REORGANIZATION. A term in common use to denote the carrying out, by proper agreements and legal proceedings, of a busi ness plan for winding up the affairs of, or foreclosing a mortgage or mortgages upon the property of, insolvent corporations, more frequently railroad companies. It is usually by the judicial sale of the corporate property and franchises, and the formation by the purchasers of a new corporation, in which the property and franchises are thereupon vested, and the stock and bonds of which are divided among such of the parties inter ested in the old company as are parties to the reorganizatioh plan.
In most of the states, statutes have been passed to regulate the purchase of corporate properties and franchises at judicial sales. They usually provide that the purchasers shall be, or become, or may organize, A new corporation in taking over the assets and franchises purchased, and have and enjoy the corporate rights and franchises of the former company.
Usually some of the security holders name a committee who formulate a plan of reor ganization providing for the deposit of secu rities with the committee as agents or trus tees for the owners; for the purchase of the property at the sale ; and the organization of a new company upon the basis of a spec ified scheme of distribution of the new se curities among those who assent to the plan. The securities are generally deposited with the committee with very full powers of con trol, under the plan, and usually with a cer tain power of modification of the plan un der specified circumstances. When the new company has been formed, the new securi ties are issued to the assenting parties in ac cordance with the terms of the plan.
Where a reorganization is the only feas ible method of protecting the relative rights of all parties interested in a large enterprise, and it can be done only by co-operation, courts of equity, in the absence of fraud or oppression, are disposed to aid rather than to thwart such schemes of reorganization ; 'Central Trust Co. of New York v. Rolling Stock Co., 56 Fed. 7. They are to be promot ed, because they are necessary to prevent great sacrifice and loss ; Robinson v. R. Co., 28 Fed. 340.
The creditors of a mortgagor railroad com pany may fairly combine to purchase the property at a mortgage sale, and other cred itors are not, by such combination, deprived of the right to bid at such sale ; Kropholler Y. Ry. Co., 2 Fed. 302. Courts will endeavor
to carry into effect a fair plan of reorganiza tion and will overlook merely technical de fects in it ; 11 Ch. D. 605. Such an agree ment is not a fraud on non-assenting credi tors and does not entitle them to claim their debts against the new company; Appeal of Pennsylvania Transportation Co., 101 Pa. Where a railroad company has issued sev eral series of mortgage bonds, some cover ing all the property and some only a part, and become insolvent, and the principal of some of the mortgages was due and the com pany had. a large floating debt, it was held that a decree foreclosing all the mortgages, entered by consent of the bondholders, would not be set aside on the petition of some of the stockholders on the ground that some of the mortgages were not yet due, as it was in the interest of the company to ef fect a reorganization which would secure and extend .its bonded debt and reduce the rate of interest thereon and provide the nec essary means to satisfy the floating debt; Carey v. Ry. Co., 45 Fed. 438.
Reorganization agreements must be car ried out according to their terms. If they are not, the subscribers to them are not bound ; Miller v. R. Co., 40 Vt. 399, 94 Am. Dec. 413 ; and the assenting security holders must also comply strictly with the agreement to which they have assented; Short, Ry. Bonds 857.
Where there was a compromise in which stockholders of a company were given the right to subscribe for stock in the reorgan ized company, upon terms specified in a cir cular addressed to the old stockholders, it was held, on proceedings by a stockholder who averred want of notice of the circular, that he had no right of action against the company, because the agreement was not made by the company or on its behalf, and that he could not complain of the terms of the agreement, as he was not a party to it ; Thornton v. Ry. Co., 81 N. Y. 462. A reorgan ization committee is not a trustee for non assenting bondholders ; Bound v. R. Co., 78 Ted. 49, 23 C. C. A. 636.