This cause was before me on another occasion upon a rule to show cause why a preliminary injunction should not issue. See ante p. 1. No further statement of facts of a general nature need be made beyond what may be found by reference to the opinion filed by me in disposing of the rule for premininary injunction.
The preliminary injunction was duly issued for the reason stated in the opinion heretofore filed. Reference to that opinion will disclose that' I was not satisfied upon the showing then made to pass upon the question of the fairness of the price at which it was proposed to sell the assets of The Steel and Tube Company
Within a short time after the issuance of the preliminary injunction, the appearing defendant moved its dissolution. Thereupon, after hearing the parties, I directed the appointment of Caleb S. Layton, Esq., as examiner and commissioner to take testimony of witnesses produced on behalf of both parties, upon the question of the fair value and adequacy of price of all the assets proposed to be sold by The Steel and Tube Company to The Youngstown Sheet & Tube Company.
The pending motion to dissolve the injunction is, therefore, to be disposed of in the light of the evidence which the fuller hearing before the examiner and commissioner has produced. This evidence consists of a large volume of testimony and numerous exhibits. It is of such fullnes and of such character as to indicate that I am now in possession of about all the facts that the parties can adduce in support of their respective views. At all events, I am convinced that further evidence on a final hearing would produce nothing more, if anything, than a mere amplification of details. In view of the determining effect of the mere passage of time upon the practical disposition of the litigation, it would appear to be the duty of the court to proceed to pass upon the question of the continuance of the outstanding injunction at the earliest practicable moment. This should not of course be done in view of the opinion heretofore filed, unless the facts now adduced by the evidence taken are sufficiently full to warrant the reaching of a conclusion which under the facts as they appeared upon the return of the rule I stated I was unable to do with any satisfying degree of confidence in my judgment. I now feel that I can reach a satisfying conclusion upon the facts before me, and I accordingly proceed to do so.
The question before me is one that concerns value. It is not one of cost value or of replacement value. It is a question of value in connection with sale. I have already held that Section 64a of our General Corporation Law (29 Del. Laws, c. 113) permits The Steel and Tube Company of America to determine the question of whether it shall sell all its assets entirely aside from any consideration of advisability or expediency. The only room for considera
This being so, the question of the expediency of the terms and whether they are in accordance with the best interests of the corporation must, when it is sought to review them as here, be passed upon in the light of the fact that it is desired to exercise the absolute right to make a sale. In other words, the question of terms is a question of selling terms. A sale can never, of course, be a one-sided affair. It necessarily imports a seller and a buyer. If the question is asked, “What selling price is expedient for a seller and in his best interest?’’ it is not satifactorily answered by stating in terms of dollars what the value is to the seller for his own use, because before the thing can be sold some one must be found who is willing to become a purchaser. Hence in ascertaining the fair price at which to sell a given thing, the willingness of the buyer to pay, as well as the willingness of the seller to receive, is an important and influencing factor. When, therefore, the section in question which authorizes a sale is to be construed, the test that the terms and conditions must be expedient and in the best intersts of the corporation is to be applied in the light of the fact that the corporation in making the sale must find a purchaser. In other words, the best interests of the corporation are those of a corporation desiring to sell. When this is said, the opposing in
On the side of the purchaser, the sole consideration to which it seems to me attention would be given is, “What is this property worth to me?” In answering that question I suppose the primary thought upon which the answer would turn would be, “What can the property be made to earn?” This in turn would depend upon what any person competent to turn the property to profit-making uses could make it yield on the investment, or the price paid; and next, in addition, upon its desirability as a prospective profit-maker due to the particular needs of the individual purchaser. In the instant case, it appears that the properties of The Steel and Tube Company of America are, for particular reasons which I shall not pause to enumerate, desirable for The Youngstown Sheet & Tube Company, the proposed purchaser. -If this be so, then The Youngstown Sheet & Tube Company would be more willing to take the property than would one having no special motive beyond that of wanting for the first time to get into the steel business, and as a consequence would doubtless be willing to pay a better price than would otherwise be the case. If this be so, then the disadvantage of having a lean market in which to make the sale is to an extent offset in favor of the seller.
The foregoing are general considerations which may be regarded as having been in the minds of the seller and purchaser in the bargaining for the price named in the contract here concerned.
Before answering the question of whether the price is fair to the seller, it is appropriate for me to observe, because of the course of argument advanced on one of the briefs filed by the complainants, that I accept the view that the test of the fairness of price, the sale being regarded as made by those who stand in a fiduciary relation towards the complainants (see ante p. 1), is whether it is to their injury and damage, regardless of whether it isXalso to the profit of the alleged fiduciaries. The opinion heretofore filed is in harmony with this conception.
The only terms and conditions of the proposed sale which are assailed in this cause as not being “expedient and for the best in- - terests of the corporation” are those which specify the price to be paid. All that I am called upon to consider, therefore, is solely; the question of price. If the selling price is a fair one under all the facts, then the requirement of the statute that terms and conditions shall be expedient and for the best interests of the corporation has been met. I can conceive of nothing outside of fairness appropriate to be taken into account when the inquiry is narrowed to whether a given price is such as is expedient and for the best interests of the corporation. It may be taken as true, as contended for by the complainants, that the gist of this complaint is an. alleged breach of duty by those in control of- the corporation towards the minority, towards whom they owe duties of a fiduciary nature. But the extent of that duty, as heretofore held, is to secure for the corporation a fair and adequate price upon the sale. So that we come back to the question of fairness of price, for if the price is fair then the full duty of the fiduciary has been done, and no ground of complaint exists.
What is a fair price for the majority in control of the corpora- - tian to accept for the assets, is a question of opinion. What is a; fair price for which to sell property is always a matter of opinion.! Opinions vary. In proportion to the distance the property ini question is removed from the qualities of-simplicity and common familiarity, the difficulty of ascertaining the question of its fair selling value is increased. In the intant case, the property con
Laying aside for the moment the views of the majority who constitute the syndicate, and who have an interest peculiar to themselves, it yet appears that among the minority interests no unanimity of opinion exists as to the fairness of the particular price named in the contract. The complainants who own about twenty per cent, of the common stock think the price is grossly inadequate. But other minority interests, who are as free from participation in the syndicate motives as are the complainants, and whose holdings of common stock are slightly above twenty per cent., are on the other hand of the opinion that the price named is a fair one. I find nothing in the case which leads me to think that the minority which approves the price is not as equally honest as is the complaining minority in the forming of its opinion. The case within itself, therefore, supplies an illustration of the truth of the observation just made, that wide divergence of opinion in such matters as this is to be naturally expected.
I am not to take the opinion of any one group among the stockholders of this corporation. Nor can I give to the judgment of the directors the benefit of that presumption which the law would ordinarily accord in favor of the fairness of their official acts. This is because of the peculiar and special interest attributable to them which in the opinion heretofore filed was pointed out and described. I conceive it my duty to pass upon the question presented in the light of the evidence now before me, according to neither of the groups of stockholders the controlling advantage of its mere opinion. In doing this, however, I shall bear in mind that in such a matter as this no man’s judgment can be expected to be correct to a positiveness, and that my own is as apt to err as is that of any one else. This requires that I avoid, as far as I can, the attitude of mind that results in ex cathedra utterances.
Furthermore, even if it should be that my own view should
I now approach the question of the fairness of price, whether the price named is an expedient one and for the best interests of the corporation. The complainants, in their brief in speaking of the standard of value which should be applied, use the following language :
“ * * * There are two measures of value of such a property that may be established by facts: (a) Replacement cost new, less depreciation and obsolescence for imperfect design and arrangement; (b) earning power. The latter will control the former, for if less than a fair return on cost, the value will be less than cost, and if more than a fair return, something more will be added for goodwill, or going value.”
While the foregoing statement may be subject to some criticism, yet in a general way it describes the elements that are to be taken into account as proper to be considered in passing upon the value of the property involved. At least the evidence adduced on both sides has been of such character as.to indicate that these two elements are the chief if not the only ones considered by the parties as lying at the bottom of the question. Of the two, the second one, that is the one that concerns earning power, is by far the more important, because no one will buy property for industrial purposes at a price in excess of a reasonable capitalization of its earning power. The learned solicitors for the complainafits are, therefore, correct in their statement that in considering value in a sale, earning power will control replacement cost.
Insofar as replacement cost is concerned, there is little or no dispute. Both complainants and the defendant accept, as the starting point for their respective contentions with respect to this, certain values placed upon the properties of The Steel and Tube Company of America as the result of an appraisement made in the latter part of the year 1921. This appraisal gave a sound value to all the properties carried in the company’s property account of $63,822,546, exclusive of coal properties which were appraised at
The properties embraced in the appraisal report going to make up the above sum of $63,822,546, are the following:
Mark plant and townsite, Indiana Harbor........................................ $27,127,056
Iroquois plant........................................................................................ 8,863,158
Zanesville plant.........................:.......................................................... 3,636,984
Evanston plant................................................................................... 2,063,771
Mayville plant....................................................................................... 4,819,000
Kalamazoo plant.................................................................................. 823,120
Iron mines............................................................................................ 13,815,998
Zinc properties...................................................................................... 2,673,459
$63,822,546
The contract of sale proposes to sell the above properties and all the other assets of the company for a price equal in round numbers to $73,000,000. The witness Wilmer testifies that this price is equivalent to the payment by the purchaser of seventy to seventy-five cents on the dollar for the entire depreciated fixed property and investment account, and paying one hundred cents on the dollar for all other assets comprising largely current assets and deferred charges. I am unable to understand how he makes his calculation so as to bring this result. Taking the property and investment accounts as they appear to be in the statement of Mr. Reynder’s final appraisal figures, the property account and investments are together $71,539,000, and other assets are $24,198,000. On this showing, if the latter is paid for by the purchaser at one hundred per cent., the property account and investments will receive sixty-six plus per cent. This statement will, however, suffice to indicate to what extent the proposed sale discounts the face value of the property account of. $69,644,000, and the investments
The complainants insist that all of the discount of appraisal values which the proposed sale contemplates is to be charged to the property account alone, because it is to be assumed that the “investments” and other assets, consisting chiefly of current assets of $27,611,174, will readily liquidate at full value. Hence, the contention is that the property account alone must be regarded as the sole bearer of the write-off from appraised values which the sales price necessitates. Mr. Wilmer, on the other hand, testifies that when the entire assets are being sold for a price below their appraised value, it is not permissible to allocate to one particular group of assets the entire discount, because it is by no means certain that current assets are worth their face value on a sale. I am inclined to take this view as a general proposition. I do not know that the point is worth discussing, however, for the evidence on both sides has.been adduced upon the assumption that the shrinkage in appraised values to the $73,000,000 named as the purchase price, insofar as it is to be accounted for by overvaluation, is to be attributed to the property account. No evidence has been adduced tending to show overappraisal of current assets and “investments.”
Aside from general conditions described by the defendant’s witnesses as peculiar to the situation of the business of The Steel and Tube Company of America, the testimony as to value deals entirely with the above properties listed in the property account as appraised at the total figure of $63,822,546. As already noted, the coal properties are omitted from the list. These coal properties were appraised 'at $4,691,897 by Messrs. Allen and Garcia. The testimony of defendant’s witness Eavenson to the effect that their true selling value was not in excess of $2,540,170 was so convincing that it was accepted by the complainants and proper reconciliation made for their overappraisement.
This still left, however, the other eight properties (listed above) subject to the dispute as to whether they were over-appraised. Let us see now to what extent these eight properties are to be written down if the other assets are to be paid for by the
The complainants make a showing that the sums which the sale proposes to deduct from the appraised values instead of being, as I have indicated, $22,737,000, is about $23,500,000. The difference is not sufficiently large to warrant me in pausing to try to reconcile the two figures. Let us call it the round figure of $23,000,000. This sum, then may be stated to be the amount by which the above eight properties are written down by the proposed sales price. Is such a write-down justified?
In answering this question, the parties have adduced evidence bearing upon the values of the respective eight properties listed above, the complainants endeavoring by their testimony to sustain the full appraised value and the defendant by its testimony attempting to show that they are not worth the figure appraised by at least as much as the above sum of $22,737,000. The testimony thus produced deals not only with the general features of the property assets of the corporation, but as well with the peculiar conditions of each individual unit. As I have above stated, the true value upon a sale to be attributed to the properties of the company is a matter of opinion. Opinions, however, to be worth while, must be sustained by some showing of facts and reasonable implications therefrom. Witnesses on both sides have expressed such opinions, but I decline to give these opinions any weight, except as the facts with all their reasonable intendments are calculated to sustain them.
With respect to one of the eight properties listed above,' I
The testimony supplies to me a reasonably certain index to the reliability of values for ore properties arrived at in the foregoing manner as an indication of market value. I am guided to my conclusion with respect to the iron mines very largely by this index. I refer to the fact that the coal mines were, in a general way, appraised in the same manner as were the iron mines. It so happens that there has been some market for coal mines. Whether this is because the conditions of a coal mine are such as to render more certain in probability accuracy in their valuation I do not know. From the fact that there have been sales of coal mines at fiat stuns, I would conclude such to be the case. The coal mines
This sum, therefore, is to be deducted from the above round figure of $23,000,000, which will leave $16,092,001, the balance of the write-off figure to be borne by the other seven properties above listed.
Before taking up these other properties it is pertinent to describe the nature of the appraisal that was made of them. This appraisal was made in the latter part of the year 1921. The appraisers were Dr. Leith for the iron ore properties, Messrs. Allen and Garcia for the coal properties' and Mr. Brassert and Mr. George for the ovens, furnaces and plants. The purpose of the appraisal was to supply data for use in connection with negotiations that were afoot looking towards a merger of The Steel and Tube Company of America, The Youngstown Sheet & Tube Company and the Inland Steel Company. The appraisers in doing their work sought only to ascertain the replacement cost of the various properties as of the date of the appraisal. The appraised figure for each property was fixed at the sum which it would cost to construct the property as constituted at that time, less proper allowance for age and obsolescence, and the values so arrived at were called “sound values.” Nothing was taken into
Thus at the outset it is to be stated that the figures placed opposite each of the above properties as representing sound value are not intended to indicate commercial values. It is interesting to note in this connection the testimony of Mr. McKee, the consulting and contracting engineer, called by the complainants as their chief expert witness. It appears that Mr. McKee had made an appraisal of assets for Rogers-Brown Iron Company. This appraisal was made by him very much on the same basis as was the appraisal of the Steel and Tube Company’s assets, made by Mr. Brassert in behalf of the three companies which contemplated a merger. Both appraisals gave sound, or replacement, values. While Mr. McKee testifies that the sound values given by Mr. Brassert to the properties of The Steel and Tube'Company of America fairly represent commercial values as he defined the term, yet with respect to the sound values which in a similar appraisal he gave to the Rogers-Brown Iron Company’s assets, he testifies they would be at least twenty-five per cent, more than the commercial values. This emphasizes the fact that sound values are no fair indication of market or commercial value, and the fact that such values are quoted to the investing public when securities of the owning company are to be sold does not alter the situation.
The testimony of Mr. Brassert is the principal testimony relied upon by the defendant to sustain its contention that the write-down from the appraised values of the above properties is justified. Mr. Brassert would knock off from the values of the Indiana Harbor plant, the Iroquois plant, the Zanesville plant and the Evanston plant from twenty-five to thirty-five per cent. This he justifies upon two grounds: First, that the replacement cost is on the basis of 1921 prices; that these prices are at least one hundred and fifty per cent, above the pre-war prices; that the plants of the companies with which The Steel and Tube Company of America must compete have been acquired by competitors in the main upon the cheaper pre-war basis (only twenty per cent., for instance, of the Republic Steel Company’s construction is attributable to the high cost basis); that any purchaser of plants of The Steel and Tube Company of America could not afford to pay a price therefor which would place him, in the point of cost of investment, at a competitive disadvantage with the others. Second, because the units of The Steel & Tube Company of America are not well integrated. For instance, the Iroquis plant, in South Chicago, is about six miles distant from the Indiana Harbor plant. The Evanston plant, in North Chicago, is about twenty-five miles distant from the Indiana Harbor plant; the Mayville plant is in Michigan, one hundred and eighteen miles distant from Indiana Harbor; and the Zanesville plant is in Ohio, about three hundred and fifteen miles distant from Indiana Harbor. The Mayville plant manufactures market pig iron. It is so detached that there is no attempt to integrate it with the general
In view of the fact that strong competitors of The Steel and Tube Company of America are integrated in just such a manner as this, it is Mr. Brassert’s view that any proposed purchaser of The Steel and Tube Company of America would, as a matter of necessary self-protection, discount' the actual replacement cost of the plants to a considerable extent.
This line of reasoning appeals to me with a great deal of force. The chief thing that I discover in the testimony of the complainants by way of offset to this logic is the suggestion that Indiana Harbor is more favorably located than are its competitors; that its chief output is pipe; that the West supplies a very great and
Whether the advantages that The Steel and Tube Company of America enjoys by reason of this freight differential are sufficiently large to offset the disadvantages under which it labors by reason of the economic waste occasioned by the interplant movements, it is, of course, difficult to say. This, however, seems to be apparent, that the advantage of the freight differential cannot be capitalized in the future as it can now. I say this for the reason that the United States Steel Corporation is now constructing a great plant at Gary, Indiana, which is a few miles from the Indiana Harbor plant of The Steel and Tube Company of America, and which by reason of its location will enjoy the same freight differential which the complainants have so strongly emphasized in connection with the property of The Steel and Tube Company of America. The proposed plant at Gary, when finished, will have and annual ingot capacity three times as great as that of The Steel and Tube Company of America. It is, therefore, apparent that within 'a very short time The Steel and Tube Company of America, with the burden of its interplant costs, will face a very serious competitor. The evidence discloses that the United States Steel Corporation’s plant at Gary, now in course of construction, will be a thoroughly intergrated plant. A great and powerful competitor, therefore, is about to enter the immediate field with the advantage in its favor of being able to operate as economically as a thoroughly integrated plant will permit, and at the same time enjoy the same freight advantages on Western shipments as are now claimed for Indiana Harbor.
This consideration suggests to me that in considering the price to be received from the sale of the Steel and Tube Company’s properties, the sellers would be justly entitled to take into
In reply to the point that the United States Steel Corporation will prove a dangerous competitor in the near future with the advantages pointed out in its favor, the complainants contend that, while all this may be true, yet the United States Steel Corporation when it finishes its construction at Gary, will find itself in possession of a plant the investment in which will be on the basis of the present cost of construction. If this be so, it is argued that the United States Steel Corporation will enjoy no advantage against The Steel and Tube Company of America. With respect to this I have to say that it is not convincing, because the United States Steel Corporation has such a vast investment in properties at pre-war prices that, if necessary, it can very well afford to carry its new plant at a figure on its books considerably below the actual cost of construction. In other words, it can, with financial comfort, have its low cost properties aggregating a tremendous total absorb any additional cost at Gary due to present construction figures.
What I have thus far said presents the conflicting views of the parties with respect to the proposition made by the witness Brassert, that a general write-off of from twenty-five to thirty-five per cent, should be made on the appraised value of the Steel and Tube Company’s properties in order to get them down to what would be a fair price that a willing purchaser would consent to pay.
I shall not attempt to name the precise percentage which should be written off because of the two reasons advanced by Mr. Brassert. In my judgment, however, there should be a substantial write-off. In his suggestions Mr. Brassert would not write off the same percentage for every plant. I believe he suggests that the Indiana Harbor plant ought to suffer a write-off of twenty-five per cent, and an additional $5,000,000 because of the necessity for the interplant movement existing between Indiana Harbor and Iro- • quais. The total of these suggested deductions from the Indiana Harbor plant makes $11,110,765. For the same reasons he would write off twenty-five per cent! from the value of the Iroquois plant (taking no account of the interplant movement — leaving all of that to be borne by thé Indiana Harbor plant;), making a write-off for
If Mr,. Brassert’s testimony is to be accorded credit, then on the basis thus far considered, it is apparent that the sales price of $73,000,000 is a fair one. His write-off of $3,019,000 for the May-ville plant is strenuously contended not to be justified by witnesses for the complainants. The Mayville plant is a producer of market pig iron. It secures its ore from the Mayville iron ore mine. This ore seems to be of high phosphorous content. The plant has both coke ovens and blast furnaces. The coal for its coke ovens is secured by rail and water transportation from the company’s mines in Kentucky and West Virginia. Mayville is located inland from Lake Michigan. The point at which it makes its water connection is Milwaukee. It is conceded that the coke ovens at Mayville are of very old type — as I recall, something like twenty years of age — though in recent years they have been rebuilt. The defendant contends that because of the high phosphorous content
I shall not attempt to review the evidence, of which there is much, dealing with this controversy concerning the Mayville plant. The testimony is undisputed that in the various merger negotiations which took place from time to time, The Steel and Tube Company of America was required strenuously to contend with the other parties to the proposed mergers, in order to save to itself something in values for the Mayville plant. This seems to me to be confirmatory evidence coming from practical steel and iron people of the conclusion which I have reached, to the effect that the Mayville plant must be very substantially written down from the appraised figure.
While I am firmly of the opinion that the eight properties above named should be very substantially written down below
This is, of course, a considerable sum of money. Considered in relative terms, however, as expressed by percentages it is a little less than sixteen per cent, of the total appraised value of $66,822,-546. If it should be that the so-called other investments do not have a market value of one hundred per cent, of their face value, and should, therefore, be required to bear the burden of some of the write-off, then the eight plants in question would be relieved proportionately of the write-off burden. In that case the percentage of write-off on the eight plants would be less than the sixteen per cent, just mentioned. As I have before indicated, there is reasonable ground to presume that upon a sale as an entirety of the other assets whose volume is such as is found in this case, a purchaser might insist upon some discount, and a seller in order to make the bulk sale might be entirely willing, in the exercise of all good faith, as well as in business prudence, to give such discount.
By way of a rough check on the reliability of Mr. Brassert’s write-off on the appraised values, the following thoughts are suggested by the testimony. Mr. Block, president of the Inland Steel Company testified that—
"highly integrated steel companies, if they are successful, have a capital basis on their ingot production that would range somewheres from $50 to $60 or $65 per ton of ingots, which means that such a concern should have its. own supply of ore and coal, pig iron and ingots and the necessary finishing mills for that production.”
The words in italics are for the purpose of emphasis because of the criticism made in one of the briefs of Mr. Block’s testimony in this regard as applicable to the situation of The Steel and Tube Company of America. (I shall not prolong this opinion by pointing how out the underscored language would remove the chief criticism made with respect to the pertinency of this testi
Now, let us use this rough method of calculation as a check on Mr. Brassert’s testimony. Mr. Brassert knocks off from the appraisal of the eight properties mentioned $24,754,738, which would leave for them a market value of $39,067,798. The eight properties in question do not include the coal mines. Both sides have accepted the appraisal of the coal mines at $2,540,170. Adding the coal mine value to those of the other properties, the. total reaches, for all the property supplying ore and coal, pig iron and ingots and the necessary finishing mills, the amount of $41,-607,968. The testimony is, further, that adjusting the surplus pig iron capacity of The Steel and Tube Company of America to an ingot basis, the total ingot capacity of The Steel and Tube Company of America is 800,000 tons, and that as a matter of fact, however, the company has never actually handled over 441,000 tons, or we will say 500,000 tons, in one year. If it be literally conceded that the company is equipped to handle the maximum capacity of 800,000 tons; then the above value arrived at by accepting Mr. Brassert’s testimony ($41,607,968) represents a capitalization of ingot production of $52 per ton. If the actual maximum tonnage ever handled in the history of the company be used as the basis, then the value just named is equivalent to an ingot capitalization of over $83 per ton. If the rough method given by Mr. Block for the estimation of the value of a self-contained steel property is reasonably justified, then the values which these properties are to be taken in for at the sales price are thus shown to be fair. I refer to this, not for any purpose of positive demonstration, but simply as a check upon the reliability of Mr. Bras-serfs testimony in writing down the appraised values.
The testimony shows that Mr. Block estimated the value of the assets of the Inland Steel Company, of which he is president, and that he regards their value as about equal to the value of the assets of The Steel and Tube Company of America. He stated that he would be entirely willing to recommend to his company the sale of its assets at the same figure which the Steel and Tube Com-
At an earlier point, in this opinion, in connection with what I had to say with respect to the Indiana Harbor plant, it would have been pertinent to make the following observation: The complainants say that if a sum of money were spent in additions and improvements at the Indiana Harbor plant, its earnings would be increased in much larger proportion than the increase in the capital investment. Their witness who spoke with reference to this was Mr. McKee. His testimony on this point is that if $4,000,000 were spent at the Indiana Harbor plant for additional finishing facilities, the capacity of the plant would be increased by 150,000 tons, and that if $2,000,000 more were spent for blast furnaces at Indiana Harbor, $400,000 a year would be saved. These expenditures total $6,000,000. The defendant in replying to this suggestion shows first by Mr. Brassert that if the improvements which Mr. McKee says would cost $4,000,000 were made, the cost figure would in fact be over $11,000,000, and that to install blast furnaces
A second answer, which the defendant makes to the suggestion that additional money if spent at the Indiana Harbor plant would increase its selling value, is that the company does not have the funds, that owing to restrictions in the outstanding mortgages securing bond issues, and to the fact that the preferred stock has been fully sold, no further funds can be realized from the sale of bonds or preferred stock. This means that the common stock-. holders would have to advance the additional capital to be spent in the way of enlargement and the integration of plant facilties. The common stockholders, with the exception of the complainants, are unwilling to do this. I know of no rule by which it would be fair to appraise the Indiana Harbor property upon the assumption that the common stockholders are bound to invest more money in the venture. I accordingly lay out of all consideration as an element in estimating value what the property could be made to earn if more money were to be invested.
There are other features of evidence relating to this branch of the case which I have not discussed. I refrain from doing so because this opinion will prove inordinately long as it is.' Further
On the whole, I am persuaded that, if the write-downs suggested by the testimony of Mr. Brassert are allowed, the result if it is not correct to the last dollar nevertheless fairly and reasonably approximates what should be taken as the fair selling price of the properties in question. When I say this I have in mind not alone all that I have heretofore said, but as well what follows with respect to the earning power of the company.
I now proceed to examine the question of the earning power, which, as stated by the solicitors for the complainants, is after all the controlling thing.
An examination of this question has involved the study of many tabulations. The complainants have adjusted book values of all properties to the Brassert appraisals and, having done so; have calculated the earnings on the total property investments thus shown. From the years 1913 to 1919, inclusive, they have by a method of calculation arrived at what they claim to be the percentage of earnings on the investment for all properties other than the Indiana Harbor plant, and from the year 1920 to 1922, inclusive, on the investment in all the plants of the company, including the Indiana Harbor plant. The net result of their statement (per Complainant’s Exhibit No. 26) is, the following: Plants other than Indiana Harbor and Townsite earned on the investment, before interest and bond discount, 9 per cent, for 1913; 7.5 per cent, for 1914; 11.4 per cent, for 1915; 28 per cent, for 1916; 21.6 per cent, for 1917; 18.2 per cent, for 1918; and 8.3 per cent, for 1919. This is an average for the seven year period of thirteen per cent, on the investment in all properties other than the Indiana Harbor and Townsite plants and before interest and bond discount. It is needless to say, also, it is before dividends on preferred stock. For the three years from 1920 to 1922, inclusive, the complainants’ statement also shows earnings on .all property, including Indiana Harbor, before interest and bond discount of 9 per cent, for 1920, no showing for 1921, and 2.4 per cent, for 1922. With respect to this it is also needless to say that the earnings referred to are before preferred stock dividends.
On the other hand, the defendant by its calculations from the
1918................................................................................ 4.34% of net book values
1919..........................’..................................................... 3.02%
1920..............................:................................................ 7.19%
1921 (loss)...................................................................... 6.72%
1922 (profit).................................................................. 1.65%
This shows an average for the five years of 1.97 per cent, and an average on the purchase price of $73,000,000 of about two and one-half per cent.
The complainants criticise the selection of the five years, 1918 to 1922, as unfair, because in those five years there were two bad years for the steel industry, viz., the years 1921 and 1922. On the other hand, the defendant criticises the seven year period of 1913 to 1919, inclusive, selected by the complainants, as being unfair because that period embraces the three war years of phenomenal earnings for the iron and steel industry. The statement presented by the complainants of the earnings covering the years just mentioned will disclose that the three years of 1916, 1917, and 1918 supply seventy per cent, of the total earning for the whole seven years. If a„portion of 1915 be taken in as a part of the war earning period, which in fairness I think it may, then the phenomenal war earnings would appear to be more than seventy per cent, for the seven year period.
It is doubtless true that each of the parties has selected the years which plausibly present their respective contentions in the most favorable light. I know nothing to do except to take the whole period from 1913 to 1922, inclusive, and average the earnings over the entire period, and in doing so I will take the figures given by the Complainants’ Exhibit No. 26 (as adjusted) and the most favorable figures shown in that exhibit for the years 1913 to 1919, inclusive, and the most favorable one shown in that exhibit for the years 1920 to 1922, inclusive. Inasmuch as the exhibit does not show the rate of loss suffered in 1921, I shall accept the defendant’s calculation of that-rate as correct, viz., 6.72 per cent. On this basis, taking the whole period from 1913 to 1922, inclusive, the average rate of earnings on those properties of the company
An average yield of 9.48 per cent, would appear to be such a yield as would indicate that the investments are conservatively carried at the book values thus adjusted. This method of presenting the case, however, overlooks important considerations that are connected with the capital structure of the company. The Steel and Tube Company of America has a funded indebtedness outstanding as of January 1, 1923, in the amount of $23/587,406.63, and cumulative seven per cent, preferred stock outstanding in the amount of $16,842,400. Taking the book values after these senior obligations are taken care of, the equity in the assets applicable to the common stock as of December 21, 1922, is about $38,337,000 (I take this figure from Defendant’s Exhibit No. 7, which, so far as I can recall, is not disputed). The annual inter-. est charge on the funded indebtedness is $1,465,418.94. The company, as of December 31, 1922, had outstanding bank loans of about $10,000,000, which unless liquidated mean an addition to the annual interest charge of $500,000 or $600,000. The annual requirement for dividends on the seven per cent, cumulative preferred stock is $1,178,968. Leaving out of account interest which the company was required to pay in 1922 on its bank loans, it thus appears that before anything could be earned for the common stock there was a charge for interest on the funded- debt and for preferred stock dividends of $2,644,-386.94. In addition to this annual charge for bond interest and preferred stock dividends, there is a further obligation on the part of the company to retire bonds and preferred stocks in large amounts running from the year 1923 to 1954, the requirements in -this particular for the year 1923 being $2,659,807.77., This annual charge for retirement is not of importance for the moment for the apparent reason-that in proportion as it is met the equity back of the common stock is increased. Danger may, however, lurk in the failure of the company to meet the bond
With respect to interest and dividend requirements, this is to be said: If there should be a default in interest on the funded debt, the danger of foreclosure would be iminent. If there should be a passing of preferred stock dividends, the worst that could happen with respect to the common stockholder would be that the dividend so passed would immediately become, as against the common stock, a capital liability and the common stock equity would accordingly be reduced. In the statement by the complainants, to which I have above referred, showing the rate of earnings on the property investments, no deduction is made for interest on the funded debt or interest on bank loans, and, of course, none is made for dividends on preferred stock. In' order for the statement of earnings to properly and fairly show the earning power of this corporation from the viewpoint of the holder of common stock, there should be first deducted from the earnings interest requirements of all kinds, and secondly, requirements to meet dividends on the preferred stock. If this is done it will then appear that nothing has been earned for the common stock of this company since the year 1920. Starting with the year 1918 the earnings up to and before preferred dividends, as shown by defendant’s exhibit No. 7 are, as follows:
1918. .......... $1,931,283
1919. .......... 1,177,162
1920. .......... 5,874,076
1921 (loss). 7,800,800
1922 (loss) 92,260
Total earnings. $1,089,461
The preferred stock dividend requirement for that period was $4,293,880, which means that the preferred stock dividends were not earned by $3,204,400. This is the showing of the defendant. An examination of the Complainants’ Exhibit No. 26, though not corresponding exactly with the showing thus made by the defendant, is, nevertheless, in substantial agreement therewith. The preferred stock was issued in 1919. In the phenomenal steel
The complainants very emphatically emphasize the character of current earnings, and they produce figures for the first four months of 1923, showing earnings which, if continued at the present rate, will yield, they say, as much as $8 a share for the common stock at the end of the current year. I do not deem it safe to allow these current earnings very much, if any, weight in the argument. This is for two reasons: First, because no man, of course, can as
In the beginning, I said that this sale cannot be regarded as a forced sale. I also said that I would point out circumstances which it seemed to me made it advisable for the seller not to stand res-i olutely for a price which, if it were differently circumstanced, it might in fairness exact. What I had in mind in making that remark was that at the close of 1922 the financial condition of this company, while not such as to make of it an insolvent, was nevertheless such as to cause very serious apprehension concerning its future. It witnessed the -approach of a huge and powerful competition in the person of the United States Steel Corporation, which was building its plant at Gary. The Steel and Tube Company of America is not a concern manufacturing a great diversity of products. Its main product is that of pipe, and its special field was about to be invaded by a very powerful competitor, which promised to be able, because of the perfect integration of its plant, not only to manufacture the specialty of The Steel and Tube Company of
These circumstances to my mind are such as to clearly point out that while the proposed sale was not a forced one, it was, nevertheless, made under such circumstances as would very legitimately permit of an attractive concession in price, if the same were necessary.
If I have erred in appraising the assets of the company by accepting a very considerable portion of the write-offs from Mr. Brassert’s appraisals, as contended for by the defendant, the earning power of the common stock equity is shown to have been such as to justify me in believing that any apparent error in this regard has been more than offset and removed as real. My conclusion is, that under the evidence the price at which it is proposed to sell the assets of the- corporation represents their fair value and is adequate, At all events, I am strongly persuaded that if the price is inadequate according to some standard of measure absolute in its precision, a standard which no man can supply, there is no such inadequacy as indicates wrong or unfairness towards the complainants ; for, having no such perfect standard by which to measure, the possible inadequacy is such as must, in my opinion, consist with honesty of judgment and an intent to obtain the best possible price.
Note: Subsequent to the foregoing opinion a motion was made for a preliminary injunction, which was denied (see post p. 117), and the bill was thereafter dismissed on motion of the complainants (see post p. 368).