Collins v. S.E.C.

• Decision Date: 30 August 1956
• Citation: 532 F.2d 584
• Parties: Fed. Sec. L. Rep. P 95,419 Richard J. COLLINS, Jr., Petitioner, v. SECURITIES AND EXCHANGE COMMISSION, Respondent. Lewis C. MURTAUGH, Trustee for Emanuel and Helen Steib, Under Declaration of Trust Dated
• Court: U.S. Court of Appeals — Eighth Circuit

Page 584

532 F.2d 584

Fed. Sec. L. Rep. P 95,419

Richard J. COLLINS, Jr., Petitioner, v. SECURITIES AND EXCHANGE COMMISSION, Respondent.

Lewis C. MURTAUGH, Trustee for Emanuel and Helen Steib, Under Declaration of Trust Dated 8/30/56, Petitioner, v. SECURITIES AND EXCHANGE COMMISSION, Respondent.

Nos. 75-1100, 75-1262 and 75-1263.

United States Court of Appeals Eighth Circuit.

Submitted Sept. 10, 1975.

Decided Jan. 23, 1976.

Rehearing and Rehearing En Banc Denied Feb. 26, 1976.

Richard J. Collins, Jr., St. Louis, Mo., and Lewis C. Murtaugh, Chicago, Ill., for petitioners.

David Ferber, Securities & Exchange Commission, Washington, D. C., for respondent.

Daniel M. Gribbon, Covington & Burling, Washington, D. C., for intervenor du Pont.

Matthew J. Broderick, Philadelphia, Pa., for intervenor, Christiana.

Before HEANEY, and STEPHENSON, Circuit Judges, and TALBOT SMITH, Senior District Judge. ^*

HEANEY, Circuit Judge.

We review an order of the Securities and Exchange Commission exempting from the prohibition of § 17(a) of the Investment Company Act of 1940, 15 U.S.C. § 80a-1 et seq., the proposed merger of Christiana Securities Company into E. I. du Pont de Nemours and Company. The Commission granted the exemption after finding the merger terms to be reasonable and fair and free from overreaching on the part of anyone concerned within the meaning of § 17(b)(1) ¹ of the Act. We reverse because:

(1) The Commission's order is premised on the erroneous view that Christiana should presumptively be valued on the basis (2) The record as a whole does not support the Commission's finding that the terms of the merger are reasonable and fair and free from overreaching on the part of anyone concerned.

of the market value of its principal asset, common stock of Du Pont.

I. STATEMENT OF UNDERLYING FACTS.

Christiana is a closed-end, non-diversified management investment company ² registered with the Commission pursuant to the Act. It was created in 1915 as a device by which members of the du Pont family could concentrate their large holdings in Du Pont and maintain control of that company. ³ The family members contributed their Du Pont stock to Christiana in exchange for Christiana shares. Christiana now holds 13,417,120 shares of Du Pont common stock, representing twenty-eight and three-tenths percent (28.3%) of the issue. ⁴ It has outstanding 11,710,103 shares of its common stock and 106,500 shares of its preferred stock. Seventy-five percent (75%) of Christiana stock is held by members of the du Pont family. Ninety-five and five-tenths percent (95.5%) of Christiana's stock is held by three hundred and thirty-eight (338) holders of one thousand (1,000) or more shares each. The remaining four and five-tenths percent (4.5%) is owned by some seven thousand six hundred (7,600) shareholders.

Christiana's stock has historically sold at a discount from the market price of Du Pont common stock. Over the two years preceding the date on which the merger negotiations were announced, the discount generally ranged from twenty to twenty-five percent (20-25%). On the date of announcement, the discount was twenty-three percent (23%). The Du Pont stock owned by Christiana has a low or zero tax basis.

Du Pont is an industrial company principally engaged in manufacturing and selling diversified lines of chemical and other related products. It has 47,445,810 shares of common stock outstanding, which are broadly and continuously traded on the New York Stock Exchange and other exchanges. These shares are owned by over 225,000 shareholders.

On April 20, 1972, Irenee du Pont, Jr., President of Christiana Securities Company, wrote to Mr. C. B. McCoy, President of Du Pont, suggesting a merger of Du Pont and Christiana. ⁵ As a result of this letter, negotiating On June 6, 1972, the special negotiating committees jointly retained Morgan Stanley & Co., the Du Pont committee retained First Boston Corporation and the Christiana committee retained Kidder, Peabody & Co., Incorporated, as financial advisers. Each financial adviser was asked to recommend a range of terms for exchange of Christiana common stock for Du Pont stock that was, in its opinion, reasonable and fair. Preliminary reports were made by the financial consultants at a joint meeting of the special committees on June 30, 1972. The final written reports were submitted on July 6 and 7, 1972. Each financial adviser recommended merger terms that approximated Christiana's net asset value. ⁶

committees were appointed by Du Pont and Christiana. Mr. McCoy, Chairman and President of Du Pont, and Irving Shapiro, Chairman of the Finance Committee of Du Pont, were named to represent Du Pont. Edward B. du Pont and A. Felix du Pont were named to represent Christiana Securities Company.

An agreement to merge was reached by the two negotiating committees on July 6, 1972, and approved by the Board of Directors of both corporations in principle on July 17, 1972. A formal plan of reorganization and agreement of merger was signed on December 20, 1972. The merger agreement provides for the issuance of Du Pont common stock equivalent in value to ninety-seven and five-tenths percent (97.5%) of Christiana's net assets after adjustment. ⁷ Each share of Christiana is to be exchanged for 1.123 shares of Du Pont. The preferred stock of Christiana can be converted into Du Pont common stock or redeemed pursuant to Delaware statutory procedures at $120 per share, plus accrued dividends. Common stock holders will also have appraisal rights under Delaware law.

Christiana and Du Pont submitted a joint application to the Commission for permission Collins filed a petition for review with this Court on February 7, 1975. Murtaugh filed a similar petition with the United States Court of Appeals for the Seventh Circuit on February 10, 1975. Murtaugh's petition was transferred to this Court pursuant to 28 U.S.C. § 2112(a).

to merge on July 20, 1972. Notice of application was published on October 3, 1972. Thereafter, the protesters in this action and others filed a request for a hearing. A hearing was held before an Administrative Law Judge between February 5 to 13, 1973. The matter was argued in July, 1973. The Commission released its findings and opinion on December 13, 1974. It concluded that the statutory requirements as to reasonableness and fairness had been satisfied. The Commission subsequently denied the petitions filed by Messrs. Collins and Murtaugh seeking a rehearing and a petition by Murtaugh for leave to adduce additional evidence.

In reviewing the Commission's order, we are guided by the principle that the order is not to be disturbed unless it is predicated on an erroneous view of the law or is based on factual findings not supported by substantial evidence on the record as a whole. 15 U.S.C. § 80a-42(a); Securities and Exchange Com. v. Chenery Corp., 332 U.S. 194, 207, 67 S.Ct. 1575, 91 L.Ed. 1995 (1947).

II. THE COMMISSION TOOK AN ERRONEOUS VIEW OF THE LAW.

We first turn to the question whether the Commission erred in holding, as a matter of law, that Christiana should be valued at the approximate value of its net assets (the market value of the Du Pont stock held by it). The Commission stated:

An investment company, whose assets consist entirely or almost entirely of securities the prices of which are determined in active and continous (sic) markets, can normally be presumed to be worth its net asset value. What better guide to its value could there be? The simple, readily usable tool of net asset value does the job much better than an accurate gauge of market impact (were there one) could. The record indicates that most of Christiana's stock is held by long-term investors. Hence there is no pressing need to depart from the net asset value test. (Emphasis added.)

Christiana Securities Company, Investment Company Act Release No. 8615 (December 13, 1974) at 23.

This statement, which appears to state a rule of law rather than a rebuttable presumption, ⁸ was central to the issuance of the exemptive order. It was the basis of the Commission's denial of the protester's Petition for Rehearing and Leave to Adduce Additional Evidence ⁹ as well as the argument stressed by the General Counsel for the Commission in its brief ¹⁰ and at oral A. The plain language of the Act does not permit the Commission to establish a rule of law that closed-end, non-diversified companies should be presumptively worth the value of their net assets. ¹² The Act was drafted with a good deal of specificity. In effectuating its remedial purposes, we will not give it a construction that strains its plain meaning. See Willheim v. Murchison, 342 F.2d 33, 42 (2nd Cir.), cert. denied, 382 U.S. 840, 86 S.Ct. 36, 15 L.Ed.2d 82 (1965). Section 17(b)(1) provides:

                argument.  11  The departure from net asset value reflected in the two and five-tenths percent (2.5%) discount was accepted only because of the "striking disparity between the substantial benefits to be received by Christiana and the far more modest ones inuring to Du Pont", and because it did not "divest Christiana's stockholders of a significant portion of the intrinsic investment values to which they are legally and equitably entitled."  Christiana Securities Company, supra at 25-26
                

The Commission shall grant such application and issue such order of exemption if evidence establishes that

(1) the terms of the proposed transaction, including the consideration to be paid or received, are reasonable and fair and do not involve overreaching on the part of any person concerned; * * * (Emphasis added.)

We read the section to require the Commission to find affirmatively that the terms of each merger are reasonable and fair, a requirement that must be fulfilled even though there are no protesters to the merger. ¹³ As was said in Grace v. Ludwig, 484 F.2d 1262, 1268 (2nd Cir. 1973), cert. denied, 416 U.S. 905, 94 S.Ct. 1610, 40 L.Ed.2d 110 (1974):

The statute here did...