334 U.S. 182 (1948), 258, Schwabacher v. United States

Docket Nº:No. 258
Citation:334 U.S. 182, 68 S.Ct. 958, 92 L.Ed. 1305
Party Name:Schwabacher v. United States
Case Date:May 03, 1948
Court:United States Supreme Court

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334 U.S. 182 (1948)

68 S.Ct. 958, 92 L.Ed. 1305



United States

No. 258

United States Supreme Court

May 3, 1948

Argued January 7, 1948




1. The Interstate Commerce Commission, under § 5 of the Interstate Commerce Act as amended, approved and authorized a voluntary merger of two railroad companies into one corporation. The Commission found that the public interest would be served by the merger and unification of their properties and operations, and that the plan as a whole, and as applied to each group of shareholders, was just and reasonable; but it disclaimed jurisdiction to pass upon the claims of dissenting stockholders who owned a small percentage of one class of stock of one of the companies and who had intervened and claimed that the terms of the merger deprived them of charter rights under the law of the incorporation of their company. The Commission considered that the amount involved in the claims of the dissenting stockholders, however settled, was not sufficient to affect the solvency of the new company or jeopardize its operations.

Held: the Commission was not free to renounce or delegate its power to settle finally the amount of capital liabilities of the new company and the proportion or amount thereof which each class of stockholders should receive on account of its contributions to the new entity. Pp. 184-202.

2. The jurisdiction of the Commission under both § 5 and § 20a is made plenary and exclusive and independent of all other state or federal authority. P. 197.

3. The Commission may not leave claims growing out of the capital structure of one of the constituent companies to be added to the obligations of the new company, contingent upon the decision of some other tribunal or agreement of the parties themselves, but must pass upon and approve all capital liabilities which the merged company will assume and discharge as a result of the merger. Pp. 197-198.

4. The Commission must look for standards in passing on a voluntary merger only to the Interstate Commerce Act. P. 198.

5. The rights of shareholders of railroads merging voluntarily under the Interstate Commerce Act are governed by federal, not state,

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law, and, apart from meeting the test of the public interest, the merger terms, as to stockholders, must be found to be just and reasonable. Pp. 198-199.

6. In appraising a stockholder's position in a merger as to justice and reasonableness, it is not the promise that a corporate charter made to him, but the current worth of that promise, that governs; it is not what he once put into a constituent company, but what value he is contributing to the merger, that is to be made good. P. 199.

7. It would be inconsistent to allow state law to apply a liquidation basis to what federal law designates as a basis for continued public service. P. 200.

8. When stockholders are given what it is just and reasonable they should have, the Interstate Commerce Act does not permit state law to impose greater obligations on the financial structure of the merging railroads, with consequent increased calls upon their assets or earning capacity. P. 201.

9. No rights alleged to have been granted to dissenting stockholders by state law provision concerning liquidation survive the merger agreement approved by the requisite number of stockholders and approved by the Commission as just and reasonable. Any such rights are, as a matter of federal law, accorded recognition in the obligation of the Commission not to approve any plan which is not just and reasonable. P. 201.

72 F.Supp. 560, reversed.

A suit to set aside an order of the Interstate Commerce Commission approving and authorizing a voluntary merger of two railroads was dismissed by a District Court of three judges. 72 F.Supp. 560. A direct appeal was taken to this Court. Reversed and remanded, p. 202.

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JACKSON, J., lead opinion

MR. JUSTICE JACKSON delivered the opinion of the Court.

This controversy grows out of the voluntary merger of Chesapeake & Ohio Railway Company and Pere Marquette Railway Company, which companies, together with Alleghany Corporation, sought approval by the Interstate Commerce Commission. Pere Marquette is incorporated under the laws of Michigan, while Chesapeake & Ohio is chartered by Virginia. Chesapeake & Ohio acquired and for some years exercised active control of Pere Marquette, whose properties and operations complement, rather than compete with, those of Chesapeake & Ohio. Late in 1945, merger proceedings were commenced under enabling statutes of the two states, and were consummated with approval of considerably more than the number of shares made necessary by statutes of the respective states. The Interstate Commerce Commission found, and there is no attack upon the findings, that the public interest is served by merger and unification of these properties and operations. The Commission also concluded that the plan as a whole, and as applied to each group of shareholders, is just and reasonable, and there is no attack upon this conclusion except that by the appellants, which is treated fully herein. Consequently, details of the plan are of little importance to this litigation.

Appellants are owners of 2,100 shares of $100 par 5% cumulative preferred stock of Pere Marquette. Their interests aggregate a little less than 2% of the outstanding stock of this class. Dividends on this stock have been unpaid since 1931, and, as of the commencement of this

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controversy, were in arrears in the sum of $72.50 per share, an amount that is increasing with time. The Pere Marquette charter provides for full payment of the stock at par, plus accrued unpaid dividends,

in the event of dissolution, liquidation, or winding up of the company, voluntary or involuntary . . . before any amounts are paid to holders of the . . . common stock.

The appellants contend that the merger hereinafter described terminates the corporate existence and, under this clause as construed by Michigan law, amounts to a "winding up." They insist that, since the merger makes provision for some compensation to common stockholders, these appellants have the right, under Michigan law, to have their shares recognized on the basis of at least $172.50 each. The Commission found the market value per share ranged at different times, from $87 to $99, while the merger terms give stocks in exchange which would have realized about $90 and $111 per share on the same dates. Appellants dissented from the merger, but Michigan law provides no specific right or procedure for appraisal and retirement of the holdings of a stockholder dissenting from a railroad merger.

When application was filed with the Interstate Commerce Commission under § 5 of the Interstate Commerce Act as amended (49 U.S.C. § 5), for approval and authorization of the merger,1 as well as for other relief,

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appellants intervened [68 S.Ct. 961] and asked that body to determine, recognize, and protect their asserted right to the full legal liquidation figure. The Commission approved the merger and the merger terms, finding them just and

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reasonable as to each class of stockholders. However, it disclaimed jurisdiction to pass upon the further claims of the appellants asserted on the basis of their interpretation of Michigan law. It reviewed at some length the economic position of the stock. It recited that these shares had received no dividends since 1931, and that appellants' witnesses agreed that these stockholders could not expect to receive any dividends for many years, apart from the merger. The Commission also pointed out the deficit in operations of Pere Marquette for the first quarter of 1946 as contrasted with the net income of Chesapeake and Ohio, and concluded that,

On the whole, it would seem that the prospects of Pere Marquette stockholders for returns on their investments would be enhanced by the merger of their company into Chesapeake & Ohio.

The Commission did not question that the stockholders, on liquidation, dissolution, or winding up of Pere Marquette, would be entitled to be paid in full the par value of their shares and accumulated dividends before any payment to holders of common stock. It did not undertake to determine

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the ultimate worth of these stocks in case of an actual liquidation, but it considered their present intrinsic value on a capitalized earnings basis, an actual yield basis, and its present market position, and concluded:

Accordingly, considering Pere Marquette's investment according to its books, other [68 S.Ct. 962] property values, the company's history as to earnings, its future prospects, and the market appraisal of its stocks, all as set forth above, we find that, as to the stockholders of both parties generally, the proposed ratios of exchange, stock issues, and assumptions of indebtedness are just and reasonable.

The Commission then noted the contention of the appellants that, as to them, the terms were not just and reasonable, because they are deprived of contract rights under Michigan law, which they have not waived. It is contended that the Commission should not remit the dissenting stockholders to remedies in state courts, as the Commission would thereby decline the jurisdiction conferred by § 5 and § 20a of the Act.2 But the Commission considered that it was entrusted with authority to decide the public interest aspects of the merger of these transportation facilities, and that it could not be expected to enter into the question of "compensation of dissenting stockholders on specified bases" before approval and merger. It thought that, having found...

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