This section is from the book "Business Finance", by William Henry Lough. Also available from Amazon: Business Finance, A Practical Study of Financial Management in Private Business Concerns.
The various interests which are concerned in a financial reorganization may ordinarily be classified in three groups, as follows:
1. The creditors, including both the holders of floating debt and the bondholders.
2. The shareholders, both preferred and common.
3. The banking houses which are figuring on the underwriting of the reorganization plan.
In a complicated reorganization each one of these three groups is subdivided. There may be a number of bond issues which have claims that in part conflict with each other. The interests of the preferred and of the common shareholders are by no means identical. There may be two or more banking houses that are working on the reorganization with an eye to handling the underwriting. It may often happen, therefore, that there is a complex struggle among the various groups of interests. On some questions there may be agreements and alliances between two or more groups, and on other questions the cleavage may be entirely different.
Naturally the chief influence is exerted by the bondholders, especially by the holders of those issues which are well protected by prior liens.
Next come the holders of the junior lien issues. The banking houses are likely to be in close touch with all the different groups of bondholders and advise with them. Inasmuch as the active assistance of some good banking house is essential in order to make any plan a success, the representatives of these houses are likely to be consulted and to have a voice in determining all important questions. Moreover, they are in the advantageous position of an outsider who may be trusted to view the situation impartially.
As for the shareholders in a drastic reorganization, they have little to say. Indeed, it sometimes happens that their claims to recognition are ruthlessly brushed aside and they are practically wiped out of existence. However, as we shall see, they are more commonly needed in order to supply the fresh cash required for the reorganized company, and for that reason are permitted to have some voice in working out the reorganization plan. The officers of a failed corporation sometimes undertake to direct the reorganization but their efforts are seldom welcomed. The receiver, as we have seen, sometimes takes a fairly active, though informal, part in working out the reorganization plan.