Let us assume that 95 per cent of the bond holders deposited under the reorganization plan. Then the reorganization managers have $19,000,000 of bonds they can pay in as part payment of the purchase price. That is equiv alent to a payment of $14,250,000 and leaves $2,250,000 of cash to be provided.
Since it is not within the bounds of prob ability that any holder will appear at the fore closure sale other than the reorganization managers, the upset price which, within every reasonable expectation, will become the pur chase price, assumes a large importance in the reorganization process. The court must be careful to fix it high enough to give the depositing bondholders everything they are justly entitled to get out of the property. Exactly what they are justly entitled to get may be very difficult to determine. No matter how active a market there may be for railroad securities, there is not an active market for whole railroads. However, the appraisal of the general investing public that is, the market values of the securities is shown by such dealings as there may be in them. The present earnings and condition of the property will be helpful in arriving at some conclusion about what may be fair terms for the minority non-depositing bond holders.
Since the majority is essentially buying out the minority interest, the value of which is being fixed on the basis of the value of the entire property, the majority, represented by the reorganization managers, want that value for present purposes estimated as low as pos sible. If they have to pay the minority hold ers too great an amount for their interest, the purchase of the property will not be a desir able one. The price may be absolutely too great, — that is, more than the interest is really worth, — or it may simply involve the payment of more cash than the managers can provide the means of raising.
Assuming that the reorganization managers do not regard the price as too high, how will they provide whatever cash may be neces sary? This question brings us to another aspect of the reorganization. The plan of reorganization shows the means the managers have provided for raising the cash. But they must have some assurance that these means will prove sufficient. So the bankers interested in the reorganization will enter into an agree ment with the reorganization managers un derwriting the cash requirements; that is, guaranteeing the sufficiency of the means provided in the financial plan of the reorgan ization. The bankers, in turn, to protect their
position will form an underwriting syndicate. This banking transaction does not differ in any essential respect from the assumption and shifting of risk involved in any purchase or underwriting of securities and the formation of a syndicate as described in an earlier dis cussion. Whatever the precise form for rais ing cash which the plan of reorganization may set out, it will amount essentially to selling some of the new securities provided for in the new plan of capitalization.
The means which a reorganization plan may provide for meeting the cash require ments of the reorganization are ordinarily thought of as two: (1) an assessment of the stockholders of the old corporation; (2) the selling for cash of some of the bonds or other securities arranged for in the reorganization plan. Though thought of and spoken of as separate means, both come really to the same thing, a selling of some of the securities of the new corporation for cash. The first means is usually stated somewhat in this way: On the payment of $20 for each share of the stock of the old corporation against which the fore closure proceedings are being taken, the stockholders of the old corporation will be given a share of stock in the new corporation on purchasing a par value of a certain issue of bonds of the new corporation at a certain price. The manner in which this is put some times has the superficial appearance of "tak ing care of " the stockholders of the old cor poration and recognizing that they have still an equity in the property. In most cases the appearance of preserving an equity will van ish on closer examination, and it will be seen that the amount of what is called an assess ment on the old stock is based upon the an ticipated value of the stock of the new cor poration, or the combined assessment and price to be paid for the new securities amounts to the estimated value of the new securities to be received. In a word, the so-called "assessment" is really a purchase of the new securities.