American Gas & Electric Co. v. Securities & Exch. Com'n

Decision Date01 February 1943
Docket NumberNo. 7948.,7948.
Citation134 F.2d 633
PartiesAMERICAN GAS & ELECTRIC CO. v. SECURITIES & EXCHANGE COMMISSION.
CourtU.S. Court of Appeals — District of Columbia Circuit

Mr. Frederic L. Ballard, of Philadelphia, Pa., for petitioner.

Mr. Lawrence S. Lesser, of Washington, D. C., with whom Mr. Chester T. Lane, General Counsel, of Washington, D. C., and Mr. Christopher M. Jenks, Assistant General Counsel, of Philadelphia, Pa., appeared on the brief, all of the Securities and Exchange Commission, for respondent.

Before STEPHENS, VINSON, and RUTLEDGE, Associate Justices.

Writ of Certiorari Denied June 1, 1943. See 63 S.Ct. 1318, 87 L.Ed. ___.

RUTLEDGE, Associate Justice.

This is a petition of the American Gas and Electric Company to review an order of the Securities and Exchange Commission.1 The order denied petitioner's application for an order, pursuant to Section 2(a) (8) of the Public Utility Holding Company Act of 1935, declaring it to be not a subsidiary of Electric Bond and Share Company.2

Petitioner and Bond and Share are both registered holding companies under the Act. Petitioner is a New York corporation which owns directly all of the outstanding securities of eleven electric utility companies which supply electric light and power to approximately 830,000 customers in New Jersey, Pennsylvania, Ohio, Indiana, Michigan, Virginia, West Virginia, Kentucky and Tennessee.3 Through its wholly-owned subsidiary, American Gas and Electric Service, petitioner furnishes its operating companies with management and supervisory services.

As of March 30, 1940, petitioner's capitalization consisted of 355,623 shares of 4¾ per cent cumulative preferred stock (par $100) and 4,482,737 shares of common stock (par $10). Both common and preferred shareholders are entitled to one vote per share.4 Bond and Share owns 846,985 shares of common stock, which constitute 17.51 per cent of the outstanding voting securities.5

Petitioner is therefore a subsidiary of Bond and Share under clause (A) of Section 2(a) (8).6 However, petitioner maintains that it satisfies the conditions prescribed by the last paragraph of clause (B) of Section 2(a) (8), that (1) it is not controlled, directly or indirectly, by Bond and Share; (2) it is not an intermediary company through which control of another company is exercised; and (3) its management and policies are not subject to a controlling influence, directly or indirectly, by Bond and Share so as to make it necessary or appropriate in the public interest or for the protection of investors or consumers that it be subject to the obligations, duties and liabilities imposed by the Act upon subsidiary companies of holding companies.

The Commission concluded that the evidence would not support a declaration under (3), that petitioner was not a subsidiary of Bond and Share and therefore no findings were made on the question of "control" under (1) and (2). This petition presents the single question whether there is substantial evidence to support the Commission's findings that petitioner's management and policies are subject to a "controlling influence" of Bond and Share so as to make it necessary or appropriate in the public interest that petitioner be subject to the Public Utility Holding Company Act as a subsidiary of Bond and Share.7

Petitioner's principal argument is that the Commission fell into error in arriving at the ultimate fact of "controlling influence" by drawing inferences from past relationships between petitioner and Bond and Share which are "directly contrary to substantial, direct, contemporaneous and uncontradicted evidence dealing with the present situation." The Commission stated its position as follows: "We believe * * * that the facts set out * * * show past relationships between applicant petitioner and Bond and Share which clearly `have resulted in a personnel and tradition which make applicant petitioner responsive to Bond and Share's desires * * *.'"8

The facts which sustain the Commission's findings are substantially as follows.

Organization. Petitioner was organized by Bond and Share in 1906 to purchase all the assets of the Electric Company of America, which consisted principally in securities of utility companies, which were controlled by the Electric Company and which served communities in Illinois, Indiana, New Jersey, New York, Ohio, Pennsylvania and West Virginia. The details of petitioner's organization were handled by Bond and Share's board of directors and general counsel. Eleven of the fifteen original directors and all the original officers were affiliated with either Bond and Share or its general counsel.

Petitioner's original capitalization consisted of $6,282,000 99-year 5 per cent collateral trust bonds, $3,500,000 preferred stock, and $3,500,000 common stock. The $6,282,000 collateral trust bonds were issued at the time of the organization in return for the Electric Company properties. At the time of organization $2,500,000 (at par) of common and $1,200,000 (at par) of preferred stock were also issued. Of the common stock, $1,300,000 was used for promotion costs, Bond and Share retaining $235,000 for its part in petitioner's organization. Bond and Share sold the remaining $1,200,000 of common and the $1,200,000 of preferred stock for $1,200,000. At the end of the organization transactions Bond and Share retained for itself 4,856 shares of common stock, which amounted to 9.7 per cent of petitioner's outstanding voting securities. Bond and Share's holdings of petitioner's voting securities remained at approximately 9.7 per cent until 1929. They rose to 17.51 per cent in 1929 and 1930.

Management. Petitioner's board of directors has consisted, from its organization, generally of 15 members, although in some years it has fluctuated between 14 and 16. As shown above, the original board consisted of 11 Bond and Share men. According to the Commission's findings "most of the key men in American Gas petitioner were taken into the organization at a time when it was clearly controlled by Bond and Share." The Commission states its position in its "conclusions" that "it is fair to infer that Bond and Share believed them to be friendly to its interests at the time they were selected. Moreover, these men are indebted for their advancement over the years and for their present status to Bond and Share and the Bond and Share management." These facts, the Commission found, show past relationships which have resulted in "personnel and tradition" which cause the petitioner to be responsive to Bond and Share.

Petitioner concedes that during the years when Bond and Share acted as petitioner's fiscal agent, during most of which it had a material representation on petitioner's board and executive committee, Bond and Share "had such an influence in the affairs of American Gas petitioner as could properly have been called a `controlling influence' over its `management or policies' had the Act been in effect in those years." Bond and Share's functioning as petitioner's fiscal agent ceased in 1928-31. Since 1931 petitioner has handled its own financing, and Bond and Share's representation on petitioner's board has diminished until only two of the fifteen directors and one member out of five on the executive committee have any formal connection with Bond and Share. As a part of Bond and Share's diminishing influence petitioner's officers have resigned from the boards of acknowledged subsidiaries in the Bond and Share system. Petitioner says these facts show the Commission's conclusion that "past relationships * * * have resulted in a personnel and tradition making petitioner responsive to Bond and Share's desires" is not supported by substantial evidence, because the basic facts relied on by the Commission do not give a rational or coherent support to the Commission's inferential findings.

The Commission relies on the following facts for the basis from which to infer "a personnel and tradition."

The chairman of petitioner's board of directors and executive committee from its organization until the present time has been a man of authority and influence in the Bond and Share's system. S. Z. Mitchell held that position from 1907 until his retirement in 1933. Mitchell was in charge of petitioner's financial policies and was influential with its growth and development through the acquisition of new properties. During this same period he served as a director and member of the executive committee of Bond and Share from its organization in 1905 to 1933; he was president of Bond and Share for 20 years and chairman of its board of directors from 1923 to 1933; when American Power and Light Company and Electric Power and Light Corporation, both registered holding companies and acknowledged subsidiaries of Bond and Share, were organized in 1909 and 1925, respectively, Mitchell became chairman of their boards of directors and member of their executive committees; and from 1925 to 1933 he was also chairman of the board of the National Power and Light Company, similarly a registered holding company and an acknowledged subsidiary of Bond and Share.

Upon Mitchell's retirement in 1933 C.E. Groesbeck assumed the key positions in the management of petitioner, Bond and Share, and the remaining holding companies in the Bond and Share system. In 1935 Groesbeck resigned from the boards of directors of American Power and Light Company, National Power and Light Company, and Electric Power and Light Corporation. However, he still retains his positions as chairman of both petitioner's and Bond and Share's boards of directors and executive committees. But he draws no salary from petitioner. As chief executive of Bond and Share he draws its top salary.

Petitioner's chief operating executive is its president, G. N. Tidd. He became petitioner's vice president in 1910, and president in 1923. Prior to 1910 he had managed the Indiana properties of...

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