This section is from the book "Business Finance", by William Henry Lough. Also available from Amazon: Business Finance, A Practical Study of Financial Management in Private Business Concerns.
An extremely simple reorganization which did not in any way affect the financial structure of the company was that of the American Woolen Company of New Jersey in August, 1915. This reorganization is fully explained in the following extract from the official statement issued at the time:
The American Woolen Company is essentially a New England organization. With but one exception all its plants are located in New England; its executive headquarters are in Boston; its largest mills are situated in Massachusetts; a very large number of its stockholders are Massachusetts people; the bulk of its taxes is paid in Massachusetts; and most of its financing is done in Massachusetts. For these and other reasons, including important advantages offered by the corporation and taxation laws of Massachusetts, it is the opinion of your directors that the interests of your Company as a corporation and of the stockholders individually will be best served by rechartering the Company as a Massachusetts corporation.
It is proposed that the new corporation shall issue amounts of preferred and common stock equal to those now outstanding of the New Jersey corporation, to wit, $40,000,000 of preferred stock and $20,000,000 of common stock; and that the relative rights and interests of preferred and common stockholders with respect to preferences, dividends, voting rights, etc., shall be the same in the Massachusetts corporation as they now are in the New Jersey corporation. The final result of the proposed proceedings will be that the assets and goodwill of the New Jersey corporation will be vested in the Massachusetts corporation, which will issue its preferred and common stock as above stated. The directors and other officers of the Massachusetts corporation will be those of the New Jersey corporation, with the exception of two inactive members of your board, one of whom is a resident of New Jersey. In other words, with the exception of some minor differences rendered essential by the statutes of Massachusetts, the rights and interests of the stockholders in the new corporation will be those in the old corporation.
A not uncommon reason for a simple reorganization is the desire to take care of accumulated unpaid dividends on preferred share issues. When a corporation, after a long period of small profits during which it has been impossible to keep up payments of preferred dividends, reaches a stage of prosperity that appears likely to be lasting, the common shareholders are often impatient at the prospect of continuing for some years the slow process of paying up the back dividends while in the meantime the common shareholders receive nothing. On the other hand, the preferred shareholders, if they feel confidence in the continued large earning power of the company, may be entirely willing to accept securities in lieu of cash in settlement of their dividend claims. In 1914 the directors of the Western Power Company formulated a plan of this kind for funding back dividends amounting to 18% which had accumulated on the company's $6,000,000 of 6% preferred stock. In substance the plan provided for a new corporation - the Western Power Corporation - which would have $7,080,000 preferred shares at a par value of $100 per share, and 146,700 common shares without par value. $118 in new preferred was offered for each $100 of the old preferred; while the new common was exchanged share for share for the old common.
A very simple method of reorganization when a going corporation needs more cash, is to persuade all the shareholders to turn back to the company a given proportion of their holdings, and then to resell this treasury stock for cash. This is a method commonly used among textile mills where the issuance of bonds is objectionable because of their bad effect on the bank credit of the companies operating in this field. The plan is obviously unworkable if any shareholder objects, and is applicable therefore only to corporations having but a small number of shareholders.