Electric Bond & Share Co. v. SECURITIES AND EXCH. COM'N

• Decision Date: 08 November 1937
• Docket Number: No. 18.,18.
• Citation: 92 F.2d 580
• Parties: ELECTRIC BOND & SHARE CO. et al. v. SECURITIES AND EXCHANGE COMMISSION et al.
• Court: U.S. Court of Appeals — Second Circuit

92 F.2d 580 (1937)

ELECTRIC BOND & SHARE CO. et al. v. SECURITIES AND EXCHANGE COMMISSION et al.^*

No. 18.

Circuit Court of Appeals, Second Circuit.

November 8, 1937.

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Simpson Thacher & Bartlett, of New York City (Thomas D. Thacher and John F. MacLane, both of New York City, of counsel), for appellants.

Homer Cummings, Atty. Gen., Allen E. Throop, Gen. Counsel, of Washington, D. C., Securities & Exchange Commission, Robert H. Jackson, Asst. Atty. Gen., and Special Counsel, Securities & Exchange Commission, Benjamin V. Cohen and Thomas G. Corcoran, Sp. Assts. to Atty. Gen. (John J. Abt, David Cobb, Joseph A. Fanelli, David Ginsburg, and Henry A. Herman, all of Washington, D. C., and Frederick Bernays Wiener, of Providence, R. I., on the brief), for appellees.

Before MANTON, L. HAND, and SWAN, Circuit Judges.

MANTON, Circuit Judge.

This appeal seeks a review of a decree which enjoins the appellants from violating section 4 (a), (1), (2), (3), (4) and (6) of the Public Utility Holding Company Act of 1935, hereafter referred to as the Act (15 U.S.C.A. § 79d (a) (1-4, 6), until they cease to be holding companies or register pursuant to section 5 of the Act (15 U.S.C.A. § 79e). The appellants have not registered and admit that they do the forbidden acts mentioned in section 4 (a), but argue that the Act and each section thereof violates the Federal Constitution in that the legislation was beyond the limited powers of Congress. A cross-bill, seeking an injunction against the enforcement of the provisions of the Act and its several sections, was filed, based upon the claim of the Act's unconstitutionality. Appellants invoke the Declaratory Judgment Act (Jud.Code § 274d, 28 U.S.C.A. § 400) in an effort to have each section of the statute declared invalid. Cross-defendants appeared and sought a dismissal of the cross-bill.

This suit is authorized by section 18 (f) of the Act (15 U.S.C.A. § 79r (f). Appellants American Gas & Electric Company, American Power & Light Company, National Power & Light Company, Electric Power & Light Company, and United Gas Corporation were subsidiaries of the Electric Bond & Share Company, which owned or controlled all their stock, and were the original defendants. Sixteen other holding companies in the bond and share system intervened. Seven of these, by the rule of the Commission were exempted from all duties and liabilities under the Act as holding companies, and two have ceased to be holding companies after acquiring all the properties of said subsidiaries. There remain as defendants, and now appellants, by intervention, the Power Securities Corporation, a subsidiary of Electric Power & Light Corporation; the Lehigh Power Securities Corporation, a subsidiary of the National Power & Light Corporation; the Utah Power & Light Company, a subsidiary of the Electric Power & Light Corporation; United Gas Public Service Company, a subsidiary of the United Gas Corporation; Houston Gulf Gas Company, a subsidiary of United Gas Public Service Company; the Nebraska Power Company, a subsidiary of the American Gas & Electric Company; and the Pacific Power & Light Company, a subsidiary of the American Gas & Electric Company. All but the first two of these are operating and holding companies. Cross-defendants named who are now appellees are government officials, the Attorney General and Postmaster General and members of the appellee Commission, who are to administer the enforcement of the Act.

A lengthy stipulation of facts has been agreed upon from which the court below made its findings.

The Act is entitled "Control of Public-Utility Holding Companies." It provides a series of regulations to be enforced by the Securities Exchange Commission "to meet the problems and eliminate the evils * * * connected with public-utility holding companies which are engaged in interstate commerce or in activities which directly affect or burden interstate commerce." Section 1 (c) of the Act (15 U.S. C.A. § 79a (c). There are provided groups of regulations covering subjects such as: Registration (sections 4, 5 15 U.S.C.A. §§ 79d, 79e); issue and sale of securities (sections 6, 7 15 U.S.C.A. §§ 79f, 79g); acquisition of securities and utility assets (sections 8, 9, 10 15 U.S.C.A. §§ 79h-79j); corporate simplification and reorganization (section 11 15 U.S.C.A. § 79k); service contracts and other intercompany transactions (sections 12, 13 15 U.S.C.A. §§ 79l, 79m); and reports and accounts (sections 14, 15 15 U.S.C.A. §§ 79n, 79o). Other sections of the Act provide for the administration and enforcement of these regulatory provisions.

Congress found that a utility company is affected with a public interest, as is a company which controls and dominates a public utility company, and is subject to restraint and control for the public good. West Coast Hotel Co. v. Parrish, 300 U.S. 379, 57 S.Ct. 578, 81 L.Ed. 703, 108 A.L.R. 1330; Nebbia v. New York, 291 U.S. 502, 54 S.Ct. 505, 78 L.Ed. 940, 89 A.L.R. 1469. And section 1 (15 U.S.C.A. § 79a) declares that such companies are affected with a national public interest when they build up and maintain control over operating companies by the use of the mails and channels of interstate commerce. Accordingly, Congress employed in this statute its authority to prevent the evils and abuses found by a report of the Federal Trade Commission (Report of Federal Trade Commission, U. S. Senate Document No. 92, part 73a, pp. 31-36, 41-58, 205-218) to exist in the use of the mails and the channels of interstate commerce. Brooks v. United States, 267 U.S. 432, 45 S.Ct. 345, 69 L.Ed. 699, 37 A.L.R. 1407; Ex parte Rapier, 143 U.S. 110, 12 S.Ct. 374, 36 L.Ed. 93.

The Act is directed to the corporate and financial relationships and dealings between or affecting the holding company organized in one state and its subsidiaries which are not confined to that state. It is aimed at the holding company which controls operating utilities in states other than its domicile and which utilizes the channels of interstate commerce. The Commission is expressly directed to exempt a holding company and its subsidiaries from the provisions of the Act if the holding company system is predominantly intrastate in character and within the effective control of a single state (section 3 (a) (1) of the Act, 15 U.S.C.A. § 79c (a) (1). The kind of holding company which falls within the Act, it is said, "transcends state lines and is national in its scope and importance characteristics which * * * subject it to the control, of the commerce clause." Fisher's Blend Station, Inc. v. State Tax Commission, 297 U.S. 650, 655, 56 S.Ct. 608, 610, 80 L.Ed. 956.

The recitation of abuses contained in section 1 (b) of the Act (15 U.S.C.A. § 79a (b) and found to be fostered and perpetuated by the use of the national channels of commerce finds support in the report of the Federal Trade Commission to the Senate.¹ These findings point out that the unsound capitalization of holding companies operate to the detriment not only of widely scattered investors, but also to the consumers of the utility products of the underlying operating companies. The Federal Trade Commission has found that holding companies have frequently been under pressure to squeeze the greatest possible revenue out of the operating companies and they have resisted voluntary rate reductions which might have strengthened those subsidiaries and increased the consumption of gas and electricity. The Federal Trade Commission report also found that they have sought unfair profits through a variety of intercompany transactions; that they have obstructed state regulations through their control of accounting practices and financial policies of their operating companies; and that they have frequently brought into common control widely distant utility facilities in disregard of economical management through the integration and co-ordination of related properties. Such holding companies have been found to be beyond the practical and legal power of the states.

Within section 2 (a) (7) of the Act (15 U.S.C.A. § 79b (a) (7), defining terms, a "holding company" is a company which actually, controls operating companies and not a company which merely has an investment in an operating company. A "subsidiary company" is one (section 2 (a) (8) of the Act (15 U.S.C.A. § 79b (a) (8), which is actually controlled by a holding company. The duties imposed by the substantive provisions of the Act apply only to a holding company which is not entitled to exemption under section 3 (15 U.S.C.A. § 79c).

Section 4(a) of the Act (15 U.S.C.A. § 79d (a), provides that, where a holding company maintains its control over subsidiaries and carries on its business through federal channels of communication or of commerce, the controlling company must register under section 5 (15 U.S.C.A. § 79e). To meet the evils referred to in section 1 (15 U.S.C.A. § 79a), the Act (section 4 (a), 15 U.S.C.A. § 79d (a), requires utility holding companies to register with the Commission, if they transmit electric energy or gas in interstate commerce (section 4 (a) (1), 15 U.S.C.A. § 79d (a) (1); or if they use the mails or channels of interstate commerce to conduct certain types of transactions with their subsidiaries or other utility companies (section 4 (a) (2), 15 U.S.C.A. § 79d (a) (2), to market their securities (section 4 (a) (3), 15 U.S.C.A. § 79d (a) (3); to increase their holdings in their subsidiary companies or in other utility enterprises (section 4 (a) (4), 15 U.S.C.A. § 79d (a) (4); or if they otherwise engage in business in interstate commerce (section 4 (a) (5), 15 U.S.C.A. § 79d (a) (5); or if they engage in any of such interstate activities through the agency of a subsidiary company which they dominate and control (section 4 (a) (6), 15 U.S.C.A. § 79d (a) (6).

By registration is meant the filing of a notification as provided by section 5(a), 15...