both for the benefit of common stockholders? If they do, then the Congress and the people are entitled to know that intention while this bill is being considered. The suggestion is so startling and so subversive of every principle of law, and of business honesty and fair dealing, that its very statement compels its rejection. Congress has so recently legislated to require the truth in securities, surely it will not now, so soon, legislate to take the truth out of securities.

Even if it were possible under the Constitution, is it desirable, as a matter of policy, for the Congress to confer upon any agency of the Government a power to make a wholesale appropriation and reapportionment of existing property rights of millions of investors? No attempt of this kind has ever been made before by the Federal Government. No commission has ever been vested with such universal authority and none can be so vested without a revolution in our American ideas of government.

2. ABSENCE OF ANY STANDARDS FOR SUCH REDISTRIBUTION

But if the proponents of the bill really intend, as this proposal of compulsory reorganization indicates, to vest the Commission with this absolute power to take property from one set of security holders and give it to another, what are the standards or principles under which this redistribution of property is proposed to be made? It is astonishing that on a matter so vitally affecting the interests of millions of investors, the bill should be utterly silent. No standards or principles whatever are laid down by the bill to control the Commission in the exercise of this unprecedented power.

It would not seem to be an easy task to find and formulate any such principle. Are we to say that a part of the property charged with the payment of the creditors' claim is to be given to stockholders merely because an equity for those stockholders existed at the time their investment was made, although that value is not realizable under the terms of the bill and the conditions now existing? If so, then what part of the property is to be taken for this purpose? Is value to be found by new appraisals? If so, as of what date will these be made and by whom? Are the legal rights of the creditors given them by consent of the stockholders in the past to be defeated or destroyed in order to advance the interests of the stockholders who consented to the creation of those rights? If so, then what proportion of the creditors' property is to be taken for this purpose?

These inquiries lead us into a maze of uncertainty and conjecture, where no existing principles of law give any assistance. All that can be said is that the Commission would be free to act in accordance with economic theories that might at the time be current among its members, and there is no way of predicting at the present time what those theories might be. The inevitable result is that either one of two situations will develop. The first alternative is that the Commission in whom this power is proposed to be vested will become an absolute dictator, prescribing the terms upon which any holder of securities may continue to hold such securities, and what securities or other elements of value he must receive in exchange for them. If this is not the intention of Congress, then the second alternative is that the whole process of reorganization will become a campaign of rivalry between committees representing different classes of securities, of jockeying between them for competitive position, and of endeavoring to enforce their respective views through the agency of the Commission.

Even if Congress were willing to ignore the constitutional objections to this plan, it surely would not be willing to confer a power of this unreckonable kind, with all the dangers and uncertainties which it must involve, upon any commission. If the proponents of the bill really contemplate, as this suggestion of theirs implies, that the provisions of the bill will operate in that way, then the question of the expediency of the bill should be considered on that basis. If they do not, then their suggestion of a compulsory reorganization under the direction of the Commission has no substantial meaning and should be given no weight by the committee.

3. CONSTITUTIONAL DIFFICULTIES IN ANY SUCH REDISTRIBUTION

It seems unlikely that the proponents of the bill can really mean to press their suggestion that the Commission can prevent excessive hardship and loss to junior security holders by forcing dissolutions and reorganizations upon terms which will save some part of the junior equities from the contract claims of senior security holders. Constitutional difficulties make the realization of any such plan impossible.

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(a) The commerce clause. It is a familiar principle, of course, that in the exercise of the commerce power, the Congress and its agencies may not step outside of that field in order to regulate and control matters that have no real or substantial relation to such commerce. Thus the Supreme Court has declared that although Congress may prohibit the interstate movement of things so inherently "evil" that their interstate movement would cause some public injury, such as Lottery tickets (Champion v. Ames, 188 U. S. 321), Congress may not prohibit the interstate movement of things for the purpose of regulating and controlling matters not substantially connected with such interstate movement, such as the use of child labor in the manufacture of articles shipped interstate (Hammer v. Dagenhart (1918) 247 U. S. 251; approved in a later and related case, Bailey v. Drexel Furniture Co. (1922) 259 U. S. 20). Applying the same principles the Supreme Court has held that the Interstate Commerce Commission, in the exercise of its authority over railway security issues, may not exercise such authority by imposing a condition designed to regulate the use of funds contributed by the security holders directly to the reorganization managers, such funds being solely a matter of private right under the local law and not substantially related to the protection of interstate commerce (U. S. v. Chicago, Milwaukee, St. Paul & Pacific Railroad (1931) 282 U. S. 311). The words of the Supreme Court in this connection are illuminating:

"The powers possessed by the Commission are delegated by Congress under, and are to be exercised in conformity with, the constitutional grant of authority to regulate interstate and foreign commerce. Proceeding under that grant, as applied to the present matter, neither the Commission nor Congress itself may take any action which lies outside the realm of interstate commerce (Hammer v. Dagenhart, 247 U. S. 251). It follows that if the condition in question relates not to such commerce, or to the rights or duties of the carrier engaged in such commerce, but exclusively to extrinsic matters, it is imposed without authority of law (p. 324.)

"It seems plain enough that the Commission, by the condition here in question, has undertaken to lay its hands upon and control the disposition of a fund created by contract between private persons to which the carrier was not a party, in which the carrier had no enforceable interest and which was not within the purview of the regulating power of the commission.

"The contract was not one in respect of commerce but involved a transaction distinct and complete in itself without regard to its results; and, whether succeeded by commerce or not, was no part of it" (p. 326).

"In that view any legislative or administrative edict which purports to empower the carrier to take the property without compensation and dispose of it, not as the contract provides, but as the governmental body may direct, must fail as a futile attempt to accomplish what the Constitution does not permit" (pp. 327, 328.

Even if we were to assume that it is within the power of Congress to require the disintegration of public-utility holding companies as a regulation of interstate commerce, this congressional purpose is satisfied by seeing that a disintegration is effected. The power would not extend to the method by which the disintegration is accomplished. From the point of view of the protection of the public interest in interstate commerce, it makes no difference whether this disintegration is accomplished by one plan or another, so long as it is in fact accomplished. It makes no difference to this congressional purpose how the proceeds may be divided, whether they be given entirely to the creditors, or given partly to the stockholders. It makes no difference to this congressional purpose whether the proceeds are derived from a sale or from an appraisal and contractual exchange. Of course, the bankruptcy power has no bearing on this question. A majority of the companies under consideration are solvent in all senses.

There can be only four reasons for Federal supervision over the dissolution of holding companies: (1) to see that disintegration is in fact accomplished, (2) to see that interstate service to the public is not discontinued, (3) to see that the plan agreed to by the securityholders does not involve issuance of securities that will threaten the ability of the operating companies to render interstate service to the public, and (4) to require fair disclosure for the protection of investors. The third of these is the reason for the supervision exercised by the Interstate Commerce Commission over railway reorganizations since 1920, but the history

of railway reorganizations since 1920 does not afford much support to the arguments of the proponents. Moreover, that kind of supervision is very different from a compulsory prescription and effectuation of a plan against the wishes of the securityholders.

These considerations show that there is no such real or substantial relation between interstate commerce, on the one hand, and the development of the terms of the reorganization plan by which new securities are to be distributed, on the other, as to support an effort on the part of the Congress or of a commission created by it, to prescribe and enforce any plan of reorganization violating the existing contractual rights of any class of security holders. The power to dissolve a corporation for a violation of a valid statute of Congress, enacted under the Interstate Commerce clause, does not carry with it any power to ameliorate the hardships and losses which one class of security holders may suffer from such a dissolution by shifting part of those losses to another class of security holders in violation of their contractual rights. This is a fundamental constitutional difficulty which prevents the realization, under the interstate commerce clause of the specious suggestion of certain proponents of the bill that excessive losses to junior security holders can be prevented by compulsory reorganizations under the power of the Commission and Congress.

(b) The due process clause.-In the second place, the committee will desire to consider whether the compulsory effectuation of a reorganization plan in the manner which has been suggested would be possible within the limitations of the due process clause. Could an order of the Commission directing the consummation of a plan in opposition to the wishes of the security holders be made effective under the provisions of the due process clause?

Such opposition might arise in any number of ways. Perhaps the most important one would be an insistence by a class or classes of senior security holders that they were entitled to receive their distributive share of the assets of the company in cash according to the terms of their contract, and could not be compelled to accept, without alternative, the securities of such company as might be provided for them in the plan. Or the creditors might insist that they were entitled to a sale of the assets of the company for the payment of their debt. Many possibilities could be listed.

The suggestion that a plan could be forced upon the security holders of a solvent company against their objection and that they could be compelled to accept new securities of a new company is unprecedented. Even in cases of insolvency, where a court of equity takes over the administration of the property and supervision over its reorganization, it has never been supposed that the constitutional rights of the security holders in the property for which they have bargained were impaired by such an event. The contrary has been frequently emphasized by the courts. The Supreme Court said in Kneeland v. American Loan Company (1890) 136 U. S. 89, 98).

"We emphasize this fact of the sacredness of contract liens, for the reason that there seems to be growing an idea that the chancellor, in the exercise of his equitable powers, has unlimited discretion in this matter of the displacement of vested liens.'

No legal argument is necessary for the point that a creditor of a solvent company is entitled to be paid the amount of his debt; that he is entitled to such payment before any distribution is made to the stockholders; that if he is not paid he has the right to sell the assets designated in the contract for his protection; and that he cannot be compelled against his will to accept new securities instead of his distributive share in cash. These are principles with which every business man and lawyer is familiar. They are looked upon as determining the ordinary standards of fair dealing in business enterprise, and they are the basis on which investments have always been made. Many cases in the Federal courts have emphasized the fundamental character of these rights, and enforced them even in cases where the corporation in question was insolvent, was being administered by_receivers, and was in process of reorganization.

Merchants Loan & Trust Co. v. Chicago Railways Co., 1907, C. C. A. 7th, 158 Fed. 923, 927, 928, and 929.

Guaranty Trust Co. of N. Y. v. International Steam Pump Co., 1916, D. Ct. So. Dist. of N. Y., affd. C. C. A. 2d, 231 Fed. 594, 595.

Ex parte Moore, 1925, D. Ct. E. Dist. S. C., 6 Fed. 2d, 905, 909.

Harding v. American Sumatra Tobacco Co., 1926, D. Ct. No. D. of Ga., 14 Fed. 2d, 168, 169.

Werner, Harris & Buck v. Equitable Trust Co., 1929, C. C. A. 10th, 35 Fed. 2d, 513, 514.

Coriell v. Morris White, Inc., 1931, C. C. A. 2d, 54 Fed. 2d, 555, 560. Reversed on other grounds, National Surety Co. v. Coriell, 1933, 289 U. S. 426. Gilfillan v. Union Canal Co., 1883, 109 U. S. 401.

To be sure, where a company has become financially embarrassed to the point that it is insolvent and is unable to meet its maturing obligations, the rights of the various creditors and security holders cannot be satisfied in full according to their terms. Consequently in the exercise of the specific power to "establish * * * uniform laws on the subject of bankruptcies * * *" (Constitution I, sec. 8, par. 5), Congress may provide that a reorganization plan accepted by a majority of the creditors and security holders of each class may be binding upon the minority members. Campbell v. Alleghany Corporation (Mar. 2, 1935, C. C. A. 4th, not yet reported); Continental Illinois National Bank & Trust Co. v. C. R. I. & P. Ry. Co. (Apr. 1, 1935, S. Ct. U. S., not yet reported). But it is perfectly certain that the bankruptcy power cannot be exercised with respect to solvent companies that are able to meet their maturing obligations. The very meaning of the word "bankrupt” is a person who is incapable of paying his debts (Kunzler v. Kohaus, N. Y., 5 Hill 317, 320), and the bankruptcy power relates solely to "a law-making provisions for cases of persons failing to pay their debts." (In re Reiman, 1874, D. Ct. N. Y., 20 Fed. Cas. 490.)

The bankruptcy power therefore has no bearing whatever on the question of what action Congress may authorize with respect to the reorganization of solvent companies. That question must be decided solely on the basis of the commerce clause as limited by other provisions of the Constitution. There is no judicial precedent for the view that the rights of a creditor to be paid can be destroyed or impaired where the debtor corporation is still solvent.

The recent decision of the Supreme Court in the so-called "Gold Clause cases”— notably, Norman v. Baltimore & Ohio Railroad Company ((1935), 79 L. Ed. 417), did not change these accepted principles of the guaranties of the due process clause. The Court in that case devoted a major part of its discussion to the question whether the joint resolution there involved was or was not a violation of the due process clause, and defined its authority under that clause by saying with respect to the action of the Congress (429):

"We may inquire whether its action is arbitrary or capricious, that is, whether it has a reasonable relation to a legitimate end."

The power of Congress there involved was the specific constitutional power to coin money and regulate the value thereof (Constitution, art. I, sec. 8) and it was held that the gold clause in private contracts was a direct interference with the exercise of this power. The decision was reached on the ground that "it is not established that the Congress arbitrarily or capriciously decided that such an interference existed", or that the provisions of the joint resolution there in question were "without any reasonable relation to the monetary policy adopted by the Congress" (pp. 432, 430).

The decision in that case disposed of an issue which had been thrown into high dramatic relief by the concern of the security markets, and for that reason has received a great deal of attention. The application of the relevant principles of law had been considered to be doubtful. But the principle which was announced by the Court and under which the decision proceeded has been an accepted principle for many years. The statement of the meaning of the due process clause made by the Court in that case is the same that had been announced in many previous decisions, and it still remains the province and the duty of the courts to inquire whether a particular action of Congress or its agencies has a reasonable relation to a legitimate end, that is, a real and substantial relation to one of the specific enumerated powers of Congress.

As has been said above, the disposition of securities consequent upon the disintegration of a holding company, and the division among the various classes of security holders of the securities or the proceeds from their sale, has in fact no relation to the accomplishment of the Federal purpose of compelling a disintegration to be made. The Federal purpose is satisfied by the disintegration itself and does not reach beyond to the subsequent division of proceeds and new securities among the old security holders, even if we are to assume that the Federal Government has authority to prevent the issuance of new securities which would constitute an improper burden on the operating companies. The prescription and effectuation of a reorganization plan cannot have any reasonable or substantial relation to the accomplishment of the Federal purpose, which is solely to require that disintegration be effected. The decision in the Gold Clause cases therefore supports the view that such action on the part of the Congress or its agencies would be beyond the power of the Congress under the due-process clause.

It is certain, of course, that in the event of compulsory dissolution or reorganization of corporations representing such an enormous investment as the holding companies now under consideration, the legal questions presented by whatever legislation may be finally adopted will be thoroughly explored by the courts. Therefore, even if it could be supposed that the major constitutional difficulties discussed above can finally be overcome, it is clear that compulsory and directed reorganization of the holding companies affords no real and practical means of relief from the hardships and losses to security holders which would result from the dissolutions decreed by the bill. Long before any such remedies could be effectuated a large portion of the junior security holders would have suffered the complete loss of their investments in the turmoil and demoralization due to endless litigation.

The preceding discussion has been entirely on the assumption that Congress has power to require the disintegration of holding companies. The fundamental question as to whether the Congress really has that power, however, is beyond the scope of this memorandum which is devoted to the Constitutional limitations upon the manner of the exercise of such power, assuming the power to exist.

4. THE ANTITRUST DECISIONS

The final argument advanced by the proponents of the bill in this connection is that in the antitrust cases disintegration was effected without any great delay or expense or destruction of values. A very brief examination of that argument will show that it is not sound.

There are a number of decisions under the Sherman and Clayton Acts, but a discussion of all those cases would serve no useful purpose here, as only four of them have been claimed to have significance in this connection. These are: Northern Securities Co. v. United States (1904, 193 U. S. 197), see also Harriman v. Northern Securities Co. (1905, 197 U. S. 244); Standard Oil Co. v. United States (1910, 221 U. S. 1, 397); United States v. American Tobacco Co. (1910, 221 U. S. 106); United States v. Reading Company (1920, 253 U. S. 26), see also Continental Insurance Co. v. United States (1922, 259 U. S. 156).

The Northern Securities Co. case and the Standard Oil Co. case do not throw any light on the present problem because they did not involve any such complicated state of facts as to make them a fair precedent in this connection. In neither case were any bonds outstanding or any preferred stock. In both cases there was only one class of security outstanding, a single issue of common stock. problem of distribution was therefore simply the mechanical problem of dividing the company's portfolio of securities into as many parts as there were stockholders to claim it.

The

In both cases, moreover, it is a conspicuous fact that the Court permitted the company, in agreement with its security holders, to work out its own plan of reorganization. The Court was interested only in seeing that the plan of disintegration was sufficient to terminate the violation of the Sherman Act. Aside from that one object, the matter was left to the security holders and the company to dispose of by customary methods in accordance with their rights.

It is true that the American Tobacco Co. case involved a capitalization on the part of the American Tobacco Co. which was analogous to that of some of the holding companies here involved. It is true, moreover, that in that case a disintegration of the company in accordance with the mandate of the Court was effected. But the proponents of the bill do not present a clear picture of that case when they say that this disintegration was effected without difficulty or destruction of value. On the contrary, it appears that the Supreme Court was gravely impressed with the intricacy of the problem and the practical difficulties presented. These were greater, the Court said, than had been presented by any case involving the antitrust law which had theretofore been considered by it (221 U. S. at 185), The corporate situation was so complicated, the Court added, "that it is difficult, if not impossible, to formulate a remedy which would restore in their entirety the prior lawful conditions" (id., p. 186). These difficulties were so imposing that the United States, in its prayer for relief, did not specifically demand any precise remedy, but merely suggested, in a tentative way, that such remedies should be granted. The loss incurred in working out the plan of reorganization in this case was enormous, in relation to the amounts of securities involved. It was said to amount to at least $22,000,000, in addition to more than $36,000,000 in cash that had to be raised and paid by the common-stock holders in order to discharge the company's bonds (191 Fed. at p. 397). When this sum is compared with the total par value of the common stock, which was $40,000,000, the extent of the sacrifice imposed upon the common-stock holders becomes evident.