Detroit Edison Co. v. Securities & Exchange Commission

• Decision Date: 12 May 1941
• Docket Number: No. 8735.,8735.
• Citation: 119 F.2d 730
• Parties: DETROIT EDISON CO. v. SECURITIES & EXCHANGE COMMISSION.
• Court: U.S. Court of Appeals — Sixth Circuit

119 F.2d 730 (1941)

DETROIT EDISON CO. v. SECURITIES & EXCHANGE COMMISSION.

No. 8735.

Circuit Court of Appeals, Sixth Circuit.

May 12, 1941.

COPYRIGHT MATERIAL OMITTED

Paul W. McQuillen, of New York City, and Oscar C. Hull, of Detroit, Mich. (Sullivan & Cromwell, of New York City, and Oxtoby, Robison & Hull, of Detroit, Mich., on the brief), for petitioner.

J. Leonard Townsend, of Washington, D. C. (Chester T. Lane, Christopher M. Jenks, Lawrence S. Lesser, J. Leonard Townsend, and Stanley L. Kaufman, all of Washington, D. C., on the brief), for respondent.

Before HICKS, SIMONS and HAMILTON, Circuit Judges.

HAMILTON, Circuit Judge.

This is a petition of the Detroit Edison Company, a New York corporation, with its principal office and place of business in the city of Detroit, Michigan, to review an order of the Securities and Exchange Commission, pursuant to Section 24(a) of the Public Utility Holding Company Act of 1935, 49 Stat. 834, 15 U.S.C.A. § 79x.

The order complained of denied the application of the petitioner to the Commission for an order pursuant to Section 2(a) (8) of the Act, 49 Stat. 804, 15 U.S.C.A. § 79b(a) (8), declaring it not to be a subsidiary of the North American Company.

The provisions of the Statute involved are set forth in the margin.¹

The petition for exemption was filed March 3, 1937, and the applicant requested the Commission to declare that it was not a subsidiary company of the American Light and Traction Company, Gardner & Brown, the North American Company, the United Light and Power Company or the United Light and Railways Company.

Gardner & Brown disposed of their stock holdings in the petitioner before the hearing by the Commission, and the Commission found the petitioner was not a subsidiary of the United Light and Power Company.

The American Light & Traction Company is a subsidiary of the United Light and Railways Company, which in turn is a subsidiary of United Light and Power Company. The American Light and Traction Company owns and controls 20.27% of petitioner's outstanding voting stock and the North American Company owns 19.28% of its outstanding voting stock, the latter company only being involved in these proceedings. After hearing before a Trial Examiner, at which testimony was taken, the Trial Examiner filed his report and findings of fact with the Commission. Petitioner filed exceptions thereto, and thereafter the matter was orally argued before the Commission. The Commission filed its opinion together with an order granting the application conditionally with respect to the United Light & Power Company, but denied such application with respect to the North American. The findings of the Commission on which its order is based are substantially as follows:

In 1902, White, then a vice president of North American, proposed to Alex Dow, former president of petitioner and now a director, then manager of the Edison Illuminating Company and the Peninsular Electric Light Company, both of Detroit, Michigan, and being the principal electric utilities companies operating in that city, that the stock of both companies be sold to North American Company, a holding company of New York. Dow and the president of Edison Illuminating Company constituted themselves a committee to study the offer and urged the stockholders to accept it, which they did and North American, acting through a syndicate, which was formed for the purpose, acquired all the stock of both companies.

North American paid Dow for his services in connection with the purchase of the Edison Illuminating Company $10,000 and agreed he would be employed to manage the Detroit properties by that Company, or a new one to be organized. This agreement disclosed the anticipation that Dow would remain indefinitely in the service.

On January 17, 1903, North American caused the incorporation of petitioner and its first organization meeting was held in the offices of North American, and its officers and directors, all designated by North American, were duly installed. The legal details of the incorporation and organization were handled for North American by Sullivan & Cromwell, then, and now, its general counsel.

At the organization meeting North American, on behalf of its syndicate, offered to sell petitioner all the stock of the Illuminating and Peninsular Companies, real estate at Delray, Michigan, plans and specifications for an electric generating plant and the right to contracts for the construction of such plant, also to provide petitioner $1,190,000 in cash for construction purposes, the consideration being $3,000,000 of Edison's first mortgage 30-year, 5 percent bonds, 50,000 shares of its capital stock and the right to suggest changes in the construction plans, which offer was accepted at the first meeting of the board of directors. The syndicate was then dissolved and North American retained 14.73 percent of the petitioner's outstanding voting securities, which holdings have since fluctuated from a low of 6.45 percent in 1924 to a high of 23.52 percent in 1931.

Petitioner's board of directors has, from its incorporation, consisted of nine members, the first of whom were selected by North American and were Messrs. Wetmore, Sheldon, Bulkley, White, Coffin, Jaretski, Dow, Russell and Bowen, the first three then being directors and members of the executive committee of North American and White a vice president who had suggested the deal between petitioner and North American. Wetmore, who was petitioner's first president was also president of North American. Jaretski was a partner in the law firm of Sullivan & Cromwell, general counsel for North American, Dow, manager of the underlying properties and to whom North American had paid $10,000 for his services to the syndicate. Coffin was president of General Electric Company and became a director of North American in 1905, in which capacity he served that company and also the petitioner until 1920. Russell and Bowen were Detroit businessmen with minor financial interests in petitioner.

The original board served until 1908 when Smithers, a director of North American and member of its executive committee, replaced White. In 1910 Russell was succeeded by Caufield, a friend of Wetmore. The next change was in 1912 when Caufield was replaced by Campbell, the then president of North American. In 1912 Wetmore retired as petitioner's president and Dow was elected to that office. In 1913 Wetmore was succeeded on the board by Jenks, a Detroit businessman. Marshall, who had been associated with Dow in the early days of the Illuminating Company, was elected petitioner's vice president in 1913 which position he held until 1940. In 1914 Campbell was replaced by Mortimer on petitioner's board of directors, and also as president of North American. In 1915 Dow became a director of North American and a member of its executive committee, which posts he held until 1921.

Four changes occurred in 1920: Williams succeeded Mortimer as chief executive of North American and replaced him as a member of petitioner's Board; Fogarty, an officer and director of North American, was elected a director but soon resigned and was succeeded by Marshall, vice president of petitioner and Coffin was replaced by Rice, who then was president of General Electric Company.

In 1923 Williams retired as North American's chief executive officer and was replaced on petitioner's board by the then vice president, Gruhl. In that year also Pomeroy was succeeded by Close, a director of Bankers Trust Company. In 1926 Jaretski was succeeded by Victor, a partner in the law firm of Sullivan and Cromwell. The following year Victor was replaced by Dulles, another member of the Sullivan and Cromwell partnership, and who, from 1930 to 1938, was a North American director. Gruhl died in 1932 while president of North American and was succeeded by Dame, both as North American president and director of petitioner, who soon died and was succeeded by Fogarty in both posts. In 1936 Rice was replaced by Gushee, a member of petitioner's operating staff. Just prior to the hearing by the Commission, Gushee was given a leave of absence by petitioner and resigned as director to accept employment with Union Electric Company of Missouri, a subsidiary of North American.

Of the nine members of the Board which originally elected Dow president, seven had been initially designated as directors of petitioner by North American and two were the president and a director of North American. In 1940 Dow was succeeded as president by Marshall, petitioner's vice president and an associate of Dow in the old Illuminating Company, but continued to act as a director. The same board of directors that elected Dow president, originally named Marshall as vice president.

Of the eight directors presently serving petitioner, Bulkley and Dow have served continuously since North American chose them on the first board; Fogarty, a third member, is North American's president, Dulles is a partner in the law firm of Sullivan and Cromwell, general counsel to North American in legal matters pertaining to petitioner's organization and general counsel for petitioner. Holden and Seyburn, two of the other directors are Detroit businessmen, another Tompkins, a director in Bankers Trust Company and Marshall is president of petitioner.

The personal stockholdings of petitioner's directors and of its officers are negligible. None of petitioner's stockholders, other than North American, ever appear to have designated any of petitioner's officers or directors and none of petitioner's officers or directors appear to have had any relationships to any substantial stockholder of petitioner except North American.

A chronological statement of the succession of petitioner's presidents and directors indicates that since its organization in 1902, North American has maintained a position of importance and influence in the affairs of petitioner based on stock ownership or historical...