In re Engineers Public Service Co.

• Decision Date: 19 March 1948
• Docket Number: No. 9440.,No. 9428,9435,9428,9440.
• Citation: 168 F.2d 722
• Parties: In re ENGINEERS PUBLIC SERVICE CO.
• Court: U.S. Court of Appeals — Third Circuit

168 F.2d 722 (1948)

In re ENGINEERS PUBLIC SERVICE CO.

Nos. 9428, 9435, No. 9440.

Circuit Court of Appeals, Third Circuit.

Argued October 10, 1947.

Decided March 19, 1948.

On Petitions for Rehearing June 11, 1948.

COPYRIGHT MATERIAL OMITTED

Francis H. Scheetz, of Philadelphia, Pa. (Evans, Bayard & Frick, of Philadelphia, Pa., on the brief), for Home Ins. Co., and others, preferred stockholders.

Roger S. Foster, of Washington, D. C. (Sidney H. Willner, Associate Solicitor, Harry G. Slater, Chief Counsel, Public Utilities Division, Securities and Exchange Commission, Bernard S. Kanton, Jerome S. Katzin, and Myer Feldman, all of Philadelphia, Pa., on the brief), for Securities and Exchange Commission.

Frederick Zazove, of New York City (Lawrence R. Condon and Milton Maurer, both of New York City, on the brief), for Streeter and others, preferred stockholders.

Louis Boehm, of New York City (Raymond L. Wise and William Esbitt, both of New York City, on the brief), for Lucille White and others, common stockholders.

Alfred Berman, of New York City (Herbert L. Cobin, of Wilmington, Del., Philip W. Amram, of Washington, D. C., J. Howard Rossbach, Abraham Shamos, and Guggenheimer & Untermyer, all of New York City, on the brief), for Central Illinois Securities and Christian Johnson.

Before BIGGS, ALBERT LEE STEPHENS and MARIS, Circuit Judges.

BIGGS, Circuit Judge.

The pertinent facts relating to these three appeals are clearly and succinctly set out in the opinion and findings of fact of the court below. See 71 F.Supp. 797. In addition thereto more complete descriptions of Engineers Public Service Company and its holding company system will be found in In the Matter of Engineers Public Service Co., 9 S.E.C. 764, 10 S.E.C. 904, and 12 S.E.C. 41 and 268. In view of these reports, no extended recapitulation of facts will be necessary.

The questions presented may be put as follows: (a) Did the Commission properly approve as "fair and equitable" within the meaning of Section 11(e) of the Public Utility Holding Company Act of 1935, 15 U.S.C.A. § 79k(e), cash payments in certain amounts to be made to the preferred stockholders of Engineers Public Service Company; and (b) did the court below err in refusing to approve the plan proposed by the Commission as "fair and equitable", deciding that the cash payments should be in lesser amounts than those set up by the Commission? These questions, albeit put as two, are in fact one and one answer will suffice for both.

Preliminarily it may be stated that after extended hearings the Commission issued a series of orders designed to effect the integration of the Engineers system pursuant to Section 11(b) (1) of the Act. It is unnecessary to deal with these orders and with their disposition in detail.¹ It is enough to state here that Engineers has no funded debt; that its capital structure consists of preferred and common stock. The preferred stock is divided into three series. There are presently outstanding 143,951 shares of $5 cumulative dividend convertible preferred stock; 183,406 shares of $5.50 cumulative dividend preferred stock, and 65,098 shares of $6 cumulative dividend preferred stock. Each share of the three series has a stated value of $100 and under the applicable charter provisions each share is entitled to receive $100 plus accrued dividends in the event of involuntary liquidation; but on redemption or voluntary liquidation each share of the $5 series is entitled to receive $105 and each share of the $5.50 and each share of the $6 stock is entitled to receive $110 per share, plus accrued dividends.² The $5 series was sold with a convertible feature which need not be described here since it expired some time ago. The $5.50 series was sold with warrants, presently inoperative, entitling the holder thereof to purchase common stock. Engineers was given the right, to be exercised at its option, to redeem or call the whole or any part of the preferred stock at $100 per share, plus the fixed redemption premium therefor, together with the amount of any dividends accrued, or to repurchase its preferred stock from time to time at a price not exceeding that at which the stock might be redeemed.³

Reduced to its simplest terms the plan approved by the Commission provides that Engineers shall dissolve⁴ and that its preferred stockholders shall receive for each share of preferred stock an amount equivalent to its stated value, plus the redemption premium as if on voluntary liquidation, with accrued dividends to the date of the deposit of each share with a designated depository.⁵ In other words, the three series of preferreds would be paid off at $105, $110 and $110 a share plus dividends. The court below took a different view, concluding that the plan approved by the Commission was not fair and equitable to the common stockholders of Engineers. Exercising its independent judgment it held that the plan would be fair and equitable if each share of preferred stock of Engineers received as payment only its stated value, viz. $100, plus an amount equal to the accrued dividends to the date of deposit. These payments would be the equivalents of those received by the preferred stockholders if Engineers had been subjected to involuntary liquidation, the common stockholders profiting, of course, to the extent of the difference. The common stockholders also give up their stock in Engineers and receive in lieu thereof stocks of subsidiary operating companies and other considerations. What has been stated represents the difference in money between the views of the Commission and that of the District Court, but the methods whereby the respective monetary results of the Commission and the court were arrived at represent the substantial question in the appeal at bar.

The Commission asserts that it arrived at the amount to be paid in cash for the preferred stocks by the application of the doctrine of equitable equivalents as enunciated by the Supreme Court in Otis & Co. v. Securities and Exchange Commission (The United Light and Power Co.), 323 U.S. 624, 65 S.Ct. 483, 89 L.Ed. 511. It takes the position that it has obeyed the clear mandate of the Act in that it has measured the rights to be surrendered by the preferred stockholders in terms of investment value; that is to say ex the Act which itself necessitated the dissolution of Engineers. Relying on its interpretation of the Otis & Co. case the Commission has disregarded the liquidation provisions of the charter. The Commission in arriving at a value for the preferred stocks relied in large part on the testimony of two experts, Dr. R. A. Badger and Mr. D. C. Barnes, president of Engineers. Dr. Badger prepared a report in which he analyzed the value of the three series of preferred stock comparing them as to fair investment, going concern and intrinsic value with stock of five other public utility holding companies like Engineers. He testified that he made his studies without regard to the plan of divestiture of Engineers required by Section 11 of the Public Utility Holding Company Act. He concluded that the three series of preferreds were worth respectively $107.49, $118.31 and $129.07 per share. He also compared the preferred stocks of Engineers with those of ten operating and holding companies selected on the basis of similarity of earnings' history with Engineers and found that these stocks had sold during the period examined at an average yield of 4.5%. Applying this yield to the three Engineers' preferreds he arrived at values for the three series of $111.11, $122.22 and $133.33. He reached the conclusion nonetheless that the "investment characteristics of the Company" and the conditions of the money market placed a proper yield for the three series of Engineers preferreds, absent a call price, of 4.6%. In view of the foregoing he expressed the opinion that the investment values of the three series were respectively $108.70, $119.57 and $130.33. Dr. Badger's evidence as to values also included a number of other elements, the principal items of which are referred to in the opinion of the court below. See 71 F.Supp. at pages 801, 802. These included the charges and preferred dividends earned, the proportion of obligations to total capitalization, the book value of equity per share of preferred, the percent of quick net assets to prior obligations and the times the parent company dividends were earned. Dr. Badger also commented on the "possible permanency of the general interest rate" and based his opinion, to a considerable extent, on this factor. These estimates of value were based as will have been observed on the continued existence of Engineers as a "going concern". Dr. Badger really was testifying as we have indicated as to the investment values of the preferreds; in short what they were worth to the present stockholders without the impact of the Act. Next, employing the call or voluntary redemption prices of the preferred as "stoppers", he cut the values down to the respective amounts, as we have stated, of $105, $110 and $110 a share. Mr. Barnes testified that the United States was in a "boom period". While conceding that the investment value of the preferreds might be as high as indicated by Dr. Badger his attitude was a more cautious one. We think that it is apparent on a careful examination of the testimony of the two men that each was testifying to values as of May, 1946, ex the Act.

The District Court expressly stated that it accepted Dr. Badger's values and that in the absence of a showing of changed circumstances it would deem them to be applicable at the time of the hearing. The District Judge went on to say, however, that "It must be conceded * * * that these values are not controlling because the plan itself does not propose to give these amounts to the preferreds." The court considered a number of other elements which it designated as "colloquial" equities. It pointed out that "A significant reason why the...