquiring why he should
be such a bad man as to prevent the good Mr. Rhawn from
making dividends to the long-suffering common stockholder,
when he would have done so if Mr. Sargent had not inter-
fered. As this became an annoyance, Mr. Sargent addressed
to the Vice-President this letter:
- LENOx, MAss., October 8, 1886.
WM. H. RHAwN, Esq.,
Wice-President S. D.
DEAR SIR:
In the Railroad Record of 26th June, and in the same journal of the
Ioth of July, the managers of the St. Paul and Duluth Railroad single
me out from a dozen dissenting stockholders, and charge that common
stockholders desiring dividends may thank me for their not receiving
them.
The managers by their report of August 2d show that they have re-
ceived a lage sum of money applicable to the payment of dividends
upon the common stock which has been applied by the Trustees to the
uses of the Corporation. -
It shows also that a large sum of money that came into the hands
of the Trustees from the sale of lands and stumpage has also been ap-
plied to the uses of the Corporation, and not to the purposes contem-
plated by the Trust.
Now will you kindly inform me what agency you impute to me in
bringing about this result When you applied all the net income of the
trust to the uses of the Corporation, please explain the process by
which you justify the statement to the public that the common stock-
holders of S. D. may thank Mr. Sargent for not receiving their divi-
dend ?
I opposed, in my own interest, as I had a perfect right to do, with-
out subjecting myself to personal attack in the public prints, a proposi-
tion to give a large portion of the property of the S. D. to the preferred
stockholders without any consideration, and you may be assured that
I shall continue to oppose it. But I submit that the managers have
no right to withhold dividends due the common stockholders, and al-
lege that I am responsible for the default. Presuming you are able to
show how the common stockholders would have received a dividend if
the twelve common stockholders had not interposed by defeating the
53
extraordinary and unprecedented donation to the preferred stock-
holders contemplated by the resolution,
I remain, very truly yours,
John O. SARGENT.
Mr. Rhawn replied to this respectful application in an
epistle that explains itself:
SAINT PAUL AND DULUTH RAILROAD COMPANY.
PHILADELPHIA, October 12, 1886.
SIR,-As this Company is in no way responsible for what the
editor of any journal may see fit to say in his paper, and cannot as-
sume to control the expression of individual opinion of any of its
managers, I must respectfully decline to enter into the discussion to
which you invite me in your letter of the 8th inst.
Respectfully, W. H. RHAwN,
John O. SARGENT, Esq., Lenox, Mass. Vice-President.
It is clear that Mr. Sargent merely called upon Mr.
Rhawn to relieve himself from the odium of the charge
that by his meddlesome interference he had deprived the
common stockholders of dividends they would otherwise
have received. This was hardly a fair statement of the case
against Mr. Sargent, and in view of his frank and courteous
call for an explanation, I cannot help thinking that Mr.
Rhawn ought to have replied in a less curt and abrupt
manner. Clear it is certainly that Mr. Sargent did not
invite Mr. Rhawn to any discussion whatever. He simply
desired to give Mr. Rhawn the opportunity of withdrawing
in a cooler moment the charge that he had unwisely made
in a moment of chagrin and disappointment, for it was an
awful disappointment to Mr. Rhawn that he was compelled
to telegraph such “tidings of despair” to his favorite organ.
He expected to telegraph that the resolution was passed
“unanimously" as usual; that he had betrayed the common
stockholders with their own proxies; that they were out of
sight of any dividend for years to come; and that the pre-
ferred stock was established permanently with a triple vote.
54
It was a shocking come-down to be obliged to confess that
the tail had wagged the dog, and that it was the most re-
markable instance on record in which such a feat had been
accomplished. Indeed there has prevailed hitherto a certain
degree of skepticism as to the possibility of such a perform-
ance, and I believe this is the first time that it has ever
been vouched for by an entirely ingenuous and truthful
eye-witness.
But I have another valuable letter from Mr. Rhawn, writ-
ten in reply to a gentleman who sought some explanation
of the resolution, which had seemed to him very extraordi-
nary. “The Board is proceeding upon the theory,” writes
the Vice-President, “that money in no wise applicable to
the payment of dividends upon the common stock used for
necessary improvements will increase earnings of the road
and hasten dividends on the common stock.”
It is surprising how soon a really capable business man
can become muddled when he begins to theorize. Here is
Mr. Rhawn starting a “theory,” to be sure. Why does not
he stick to facts and terra firma, and not be getting into the
clouds with his conceits and whimseys. The very first thing
a man ought to do when he sets up a “theory" is to be sure
of his facts. If he has not got the facts for his “theory” he
might as well set up a coach without horses. Now the
whole “theory" of the Board rests upon the fancy that
there is somehow, somewhere, money accruing to the Cor-
poration that is in no wise applicable to the payment of divi-
dends upon the common stock. This is a favorite “theory”
of the Vice-President, thrown out often in very choice italics
in the Railroad Record. The only trouble is that THERE IS
NO SUCH MONEY. That knocks the “theory” of the Board
into a cocked hat, to say the least. After paying 7 per
cent. to the preferred stockholders, every dollar that accrues
to the Corporation is due in dividends to the common
stockholder—first, in cash to him in hand paid, and
secondly, in the cash applied to the retirement of the pre-
ferred stock.
55
I must refer once more to the allegation of the Answer
that “a majority of the holders of the common stock of
said defendant Corporation, present at Said meeting in
person or by proxy, actually favored the adoption, then
and there, of said proposed change of plan.”
That is true, and the reader is now fully informed as to
the methods employed by men standing in fiduciary rela-
tions to these common stockholders to secure those proxies.
The answer might have added, as the Management said in
their report in the Record, that “but for the action of the
twelve protesting stockholders, representing only 1,278
votes out of the 46,180 votes represented at the meeting,
the resolutions would have been legally adopted by a unanimous
vote.” It is said that 23,341 shares of common stock, Consti-
tuting a majority, were in favor of the unanimous adoption
of the resolution pressed by 38,352 preferred stockholders,
and that all this array was sat upon by a little bit of paper
filed by one dozen common stockholders, containing a few
unintelligible observations dictated to a typewriter half an
hour before the meeting.
The common stockholders now feel and understand how
very narrow their escape has been, and they would not
have escaped at all if it had not been that Mr. James J. Hill
promptly denounced the outrage, and put his foot on it, as
the answer emphatically observes, “then and there.” To
his excellent sense and sterling honesty the common stock-
holders understand that they are indebted for saving the
larger portion of their valuable property.
It is hardly necessary to discuss the propositions adopted
by the Directors on the 5th of February, 1887. They will
be defeated for obvious reasons. My impression is that at
the next meeting of the stockholders it will not be the Vice-
President in the chair, with President Fisher on a stool by
his side; but it will be President Fisher in the chair with
the Vice-President on the stool by his side, and it will be a
stool of repentance.
In conclusion, I would merely add from the recent cir-
56
cular of Messrs. Gwynne & Day and Lawrence Bros. & Co.
a list showing the individual holdings of the members of
the Board, as revealed by the stock books at their closing,
on May 14, as follows:
PREFERRED. COMMON.
William H. Fisher
tº gº tº me wºº tº m º ºn me sm ºs 7 tº ºs º º
William H. Rhawn ------------ 2O I,OOO
James Smith, Jr.--------------- - - * *s sº ims
James J. Hill ----------------- 2 I *-º ºn tº º
Henry P. Upham ------------- - - - ºn tº ºt
Charles D. Drake ------------- 2O4. - - - -
James M. Earle --------------- 22 I6
C. D. Baldwin ---------------- 6 * * * *
Charles Fairchild ------------- - - IO
28O I,026
This would seem to leave the preferred stockholders in
a somewhat dubious condition as to the selection of their
representatives.
57
A PP E N D I X.
CORRESPONDENCE THAT EXPLAINS ITSELF.
No. I.
HoN. JoHN E. WARD To HoN. C. D. DRAKE.
New York, May 27, 1886.
DEAR SIR,-A number of my clients have received powers of attorney
in the matter of the St. Paul and Duluth, and a letter requesting their
proxies. As your name appears in the power sent them, I take the
liberty of renewing an old acquaintance in this way for the want of a
personal opportunity.
Some time in February last I was consulted by several clients who
had long held interests, both as preferred and common stockholders,
and my attention was called to an article in the Philadelphia Railroad
Record, coming from a distinguished jurist who had been long an ad-
viser of the Company. When I received the power with your name in
it, it naturally occurred to me that you were the gentleman referred to.
Now as I would willingly advise my clients to send their proxies to a
gentleman in whom I have such entire confidence, I desire only that
you will give me your confidence to the extent of an early reply to a
few suggestions. sº.
In the letter referred to, you admit the right of the common stock-
holders to inquire into dividends, and you express the opinion that if
injustice in any way had been done to them, it would not be necessary
to resort to litigation to secure their equities.
In the March number of the same journal there is an article com-
menting on some advice which I had given to my clients pointing out
to them the remedies in their power for the protection of their equitable
rights.
58
In this article—and I will not affect to consider it anything else
than as a paper by one having authority to speak, and not by a mere
scribe—the writer says, speaking of a distribution of preferred stock
that had already taken place: “If there should ever be any question,
as to what may be due the common stockholders, the precedent has
been established and may doubtless be settled in the same way.”
I drew the natural inference from these expressions that at least the
legal adviser and the Vice-President were disposed to do justice in the
premises.
But when I see them soliciting proxies for the resolutions recom-
mended at the Directors' meeting of May 12th, confirming the past use
of the stumpage and land money, without any compensation to the
common stockholders for its diversion from the uses contemplated
by the plan of reorganization, and the future use of the same to an
unlimited amount and for an indefinite period with no compensation,
I confess that I cannot comprehend it. -
I consider those resolutions in the highest degree “detrimental *
to the common stockholders. That they are so regarded by others I
infer from an editorial article written with the evident purpose of adding
to the injury contemplated by the resolutions, from the New York
Financial Daily Record of May 27th: “The effect of the passage of the
above will be to deſer indefinitely all prospect of dividends upon the
common stock.”
I think no other conclusion can be drawn from them. They pro-
vide for the preferred stockholders only. In writing you thus, if I
presume too much on the privileged relations among members of the
profession, I trust you will pardon me from the large interests my
clients have in the premises, and my solicitude to give them the best
advice.
If there is no intention to consider the “equities” of the common
stockholders and to “settle them in the same way” as they were settled
for the preferred, it seems to me that litigation is inevitable.
I see a decision of Judge Wallace in the papers to-day, that has an
important bearing on the contemplated action of the stockholders.
Very truly yours,
John E. WARD.
59
No. II.
DRAKE TO WARD.
John E. WARD, Esq., WASHINGTON, June 3, 1886.
New York.
DEAR SIR,-Though, after my interview with you day before yester-
day, it is not worth while for me to answer your letter of 29th ult., yet
I feel it worth while to say a few words to you in writing, the purport
of which I said when I saw you.
I am so thoroughly convinced that some of the common stock-
holders of the St. Paul and Duluth Railroad Company are laboring
under a great misapprehension in regard to the effect on their interests
of the adoption of the propositions to be voted on the 21st inst., and
that the rejection of those propositions will result in serious injury to
them, that I greatly desire that there should be no failure on their part
to send to St. Paul, in advance of the annual meeting, some intelligent
and fair-minded men to investigate the whole matter. So far as I am
concerned I wish that a thorough investigation should be made, If
there has been any wrong in the management of the Company I know
nothing of it; if there has not been, I want the stockholders to
know it. Yours truly, C. D. DRAKE.
No. III.
WARD TO DRAKE.
61 WALL STREET,
NEw York, June 4, 1886.
MY DEAR JUDGE,--I am this morning in receipt of your kind favor
of yesterday, for which please accept my thanks. I am sure I need not
say to you that “if there has been wrong in the management of the
Company” you knew nothing of it, and all those I represent I will
impress with this view. -
The more difficult task for me to impress upon them is that the
common stockholders have not been greatly wronged in the manage-
ment of the Company, and that by the contemplated proceeding their
rights are not to be entirely ignored and sacrificed. Intelligent and
fair-minded men will however be on the spot prepared, I think, to
give all matters fair and candid investigation.
Very truly yours, John E. WARD.
Hon. C, D, DRAKE, Washington, D. C.
60
NO. IV.
[Judge Drake's request in regard to the intelligent and fair-minded
men was complied with and the result was this protest, which so
astonished the Directors that they could not understand it. They
were not only unable to understand, but they said it prevented them
from paying any dividend to the common stockholders till they were
all dead and gone.]
PROTEST of A PREFERRED AND COMMON STOCKHOLDER.
Whereas, there are now accrued, subject to the uses of the com-
mon stockholders of the St. Paul and Duluth Railroad Company,
moneys exceeding half a million dollars, and of the funds now accru-
ing and to accrue from all sources, subject exclusively to the same
uses, it is proposed to apply at least half a million more to the uses of
the Company, making in all more than a million of dollars, to the
benefit of which the common stockholders are exclusively entitled;
which it is proposed to convert to the uses of the Company without
allowing to said individual common stockholders one dollar of com-
pensation.
And, whereas, of the said million dollars, a portion is applicable
to the retirement of the preferred stock at par, which retirement is ad-
verse to the interests of said preferred stockholders, and its diversion
to the uses of the Company is a great benefit to them, as it defers the
extinguishment of their stock as provided in the plan; and, while no
compensation is made to the common stockholders for diverting a
million of their own money from the uses of the trust, certain resolu-
tions submitted by the Directors this day, propose to compensate the
preferred stockholders for submitting to this benefit by giving them,
forever, 55 per cent. of the net earnings of the railroad, which said
gift, so generously proposed to be made by the preferred stockholders
to themselves, is just so much over and above 7 per cent. to which the
mortgage interest is expressly limited by the deed of conveyance and
the contract of the parties. -
And, whereas, this is, perhaps, the largest usury that was ever paid
by any party on his own money for the privilege of having it applied
to other people's uses.
Zherefore, the undersigned, a preferred and common stockholder
of the St. Paul and Duluth Railroad Company, desires to file this, his
protest, and to enter the same on the minutes of this meeting, against
61
the adoption of the resolutions, each and all, submitted by the Trustees
and Directors, and against any action on the same as being beyond the
powers of this meeting.
- And he thus respectfully assigns the reasons for this protest.
First.—Because the resolutions directly impair the obligations of
the contract embodied in the plan of reorganization.
Second.—Because they are founded on the false theory that the
preferred stock is something “paramount and superior,” intended by
the parties to the contract to enjoy greater advantages and larger re-
turns than the common stock; whereas the preferred stock is strictly
and simply an incumbrance on the property of the common stock-
holders, to whose use the entire net income of lands and road, after
payment of 7 per cent, on the preferred stock, is expressly dedicated,
and to none other, subject always to the lien of the preferred stock-
holders.
Third.—Because it was in view of this strict limitation of the rights
of the preferred stockholders to 7 per cent. and liquidation, and the
surrender of all claims to profits on the residuary net income, and to
all accretions and additions to the property of the Company, except as
a security, that the common stockholders allowed the triple vote to the
preferred stockholders, for their protection while their lien was in the
process of extinguishment.
Fourth. —Because all the obligations of the Company with regard
to this lien, and all the rights of its holders being thus strictly defined
and limited, any proposition to divide the net earnings of the railroad
with the holders of the lien is totally irreconcilable with the nature of
their holdings and with the rights of the common stockholders.
Fifth. –Because the proposed temporary change in the plan is
practically perpetual, as such disposition is made of the net income as
to place the whole matter in the hands of the preferred stockholders
with their triple vote.
Sixth.-Because if, by a vote of the stockholders, the unchangeable
plan can be changed at all, it can be changed entirely, and all the
rights of the owners of the property can be thus placed at the disposal
of the holders of the lien. -
Because if the preferred stockholders can come together to-day and
lawfully vote themselves, off-hand, fifty-five per cent. of the net earn-
ings of the railroad, they can come together again to-morrow and vote
themselves the other forty-five per cent., in spite of the protest of the
minority. -
62
Decause the contract of the preferred stockholders was for 7 per
cent, and liquidation, and the contract of common stockholders was
for 6 per cent, and the property, which, with the franchises and land
grant, and the road, with its extensions, additions, improvements and
betterments, and all accretions to the property in which the moneys of
the common stockholders have been invested, belong to the common
stockholders, subject only to the lien of the preferred stockholders;
and the common stockholders do not propose to be voted out of the
Same, or to part with their interests, except by a fair contract of bargain
and sale. - JoHN O. SARGENT.
NO. V.
[The report of the St. Paul and Duluth Railroad Company for 1886
states the results of the year's operations as follows:
Net earnings from the operation of the road, $630,790.61. Receipts
from land and stumpage sales, $163,057.73. The contract or the plan
requires that after the payment of 7 (seven) per cent, to the preferred
stockholders ($350, 182) all the residue shall enure to the benefit of the
common stockholders; to wit (approximately) $240, OOO in a six per
cent. dividend on the common stock, and $163,057, with the $40,000
surplus from the railroad earnings, to the retirement of the preferred
stock. That is the contract, and can of course be enforced in the
Courts. The Vice-President, being a very skillful book-keeper, con-
ceived the ingenious, but somewhat extrordinary, idea that he could in-
validate the obligations of this contract by changing his method of
stating the results. He labors under the singular delusion that he can
abrogate the contract by a book-keeping device. This is not possible.
Even a sovereign State cannot do it. Here is Virginia, for instance, a
State that has been trying to Swindle her creditors for the last ten years,
by impairing the obligation of a contract, and with only moderate suc-
cess. She ought to employ the Vice-President. He will tell her per-
haps that Courts and the law can be circumvented by the book-keeping
dodge, and that if she will only change her methods of book-keeping
so as to make things appear different from what they are, Virginia can
impair the obligation of her contract without having to run away
from the constable.]
63
No. VI.
MR. SARGENT To PRESIDENT FISHER.
28 EAST 35TH STREET,
WILLIAM H. FISHER, Esq., NEw York, April 30, 1887.
President, etc.
DEAR SIR,--I avail myself of your kind intimation that you are
gratified by an exhibition of interest in your management of the St.
Paul and Duluth Railroad, and write again to make an inquiry that you
will not consider impertinent in a holder of the stock of the Company.
In Mr. Adams' testimony before the Pacific Railroad Commission,
reported in the Times this morning, I find the following statement:
“Net earnings are reached by deducting the operating expenses from
the gross earnings.” This is the method employed by the Government
and authorized by the Courts.
In your report for 1886, you state the net earnings from the opera-
tion of the road at $630,000. You reach this result by deducting the
actual operating expenses, $927,295. 23, from the gross earnings of the
road, the method sanctioned and established by the Government and
the Courts of the United States.
I would respectfully ask if it is possible by any book-keeping devices
to change the legal rights resting on these inexorable facts?
If you will refer to the Charter of the Company, you will find by its
seventh section that the holders of the common stock of S. D. are
“entitled ” to dividends out of the “balance of the met earnings of the
railroad "after payment of 7 per cent. On the preferred stock.
Please observe the language of the charter. The common stock-
holders are “entitled” to dividends, etc.
By the fourth article the preferred stockholders are to “receive” divi-
dends when the profits from all sources admit of them; and deducting
those dividends from the “net earnings” of the railroad, out of the
“balance" the common stockholders are “entitled ” to a dividend
not exceeding six per cent. in each year.
Down to the year 1885 you recognized the lawful method of as-
certaining net earnings contemplated by the Government and the
Courts. In 1885 you changed it, after it had been established in your
Company from the first day it paid dividends down to the time when
it became necessary to change it or pay dividends on the common
stock.
I would respectfully ask if the latter necessity can be obviated by an
64
inequitable and unwarrantable change in the mode of stating the re-
Sults of your operations; or, in other words, whether it is legally possible
to change facts by a mere manipulation of figures?
I think you cannot fail to agree with me that no such change can
be lawfully accomplished. If it cannot be, then the common stock-
holders were “entitled” from the “net earnings” of 1886 to a cash
dividend of six per cent., and are now lawfully “entitled” to it. In
view of the fact that the preferred stockholders have managed to pay
themselves in the last six years $2,465,924 in dividends, I think you
will admit it is high time to do something in this way for the com-
mon stock. Yours very truly, JoHN O. SARGENT.
No. VII.
PRESIDENT FISHER To MR. SARGENT.
JoHN O. SARGENT, Esq.,
28 East 35th Street, New York.
DEAR SIR,-Your favor of April 30th is received. In reply will
say a number of the common stockholders have commenced an action
against the Company, which involves the questions suggested by your
letter.
A pamphlet is now in press containing the complaint and answer
of the Company and Directors thereto, to which I can add nothing.
I will mail you this pamphlet as soon as printed, which will be in a
few days. Yours truly, W. H. FISHER,
President and General Superintendent.
No. VIII.
RETIREMENT OF PREFERRED STOCK.
W. H. FISHER, Esq., President.
DEAR SIR,--Replying to your inquiry of this date, I beg leave to
inform you that the
Net income from land and stumpage for
the year 1886 was . . . . . . . . . . . . . . . . $163,057 73
Ditto for the month of January, 1887. . . . $126,31 I 91
The income for the month of January, 1887, was unprecedentedly
large. Income for February not yet made up.
Yours respectfully, D. A. McKINLAY,
Auditor.
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