No holder of the old stock can be obliged to pay the assessment and purchase the new securities. When he bought his stock it was fully paid-up stock, and the liability of the purchaser was absolutely limited to what he had already put into it. Of course, there is nothing to prevent him from entering into special agreements over -the stock that will create new liabilities, but these new liabilities do not and cannot arise from the mere fact of his existing status as a stockholder. If he deposits his stock at the instance of a protec tive committee signifying his joining in the depository agreement, he creates new liabil ities in connection with his stock. His status as a stockholder precludes any obligation to deposit his stock. So when the so-called "assessment" is made it cannot impose any duty to assent to its terms and become bound to its obligations.
The situation may strongly invite the stockholder, however, to pay the so-called "assessment." Most people feel a distinct aversion to marking entirely off their books anything they have ever carried as an asset. If the stockholder does not come in and pay the assessment, he must confess to himself that he has suffered a total loss and has no possibility of salvage. His interest in the en terprise will be entirely gone. He feels that the property owes him something. It does. it owes him whatever he invested in purchas ing the stock. He feels a natural creditor's desire to collect some of the debt if possible. His only chance of collecting from the prop erty some of the debt it owes him is to ad vance some more money to it, and, by helping get it under way in its reconstituted form, hope that it will ultimately pay him back more than the additional amount he is now putting in. Though the investment may be good, the motives on which it is made rest upon a subconscious reasoning that is mostly fallacious. However, these motives are often taken advantage of to raise, or help raise, the cash requirements of the business in reorgan ization.
The other method of raising cash accom plishes the same result with less appearance of indirection. In arranging the capital plan of the new organization the managers will make one or more of the new bond issues large enough so that part of the issue will be available for sale to raise additional cash be yond the amount necessary for the require ments of distribution among the depositing bondholders.
If the so-called "assessment" plan is tried, and managers estimate that all or any given percentage of the old stockholders paying the asssessment would provide the cash needed, then the underwriters have to be prepared to stand in the breach and provide any part of the necessary cash which the old share holders do not supply. As already stated, this procedure is in no sense different from that of any underwriting syndicate operation. If the new funds are to be provided by the sale of bonds, then the position of the under writers is just the same as in the case of a syn dicate purchasing any issue of securities.
It should be pointed out that the assess ment method is not confined in its operation to the common stockholders or to any other class of stockholders. The reorganization plan
may apply it to any class of security-holders junior to the issue on account of which the property is being foreclosed or even to that issue itself. If in case of the capitalization plan presented at the beginning of this dis cussion, for example, the default had been in the first and refunding 41's, the chance to pay an assessment and participate in the reorganization might have been presented to the holders of the general mortgage 5's. With the foreclosure at the instance of the holders of the general mortgage 5's the as sessment plan may be presented to both the preferred and the common stockholders. Each situation presents its own aspects, and the reorganization managers must decide on the best methods. Most reorganizations utilize the psychological appeal of the assessment, either alone, or combined with a more frank selling of new securities.
If an assessment forms any part of the re organization plan, presumably the cash will be called for before the foreclosure sale, to be returned if anything should still prevent the reorganization from being accomplished. It may be remarked that for the series of reor ganizations which Mr. Stuart Daggett con sidered in his book on Railroad Reorganiza tions, he points out the fact that a short time after the reorganization the new securities could regularly have been bought at less than the assessment price.
Obstructionists are most likely to appear in connection with the fixing of the upset price. If the price is placed too high the re organization managers and their supporting syndicate cannot carry the reorganization through. It will require more cash than they can raise without jeopardizing the success of the reorganizing enterprise. Minority holders may endeavor to get the price higher simply for the direct benefit that may accrue to them. It should be remembered, however, that a minority holder may have a much more important interest in some other issue and may be seeking to get a better bargain for the other issue. This is not a legal treatise, and we will not go into a discussion of all the legal resources of those who are trying to make better terms. Even though their contentions might ultimately be rejected absolutely, time is of the essence with the zeorganization syndicate. It has made its agreement with the reorganization managers On the basis of existing financial conditions. These may change at any time and make the transaction on the proposed terms a certain loss. The reorganization managers may deem it business expediency to make terms with objectors which the managers do not regard as really just, but which they are financially able to meet. The objectors have a "nui sance" value, and sometimes are very well aware of the fact. Objectors may, however, simply cause such delays as to prolong the situation beyond the time for which the syndicate is bound, and it may then throw up the entire matter. The necessary time limit of its agreement with the syndicate puts the reorganization committee under pressure to be able to declare the plan operative within the time allowed.