In re Consolidated Electric & Gas Co.

• Decision Date: 10 April 1944
• Docket Number: No. 382.,382.
• Citation: 55 F. Supp. 211
• Parties: In re CONSOLIDATED ELECTRIC & GAS CO.
• Court: U.S. District Court — District of Delaware

55 F. Supp. 211

In re CONSOLIDATED ELECTRIC & GAS CO.

No. 382.

District Court, D. Delaware.

April 10, 1944.

Ralph C. Binford and David K. Kadane, both of Philadelphia, Pa., for Securities and Exchange Commission.

George B. Pidot, of New York City, for Consolidated Electric & Gas Co.

Perry M. Chadwick (of Chapman & Cutler) of Chicago, Ill., for Harris Trust & Savings Bank, trustee.

LEAHY, District Judge.

Securities and Exchange Commission applies under Sec. 11(e) of the Public Utility Holding Company Act of 1935, 15 U.S.C.A. § 79k (e), for approval of a certain plan of Consolidated Electric and Gas Company¹ as fair, equitable and appropriate to effectuate the provisions of Sec. 11(b) of the Act. Harris Trust and Savings Bank, of Chicago, Illinois, Trustee under an indenture securing certain bonds which have been assumed by Consolidated, opposes court approval on the ground that the plan (a) is not "fair and equitable", (b) not "necessary", and (c) is not a "plan" under Sec. 11(e). The attack comes from four sides: (1) the trust indenture covenants relating to redemption of bonds before maturity require payment of the stated premium; (2) when the plan calls for redemption of the bonds without payment of the agreed premium Sec. 26(c) of the Act, 15 U.S.C.A. § 79z (c), and Amendment V of the Constitution are violated; (3) Sec. 11(e) requires a single plan, comprehensive enough so that when carried out the holding company system affected will be brought into complete conformity with Sec. 11(b) of the Act; and (4) there being no "plan" under Sec. 11(e), it was not proper for the Commission to find the (so-called) plan sub judice either "fair and equitable" or "necessary". Counsel have agreed there are no fact questions. Nevertheless, after hearing and an examination of all the evidence, the court concludes it necessary under Rule 52(a), Federal Rules of Civil Procedure, to make the following.

Findings of Fact: 1. Consolidated is a Delaware corporation and an inhabitant of Delaware under Sec. 25 of the Act, 15 U.S.C.A. § 79y, 28 U.S.C.A. following section 723c, a holding company under Sec. 2 (a) (7), 15 U.S.C.A. 79b (a) (7), and has filed a notice of registration, as a holding company, under Sec. 5(a), 15 U.S.C.A. § 79e (a). On December 31, 1942, Consolidated controlled forty-four subsidiary companies which were, for the most part, public utility companies (as defined in Sec. 2(a) (5)) organized in various states and operating in twenty-two states, in Puerto Rico, the Phillipine Islands and in Spain, Canada, the Dominican Republic, and the Republic of Haiti.

2. During 1943, Consolidated through sales of securities and assets of subsidiaries (followed by liquidation of the subsidiary companies) disposed of sixteen of its subsidiaries, all of which were public utility companies, for the purpose of complying with Sec. 11(b) of the Act. As of December 31, 1943, Consolidated's security structure was

                Federated Utilities, Inc., First
                  Lien Collateral Trust 5½%
                  Bonds, due March 1, 1957
                  (assumed by Consolidated)                $ 4,960,500
                Southern Cities Utilities Company
                  Thirty-Year 5% First
                  Lien and Collateral Trust
                  Bonds, Series A, due April
                  1, 1958 (assumed by Consolidated)          6,623,500
                Collateral Trust Bonds (Consolidated)
                  due August 1
                  1957, and 2 series due August
                  1, 1962                                   19,849,500
                6% Demand Note of Islands
                  Gas and Electric Company
                  guaranteed by Consolidated                 2,500,000
                *Preferred Stock, $6 cumulative,
                  no-par-authorized,
                  400,000 shares; issued,
                  183,012 shares (37 shares
                  held in treasury); outstanding,
                  182,975                                   18,297,300.
                Class A non-cumulative participating
                  stock—entitled to
                  a preference dividend of
                  $1.75 a share and preference
                  in liquidation of $25 a
                  share—authorized, issued
                  and outstanding, 1,480,000
                  shares of $1 par value each                1,480,000.
                Common stock—authorized,
                  issued and outstanding, 1,000,000
                  shares of $1 par
                  value each                                 1,000,000.
                *At December 31, 1943, the
                  dividend arrearage claim
                  of the preferred amounted
                  to                                        12,414,832.
                

3. On January 31, 1943, Consolidated purchased the 6% demand note of $2,500,000 issued by its totally owned subsidiary, Islands Gas and Electric Company—Consolidated guarantor—and held by International General Electric Company, Inc., for 85% of its principal amount plus accrued interest.

4. On November 9, 1943, Consolidated owned all the voting securities of Central consisting of 74,242 shares of no par common. The stock was pledged with the Trustee as security for 5½% bonds issued by Federated under the terms of the original indenture—executed March 1, 1927—securing said bonds, and of a supplemental indenture, and thereafter assumed by Consolidated.

5. On November 9, 1943, Consolidated and Central jointly applied to the Commission for authorization and approval (a) to reclassify all of Central's outstanding capital stock into 400,000 shares of common with a $15 par, or an aggregate par value of $6,000,000; (b) the sale of such stock to the public; and (c) the application of the proceeds to the redemption of the Federated bonds by the payment to the holders of such bonds the principal amount without premium but plus accrued interest to a date 60 days after the date of the first publication of a notice by Consolidated of the imminent retirement of said bonds. Since November 9, 1943, seven amendments to the application have been filed with the Commission by Consolidated and Central. Public hearings have been had on the application (notice thereof having been published in the Federal Register) before a Trial Examiner designated by the Commission.

6. On February 4, 1944, the Commission made certain findings upon the application and entered an order authorizing the proposed reclassification of the common stock of Central. In this finding the Commission found that the planned divestment by Consolidated of its interest in Central and the proposed application of the proceeds of the sale of the new stock were necessary to effectuate the provisions of Sec. 11(b) of the Act; and by its order the Commission approved the plan as submitted by Consolidated to the extent of authorizing the reclassification and the invitation by Consolidated of competitive bids pursuant to Rule U-50 of the Commission for the sale of said stock.

7. On February 15, 1944, the Commission made further findings that the proposed sale of the reclassified stock of Central was necessary to effectuate the provisions of Sec. 11(b) of the Act and fair and equitable to all persons affected and, in respect of such proposed sale, approved said plan and authorized the sale of the stock for $7,052,000—the highest and best bid—but reserved jurisdiction as to the disposition of the proceeds.

8. On February 18, 1944, the Commission made supplemental findings that the payment of Federated bonds in the principal amount plus accrued interest as provided in the plan was fair and equitable.²

9. On February 18, 1944, Consolidated, having sold the common stock of Central for $7,052,000, the release of such stock from the lien of the indenture securing the Federated bonds—for delivery to the purchaser —was accomplished by depositing with the Trustee the proceeds of the sale of the stock in substitution for the securities sold.

10. The Commission found that Central could not have been retained within the Consolidated holding company system, under Sec. 11(b) (1), as a system additional to any integrated system presently controlled by Consolidated; and, consequently, the sale of the Central stock and the retirement of the Federated bonds were necessary to effectuate the provisions of Sec. 11(b) (1).

11. The Commission found that the continued existence of the Consolidated system in any form which supported its recent security structure—particularly the Federated bond indebtedness—is incompatible with the requirements of Sec. 11(b). This court finds the retirement of the Federated bonds is appropriate to simplify the security structure of Consolidated.

12. In accordance with Sec. 11(e), Consolidated requested the Commission to apply to a court to enforce and carry out the provisions of the plan for the retirement of the Federated bonds.

Discussion. 1. The primary inquiry is whether the covenants in the indenture respecting redemption are applicable to the present situation. The pertinent clause (Supplemental Indenture, Sec. 2, Art. 1) provides that "the bonds of the first series at the option of the Company emphasis added may be redeemed prior to maturity * * * in the manner and upon the terms provided in Article IV of the Original Indenture and upon payment of the redemption prices" specified in the Supplemental Indenture.³ The redemption premium upon the Federated bonds at the present time and until March 1, 1947, is 2¾% of the principal amount of said bonds.

Federated bondholders do not have an absolute claim to the payment of the premium; at most, here is a contingent claim if the bonds are redeemed prior to maturity "at the option of the Company". Such option simply gives the company the right to mature its bonds at a date earlier than that otherwise provided. There is no provision for payment of a premium in the event of acceleration of the maturity date by reason of default or otherwise. The language of the indenture, then, plainly indicates that the parties did not contemplate that the redemption provision should be effective upon action taken by the corporation in an effort to comply with the mandate of Congress as embodied in the Public Utility Holding Company Act of 1935. Clearly on principle, the indenture covenants respecting redemption are inapplicable where the retirement proposed is not voluntary. This view is supported by judicial authority. In the Matter of North Continent...