After the consolidation has been completed the old corporation ceases to exist and all its property be comes vested, without further transfer, in the name of the consolidated company. Thus it is unnecessary for the consolidated company to receive a deed of real estate from the constituent companies.
6. Effect of consolidation, upon the status of credi it will be seen, are not consulted in the process of consolidation. It is a well established principle, however, that the rights of a creditor can not be affected by actions of the debtor. For that reason the new company assumes all the obligations and duties of the constituents and if the consolidated company fails, the creditors of the constituent com panies may pursue such assets of the constituent companies as can be identified. Of course, mort gages placed on properties of constituents, are-not affected any more than they would be if a company which had placed a mortgage on its property sold out. While under the rules just stated, unsecured credi tors of the constituent companies would seem to have a first equitable claim against the separate properties of the constituent companies, the fact that this claim existed would not prevent the consolidated company from placing a mortgage on its property that would have priority over the claims of the unsecured credi tors. This rule does not injure the right of the un secured creditors of the constituent companies since the constituent companies themselves might have mort gaged the property' even tbo they had incurred unse cured debts which were outstanding.
7. Amalgamation of American 'Tobacco Company. —An example of an amalgamation is presented in the case of the American Tobacco Company. This amalgamation was consummated in 1904. This com pany, it will be remembered, was dissolved by decree of the United States Supreme Court in 1911.
In 1901 the Consolidated Tobacco Company was formed to hold the controlling interests of the Amer ican and Continental Tobacco Companies. Nearly all of the common stock of these companies was ex changed for 4 per cent bonds of the Consolidated To bacco Company secured by a deposit of the stock.
For three reasons it was decided to change this hold ing company arrangement into a complete consoli dation. In the first place, holding companies, when they control subsidiaries that have a dominating posi tion in an industry, had been condemned by the de cision of the Supreme Court of the United States in the Northern Securities case. To abandon this legal organization might strengthen the position of the combination in case it were attacked under the anti trust laws. In the second place the 4 per cent bonds exchanged for common stock of the subsidiaries were largely held by the directors of the consolidated com pany who were compelled to stand by while the mar ket value of these bonds dropped to 50. Some arrangement had to be made to strengthen their position. In the third place it was desired to concen trate control by providing a class of non-voting pre ferred stock which was to be held largely by outsiders. The inner circle was to receive a small amount of stock carrying the voting power. The merger agreement provided for the consolidation of the three companies into "The American Tobacco Company" with a board of twenty-eight members all of whom had been di rectors or officers of the amalgamated companies. The general arrangement was "that the outstanding common stock of the Consolidated, together with the small amount of common stock of the American and Continental which was held by individuals, should be exchanged for equal amounts of common stock in the new or merged company and thereby retired; that the common stock of the American and Continental companies which was held by the Consolidated, as well as intercompany holdings of Continental pre ferred stock, should be canceled; that the preferred stocks of the American and Continental companies held by the public should be exchanged for first-lien bonds of the new company and retired and that the bonds of the Consolidated Tobacco Company, which had previously been issued in exchange for the com mon stock of the American and Continental com panies should be converted partly into second-lien bonds and partly into preferred stock of the reor ganized American Tobacco Company." The securities of the several companies were ex changed as follows: 2 8. Advantages of consolidation,.—Complete legal
consolidation presents certain advantages over tbe other forms of intercorporate relations. In the first place it creates a simple organization that makes uni form management possible. Where corporations are brought together under a holding company scheme, taxes and other burdens imposed by the state are con siderable. As the income passes from one corpora tion to another the subsidiaries must pay the Federal income tax. Each subsidiary keeping its own sep arate existence must render the necessary reports to the various departments of the government. When a public utility company has subsidiaries in several states, the number of general and special reports to be submitted to the Federal and state authorities runs into the hundreds every year. Moreover, a system of subsidiary companies offers opportunity for manipu lation, since it is possible to hide the true financial con dition of subsidiaries. In the consolidated company all the financial accounts are plainly set forth in the balance sheet and the income and profit and loss state ments so that juggling of the accounts can hardly escape the charge of downright false statement. Finally, as in the case of the American Tobacco Company, consolidation often offers an oppor tunity to reorganize a number of relatively small companies whose financial plans consist of an il logical jumble of stocks and bonds. The recent consolidation of the New York Central and Hud son River Railroad and the Lake Shore and 'Michigan Southern Railroad Company with its sub sidiaries into the NM York Central Railroad Com pany is a case in point. The reasons for the con solidation were briefly stated by the Interstate Com merce Commission as follows : The New York Central states that the proportion of bonds to stock of the Lake Shore approaches closely the limit of separate and economic financing of that property ($150, 000,000 of bonds to $50,000,000 of stock), and that the situation as to the Lake Shore is further complicated by the restriction mentioned with respect to any future in crease in its capital stock. The New York Central proposes to provide for the issuance, following the consolidation, of bonds secured by mortgage on the combined properties, to be available for refunding the present bonded debt of the two companies and for additional future capital needs of the con solidated company so far as those needs are to be met by the sale of bonds. It represents that such a simplified series of bonds, each of equal lien, would find readier confidence with the investing public than would the separate issues of the tWo companies, each subject to previous issues of prior lien, and that they would soon becOme established in the market as the consolidated company's standard bonds.1 9. Disadvantages of consolidation.—Consolidation, when it takes the form of an amalgamation, causes the dropping of the names of all the constituent com panies; in the case of merger all but one of the names are dropped. With the loss of names there fre quently disappears a considerable amount of valu able good-will. For that reason the Central Leather Company, for example, did not merge into itself the United States Leather Company, but preserved the name of the U. S. Leather Company by maintain ing the separate existence of that company for sell ing purposes with a nominal capitalization of $100, 000. Another objection to consolidation is the for mal procedure with which it must be accomplished. Stockholders must be notified and their consent must be obtained. -Usually some stockholder will raise ob jections, if only to use them for the purpose of black mailing the company into paying him an exorbitant price for his stock. When, for example, the Amer ican Tobacco Company proposed to replace the bonds of the Consolidated Tobacco Company, one of the constituent concerns, with new bonds of its own, a suit was immediately brought by a bondholder but the court pointed out that since the old bonds had been secured by common stock and the new bonds were to be secured by the property itself, the bond holder could have no objection.' Another disadvantage of the fusion of companies bv legal consolidation is that once formed, the con solidation cannot easily be undone.