certain industrial or commercial interests, or to other organized groups. Likewise, control of a corporation having such large purchasing power and such great employment capacity may readily be of considerable importance to particular interests which could afford to advance funds sufficient to acquire such control. From a speculative viewpoint, such control might offer the temptation to effect changes in operating methods either through increasing or decreasing maintenance expenses, shifting traffic policies, or adjusting capital expenditures, so as to affect favorably or adversely the earning power of such stock or the equity of such stock in the assets of the corporation.

Only a brief consideration of these possibilities is required to demonstrate that the potential effects of such a type of control would be wholly unrelated to the necessities of the transportation industry. It is a matter of prime importance to the public that adequate safeguards be provided against such contingencies. The voting trust is the most adaptable device for this purpose.

NECESSITY FOR STABILITY OF MANAGEMENT FOLLOWING

REORGANIZATION

It is likewise a matter of common knowledge that under ordinary conditions railroad stocks sell at depressed prices immediately following reorganization and until a period of seasoning has elapsed. As a consequence changes in ownership are responsive to slight variations in market prices, thus inviting a shifting control. Such a condition is not conducive to the stability and continuity of management essential to the development of sound policies. During this transitional stage it is essential that a reorganized company have a strong management that can develop sound policies and render them effective. Policies designed to meet competitive influences, develop effective traffic solicitation programs, install efficient operating methods, and evolve comprehensive improvement programs and constant modernization of facilities, require a period of time, and must extend over a sufficient interval to permit not only their development but likewise their fruition, if positive results are to be obtained. Any sound program of rehabilitation and business development must necessarily encompass a period of years. The possibility of a shifting control discourages the development of such a program and encourages a temporary "hand-to-mouth" program of immediate expediency.

Experience has shown that the voting trust provides a satisfactory method of accomplishing the foregoing purposes. In order that they not be unnecessarily extended, the plans of reorganization generally provide for their termination at such time as earnings reach a point where the securities should attain a market price that would discourage speculative and shifting control.

SENIOR CREDITORS ARE ENTITLED TO PROTECTION OF VOTING TRUST

Not only is the creation of a voting trust a matter of profound importance to the public, but it is something to which senior security holders are entitled in the protection of their investment and as a matter of fair and equitable treatment.

Senior creditors who become holders of income bonds as a result of reorganization are entitled to protection from the improper diversion

of traffic for ulterior motives, the dissipation of revenues through poorly considered or inadvisable operating programs and the making of inappropriate capital expenditures. Likewise, the holders of new fixed interest bonds are entitled to assurance that the policies and programs of the reorganized company will be such as to avoid default and a recurrence of reorganization. Each of these classes of security holders is therefore vitally interested in having a strong and continuing management after reorganization that will manage the property in the best interests of the entire group of security holders.

IT HAS NOT BEEN POSSIBLE TO SATISFY EVEN BONDHOLDERS' CLAIMS IN FULL

Report No. 1170 says:

The committee desires to emphasize that the Congress cannot by legislative action pump value into securities which are valueless; it does not do that by the recommended bill nor can that be done by any Congressional fiat. But the committee's investigations and hearings thus far compel it to recognize that forfeitures are taking place or are contemplated, that have no basis in equity or moral right.

If this is true, then it must follow that the value to which the old stockholders are entitled was received by someone else, who thereby received more than they were entitled to. However, this is clearly not the case, for the reorganizations approved by the Interstate Commerce Commission under section 77, severe as they have been alleged to be, have frequently failed to produce full market value for any of the claims recognized in full in those plans. Schedule 10 shows one important bond issue of each of the major roads whose reorganization has been completed, the new securities received in reorganization, and the market value of those securities as of May 17, 1947. Generally speaking these bond issues are the most junior bond issues which were nominally recognized in full and in nearly every case received a large part of the common stock of the reorganized company. They therefore received "all the equity" which there was to offer.

If anything more had been given to issues junior to those shown on schedule 10, it could only have been given at their expense, and it would have reduced the value of the securities they received correspondingly. It will be noted that in only one case, that of the first mortgage bonds of the Western Pacific, does the present market value of securities received equal or even approach the original principal amount of the bond, and even in that case the present market value of securities received was only about 80 percent of the total claim. It will be noted that the average ratio of market value to total claim for all of these securities was 43 percent and the average ratio of market value to total principal amount of claim, excluding any unpaid interest, was only 55 percent. These security holders, ranking in every case senior to securities held by the Commission to be without value in whole or in part, had thus already lost on the average 57 percent of their total claim or 45 percent of their claim for principal, and they would have inevitably lost more if the proposed amendments had been law at the time of reorganization, and something had been taken away from them for more junior issues.

(Schedule 10 is as follows:)

of Vorge inted on Total. $7,314, 000

$1,380 GC

$55,628, 338

SOURCE: Plans of reorganization.

1,000

263

1, 263

Market quotations-closing prices as of May 17, 1947, from Wall Street Journal.