from others and your position here is very persuasive.

Thank you, sir, and your colleagues.

Mr. EDWARDS. I yield now to the gentleman from Virginia, Mr. Butler.

Mr. BUTLER. Thank you, Mr. Chairman.

I too appreciate the help of the Commission. We, of course, have had the opportunity to review the summary that was given us in advanceand also the Senate testimony summary and we appreciate that contribution. It seems to me that this is a very technical area and we have to be careful.

We had a witness from the Department of Justice who suggested that some of the questions and problems we are faced with now under the current law would have been avoided entirely if the Department had been consulted during the drafting of the law. It would have been useful if we had undertaken that policy at the time we were given the legislation; then, after we had made policy decisions we could submit a draft statute to the agency for review of the very careful wording of the statutes involved. I would like to think there is no reason why the staff of your Commission would not be able to work through our staff after we make the basic decision in a similar fashion.

Mr. LOOMIS. They will be glad to.

Mr. BUTLER. I am not surprised but I am pleased to hear that.
I have several more questions.

Basically, the complexity of this act is such that I do not want to always reveal my ignorance about what is undertaken here.

I would like to refer for a moment, if we can, to your testimony on page 11, the second modification. You refer to the:

burden of this overhanging contingency, particularly on subsequent public offerings of securities and on the market price of securities issued under the plan which outweighs any benefits to an excluded class.

I can see where many questions can be raised, because, if you get new ideas, you are going to have problems with them. But, would not the overhanging contingency be pretty well reserved in the case of the public offering of securities? Would not the subsequent public offering have to be somehow involved under some listing in some way by the bankruptcy court?

Mr. LOOMIS. I do not believe so. I think that this refers to offerings which are made after the reorganization has been completed and the trustee has been discharged, and the company has been sent out into the world to do business.

But, there is this overhanging in the sense that there is a possibility for 5 years, of the issuance of these additional securities pursuant to the contingency.

So, anyone considering underwriting an offering for this company during this period would have to evaluate whether these securities would be issued. And if so, how that would affect the market, and the participation, and the efforts of the people who are employed to come in and do public offerings.

Mr. BUTLER. I appreciate the problem. I was wondering what can we do based on any experience in this area? Is there someone who can tell us if this sort of thing is developing?

First, it does not come up because there is no provision under the present Bankruptcy Act to provide warrants for delayed participation.

Mr. LOOMIS. Well, our basic answer to this is that what the Bankruptcy Commission provides for is not the real problem. That just does not exist in practice.

Perhaps I can suggest that valuation is not something that is as certain. There is always a chance that you may exclude a junior interest even though later evidence will show that the company will do better and, therefore, they should have gotten some participation.

In the report that we intend to submit, we will point out that we have examined a selected group of larger reorganizations. We find cases where the court found that the debtors were solvent and allowed stock holders to participate.

In other cases the court has found the debtor to be insolvent and excluded the participation by stockholders who have the last interests in the organization. These are not borderline cases. They are insolvent by a wide margin.

It is not likely that a court will so define its findings of value to say that there are $10 million in liabilities and the court finds the value of the assets to be $10 million.

Therefore, the stockholders might get a participation in case of a slight adjustment in the valuation. These cases run just in the other direction. Either they are solvent by a wide margin or insolvent also by a wide margin. A close case for stockholders where the assets are precisely equal to the liabilities is not a real case.

Therefore, we do not have to worry about these marginal cases. Mr. BUTLER. Thank you.

Mr. LOOMIS. In other words, it is unlikely that the court would be confronted with a borderline case where it would have to address these contingent interests.

Mr. BUTLER. You think it is a solution without a problem.

Mr. LOOMIS. Yes.

Mr. BUTLER. All right, I thank you.

Mr. EDWARDS. I yield now to Mr. Parker.

Mr. PARKER. Commissioner Loomis, there is no question that the litigation over the use of a chapter X has been classified as unproductive through the years. But, also, many judges feel, that they were very often made to choose, or were put into a position of choosing a very strong formula of mandatory trustees or mandatory new management in a case in which some of the management might have been retained. Also, for many years, sometimes facetiously, and sometimes seriously, there has been talk of what was known as a proposed chapter X12. And for some reason the Commission solved the problem by having one chapter. Would the SEC be happier with something that could provide for a choice between comprehensive reorganization using a trustee on the one hand and the simple adjustment on the the other hand?

In other words, would you be happier with a chapter X1% that might take those corporate entities that have public security holders but who might be more amenable to an arrangement with the debtor in possession, without affecting the public and keeping some of the other aspects of chapter X.

Mr. LOOMIS. In other words, what you are suggesting is that there should be some arrangement for a publicly held company where there would nevertheless be what is now called a chapter XI type arrange

ment.

Mr. PARKER. That is correct.

Mr. LOOMIS. Generally, I tend to agree with you that there are some cases where that would be desirable, where it is not necessary to modify any publicly held interest.

But, on the other hand, the Supreme Court has said that chapter X and chapter XI are not alternatives, you go into the one that you like best. It depends on the needs to be served. We think that there may be such situations but that they shouldn't be allowed to erode investor protection because of the pressure that exists, particularly on the part of management to go into chapter XI because it is easier and cheaper. The interest of the public investors may suffer if those pressures are yielded to. I think it is a possibility we would like to work with you on.

I think you propose some tests or standards for determining in the case of publicly owned corporations that there was no need for reorganization and that a minor readjustment would do the trick and to specify how that should be done.

Mr. LEVY. I might add that mathematically X2 is just an average between X and XI. But a new chapter X2 is neither X nor XI, and this solves no problem. I do not think that there is any need for just more numbers or another type of chapter.

Chapter X provides the appropriate procedure and remedy. On the other hand, the Supreme Court refused to adopt flatly the proposition that we had urged that where there was publicly held debt, you must proceed under chapter X. There may be cases where all that is needed is a simple adjustment.

This is already allowed for in chapter XI. So, if a large company is caught in a bind because of short-term credit, there is need only of some arrangement with institutional lenders. That can be done in chapter XI.

On the other hand, where an attempt is made to reorganize, because that is necessary for financial rehabilitation, then chapter X is the appropriate remedy. It is really a way to get to what the debtor needs. Mr. PARKER. So, as I understand it, you respect ingenuity and you would prefer to maintain two chapters with a better look at the standards that you like?

Mr. LOOMIS. Well, not necessarily. There is an appeal to the idea of having only one chapter so that you won't argue about which one you should be in. But, I think that the standards that you use when you do go in to determine which way you go should be clearly defined along the lines that have been discussed today, with a chapter XI type procedure being available only when that is appropriate and there is no need to go further.

Mr. PARKER. Thank you very much.

Mr. EDWARDS. I yield now to Mr. Klee.

Mr. KLEE. Thank you, Mr. Chairman.

Part of the corrective surgery that you were talking about includes an attempt by both the Bankruptcy Commission and the Judges to allow secured debts to be subject to arrangement in a chapter XI type context. Why do you advocate limiting the use of arrangement of secured debts?

Mr. LEVY. We will expand upon that in the report that we will submit. We interpret that provision in the bills to allow for dealing with

secured debts for individuals, for which there is a chapter XII in existence.

The Bankruptcy Commission has proposed the elimination of the chapter XII. We have interpreted that provision as a substitute for the chapter XII and not for corporations. That purpose should be made clear.

Mr. KLEE. I think that they wanted to expand it.

Would you oppose that expansion to permit arrangement of any kind of secured or unsecured debt other than publicly held securities? Mr. LEVY. Well, I haven't really thought about it. I haven't thought about this question.

Mr. GUTHRIE. Let me add one thought on that as a practical matter. If you are not dealing with publicly held securities, there is no obstacle to arranging the secured debt in connection with a chapter XI procedure. You would need that in a nonpublic case in any event; otherwise, the secured creditor wouldn't accept the plan.

So, I am not sure the decision is as bold as it might sound.

Mr. KLEE. A crucial part of your testimony relates to the definition of publicly held securities. The Commission bill defines it in a manner that differs from section 12(g) of the 1934 Securities Exchange Act and you, of course, define it even more restrictively than that.

Under your definition if there are at least 100 holders of publicly held securities and a debtor with at least $1 million in either assets or liabilities-and I do not know if you mean to combine them-then you would have a publicly held securities case.

Why should not section 12(g) of the Securities Exchange Act be the standard used?

Mr. LEVY. That is because 12(g) involves one class. That is all that we are dealing with. In reorganization you have many classes. It includes unsecured debt. It may also involve bonds and stock. We do not feel that we should define the public interest in terms of each class. There may be less than 100 in each class, but together the public interest may be much larger.

Therefore, we must adopt a definition not in terms of each class, but in terms of aggregate numbers.

Mr. KLEE. In terms of aggregate numbers, do you think that 100 is a proper limit?

Mr. GUTHRIE. If I might add to that, section 12(g) of the 1934 act deals with rights of public security holders.

The problem is the right to procedural due process when one's securities are involved in a bankruptcy proceeding and there is a prospect that one might be wiped out entirely. And so we think that the number of 100 security holders ought to be the point at which these primary procedural safeguards ought to apply.

Mr. KLEE. By putting the corporation in chapter X you almost insure that the very stockholders you are trying to protect will be wiped out. If you put the corporation into a chapter X, the stockholders are almost invariably going to be wiped out unless the company is solvent; so you are really protecting the publicly held debt holder. It seems there is such an aversion to chapter X in terms of delay and the absolute priority rule, that many witnesses have said that it is viewed both by debtors and creditors as equivalent to ultimately winding up in liquidation.

What has been your experience in this area?

Mr. LOOMIS. I do not think that it has been that bad. There has been quite a lot of highly successful reorganization.

Mr. LEVY. In a report that we will submit we will tabulate quite a number of cases and we point out that they have been successfully reorganized and that liquidation is only the last remedy.

Mr. KLEE. I would like now to explore the securities exemptions in H.R. 31 and H.R. 32. You mentioned in your testimony that transactional exemptions are implicit under the law because of the attitude the SEC has taken.

Is it not necessary to write into the Bankruptcy Act a transactional exemption to make sure that a person who gets a security in a reorganization will be able to sell it individually?

Mr. LOOMIS. I think that we do not have too many problems with the idea of a transactional exemption in the bankruptcy proceeding.

That is, that they did not have to register any transaction of issuance of a security in the reorganization and the Securities Act did not apply. The problem is the continued exemption that seems to be called for by the Bankruptcy Commission bill which are not transaction exemptions but create a particular kind of exempt security.

Mr. KLEE. My next question relates to the automatic ousting of management and the appointment of a trustee. Testimony has been presented that the decision to oust management is something that really does not depend on whether the debtor is publicly held or on the amount or number of publicly held security holders. Rather it is something that depends on facts of each case.

For example, there might be a chapter XI type company that has a management that needs to be ousted; on the other hand there might be a company that has $1 million or more in assets or 300 or more publicly held security holders that is put into chapter X by an exogenous economic factor, not a factor of credit or mismanagement.

In the latter case, the SEC proposes to automatically oust the management and waste the management's expertise. How can you justify that?

Mr. LOOMIS. The independent trustee is the key to reorganization. Now, as far as the management is concerned, presumably he could retain members of the management who have expertise to continue to participate and in fact I think that they often do. I think that it is accepted after many years of experience that an independent trustee be brought in to do the job.

Now, there may be situations where the management is fine and maybe he could be disturbing them very much. But the basic principle is that you need an independent trustee to do the investigation and to arbitrate between the various interested groups. And keeping the management is usually not feasible in a major chapter X type of reorganization.

Mr. LEVY. I would add two additional thoughts to the Commissioner's statement. One, it is not practical in each case to have to determine whether or not a trustee should be appointed if there is to be litigation and appeals and so on. He is somewhat in limbo and uncertain in the meantime.

In addition the appointment of a trustee does not imply dishonesty in management although in some cases that is true. Appointment of an