Securities and Exchange Commission v. Securities Corporation Streeter v. Securities Corporation Home Ins Co v. Securities Corporation Securities Corporation v. Securities and Exchange Commission

• Citation: 93 L.Ed. 1836,338 U.S. 96,69 S.Ct. 1377
• Decision Date: 27 June 1949
• Docket Number: 227,266,CENTRAL-ILLINOIS,Nos. 226,243,s. 226
• Parties: SECURITIES AND EXCHANGE COMMISSION v. SECURITIES CORPORATION et al. STREETER et al. v.SECURITIES CORPORATION et al. HOME INS. CO. et al. v.SECURITIES CORPORATION et al.SECURITIES CORPORATION et al. v. SECURITIES AND EXCHANGE COMMISSION et al
• Court: United States Supreme Court

338 U.S. 96

69 S.Ct. 1377

93 L.Ed. 1836

SECURITIES AND EXCHANGE COMMISSION

v CENTRAL-ILLINOIS SECURITIES CORPORATION et al.

STREETER et al.

v. CENTRAL-ILLINOIS SECURITIES CORPORATION et al.

HOME INS. CO. et al.

v. CENTRAL-ILLINOIS SECURITIES CORPORATION et al.

CENTRAL-ILLINOIS SECURITIES CORPORATION et al.

v. SECURITIES AND EXCHANGE COMMISSION et al.

Nos. 226, 227, 243, 266.

Argued Jan. 12, 13, 1949.

Decided June 27, 1949.

[Syllabus from pages 96-98 intentionally omitted]

Mr. Roger S. Foster, for Securities & Exchange Commission, washington, D.C.

Mr. Lawrence R. Condon, New York City, for Thomas W. Streeter and others.

Mr. Francis H. Scheetz, Philadelphia, Pa., for Home Ins. Co. and others.

Mr. Louis Boehm, New York City, for Lucille White and others.

Mr. Alfred Berman, New York City, for Central-Illinois Securities Corp. and others.

Mr. Justice RUTLEDGE delivered the opinion of the Court.

The case involves an amended plan filed under § 11(e) of the Public Utility Holding Company Act of 1935¹ by Engineers Public Service Company. The plan provided, inter alia, for satisfying the claims of Engineers' preferred stockholders in cash as a preliminary to distributing the remaining assets to common stockholders and dissolving the company. Broadly, the question is whether the Securities and Exchange Commission, in reviewing the plan, correctly applied the 'fair and equitable' standard of § 11(e) in determining the amounts to be paid the preferred stockholders in satisfaction of their claims.

As will appear, the ultimate effect of the Commission's determination was to allow the holders of the three series of Engineers' outstanding cumulative preferred stock to receive the call (or voluntary liquidation and redemption) prices for their shares, namely, $105 per share, $110 per share and $110 per share, rather than the involuntary liquidation preference which, for each of the three series, was $100 per share. Common shareholders oppose the allowance to the preferred of the call price value, insisting that the maximum to which the preferred are entitled is the involuntary liquidation preference of $100.

In this view the District Court and, generally speaking, the Court of Appeals have concurred, declining to give effect to the plan as approved in this respect by the Commission. Consequently we are confronted not only with issues concerning the propriety of the Commission's action in applying the 'fair and equitable' standard of § 11(e), but with the further question whether its judgment in these matters is to be given effect or that of the District Court, either as exercised by it or as modified in certain respects by the Court of Appeals.

The facts and the subsidiary issues involved in the various determinations are of some complexity and must be set forth in considerable detail for their appropriate understanding and disposition.

At the time the Public Utility Holding Company Act was enacted, the holding company system dominated by Engineers consisted of 17 utility and nonutility compa- nies. Of these, nine were direct subsidiaries of Engineers and eight were indirect subsidiaries. Integration proceedings under § 11(b)(1) of the Act were instituted with respect to Engineers and its subsidiaries in 1940. In a series of orders issued in 1941 and 1942 the Securities and Exchange Commission directed Engineers to dispose of its interests in all companies except either Virginia Electric and Power Company or Gulf States Utilities Company, and designated Virginia as the principal system if Engineers failed to elect between it and Gulf States.² At the time the plan now under review was filed Engineers had complied with the divestment orders to the extent of disposing of all its properties except its interest in Virginia, consisting of 99.8 per cent of that company's common stock, and its interest in Gulf States and El Paso Electric Company, consisting of all their common stock. Engineers' principal assets were the securities representing its interest in these companies and $14,650,000 in cash and United States Treasury securities.

Engineers had no debts. It had outstanding three series of cumulative preferred stock of equal rank: 143,951 shares of $5 annual dividend series, 183,406 shares of $5.50 series, and 65,098 shares of $6 series. As has been said all three series had involuntary liquidation preferences of $100 per share, call prices of $105 for the $5 series and $110 for the $5.50 and $6 series, and voluntary liquidation preferences equal to the call prices.

Proceedings before the Commission. The Plan as Originally Filed. The plan as originally filed by Engineers provided for the retirement of all three series of preferred stock by payment of the involuntary liquidation preference of $100 per share, plus accrued dividends to the date of payment.³ The remaining properties of Engineers were then to be distributed among the common stockholders, and Engineers was to dissolve.⁴

In order to insure adequate presentation of the views of the preferred stockholders, Engineers' board of directors authorized one of its members, Thomas W. Streeter, who was primarily interested in the preferred stock, to retain counsel partly at the company's expense. Streeter and members of his family are petitioners in No. 227. These preferred stockholders and representatives of a group of institutional investors who held preferred stock the Home Insurance Company and Tradesmens National Bank and Trust Company, petitioners in No. 243, appeared before the Commi sion in opposition to the plan. They contended that they should receive amounts equal to the voluntary liquidation preference of the preferred.

After summarizing the issuing prices,⁵ the dividend history,⁶ and the market history⁷ of the three series of preferreds, the Commission analyzed the assets coverage and earnings coverage of the stock. The preferred stock of Engineers represented 17.5 per cent of the consolidated capitalization and surplus of the system. That stock was junior to the 66.2 per cent of the consolidated capitalization and surplus which consisted of securities of Engineers' subsidiaries held by the public, and senior to 16.3 per cent consisting of Engineers' total common stock and surplus.

The system's average earnings coverage of fixed charges and preferred dividends for the last five years prior to the submission of the plan was 1.4 times. For these five years Engineers' average earnings coverage of preferred dividends was 1.5 times.

Certain expert testimony concerning the going-concern or investment value of the preferred stock was adduced before the Commission. Dr. Ralph E. Badger was an expert witness on behalf of certain preferred stockholders. He made a detailed analysis of the earnings and assets of Engineers and of the three series of preferred stock. He then compared Engineers and the preferred stock with relevant information concerning other comparable companies and securities. ⁸ He concluded that, apart from their call provisions and on the basis of quality and yield, the three series of preferred stock should be valued at $108.70, $119.57, and $130.33 respectively, but that because of the redemption privilege, 'the present investment values are represented by their call price, plus a slight premium to account for the time required to effect a call.' The fair investment values of the preferred, in view of the redemption privilege, were: $5 series—$106.25; $5.50 series—$111.38; $6 series—$111.50. No rebuttal testimony was introduced, and there was no serious challenge to Badger's conclusions that the fair investment value of each series of the preferred exceeded the call prices.

Donald C. Barnes, Engineers' president, testified that apart from the impact of § 11 of the Act and taking into account the call prices, the fair value of the preferreds, i.e., 'what a willing buyer would pay and what a willing seller would take in today's market for such securities,' was somewhat above the redemption prices. Barnes spoke of several factors, viz., possibilities of continued inflation, of depression, government competition, adverse changes in regulatory policy, or developments in atomic energy, all 'common to the utilities industry generally,' which might have a future adverse effect on the value of Engineers preferred. Both witnesses agreed, however, as Engineers stated in its brief before the Commission, that 'the present value or investment worth of these three series of stock, on a going concern basis and apart from the Act, under prevailing yields applied to comparable securities' was in excess of the call prices. Barnes also testified that the preferred stock would have been called if it had not been for the impact of § 11.

The Commission first held that 'the dissolution of Engineers (was) 'necessary' under the standards of the Act.' However, since such a liquidation, under Otis & Co. v. Securities and Exchange Commission, 323 U.S. 624, 65 S.Ct. 483, 89 L.Ed. 511, 'does not mature preferred stockholders' claims' the so-called involuntary liquidation provision of Engineers' charter was not operative. The Otis case ruled 'that Congress did not intend that its exercise of power to simplify should mature rights, created without regard to the possibility of simplification of system structure, which otherwise would only arise by voluntary action of stockholders or, involuntari y, through action of creditors.' 323 U.S. at page 638, 65 S.Ct. at page 490.

After announcing that in a § 11 reorganization 'a security holder must receive, in the order of his priority, from that which is available for the satisfaction of his claim, the equitable equivalent of the rights surrendered,' the Commission considered all the charter provisions which affected the preferred, 'such as the dividend rate and the call price as well as the liquidation preferences,' and analyzed the financial condition of the company 'with particular regard to the asset and earnings...