332 U.S. 194 (1947), 81, Securities and Exchange Commission v. Chenery Corporation

Docket Nº:No. 81
Citation:332 U.S. 194, 67 S.Ct. 1575, 91 L.Ed. 1995
Party Name:Securities and Exchange Commission v. Chenery Corporation
Case Date:June 23, 1947
Court:United States Supreme Court

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332 U.S. 194 (1947)

67 S.Ct. 1575, 91 L.Ed. 1995

Securities and Exchange Commission


Chenery Corporation

No. 81

United States Supreme Court

June 23, 1947

Argued December 13, 16, 1946




1. In approving a plan for the reorganization of a holding company under the Public Utility Holding Company Act of 1935, the Securities and Exchange Commission required that preferred stock purchased by the management without fraud or concealment while plans of reorganization were before the Commission should not be converted into stock of the reorganized company, like other preferred stock, but should be surrendered at cost plus interest. In SEC v. Chenery Corp., 318 U.S. 80, this Court held that this requirement could not be sustained on the sole ground upon which it was based by the Commission -- i.e., principles of equity judicially established. On remand, the Commission reexamined the problem and reached the same result, but based this requirement on the ground that to permit the management to profit from purchases of stock made while reorganization proceedings were pending would be inconsistent with the standards of §§ 7 and 11 of the Act. Held: the new order is sustained. Pp. 196-199, 209.

2. This Court's earlier decision held only that the requirement could not be supported on the sole ground stated by the Commission in its first order, and, on remand for such further proceedings as might be appropriate, the Commission was not precluded in the performance of its administrative function from reaching the same result on proper and relevant grounds. Pp. 200-201.

3. The Commission's action was not precluded by the fact that the Commission had not anticipated this problem and adopted a general rule or regulation governing management trading during reorganization. Pp. 201-202.

4. The choice between proceeding by general rule or by ad hoc decisions is one that lies primarily in the informed discretion of the administrative agency. Pp. 202-203.

5. That an ad hoc decision of the Commission might have a retroactive effect does not necessarily render it invalid. P. 203.

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6. The scope of judicial review of an administrative decision in which a new principle was announced is no different from that in the case of ordinary administrative action. P. 207.

7. The judicial function on review of an order of the Commission is at an end when it becomes evident that the Commission's action is based upon substantial evidence and is consistent with the authority granted by Congress. P. 207.

8. In determining whether to approve a plan of reorganization under the Act, the Commission may properly consider that some abuses in the field of corporate reorganization may be dealt with effectively only by prohibitions not concerned with the fairness of a particular transaction. Pp. 207-208.

9. In its interpretation and application of the "fair and equitable" rule of § 11(e), and of the standard of what is "detrimental to the public interest or the interest of investors or consumers" under §§ 7(d)(6) and 7(e), the Commission did not abuse its discretion in this case. P. 208.

10. There was reasonable basis in this case for the conclusion that the benefits and profits accruing to the management from the stock purchases should be prohibited, regardless of the good faith involved. P. 208.

11. The Commission's conclusion in this case is the product of administrative experience, appreciation of the complexities of the problem, realization of the statutory policies, and responsible treatment of the uncontested facts, and constitutes an allowable administrative judgment which cannot be disturbed on judicial review. P. 209.

154 F.2d 6 reversed.

Upon remand to the Securities and Exchange Commission of the case decided by this Court in SEC v. Chenery Corp., 318 U.S. 80, the Commission denied an application for approval of an amendment of the plan of reorganization. Holding Company Act Release No. 5584. The court below reversed. 154 F.2d 6. This Court granted certiorari. 328 U.S. 829. Reversed, p. 209.

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MURPHY, J., lead opinion

MR. JUSTICE MURPHY delivered the opinion of the Court.

This case is here for the second time. In SEC v. Chenery Corp., 318 U.S. 80, we held that an order of the Securities and Exchange Commission could not be sustained on the grounds upon which that agency acted. We therefore directed that the case be remanded to the Commission for such further proceedings as might be appropriate. On remand, the Commission reexamined the problem, recast its rationale, and reached the same result. The issue now is whether the Commission's action is proper in light of the principles established in our prior decision.

When the case was first here, we emphasized a simple but fundamental rule of administrative law. That rule is to the effect that a reviewing court, in dealing with a determination or judgment which an administrative agency alone is authorized to make, must judge the propriety of such action solely by the grounds invoked by the agency. If those grounds are inadequate or improper, the court is powerless to affirm the administrative action by substituting what it considers to be a more adequate or proper basis. To do so would propel the court into the domain which Congress has set aside exclusively for the administrative agency.

We also emphasized in our prior decision an important corollary of the foregoing rule. If the administrative action is to be tested by the basis upon which it purports to rest, that basis must be set forth with such clarity as to be understandable. It will not do for a court to be compelled

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to guess at the theory underlying the agency's action; nor can a court be expected to chisel that which must be precise from what the agency has left vague and indecisive. In other words, "We must know what a decision means before the duty becomes ours to say whether it is right or wrong." United States v. Chicago, M., St. P. & P. R. Co., 294 U.S. 499, 511.

Applying this rule and its corollary, the Court was unable to sustain the Commission's original action. The Commission had been dealing with the reorganization of the Federal Water Service Corporation (Federal), a holding company registered under the Public Utility Holding Company Act of 1935, 49 Stat. 803. During the period when successive reorganization plans proposed by the management were before the Commission, the officers, directors and controlling stockholders of Federal purchased a substantial amount of Federal's preferred stock on the over the counter market. Under the fourth reorganization plan, this preferred stock was to be converted into common stock of a new corporation; on the basis of the purchases of preferred stock, the management would have received more than 10% of this new common stock. It was frankly admitted that the management's purpose in buying the preferred stock was to protect its interest in the new company. It was also plain that there was no fraud or lack of disclosure in making these purchases.

But the Commission would not approve the fourth plan so long as the preferred stock purchased by the management was to be treated on a parity with the other preferred stock. It felt that the officers and directors of a holding company in process of reorganization under the Act were fiduciaries, and were under a duty not to trade in the securities of that company during the reorganization period. 8 SEC 893, 915-921. And so the plan was amended to provide that the preferred stock acquired by the management, unlike that held by others, was not to be converted

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into the new common stock; instead, it was to be surrendered at cost plus dividends accumulated since the purchase dates. As amended, the plan was approved by the Commission over the management's objections. 10 SEC 200.

The Court interpreted the Commission's order approving this amended plan as grounded solely upon judicial authority. The Commission appeared to have treated the preferred stock acquired by the management in accordance with what it thought were standards theretofore recognized by courts. If it intended to create new standards growing out of its experience in effectuating the legislative policy, it failed to express itself with sufficient clarity and precision to be so understood. Hence, the order was judged by the only standards clearly invoked by the Commission. On that basis, the order could not stand. The opinion pointed out that courts do not impose upon officers and directors of a corporation any fiduciary duty to its stockholders which precludes them, merely because they are officers and directors, from buying and selling the corporation's stock. Nor was it felt that the cases upon which the Commission relied established any principles of law or equity which, in themselves, would be sufficient to justify this order.

The opinion further noted that neither Congress nor the Commission had promulgated any general rule proscribing such action as the purchase of preferred stock by Federal's management. And the only judge-made rule of equity which might have justified the Commission's order related to fraud or mismanagement of the reorganization by the officers and directors, matters which were admittedly absent in this situation.

After the case was remanded to the Commission, Federal Water and Gas Corp. (Federal Water), the surviving corporation under the reorganization plan, made an application for approval of an amendment to the plan to provide

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for the issuance of now common stock of the reorganized company. This stock was to be distributed to the members of Federal's management on the...

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