327 U.S. 686 (1946), 1, North American Co. v. Securities & Exchange Commission

Docket Nº:No. 1
Citation:327 U.S. 686, 66 S.Ct. 785, 90 L.Ed. 945
Party Name:North American Co. v. Securities & Exchange Commission
Case Date:April 01, 1946
Court:United States Supreme Court

Page 686

327 U.S. 686 (1946)

66 S.Ct. 785, 90 L.Ed. 945

North American Co.


Securities & Exchange Commission

No. 1

United States Supreme Court

April 1, 1946

Argued November 15, 1945




1. The enactment of § 11(b)(1) of the Public Utility Holding Company Act of 1935, authorizing the Securities and Exchange Commission to require each public utility holding company engaged in interstate commerce to limit its operations to a single integrated public utility system, was within the power of Congress under the commerce clause of the Constitution. Pp. 700-707.

(a) While the ownership of securities, considered separately and abstractly, may not be commerce, the ownership of securities of operating companies has a real and intimate relation to the interstate activities of public utility holding companies and cannot be

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effectively divorced therefrom; such ownership is the generating force of the constant interstate flow of reports, letters, equipment, securities, accounts, instructions and money which constitute the life blood of holding companies and allow abuses to be effectuated. P. 702.

(b) Congress may impose relevant conditions and requirements on those who use the channels of interstate commerce in order that those channels will not become the means of promoting or spreading evil, whether of a physical, moral, or economic nature. P. 705.

(c) The fact that an evil may involve a corporation's financial practices, its business structure, or its security portfolio does not detract from the power of Congress under the commerce clause to promulgate rules in order to destroy that evil -- once it is established that the evil concerns or affects commerce in more States than one. P. 706.

(d) Congress having found that economic evils resulting from unintegrated public utility holding company systems were polluting the channels of interstate commerce and took the form of transactions occurring in and concerning more States than one, it had power under the commerce clause to attempt to remove those evils by ordering the holding companies to divest themselves of the securities that made such evils possible. P. 706.

2. An order of the Securities and Exchange Commission requiring a public utility holding company to divest itself of its scattered subsidiaries and to confine its operations to a single integrated public utility system, pursuant to § 11(b)(1) of the Public Utility Holding Company Act of 1935, does not take property without just compensation in violation of the due process clause of the Fifth Amendment. Pp. 707-710.

(a) Congress having determined that the economic advantages of a holding company at the top of an unintegrated public utility system are not commensurate with the resulting economic disadvantages, the fact that valuable interests may be affected does not, by itself, render that determination invalid under the due process clause. P. 708.

(b) Since the Act does not contemplate or require the dumping or forced liquidation of securities on the market for cash, but requires any divestment or reorganization plan to be fair and equitable and to be carefully scrutinized by both the Commission and the enforcing court -- thus enabling the assertion and protection of all shareholders' rights -- it cannot be said, in the absence of any alleged unfair plan of divestment, that the shareholders are adversely affected from a constitutional standpoint by the operation of § 11(b)(1). P. 709.

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3. Congress having decided, within the scope of its constitutional power and discretion, that it is necessary to reorganize existing public utility holding company systems, this Court cannot question the appropriateness or propriety of its decision, even though other sections of the Act provide for the regulation of future transactions of the kinds that were found to give birth to many of the evils about which Congress was concerned. P. 710.

4. Even though a particular holding company may not have engaged in any of the evils enumerated in § 1(b) of the Public Utility Holding Company Act of 1935, this does not make the application of § 11(b)(1) to it unconstitutional, since the power of Congress to legislate generally in order to prevent potential injury to the national economy from becoming a reality is not limited by proof of the existence of evils in each particular situation. P. 710.

5. In the light of the facts stated in the opinion, and particularly petitioner's extensive holdings of the securities of its subsidiaries and the penetration of local managements with men selected by or historically related to petitioner, the Commission was justified in treating petitioner not as engaged solely in the business of acquiring and holding stocks and other securities of its subsidiaries for investment, but as a "holding company" possessing domination over its subsidiaries or the power to dominate them when and if necessary, even though petitioner's active intervention in the affairs of its subsidiaries has been of a limited character and operational policies have been left entirely to local management. Pp. 692-693.

6. Petitioner clearly is engaged in interstate commerce, since it is the nucleus of an empire of corporations covering 17 States and the District of Columbia, its influence and domination permeate the entire system, the mails and instrumentalities of interstate commerce are vital to the functioning of this system, and several of its subsidiaries admittedly are engaged in interstate commerce. P. 694.

7. The power of the Commission to deny exemption under § 3(a)(1) to a predominantly local holding company does not mean that a holding company having no relation whatever to interstate commerce may be subjected to § 11(b)(1) or to any other provisions of the Act. P. 699.

133 F.2d 148, affirmed.

After appropriate administrative proceedings under § 11(b)(1) of the Public Utility Holding Company Act of 1935, the Securities and Exchange Commission entered

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orders limiting petitioner's properties to those which, in the judgment of the Commission, complied wit the standards of that section and requiring it to sever relationship with all of its other properties. 11 S.E.C.194; 11 S.E.C. 715. On petition for review, the Circuit Court of Appeals sustained the Commission's order. 133 F.2d 148. This Court granted certiorari. 318 U.S. 750. See also 320 U.S. 708. Affirmed, p. 711.

MURPHY, J., lead opinion

MR. JUSTICE MURPHY delivered the opinion of the Court.

Congress enacted the Public Utility Holding Company Act of 1935, 49 Stat. 803, in order to correct grave abuses which it had found in the use of the holding company device in the nation's electric and gas utility industries. This Court, in Electric Bond & Share Co. v. Securities and Exchange Commission, 303 U.S. 419, held constitutional the various provisions of the Act relating to the registration of holding companies as therein defined. In this case, we are called upon to determine the constitutionality of § 11(b)(1) of the Act, authorizing the Securities and Exchange Commission to act to bring about the geographic and economic integration of holding company systems. Specifically, we must decide whether this requirement falls within the power of Congress to regulate commerce among

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the several states and whether it violates the due process clause of the Fifth Amendment.

The North American Company, the petitioner, is a holding company within the meaning of the Act, § 2(a)(7), and is registered as such with the Securities and Exchange Commission.1 The Commission instituted appropriate administrative proceedings against North American under § 11(b)(1), the provisions of which apply to registered holding companies. As a result, the Commission entered orders limiting North American's properties to those which, in the Commission's judgment, complied with the standards of § 11(b)(1), and compelling it to sever relationships with all its other properties.2 The court below, after affirming the orders of the Commission on a statutory level, rejected North American's constitutional objections. 133 F.2d 148. Only these constitutional issues are now before us.

As was the situation in the Electric Bond & Share Co. case, North American is clearly engaged in activities which bring it within the ambit of congressional authority. North American is a typical utility holding company. It is the pinnacle of a great pyramid of corporations, the majority of which operate electric and gas utility properties. These properties are scattered throughout the United States, many of them serving large cities and contiguous territories.3 Electric energy is transmitted across state lines by numerous companies in the pyramid or

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system.4 As of December 31, 1940, there were some eighty corporations in the system, with an aggregate capitalized value in excess of $2,300,000,000. Organized in New Jersey in 1890 and maintaining business headquarters in New York City, North American maintains direct or indirect interests in these corporations through the medium of stock ownership. It is that medium that binds the system together.

North American owns stock directly in ten of the corporations, holding 79% or more of the common stock of eight of them and 17.71% and 19.2%, respectively, of the voting securities of the other two. Three of these direct subsidiaries are registered holding companies: (1) Union Electric Company of Missouri, operating in and around St. Louis Mo. and with subsidiaries operating in Illinois and Iowa as well; (2) Washington Railway and Electric Company, with subsidiaries operating in the District of Columbia and adjacent [66 S.Ct. 790]...

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