A business situation proved really the piv otal point. Merchandise creditors naturally looked forward to continuing business with the rehabilitated company. It frequently happens that in smaller enterprises than the Westinghouse business adjustments are made on this principle. If those in charge of a busi ness are known to have such abilities and reputations that they will continue in the same business and use the same materials after their financial difficulties are adjusted, their merchandise creditors are likely, rather than force them through bankruptcy, to make a composition with them in the expectation of continuing their good-will. Such creditors expect to benefit through the profit of future business more than enough to make up present losses. By forcing the debtor into bankruptcy they would lose his good-will and probably gain nothing over the composition. The West inghouse difficulties presented a case in which those who were creditors on account of current liabilities were most immediately concerned. The merchandise creditors wanted to con tinue in the good-will of the dominating in terests in the enterprise for the sake of future business. The local banks also looked to fu ture business. These two divisions of the creditors were the easiest to deal with.
Other bank creditors presented a more difficult problem for those who were seeking to arrange the finances of the company. For the various reasons which make it necessary or expedient for a concern like the Westing house Company to seek a broader area of credit than the local community, it had through note brokers placed large amounts of its paper with banks throughout the country. These banks had nothing to gain from busi ness relationships with the concern. What ever they were to rescue from the situation they had to salvage at once. They were not so easy to deal with.
Under the plan that finally gained accept ance, merchandise creditors to the amount of some $4,000,000 agreed to take stock of the company at par in the settlement of their claims. The plan offered the bank creditors 50 per cent of their claims in convertible long term bonds. They were given an option of several proposals in settlement of the other 50 per cent of their claims: (1) to take 30 per cent in four, five, and six year notes and 20 per cent in stock; (2) to take it entirely in fifteen year notes; (3) to take it entirely in stock. There was about $8,000,000 of this
bank debt.
The concern required some actual cash, however, to get its affairs straightened out. The stockholders were asked to subscribe to $6,000,000 of stock at par. Though the con cern was embarrassed with its large float ing debt, its assets and earning power in normal times made its stock valuable. Dur ing this period, however, the stock was not selling in the general market at par, and the purchase of stock at par was equivalent to making a cash contribution to the treasury of the company. Only the large stockholders saved the situation at this point. With some banking assistance they came forward and subscribed for the necessary amount of new stock. Of course, no compulsion could be put on the stockholders, and, as the corporation was issuing this stock for cash, it had to be sold for par.
Non-local bank creditors did not look with much favor on the proposals made to them. A gradual revival in business conditions, how ever, made it seem probable that the new securities would have a sufficient value at least to let them out whole, and finally they agreed to the plan.' Only the threat of a judicial sale makes possible a voluntary readjustment of the capital account: Do this or worse things will happen to you. Even with this threat, gen erally anything requiring a unanimous con sent cannot be carried through. Some recal citrant (from the viewpoint of those trying to carry through the readjustment) will refuse to act except under court compulsion. Yet, if the number of people who are directly affected is not too great, and if the situation is strong enough, sometimes practically unani mous action may be had. In a sufficiently strong situation the writer once succeeded in getting all of the second mortgage bondholders of an enterprise to agree to accept the posi tion of third mortgagees in order that cash might be provided by a smaller issue of bonds with a second mortgage claim.