It will be noted that the reorganization managers have been compelled to organize a new corporation and to receive the cooperation of the receiver, the court, the bankers, and a large majority of the old se curity-holders and creditors in order to effect a suc cessful reorganization. The details and steps may vary, but the foregoing outline is typical.
5. protective committees.---In case of receivership, protective committees usually spring up immediately for each class of security and for unsecured creditors, the importance of each com mittee depending upon the value and class of the claims deposited with it. The most important com mittee is that representing the principal issue in de fault. In order to forestall opposition committees, the management of the company, anticipating default, usually arranges in advance with well-known claim ants of each class to announce themselves as a self-ap pointed protective committee immediately upon the appointment of the receiver.
Each committee invites all its fellows in misery to deposit their securities and claims with a certain stated trustee for mutual protection. The trustee is usually a trust company, and it acts under the terms of a de posit trust agreement, which outlines the duties of the trustee, the rights of the parties who deposit and the powers of the protective committee. The agreement, of course, binds only those who deposit, and is for the purpose of enabling the protective committee to exer cise a powerful voting control in the reorganization proceedings ; each committee fights for the better recognition of the class of security which it represents.
Holders of securities not in default, including even the common stockholders, may have. protective com mittees. Trade creditors have a committee to repre sent the amounts due them on open accounts. The power of each committee depends largely upon the ex tent to which it is successful in inducing the owners to deposit their securities or claims under the trust agree ment. Owners are often slow to come forward, and there are usually some who refuse to deposit. Some times opposition committees spring up, and these are always a great nuisance to the reorganization mana gers. Sometimes a committee, as an inducement to security-holders, will itself underwrite or advance the interest upon the defaulted security, pending the reor ganization. It is essential that the various protective committees, which control a large part of the outstand ing securities, act in harmony if a reorganization is to be effected.
No security-holder is under any obligation to de posit his bonds or stocks with a protective committee, or to participate in the plan of reorganization. Those who deposit their securities, however, receive from the trustee transferable and negotiable certificates in lieu of the stocks or bonds or other claims deposited. Al tho the protective committee represents the deposit ors, it cannot bind them to any actual plan of reor ganization without first submitting it and receiving their assent.
6. Deposit agreement.—The deposit agreement gives broad powers to the protective committee. An ticipating a reorganization, it provides that the corn mittee may negotiate with other committees, com panies or bankers ; plan a reorganization which in volves forming a new company or a recapitalization, or provides for disposal of any part of the property; appoint managers; pay their committee expenses; and do such other things as it may find proper and ex pedient in the interests of its principals. All these powers, of course, are given merely that the committee may have broad scope in negotiating a reorganization.
The certificates issued by the trustee to the deposit ing security-holders state the names of the members of the protective committees, identify the securities which have been deposited, refer to the trust agree ment and stipulate that certificate-holders are entitled to all the privileges and benefits conferred thereby. These certificates are usually assignable by transfer on the books of the trust company, subject to the terms of the deposit agreement. On the back they have the usual printed form of power of attorney, so that, like stock certificates, they may be sold or passed by delivery at any time. The certificates may be made to bearer, but they are usually registered, and are rendered sufficiently negotiable by the power of attorney, which, when signed in blank, makes them good in the hands of the bearer for transfer on the books of the company. The purpose of the certifi cates is to enable the owner to possess and negotiate evidence of his interest in the corporation and yet deposit with the committee the control necessary to effect the reorganization. These certificates may be dealt in exactly as the securities themselves, and they are often listed upon the stock exchanges.