not rest in the whim of a reorganization committee in Wall Street to impose a perpetual tax upon that whole southern country. In the year 1899 the Southern Railway earned net about 4 per cent on $40,000 a mile of the mileage of its entire system. That system extends, as a rule, through sparsely populated territories; no difficult and expensive engineering feats were involved in its construction, nor has it in proportion to its extent many expensive terminals. It will hardly be claimed that the cost of reproducing that property in its present state would equal $40,000 a mile." 71

§ 265. Bonded indebtedness beyond present values.

It used to be more or less a sentiment that there was something sacred about an issue of bonds, especially when based upon a mortgage of realty.72 At all events, few cases go so far as refuse to recognize the validity of the claim to interest upon bonds, even when the security has depreciated. But in Steenerson v. Great Northen Railway 73 Mr. Justice Canty said: "In determining what are reasonable rates, it is perfectly immaterial whether the railroad is mortgaged for two or three times what it would cost to reproduce it, or whether it is free from incumbrance. To hold otherwise would be to hold that the State or the public have indirectly guaranteed the payment of the morgtage bonds of every railroad. The State may as well guarantee the bonds directly as indirectly. But neither the State nor the public have done either the one or the other. It is immaterial how the property has been split up into different rights, interests, and claims. For the purpose of fixing rates, the holders of all these stand in the shoes of the sole owner of the property, unincumbered. The rights of the bondholders

71 See the history of the Rhode Island Company in The New England Investigation, 27 I. C. C. 560.

72 See, especially, Chicago & N. W. R. R. v. Dey, 35 Fed. 866, 1 L. R. A. 744.

73 69 Minn. 353, 72 N. W. 713.

are no more and no less sacred than the rights of such an owner."

§ 266. Market value of securities.

There have been some remarks in certain opinions which show some disposition to consider the market value of securities. In one of its general opinions upon rate matters the Commission said that the market value of stock should be considered, but such rates will not necessarily be allowed as will guarantee prices at which the stock was brought.74 And the Commission will pay little attention to what the history of the capitalization in question has been. It appeared in one proceeding that the Great Northern Railway had in the past distributed its stock issues among its stockholders at par, from time to time, although the market value of the stock was often much above par; but this practice, it was said, could have no bearing upon the earnings to which the company was entitled.75 Conversely the fact that a carrier's stock originally sold at less than par cannot be urged on a question of reasonableness of rates to deny the present holders thereof fair dividends therefrom. Nor can the fact that a carrier has issued watered stock be urged, on a question of reasonableness of rates, to deny the right of present holders of the stock to receive reasonable dividends thereon.

§ 267. Securities issued upon reorganization.

A complication frequently met is that the operating company is the result of the consolidation of several previous companies or the reorganization of a previous corporation. In many actual cases both reorganization and consolidation are to be found so many times at various stages of the corporate history of the given concern that the outstanding issues tell little or nothing of real invest

74 In re Advances in Rates, Eastern Case, 20 I. C. C. 243.

75 City of Spokane v. N. P. Ry. Co., 15 I. C. C. 376.

76 A reorganization

ment now devoted to the public service." may mean an increase in the nominal capitalization to placate certain interests, or it may mean drastic elision of securities that represented actual investment. A consolidation similarly may mean increase or decrease in nominal capitalization. Obviously when a holding company is utilized there is a duplication of stock issues, at the very least. And when the consolidation is effected by buying the former properties outright an inflated price is usually paid. When in any of these ways the actual property is buried beneath corporate finance, little respect is to be paid to the outstanding issues as such, but the question should be as to the real values underlying."

§ 268. Capitalization authorized by public authorities.

Special conditions may be found in certain environments which may call for peculiar treatment. Where, for example, there has been an explicit legislation, providing for the validation of certain issues of securities to an amount named, no tribunal, it would seem, would venture to question the action of the legislature. The United States Supreme Court has held in a recent case that, as the capitalization of the company in question had been fixed in part by special legislation, the court would not question the values thus established.78 So where the laws of the State have provided that stock could not be sold for less than a price fixed by the public authorities, it would seem that this capital, if duly devoted to the objects designated, has peculiar claims to consideration. And it seems that where bonds are sold at various prices it should be a question of par values; as the discount or premium, if proper, really affects the interest rate, not the capital charge.79

76 See Chicago Union Traction Co. v. Chicago, 199 Ill. 579, 65 N. E. 470. "See also State ex rel. v. Railroad Commission, 137 Wis. 80, 117 N. W. 846.

78 Willcox v. Consolidated Gas Co., 212 U. S. 19, 53 L. ed. 382, 29 Sup. Ct. 182.

79 See People ex rel. D. & H. R. R. v. Stevens, 197 N. Y. 1, 90 N. E. 60.

§ 269. The problem of watered stock.

To make the capital account of a public service company the measure of its legitimate earnings would place, as a rule, the corporation which has been honestly managed from the outset under enormous disadvantages. One who examines into these questions even in the most casual manner is soon clear on one point, and that is that the par value of the outstanding stock issues does not necessarily constitute a proper basis for the capital charge. Little if any weight, therefore, is to be attached to the nominal capitalization of the company, even although these shares may now be in the hands of innocent holders.8 For, however distressing this circumstance may be, the law must take the attitude that these holders purchased with imputed knowledge of the public service law, by which the State may always reduce the rates without unconstitutionality to a point where they will yield no more than a fair return upon actual values. So notorious is it that outstanding securities may have no relation to actual values, that their par value is hardly regarded by anyone to-day.81

§ 270. Property acquired from surplus earnings.

80

Doubts have sometimes been expressed as to the standing of securities issued to stockholders when surpluses have been accumulated. That this process may be stopped for the future by the reduction of rates to a point where no

80 The plight of such holders appealed to Judge Hough in Consolidated Gas Co. v. Willcox, 157 Fed. 849. But Judge Ross had no sympathy for such holders in San Diego L. & T. Co. v. National City, 74 Fed. 79.

In Southern Pacific R. R. Co. v. Bartine, 170 Fed. 751, it was said that the fair value of the outstanding securities was one of the elements to be considered.

81 Allegations as to outstanding

securities are pertinent. Houston & T. C. Ry. Co. v. Storey, 149 Fed. 499. But they are inconclusive. Perkins v. Northern Pacific Ry. Co., 155 Fed. 445.

For an excellent recent case in which it is pointed out that fictitious valuations indicated by overissues of securities are to be rejected in dealing with this problem, see Coal & Coke Ry. Co. v. Conley, 67 W. Va. 129, 67 S. E. 613.

such surplus will be earned is true. But if at some past time a surplus has been earned and either held as cash or utilized in new construction, an issue of new securities against this would seem to represent capital belonging to the stockholders devoted to the business of the company as much as any other securities paid for by their holders.82 "In determining the amount of the investment by the stockholders it can make no difference that money earned by the corporation, and in a position to be distributed by a dividend among its stockholders, was used to pay for improvements and stock issued in lieu of cash to the stockholders. It is not necessary that the money should first be paid to the stockholder and then returned by him in payment for new stock issued to him. The net earnings, in equity, belonged to him, and stock issued to him in lieu of the money so used that belonged to him was issued for value, and represents an actual investment by the holder."

1983

§ 271. Inquiry into foregone profits.

The Commission has several times said that, when the reduction of rates is asked by shippers, past earnings now represented by surpluses cannot be used as an argument for reducing rates, with a view of returning past exactions to the public.84 But it has served notice upon the railroads that they cannot expect to advance their rates to secure a return upon such values.85 "We are not here dealing with the value of this property nor with the definition of value, whether value means investment, cost of reproduction, or something else; our position is that a

82 See Logansport Gas Co. v. Peru, 89 Fed. 185.

83 Brymer v. Butler W. Co., 179 Pa. St. 231, 36 Atl. 249, 36 L. R. A. 260.

84 Kindel v. Adams Exp. Co., 13 I. C. C. 475.

85 Advance in Rate Case,-Eastern Case, 20 I. C. C. 243.

Previously the Commission had said that in fixing rates it cannot assume that the surplus accumulated by a railroad has been derived from unreasonable exactions, and establish low rates with a view of returning it to the public. City of Spokane v. N. P. Ry., 15 I. C. C. 376.