Commonwealth & South. Corp. v. Securities and Exch. Com'n
| Citation | 134 F.2d 747 |
| Decision Date | 31 March 1943 |
| Docket Number | No. 8052.,8052. |
| Court | U.S. Court of Appeals — Third Circuit |
| Parties | COMMONWEALTH & SOUTHERN CORPORATION v. SECURITIES AND EXCHANGE COMMISSION. |
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George Roberts, of New York City (John C. Weadock and Hayden N. Smith, both of New York City, and Joseph S. Clark, of Philadelphia, Pa., on the brief), for petitioner.
Robert M. Blair-Smith and John F. Davis, both of Philadelphia, Pa. (Homer Kripke, Asst. Solicitor, Roger S. Foster, Counsel, Public Utilities Division, Maurice C. Kaplan, and Arnold R. Ginsburg, all of Philadelphia, Pa., on the brief), for respondent.
Before BIGGS, MARIS, and GOODRICH, Circuit Judges.
The Commonwealth & Southern Corporation is a Delaware corporation duly registered as a public utility holding company under section 5 of the Public Utility Holding Company Act of 1935, 15 U.S.C.A. § 79 et seq. Its principal assets consist of the common stocks of ten public utility subsidiaries engaged, inter alia, in the business of furnishing electricity and gas. These subsidiaries are located within the states of Michigan, Illinois, Indiana, Ohio, Pennsylvania, Alabama, Georgia, Mississippi, Florida and South Carolina. Except for the electric properties of the southern subsidiaries which are interconnected with each other and the electric properties of the Ohio subsidiary which are interconnected with the Pennsylvania subsidiary there is no physical interconnection between the subsidiaries.
The holders of the preferred stock are entitled to be paid, when and as declared by the board of directors, dividends of $6 per share per annum before any dividends are paid upon the common stock. Unpaid dividends are cumulated without interest. Since 1934 only one-half of the preferred dividends has been paid, the remaining one-half having been accumulated at the rate of $4,500,000 each year. Since 1932 no dividends have been declared or paid on the common stock. The holder of each share of preferred and of each share of common has one vote per share.
On March 6, 1940 the Securities and Exchange Commission instituted integration proceedings under section 11(b) (1) of the act. On March 19, 1941, it filed tentative conclusions as to what it found to be the single integrated public utility system of Commonwealth. These conclusions were put at issue by Commonwealth. On April 8, 1941 the Commission instituted simplification proceedings under section 11(b) (2) of the act. These proceedings were given precedence by the Commission over the integration proceedings. On May 1, 1941 Commonwealth filed an answer in the simplification proceedings and on July 2, 1941 Commonwealth filed a supplemental answer in both proceedings. It thereby proposed a plan which provided for the retention by Commonwealth of its southern group of subsidiaries as a single integrated system. Commonwealth was to offer the common stocks of its northern group of subsidiaries in exchange for the outstanding shares of its preferred stock. If all the holders of preferred stock accepted the offer all the preferred stock would thereby be retired. Commonwealth claims that the plan thus would achieve the objectives of both the integration and simplification proceedings. No action has as yet been taken by the Commission on this plan. On April 9, 1942 the Commission entered its simplification order and on May 15, 1942 denied by order Commonwealth's petition for rehearing. Both orders are now under review. The Commission scheduled hearings on the issues raised in the integration proceedings for June, 1942, and ordered that evidence be taken at these hearings upon Commonwealth's plan and any other plan submitted by duly qualified persons at these hearings. These issues are still undecided.
The order which Commonwealth has brought here for review was entered under the provisions of section 11(b) (2) of the act, 15 U.S.C.A. § 79k(b) (2). That section, in so far as here pertinent, provides that it shall be the duty of the Commission, as soon as practicable after January 1, 1938 "To require by order, after notice and opportunity for hearing, that each registered holding company, and each subsidiary company thereof, shall take such steps as the Commission shall find necessary to ensure that the corporate structure or continued existence of any company in the holding-company system does not unduly or unnecessarily complicate the structure, or unfairly or inequitably distribute voting power among security holders, of such holding-company system."
The Commission found that the corporate structure of Commonwealth unduly and unnecessarily complicates the structure of its holding company system as a whole and unfairly and inequitably distributes voting power among security holders of the holding company system. It also found that the elimination of all preferred stock and the resultant reduction of Commonwealth's corporate structure to a single class of common stock was a step necessary to ensure against both evils. It thereupon entered the order here under review, the pertinent part of which reads: "It is Hereby Ordered, pursuant to Section 11(b) (2) of the Public Utility Holding Company Act of 1935 and in accordance with said findings and opinion, that the Commonwealth & Southern Corporation shall change its present capitalization to one class of stock, namely, common stock, in an appropriate manner, not in contravention of the applicable provisions of said Act or the rules, regulations and orders promulgated thereunder; provided, that its present funded debt may be liquidated according to its terms without acceleration other than such acceleration as may be found practicable from time to time and as shall not be in contravention of the applicable provisions of the Act or the Commission's rules, regulations and orders promulgated thereunder."
It is not claimed by Commonwealth that there is not substantial evidence to sustain the findings by the Commission that the corporate structure of Commonwealth unduly and unnecessarily complicates the corporate structure of the entire holding company system and that the voting power is unfairly and inequitably distributed among security holders of the holding company system. Indeed, there is tacit acceptance by Commonwealth that these findings are based upon substantial evidence as may be gathered from its supplemental answer in which it presents its own plan for simplification. Commonwealth contends, however, that the order should be set aside because it is not authorized by the statute; because Section 11 of the act, if construed so as to authorize such an order, is unconstitutional; and because the proceedings which terminated in the order were objectionable.
Commonwealth urges that the order in the form in which it was entered is not justified by the language of section 11(b) (2) of the act. This contention requires us to consider the congressional purpose and the language used to carry out that purpose. What Congress evidently sought was the simplification of those holding company systems whose corporate complexities it found had had an undesirable effect upon interstate commerce. In section 11 Congress provided the machinery to be used in achieving that end.
Subsection (a) of section 11 provides for essential preliminary studies by the Commission of each registered holding company and subsidiary to determine the extent to which the holding company system may be simplified, unnecessary complexities eliminated, voting power fairly and equitably distributed and the properties and business confined to those necessary or appropriate to the operations of an integrated public utility system.
Subsection (b) of section 11 provides that after hearing and presumably in the light of its preliminary study the Commission shall require by order that the holding company and its subsidiaries take such action as may be necessary to bring about compliance with the standards set up by the subsection. The Commission's action may include both an integration and divestment order under subdivision (1) and a simplification order under subdivision (2). In the case of a simplification order the Commission must direct what step or steps the holding company is to take in order to bring its corporate structure and voting power in line with the standards of subdivision (2). But such an order is not self-executing and the act has accordingly provided two alternative methods of carrying it out.
The first of these methods is through a plan voluntarily submitted by the company under subsection (e) of section 11 and approved by the Commission. If the plan is one which can be carried out by the sole action of the parties thereto no further proceedings are needed. If not, the subsection authorizes the Commission, at the request of the company proposing the plan, to make application to a district court to enforce and carry out the plan. In this proceeding the court, if it finds the plan fair, equitable and appropriate, may direct it to be carried out, taking possession of the company and its assets if necessary to that end. The second method is provided by subsection (d) of section 11 which authorizes the...
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