in the first instance by the Commission or by any person having a bona fide interest in the reorganization subject to such rules and regulations as the Commission may prescribe. The Commission is also given extensive powers over bankruptcy proceedings under section 77B of the Bankruptcy Act.

Within a year and a half, therefore, all holding companies must, under the proposals of the bill, dispose of any interest in any business other than gas and electric utilities, any interest in any natural gas company, and any interest in any public-utility company which is organized or doing business outside of the United States. Beginning 1 year later the Commission is authorized to require any holding company to dispose of any securities or capital assets whatever, or to be reorganized or dissolved. Two years thereafter the Commission is put under a mandatory duty to effectuate the complete abolition of all holding companies, subject to the above-mentioned inconspicuous discretionary exceptions which do not restrict the general application of the dissolution requirement.

The bill decrees, therefore, that in this brief period, there shall be a progressive disintegration of holding-company systems and requires a practically complete abolition beginning at the end of a 5-year period.

The hearings have shown that the effectuation of this policy will necessarily impose great injury to investors, anticipation of which is evidenced by the proviso in section 11 (b) (3) of the bill. It seems certain that a great sacrifice of values will result, in many instances sufficient to destroy the entire investment in the junior securities, particularly the common stocks, and that the entire industry will be plunged into confusion and litigation with great delay and expense before any final reorganization of the industry can be achieved.

It is unfortunate that these consequences have not been candidly recognized by the proponents of the bill, in order that the issue might be clearly presented for a weighing of the interests involved. Deliberate efforts have been made, however, to produce an impression that these drastic readjustments can be effectuated without any such general disturbance and destruction of values as should be s cause for concern by the Congress or by the investing public. In a matter of such importance it is worthwhile to consider the various suggestions which have been proposed as a means for accomplishing this result, in order to see what weight should fairly be attached to them.

III. SUGGESTED MEANS OF VOLUNTARY DISSOLUTION

It is suggested first that the lawyers who created these companies can surely find a way to take them apart, so that the Congress need not concern itself about the way in which this can be done. The committee will recognize, however, that it is much easier to create a debt than it is to terminate one. Anyone can incur a debt, even without the advice of counsel, but the most capable counsel cannot, and should not try to, find a way to escape that debt while his client is still solvent. The debt must be paid or the consequences suffered unless the debtor is a bankrupt.

This is but an illustration of the fact that lawyers can contribute nothing to the solution of a business problem except the legal forms and mechanisms for accomplishing an object which is in itself practicable and lawful. The object to be accomplished here is to find purchasers for millions of dollars of utility securities. No lawyer can do that. He can only write the contracts if purchasers are found.

1. DISTRIBUTION IN KIND

Then the suggestion has been advanced that "in some cases it may be possible" before the expiration of the 5-year period to divide the securities owned by a holding company among the holders of its own securities. It is not believed that any serious importance has been attached to this suggestion, in view of the recognized fact that many, if not most, of the important holding companies have issues of debt and preferred stock outstanding which would make impossible any distribution of the underlying securities in the simple way contemplated by the suggestion.

No very complicated capital structure is necessary in order to make such ready distribution impossible. Assume a holding company having only two classes of securities outstanding, an issue of preferred stock and an issue of common stock. The underlying securities, priced under the conditions of today, are far below their real value and often do not equal the par value of the outstanding preferred stock, which in the ordinary case is entitled to preferred payment in cash on dissolution. Will the common-stock holders give their approval to a plan of dissolution which contemplates distribution of all the assets of the company to

the preferred stock only? If such approval cannot be secued, and the company in question is solvent, how is distribution to be voluntarily achieved?

Even without a complicated capital structure of the holding company, the variety of stocks in its portfolio to be divided among its own numerous stockholders would make the problem of distribution in the ordinary case so complicated as to be impracticable on account of the small fractions into which the underlying stocks would have to be divided.

Since, generally speaking, the common stocks of the operating companies have been owned 100 percent by the holding companies and accordingly have no ascertainable market price, it will be difficult for the average investor to form a wise judgment with respect to the value of his holdings. This situation, in previous experience, has played into the hands of speculative elements, to the great injury of the small investor, and it is certain that similar consequences would follow here any attempt to carry out a dissolution in this manner.

2. EXCHANGES

The next suggestion has been that during this 5-year period some holding companies may exchange certain of their operating properties for properties of other companies, making possible the reorganization of some holding companies into integrated operating units or their continuance as holding companies under the limited exceptions above mentioned. Aside from the limited situations in which the bill proposes to permit a discretionary continued existence of holding companies, this suggestion really means no more than that the holding companies must dispose of their properties in one way or another, if not for cash, then for other properties. The suggestion that other properties may be received in lieu of cash does not materially assist in a solution of the problem. In whatever medium these purchasers are to pay, it will still be necessary to find purchasers for the properties, and the problem of finding a method, if any is available, for accomplishing such a disposition is not simplified by the nature of the consideration which the company is to receive.

The substitution of physical properties for dollars as a medium for the dissolution and reorganizations of these systems cannot simplify the problem unless it be assumed that the measurement of value is easier in terms of property than in terms of dollars. Anyone who has had experience in utility valuations knows that this assumption cannot be true.

Furthermore it must not be forgotten that before any such exchanges of operating properties can be made, two holding companies must be found, each of which happens to own properties which can be usefully employed by the other company in the light of the location of their systems and the requirement of the bill that such systems be restricted to geographically and economically integrated units. Past experience shows that exchanges of operating properties are not to be expected. Such exchanges will be even more difficult if the proposed bill is enacted with the various restrictions which it imposes, particularly the mandate requiring geographically and economically integrated units, which is as yet undefined.

Many other difficulties in the way of accomplishment of any such exchange could be pointed out. For one thing, it is highly improbable that two properties could be found with approximately equivalent value; in nearly every case there would be a substantial balance of cash to be paid by one or the other party; and provision for raising substantial sums of cash would have to be made. For another, it will more often be found that the only way of arranging any practicable exchange would be through a succession of parties rather than between any two parties that could be found, and the corporate problems presented by such elaborate disposition would become overwhelmingly complicated. Then, too, the very size of the properties involved raises a formidable obstacle to the effectuation of any such exchange. If the properties were small grocery stores scattered through various parts of the country, it might be possible to find a basis for their exchange, although the problem of determining fair exchange value would be difficult even there. In the case of important public utility operating properties, however, the investment is so great and the property so complicated that this difficulty is immeasurably increased. An insuperable obstacle will very frequently exist in the provisions of mortgages which rest upon the operating properties. The difficulty of arriving at barter values of the common stocks involved, without using a dollar medium, would in many instances involve valuation problems as complicated and impracticable as in the case of physical properties themselves, particularly where these common stocks are held by banking institutions as collateral for loans made under more favorable conditions.

3. SALES OF SECURITIES

It has been further suggested that during this 5-year period some companies may be able to sell through investment bankers the securities of operating companies which may be held by them, in such manner as to enable them to retire their funded debt and then distribute the residue of their assets among the stockholders. This is, of course, exactly the method of dissolution which it is feared will produce the most disastrous consequences upon all persons having an interest in the industry. Any liquidation means sacrifice; liquidation under threat means greater sacrifice; liquidation under court order means still greater sacrifice. This is a simple fact of common knowledge. The forced disposition of enormous volumes of stocks involving an entire industry, in the depressed conditions prevailing generally, and certain to be prolonged in an industry subject to disorganization and dismemberment after 5 years, cannot be expected to yield prices anywhere near their fair and reasonable value. It is certain that very little if any assets would remain for distribution among those who have invested their money in these companies' junior securities.

The same considerations apply to the suggestion that holding companies might in this same way reduce the amount of their holdings in subidiary companies to a point where they no longer exercise, or are capable of exercising, control over such companies, and thereby cease to be holding companies within the meaning of the bill. The enormous liquidation involved in such a process would be practically as complete and disastrous as the one just discussed.

4. TRUSTEESHIP

The suggestion has also been made that a holding company might divest itself of control of its operating companies by the simple process of conveying its stock in such companies to trustees for the benefit of its security holders as their interests might appear, divesting itself in this way of all voting power over the operating companies and vesting such power in the mass of its individual security holders, such voting power to be evidenced by certificates of beneficial interests, or otherwise. Liquidation and sale by these trustees, it is supposed, could then proceed more gradually and with more opportunity to protect the interests of those beneficially entitled to the property.

This suggestion is apparently made with greater confidence than any of those previously mentioned, and it is the most deceptive. At first sight it might be supposed that such an arrangement would leave the property interests of the holding company and its security holders substantially intact, eliminating only the holding company's power to vote these securities, and leaving the ultimate satisfaction of the rights of the various classes of security holders for gradual realization. Not much reflection is necessary, however, in order to see that this proposal, plausible though it may seem at first sight, will produce exactly the same destructive consequences that immediate liquidation is apparently admitted to involve.

With the elimination of the control through voting power exercised by the holding company, the system has been destroyed. This act of severance in itself involves an immense destruction of value. The unity of the system is the basis on which the securities were purchased. This unity must be a unity of operation for the common end of the advantage of all the operating properties as a group. Where the operating properties are set adrift as semiautonomous bodies without concerted direction as constituents of a system, the securities which rest upon the maintenance of that system cannot retain their value.

Certificates of beneficial interest in various operating subsidiaries, which this suggestion assumes will be issued in lieu of the original securities of the holding company, are not securities in a living organism, but evidences of proprietary interest in an aggregate of paralyzed parts. These certificates can be nothing more than legal machinery adopted as a transitional device pending the ultimate effectuation of disintegration. They would permit an extension of the time for this reorganization but would not delay its destructive consequences for the value of the securities. Sooner or later, in any event, these securities will have to be sold by the trustees, and thus, through a more roundabout method, we come back to exactly the same fundamental problem with which we started.

In other words, the trust has been created as a mere legal form incident to the ultimate sale and liquidation. The interposition of these legal forms does not solve any difficulties, but merely postpones the time when those difficulties will have to be faced. The fundamental question still remains, how and when and to whom can these securities be sold?

It must not be forgotten that in the case of a very large percentage of the operating companies their stocks are not listed and no market exists for them except in occasional over-the-counter transactions. A market such as this would offer no assistance in the disposition of a substantial block of shares. Moreover, in many instances the holding company owns the entire outstanding common stock of the operating subsidiary. Under the bill no person could buy any of these shares for the purpose of control. No person would buy these shares for the purpose of investment unless a sufficiently broad market had first been established so that disposition of them would be possible. To accomplish this, a substantial distribution of the stock would be prerequisite. The trustees would be forced to negotiate for a distribution to the public in small lots. No one could be expected to underwrite such an issue except at a sacrificial price.

When we remember that liquidation of the operating-company stocks owned by all other public-utility holding companies in the United States would be simultaneously proceeding, and that enormous blocks of stock of these same operating companies would be hanging over the market for further distribution as soon as possible, it seems highly improbable that investors could be found who would be willing even to consider such purchases except upon terms that would yield large speculative profits. The difficulty is increased by the fact that many operating-company stocks are not on a dividend basis at this time.

The use of this legal machinery of trusteeship and beneficial certificates, therefore, would not postpone the day of loss to the present security holders but will merely postpone the day of realization and extend over a longer period of years the uncertainty and confusion which would necessarily follow this unprecedented proposal to liquidate a Nation-wide industry. Damage and loss of value, however, would be immediate upon the enactment of the bill; the directors of holding companies would thereupon virtually become trustees in dissolution, and the policies of the companies would necessarily be directed to that end.

The above discussion of each of these various suggested means of voluntary dissolution has assumed that if agreement on the part of the security holders could be secured, such agreement would be unanimous. No such condition can be expected to be met with in practice, and in every instance there would probably be large dissenting interests. Cash must be found with which to pay the distributive shares of such dissenting security holders. The difficulty of finding the sums of cash that might be needed for this purpose in particular situations constitutes an additional and serious obstacle to the effectuation of the suggestion. The proponents of the bill desire to produce the impression that the voluntary disintegration of holding-company systems by these various methods which have been suggested can be accomplished without real injury to the investing public. They forget, however, that any attempt to carry out any one of these suggestions will be made under the shadow of the congressional mandate, which the bill proposes, for a practically complete abolition of the public-utility holding company after January 1, 1940. The existence of this fixed term will necessarily disorganize the markets in which any voluntary disintegration must be accomplished, and will intensify the difficulties and confusion which each of those suggested alternatives has been found to involve.

5. OPERATING COMPANY SECURITIES

It cannot be expected that this general liquidation of, and turmoil in, the securities of operating companies owned by holding companies, will be without a directly disturbing effect upon other securities of the operating companies. Even where only common stock of the operating companies is involved, the forced liquidation of this stock in the manner contemplated by the bill will be a threat to the credit standing of the operating companies, and all securities of the operating companies are likely to suffer in proportion.

This is especially true where the development or growth of the operating company will require additional investments of capital; financing by bond issue will be made more expensive by such injuries to the credit standing of the company, and will even become impossible unless some proper ratio of stock to bonds is maintained; this last consideration will be especially important where the forced liquidation of the company's stock makes further issue of its stock impracticable. This confusion will be intensified by two specific circumstances directly bearing upon the value of the securities of the operating company. In the first place, many millions of dollars are owed by the operating companies to the holding companies on demand obligations, representing actual cash advanced for working capital and plant additions. The holding companies, or its trustees in dissolution,

will be bound to try to collect this cash; in many instances the operating companies will not be able to make this payment, and the threat of a receivership will be presented; in any event millions of dollars of working capital will be forced out of the public-utility industry, which has hitherto been available for the needs of the operating company.

In the second place, regardless of the criticisms that may be made of some practices on the part of some holding companies in the past, it remains true that one of the principle elements of value in the securities of the operating companies is that the credit and management of these companies have been supported by the holding companies, through their financial and management organizations. Any dispassionate survey of the industry will show that a great loss of value consequent upon the termination of this support is certain to ensue, except perhaps in the case of a few of the largest and most powerful operating units.

IV. SUGGESTED MEANS OF COMPULSORY DISSOLUTION

The most dangerous and destructive provision of the bill is of course the provision that after 5 years all holding companies must be abolished, and that within the 2 years next preceding that time the Commission may, in its discretion, abolish them. The proponents of the bill have suggested two considerations as sufficient to avert the hardships of this forced liquidation of holding companies.

In the first place, they point out that a court of equity has power to defer a sale until it can be accomplished without unnecessary hardship. But this suggestion reaches no further than the suggestion of transferring all voting securities to trustees, which has already been discussed. This is not a legal problem, but an exclusively practical one that cannot be solved by mere legal machinery. That problem is how and when and where, under the demoralized market conditions which will exist, purchasers can be found for the greater part of the securities of the public utility industry. If this cannot be done, or can be accomplished only with great sacrifice of values, no assistance is offered by a suggestion which will only continue the litigation and confusion accompanying the attempt for a longer number of years. Values destroyed by this bill cannot be restored by a court moratorium.

The second consideration_suggested by the proponents of the bill is an emphasis on the power of the Commission to compel a reorganization pursuant to a plan that has been approved by it. This suggestion is stated in such a way that one is led to suppose that this dissolution can be effected without a forced sale of assets, without the delay, expense, and litigation consequent upon disagreement between the security holders, and without any necessity for finding enormous sums of cash to pay the claims of dissenting security holders, and can be forced through as an orderly and punctual program by the mandate of the Commission and the courts. But these suppositions fly in the face of all experience. The conflicting interests of different groups of security holders would breed a variety and amount of litigation that would keep the courts occupied for a generation.

Market prices are sensitive, and shrink with experiment and the hazards of litigation. It is impossible to forecast all the complexities of rearrangement which would result from the judicial sales and the wholesale reorganizations necessary under the suggested process of dismemberment of an entire industry. Section 77 of the Bankruptcy Act, which was enacted to give swift cure, as it was thought, to a critical situation and expedite the process of railway reorganization, has failed utterly of its purpose, and no reorganization under it has been accomplished.

1. DICTATORIAL POWER TO REDISTRIBUTE PROPERTY

What is it exactly that the proponents of the bill advocate by this proposal of forced reorganizations of solvent companies? Do they propose that the creditors of a solvent holding company shall not be paid in full upon its dissolution? Do they propose that the assets which are needed to pay creditors shall be taken from them and used to pay stockholders? Do they propose to do this simply on the ground that there is not enough value left in the assets of the company to pay all security holders in full, in spite of the fact that the right of the creditors to prior payment is a vested property right which they acquired by express contract before the introduction of this bill? Do they mean to make such reapportionments between different classes of security holders, to scale down the debenture holders for the benefit of preferred stockholders, and to scale down