Meantime the X. Y. Railroad Company has prospered and its management has seen certain advantages that would result if it could add the X. R. Railroad Company to its property. It buys up quietly a good deal of the stock of the X. R. Railroad Company and makes an offer to the remaining stock holders which results in its acquiring enough of the stock to control the situation. Let us assume that, under the laws of the jurisdic tion in which the X. R. Railroad Company is incorporated, a vote of seventy-five per cent of the stock of a corporation is sufficient to authorize a sale of the assets of the cor poration. Of course, the sale must be at such a price as will afford the minority of stock holders a proper compensation. A majority sufficient to vote a sale of the assets must not exercise their power in such a way as to work a fraud on the minority holders. It would not be necessary for the X. Y. Railroad Company actually to acquire three quarters of the stock of the X. R. Railroad Company. If by means of a depository committee, or otherwise, they can count on a three-quarters vote to approve the proposal, they can go ahead. It may be that the management of the X. Y. Railroad Company does not want the stock of the X. R. Company unless it can get enough to put through the merger. In that event, it will prefer not to begin buying the stock, since it may not be able to acquire enough on suffi ciently advantageous terms. It can organize a depository committee of stockholders of the X. R. Railroad Company and agree to pay a stated amount for the X. R. property pro vided it gets enough assenting stockholders to put through the transaction. Then, if it fails to gain the adhesion of enough of the stockholders of the X. R. Company the de pository committee can simply return the certificates to the stockholders, and the X.
Y. Railroad Company is not possessed of any stock it does not want.
The management of the X. Y. Railroad Company, then, votes to acquire the X. R. property on certain terms, and the stock holders of the X. R. Railroad Company vote to accept those terms. We will assume that any minority stockholders of the X. R. Railroad Company are nearly enough satis fied with the transaction not to oppose it, and the transfer takes place. In view of the en larged scope of their activities the manage ment of the X. Y. Railroad Company has the name of the corporation changed to the X.Y. & R. Z. Railroad Company.
How did the old X. Y. Railroad Company provide the funds to acquire the new X. R. property? Let us assume that at this time the X. Y. first mortgage 20 year 5's were closely approaching maturity. Then the X. Y. Railroad Company authorized a first and refunding mortgage bond issue. It author ized bonds to be issued under this mortgage of $20,000,000. Of this amount the mortgage provides that $5,000,000 are to be issued immediately to provide funds to meet the maturity of the X. Y. first mortgage 5's. The mortgage reserves $4,000,000 to provide for the retirement of the X. Z. Division first mortgage 5's when they mature. It author
ized the issuance of the remaining $11,000,000 from time to time to provide funds for new construction or the purchase of additional property or the purchase of the securities of other railroads. Since the X. Y. Railroad Company has now had a long record of good earnings it can borrow money on more ad vantageous terms than it could while in the process of construction. We will assume that it makes these new bonds 41's and has them run for a term of fifty years. It carries out the refunding operation and retires the $5,000, 000 first mortgage 5's. The 'X. Y. Railroad Company then buys stock of the X. R. Railroad Company, from time to time bor rows funds at the banks temporarily to make immediate payments, and, as it acquires the stock, issues additional 42's to pay off the bank loans. We will assume, as would ordi narily be the case, that the new 41's first and refunding mortgage is a blanket mort gage. Then after the X. Y. Railroad Com pany had carried out the merger of the X. R. line with its existing properties and had be come the X. Y. & R. Z. Railroad Company, these new first and refunding 41.-'s have a first mortgage on the line from X. to Y. (the previously existing first mortgage has been retired), a second mortgage on the line from X. to Z., ---that is, subject to the X. Z. Division first mortgage 5's, — and a second mortgage on the newly acquired line from X. to Z., — that is, subject to the existing X. Z. first mortgage 5's. Of course the X. Y. & R. Z. Railroad Company assumes payment of the X. Z. first mortgage 5's and they become X. Y. & IL Z. Railroad Company X. Z. Divi sion first mortgage 5's.
Meanwhile, the affairs of the M. X. Railroad Company continue to prosper. Its manage ment becomes impressed with the advantages of bringing the M. X. and the X. Y. & R. Z. together in a single system. Just as the X. Y. had done in the case of the X. R., now the M. X. proceeds to acquire stock of the X. Y. & It. Z. To finance these purchases the M. X.
provides a collateral trust issue, the M. X. Railroad, X. Y. & R. Z. collateral trust 42's, of which it authorizes $20,000,000. Let us assume that by means of this issue the M. X. Railroad Company acquires practically all of the stock of the X. Y. & R. Z. So the manage ment of the M. X. creates an extensive rail road system, and for some time operates it in this form. Let us assume that the manage ment comes to see an advantage in unifying the system into the ownership of a single corporation. It must get the consent of its X. Y. & R. Z. collateral 5 per cent bond holders. Their security is the stock, and in effecting a merger the stock will no longer exist. So the management of the M. X. Railroad Company offers these collateral bondholders a new security. To make the problem simple, let us assume that the col lateral trust 42's have a market value of just par. At the same time the management of the M. X. Railroad Company wants to pro vide funds for an extension from M. to P. that will cost about $5,000,000.