In present-day practice one of the immediate results of the announcement of insolvency of an important corporation is the formation of a number of security holders' committees, each one representing a certain security issue. Sometimes one committee may represent two or more issues, the interests of which are not conflicting. The process of formation of these committees is nearly always something of a mystery. They seem to spring up sometimes overnight without special authority. As a matter of fact they are usually self-appointed and each committee is, in reality, simply a group of individuals who have determined among themselves that it is wise and proper for them to solicit authority from their fellow security holders to act in their behalf.

In order to secure this authority, it is essential that the members of the committee should either be personally well known to the security holders or should be connected with important firms or banking houses. In large reorganizations membership on these committees is regarded as something of a prize. The members are frequently allowed generous fees for their services and do not, as a matter of fact, have many onerous duties. The detailed work is usually handled by the secretary of the committee or by counsel. However, it would be an injustice to fail to point out that many reorganization-committees composed of able men devote a great amount of time and effort to their work and sometimes, especially in the smaller reorganizations, give their services without compen-sation.

Even in the latter case, the fees of attorneys for the various reorganization committees must be provided for in the reorganization plan. Payments must be made to the managers of the reorganization and to the banks or trust companies which act as depositories for securities. The receiver's fees, plus the fees of the attorneys who advise with him, are nearly always heavy. And, finally, there are numerous incidental expenses and fees for services of accountants, for advertising and circularizing in connection with the reorganization plan, and so forth, which aggregate a large amount. The expenses of reorganization are so heavy that members of reorganization committees are likely to persuade themselves that it makes little difference if they include a liberal compensation for themselves.

The self-appointed committee for a certain group of security holders does not always meet with instant acceptance. Security holders are likely to be somewhat skeptical. Unless most of the large holders are represented in the reorganization committee, they are likely to start an opposition committee and there may be an active struggle for proxies. If the opposition committee is at all successful, there may be later a merger of two committees, for it is clearly essential that there should not be dissension among any one group of security holders.

In the normal course of events, after several committees have been formed these committees begin to negotiate with each other and with the receiver with a view to arranging the best possible terms for the interests they represent. It is hardly possible for any general agreement to be reached except by a protracted series of negotiations and compromises and there must be some supreme judge or arbiter. Unless the receiver, some official of the company, or some influential person or banking house can assume this function and really take charge of the whole process of bringing about an agreement, it is natural and customary to select from the various security holders' committees a group which includes at least one representative of each set of interests that must be taken into consideration; this group is customarily known as the "Reorganization Committee." This is the committee that, in the final analysis, devises the plan of reorganization. The various security holders' committees may negotiate, but they are likely to follow the lead of their representative on the general reorganization committee and in reality do little more than give their public approval to the final reorganization plan.

In spite of its drawbacks, including the ever-present possibility that not all the security holders' committees will conscientiously represent the interests entrusted to their care, the committee method of working out a reorganization plan is in most cases the only practical method. In a large corporation meetings of the security holders are quite impracticable; and if they were held they would be utterly useless so far as working out a plan is concerned.

The committee plan might be used more frequently in smaller corporations, the security holders of which cannot effectively express their will. In a recent instance the majority shareholders of an oil-producing company were believed by the minority party to have driven the company into bankruptcy. The sale of its property and assets had been ordered by the Federal Court and a so-called "Reorganization Committee" composed of former officials was planning to bid for the company at this sale. At the last moment some of the minority shareholders appointed themselves a committee, secured the co-operation of a good proportion of the outstanding shares, employed a capable lawyer and incurred other necessary expenses which did not constitute a heavy burden on any individual shareholder, and presented their objections to the court. These objections were sustained, and in the end the committee forced the adoption of a new and much more equitable plan. In this instance the prompt and courageous action of a few small shareholders checked what probably amounted to a conspiracy to obtain full control of the property.