General Protective Committee For Holders of Option Warrants of United Corp v. Securities Exchange Commission

• Decision Date: 04 January 1954
• Docket Number: No. 184,184
• Citation: 98 L.Ed. 261,346 U.S. 521,74 S.Ct. 261
• Parties: GENERAL PROTECTIVE COMMITTEE FOR HOLDERS OF OPTION WARRANTS OF UNITED CORP. v. SECURITIES & EXCHANGE COMMISSION et al
• Court: U.S. Supreme Court

346 U.S. 521

74 S.Ct. 261

98 L.Ed. 261

GENERAL PROTECTIVE COMMITTEE FOR HOLDERS OF OPTION WARRANTS OF UNITED CORP.

v SECURITIES & EXCHANGE COMMISSION et al.

No. 184.

Argued Dec. 2, 1953.

Decided Jan. 4, 1954.

Rehearing Denied Feb. 8, 1954.

See 347 U.S. 911, 74 S.Ct. 474.

Mr. John Mulford, Philadelphis, Pa., for petitioner.

Messrs. William H. Timbers, Richard Joyce Smith, New York City, Randolph Phillips, for respondents.

Mr. Justice DOUGLAS delivered the opinion of the Court.

The United Corporation is a holding company registered under the Public Utility Holding Company Act of 1935, 49 Stat. 803, 15 U.S.C. § 79 et seq., 15 U.S.C.A. § 79 et seq. Section 11(b) of that Act requires each holding company, with exceptions not material here, to limit the operations of the holding company system of which it is a part to a single integrated public utility system and to businesses reasonably incidental or economically necessary or appropriate to that system. Section 11(e) allows a registered holding company to submit a plan to the Commission which will enable it to comply with § 11(b).

United controlled, directly or indirectly, various gas and electric utility companies in the east. It submitted a plan to the Commission which, it claimed, would complete its compliance with § 11(b). The Commission rejected United's plan. 13 S.E.C. 854, 898 899. The Commission, however, withheld issuance of a dissolution order so as to afford United an opportunity to comply with the Act by divesting itself of control over its subsidiaries and by transforming itself into an investment company. Id., p. 899. The Commission accordingly directed that United cease to be a holding company and limit its corporate structure to a single class of stock, namely, common stock.¹

No review of that order was sought. Thereafter United retired its preference stock by exchanging it for underlying portfolio securities and for cash. Other portfolio securities were disposed of through market sales and dividend distributions.

As of December 31, 1950, United had outstanding 14,529,491.5 shares of common stock, and option warrants entitling the holders to purchase 3,732,059 shares of common stock at any time at a price of $27.50 per share. As of December 31, 1950, United's assets consisted approximately of $57,000,000 of securities and $2,000,000 in cash and government bonds, which was equivalent to $4.12 per share of common stock. The securities, which consisted of common stocks of utility operating and holding companies, included 11.9 percent of the voting stock of Niagara Mohawk Power Corp., 28.3 percent of South Jersey Gas Co., 5.8 percent of The United Gas Improvement Co., 5.5 percent of The Columbia Gas System, Inc., and voting stocks of other companies in amounts less than 5 percent of the total outstanding.

United submitted a further plan which provided in essential part as follows:

First. The sale by United of all of its South Jersey common stock and of sufficient amounts of its stockholdings in the other utility companies so that within one year its resultant holdings would not exceed 4.9 percent of the voting stock of any of those companies.

Second. An offer to United's stockholders who wanted to withdraw from the company. Holders of 100 or more shares of United's common stock were offered common stock of Niagara Mohawk that United had in its portfolio; holders of smaller blocks of United's common stock were offered cash. These offers were on a voluntary basis.

Third. Cancellation of the option warrants without any compensation to the holders.

Fourth. Amendments to the charter and by-laws of United (without a vote of stockholders) to provide for cumulative voting in the election of directors and a 50 percent quorum at stockholders meetings.

The Commission approved the plan with modifications not material to the issues presented in this case. Holding Company Act Releases Nos. 10614, 10643.

First. The method of transforming United from a holding company into an investment company was approved.

Second. Offers to those stockholders who wanted to withdraw from the enterprise were held to be fair both to them and to those who chose to remain as investors in United.

Third. The holders of the option warrants were denied any participation in the reorganization on the ground that there was no reasonable expectation that the market price of the common stock would increase to the extent needed to give the warrants a recognizable value and that continuance of the warrants would be inherently deceptive to investors and perpetuate useless and unnecessary complexities in the corporate structure.

Fourth. The changes as respects cumulative voting and quorum requirements were approved.

The Commission in its order of approval stated that the provisions of the plan relating to the cancellation of the warrants and the amendment of the charter and bylaws would not be operative 'until an appropriate United States District Court shall, upon application thereto, enter an order enforcing said provisions.' Holding Company Act Release No. 10643, p. 3. No such provision was made as respects the other provisions of the plan.

Some of the common stockholders thereupon filed a petition for review in the Court of Appeals for the District of Columbia under § 24(a) of the Act.² They challenged the First and Second provisions of the plan, which we have described above. They also asked that the Third and Fourth provisions, the ones which were made subject to approval by the District Court, be approved by the Court of Appeals. The petitioner in this Court is a protective committee representing holders of the option warrants. It moved to intervene in the review proceedings in the Court of Appeals, claiming that forfeiture of the warrants was not justified. The Commission and United opposed the intervention on the ground that by reason of the Commission's order and § 11(e) of the Act³ only the District Court had jurisdiction to review the provisions of the plan respecting the elimination of the warrants and the amendments to the charter and bylaws.

The Court of Appeals allowed petitioner to intervene. It held that so long as the Commission had not applied to a district court under § 11(e) to enforce a plan, the Court of Appeals had exclusive jurisdiction on petition of an aggrieved person under § 24(a) to review the entire plan, including those provisions which the Commission made enforceable by the District Court. The Court of Appeals further held that if it affirmed or modified an order of the Commission approving a plan and the Commission thereafter applied to the District Court to obtain enforcement, the District Court would have no function except to enforce, since the ruling by the Court of Appeals on the fairness of the plan would be binding on the District Court. Accordingly the Court of Appeals reviewed the entire plan, found it fair and equitable in all respects, and affirmed the Commission's order. 92 U.S.App.D.C. 172, 203 F.2d 611. The case is here on certiorari limited to the question of jurisdiction. 346 U.S. 810, 74 S.Ct. 42.

The question is not whether there is judicial review of orders of the Commission. The question is which orders are reviewable in the District Court, which in the Court of Appeals. The first reading of the Act may leave the impression that there is conflict between § 24(a) and § 11(e). Section 24(a) gives review in the Court of Appeals of 'an order' of the Commission and grants the Court of Appeals 'exclusive jurisdiction to affirm, modify, or set aside such order, in whole or in part.' This is clearly broad enough to include an order of the Commission under § 11 respecting a plan of a holding company seeking compliance with § 11(b). Section 11(e), however, provides in some instances for review of such plans on application by the Commission to the District Court. Moreover, the Commission by virtue of § 18(f)⁴ may apply to the District Court for enforcement of any of its orders where it appears that someone is about to commit a violation.

We are tendered several alternatives:

1. That the Court of Appeals having first acquired jurisdiction can and should review the entire plan.

2. That the District Court can and should review all phases of the plan in an enforcement proceeding and, pending application for enforcement, no review of any phase of the plan should be entertained by the Court of Appeals.

3. That a so-called split review is permissible where as here the Commission has reserved for enforcement pro- ceedings in the District Court only certain provisions of the plan, the Court of Appeals being restricted under § 24(a) to those not so reserved.

We have concluded that the so-called split review is permissible under the circumstances here present and that the Court of Appeals had jurisdiction under § 24(a) to review all questions tendered it, except those pertaining to the elimination of the option warrants and the amendments to the charter and bylaws. In result we affirm in part and reverse in part the Court of Appeals on the jurisdictional question to which we restricted the grant of the petition for certiorari.

It should be noted to begin with that the Act marks out two paths to compliance by a registered holding company with the requirements of the Act. One is the procedure under § 11(b) whereby the Commission by order may require that designated steps be taken by the holding company. Failing that, the Commission may apply to a District Court for enforcement of its orders under § 11(d). See Commonwealth & Southern Corp. v. Securities & Exchange Commission, 3 Cir., 134 F.2d 747. We are not concerned here with that method of bringing holding companies into compliance with the Act. We deal here with the second method of compliance—the voluntary reorganization which the company itself submits under the broad discretion Congress left to management to determine how to bring their systems into compliance with the Act. Our...