Pacific Gas & Elec. Co. v. Securities & Exchange Com'n

• Decision Date: 06 June 1942
• Docket Number: No. 9918.,9918.
• Citation: 127 F.2d 378
• Parties: PACIFIC GAS & ELECTRIC CO. v. SECURITIES & EXCHANGE COMMISSION.
• Court: U.S. Court of Appeals — Ninth Circuit

127 F.2d 378 (1942)

PACIFIC GAS & ELECTRIC CO. v.SECURITIES & EXCHANGE COMMISSION.

No. 9918.

Circuit Court of Appeals, Ninth Circuit.

April 14, 1942.

Rehearing Granted June 6, 1942.

COPYRIGHT MATERIAL OMITTED

Herman Phleger and Wm. B. Bosley and Robert H. Gerdes, both of San Francisco, Cal., (Brobeck, Phleger & Harrison, of San Francisco, Cal., of counsel), for petitioner.

Chester T. Lane, Gen. Counsel, Securities and Exchange Commission, Christopher M. Jenks, Asst. Gen. Counsel, Lawrence S. Lesser and E. M. Calkin, Attys., all of Washington, D. C. (Arnold R. Ginsburg, Eugene Gressman, and Julian M. Meer, all of Washington, D. C., of counsel), for respondent.

Before GARRECHT, HANEY, and STEPHENS, Circuit Judges.

HANEY, Circuit Judge.

The present cause arises on a petition to review and modify, or set aside an order of the Securities and Exchange Commission.

Pacific Gas and Electric Company, petitioner, hereafter called the company, is a California corporation, and was organized in 1905.On March 23, 1912, the Public Utilities Act of California became effective, St.1911, Ex.Sess., p. 18, and since that date, the company could issue securities only with the approval of the Railroad Commission of California.All its securities now outstanding, have been authorized by the Railroad Commission except 15% of its common stock which was issued prior to March 23, 1912.All the company's public utility properties are located in, and its business is conducted in, the State of California.

The Public Utility Holding Company Act of 1935, 15 U.S.C.A. § 79 et seq., hereafter called the act became effective on August 26, 1935.Section 2(a)(8) of the act defines a "subsidiary company" as meaning:

"(A) any company 10 per centum or more of the outstanding voting securities of which are directly or indirectly owned, controlled, or held with power to vote, by such holding company * * * unless the Commission, as hereinafter provided, by order declares such company not to be a subsidiary company of such holding company; and

"(B) any person the management or policies of which the Commission, after notice and opportunity for hearing, determines to be subject to a controlling influence, directly or indirectly, by such holding company (either alone or pursuant to an arrangement or understanding with one or more other persons) so as to make it necessary or appropriate in the public interest or for the protection of investors or consumers that such person be subject to the obligations, duties, and liabilities imposed in this chapter upon subsidiary companies of holding companies.

"The Commission, upon application, shall by order declare that a company is not a subsidiary company of a specified holding company under clause (A) if the Commission finds that (i) the applicant is not controlled, directly or indirectly, by such holding company (either alone or pursuant to an arrangement or understanding with one or more other persons) either through one or more intermediary persons or by any means or device whatsoever, (ii) the applicant is not an intermediary company through which such control of another company is exercised, and (iii) the management or policies of the applicant are not subject to a controlling influence, directly or indirectly, by such holding company (either alone or pursuant to an arrangement or understanding with one or more other persons) so as to make it necessary or appropriate in the public interest or for the protection of investors or consumers that the applicant be subject to the obligations, duties, and liabilities imposed in this chapter upon subsidiary companies of holding companies.The filing of an application hereunder in good faith shall exempt the applicant from any obligation, duty, or liability imposed in this chapter upon the applicant as a subsidiary company of such specified holding company until the Commission has acted upon such application.Within a reasonable time after the receipt of any application hereunder, the Commission shall enter an order granting, or, after notice and opportunity for hearing, denying or otherwise disposing of, such application."

Section 79f makes it unlawful for a subsidiary company of a registered holding company to issue or sell any of its securities except with the approval of the Commission.

On November 29, 1935, the company filed an application with the Commission for an order declaring that it was not a subsidiary company of the North American Company, a registered holding company under the act which has held 17.71% of the company's voting stock since June 12, 1930.On September 4, 1940, the Commission directed a hearing upon such application, and on October 10, 1940, directed that such hearing commence, and it did commence, on November 12, 1940.The hearing concluded on January 16, 1941.The trial examiner on April 22, 1941, filed his report recommending that the company's petition be granted.

On July 1, 1941, the California Railroad Commission authorized the company to issue and sell 400,000 shares of its 5% First Preferred Stock, and it commenced to sell them after July 8, 1941.

On September 10, 1941, the Commission entered an order denying the company's application.At that time the company had sold 199,433 shares of the stock above mentioned.On September 18, 1941, the company filed a petition in this court to Review and Modify or Set Aside the order of the commission, and for a stay pending such review.On the same date it filed an affidavit in support of the stay.On the following day, this court made an ex parte order staying and suspending the order and the "operation" thereof, reciting "that by Section 24 of the Public Utility Holding Company Act of 1935 said petitioner is entitled to a review of said order, and that the Court may stay the operation of said order pending review thereof".

On October 17, 1941, the Commission moved to vacate so much of the order of September 19, 1941, as provided for the stay and suspension, on four grounds: (1) the Commission's order is not susceptible of being stayed, because of the act, the company is a subsidiary company, and to stay the order is to have no effect other than to leave the company in the status in which the statute places it, i.e., a subsidiary company; (2) if effective to remove the company from its status as a subsidiary, the stay does not preserve the status quo because when the Commission acted, the company was a subsidiary company under the act, and a stay could not change it; (3) no great or irreparable loss or injury will be suffered by the company, if the stay is vacated, but if not, the national public interest and the interests of investors and consumers may be adversely affected; and (4)this court was without jurisdiction to stay the Commission's order because the jurisdiction to stay is for the purpose of preserving the statu quo, but here, statu quo, i.e., as a subsidiary company, is preserved without the stay.

Upon the hearing of respondent's motion the cause was set for hearing on the merits, and the motion taken under advisement.In view of our decision on the merits, the motion has become moot.

The Commission held that the Trial Examiner had reached his recommendation because he had misconstrued the statute.The Commission construed § 2(a)(8) of the act as meaning (1) that the applicant had the burden of proving that its management and policies are not subject to the controlling influence of North American; and (2) that "controlling influence" meant something less in the form of influence on the management or policies of a company than "control" of such company, that "control" includes the power to control, and "subject to a controlling influence" includes susceptibility to domination.It found that petitioner"has not demonstrated that its management and policies are not subject to the controlling influence of North American * * *" The two rules of law mentioned above and the finding are challenged here.

As to the finding, petitioner contends, as the Board found "that the record does not reveal any past attempts by North American to interfere affirmatively with the management or policies of P. G. & E."If petitioner's contention regarding the second rule of law above mentioned is correct, then reversal follows.However, if the Commission's view on the second rule of law is correct, then the question arises as to whether there is any substantial evidence to support the finding.

Section 2(a)(8) of the act provides that the Commission shall declare that an applicant is not a subsidiary company, if it finds three facts: (1) that the applicant is not controlled directly or indirectly by a holding company; (2) that the applicant is not the medium of control of another company by a holding company; and (3) that "the management or policies of the applicant are not subject to a controlling influence, directly or indirectly, by such holding company * * * so as to make it necessary or appropriate in the public interest or for the protection of investors or consumers that the applicant be subject to the obligations, duties, and liabilities imposed in this chapter upon subsidiary companies of holding companies."Since the statute requires findings of all three facts, in order to exempt a subsidiary as such, and since the third fact was not found by the Commission, the company is not entitled to exemption if the Commission's action regarding the third fact is sustained here.

The company contends that the language of the statute describing the third fact means "actual and existing control", rather than "susceptibility to control" as the Commission held, and since the Commission found that the evidence affirmatively showed a lack of actual and existing control, an exemption order should have been granted.The company quotes a portion of a committee report, and a part of Senator Wheeler's argument in the debates on the act.While the report sheds no light on the present...