In re Kings County Lighting Co.
| Decision Date | 03 July 1947 |
| Docket Number | Civ. No. 7609. |
| Citation | 72 F. Supp. 767 |
| Parties | In re KINGS COUNTY LIGHTING CO. |
| Court | U.S. District Court — Eastern District of New York |
COPYRIGHT MATERIAL OMITTED
Harry G. Slater, Chief Counsel, Public Utilities Division, of Philadelphia, Pa. (Solomon Freedman, of Philadelphia, Pa., and Alfred Hill, of Philadelphia, Pa., of counsel), for Securities and Exchange Commission.
Philip Halpern, of New York City, for Public Service Commission.
Charles G. Blakeslee, of New York City, for Kings County Lighting Co.
Levien, Singer & Neuberger, of New York City (Stuart Steinbrink, of New York City, of counsel), for individual preferred stockholders of Kings County Lighting Co.
Nathaniel L. Goldstein, Atty. Gen. of the State of New York (Samuel A. Hirshowitz, Asst. Atty. Gen., of counsel), for the Secretary of State of New York.
Unger & Pollack, of New York City, for committee for preferred stockholders of Long Island Lighting Co.
McLaughlin & Stern, of New York City, for Katherine S. Campbell and other holders of preferred stock of Nassau & Suffolk Lighting Co.
The Application, generally considered.
The Securities and Exchange Commission applies for an order approving and enforcing an Amended Plan of Reorganization submitted by Kings County Lighting Company (herein called Kings) under the terms of the Public Utility Holding Company Act, Act of August 26, 1935, c. 687, title 1, sec. 1 et seq., 49 Stat. 838, 15 U.S. C.A. § 79 et seq.; herein sometimes called the "act" and sometimes "the statute." The precise statutory basis for the application is section 11(e) of the act.1 The Long Island Lighting Company (herein called Long Island) is a holding company as defined by section 2(a) (7) of the act. Kings is a subsidiary of Long Island under section 2(a) (8) (A) of the act. Under the statute, section 11(b) (2), it was the duty of the Securities and Exchange Commission to require Kings to take whatever steps that commission found necessary to insure that the corporate structure did not unfairly or unequitably distribute the voting power among security holders.
The statute also authorizes any subsidiary company of a registered holding company (like Kings) voluntarily to submit a plan to the Securities and Exchange Commission, section 11(e), in order to accomplish the purpose of section 11(b) (2) of the act, among which are, as I have mentioned, the correction of corporate structure to eliminate unfair or inequitable distribution of voting power. It is an amended plan, submitted by Kings under section 11(e) that is the subject of the application before me. Ordinarily, of course, the only question before me would be whether the proposed plan is fair and equitable, and calculated to accomplish the statutory purpose, section 11(e). However, as will appear, more than that is here for decision: the application itself has produced a jurisdictional controversy between the Public Service Commission of the State of New York and the federal Securities and Exchange Commission.
It should be unnecessary at this point to dwell at very great length on that amended plan to revise the capitalization of Kings, although some brief reference ought now to be made to it. I say this because the area of controversy over the plan itself seems to me to be very narrow.
At present, the outstanding shares of common and preferred stock of Kings are as follows:
Preferred stock
17,871 shares 7% Series B
par value $100....... $1,787,100
1,129 shares 6% Series C
par value $100....... 112,900
25,000 shares 5% Series D,
par value $100....... 2,500,000.
Common stock:
50,000 shares without par
value, having a value
for capital purpose of $2,000,000.
Total capital represented by
outstanding stock ........... $6,400,000.
If the plan is approved and carried out, the capitalization of Kings will be as follows:
Preferred stock:
44,000 shares new 4% preferred
stock, par value
$50 ................... $2,200,000.
New common stock:
440,000 shares without par
value, having a value
for capital purposes
of ................... $2,200,000.
Total capital represented by
outstanding stock ............ $4,400,000.
It will be observed that the net effect of these changes is to reduce the capital of the company in the amount of $2,000,000. Out of this amount it is planned to return in cash to preferred stockholders $191,484, and with the remainder to create a capital surplus of $1,808,516, to be used solely for the purpose of making such adjustments in the company's books of account as may be directed by the Public Service Commission of the State of New York with respect to depreciation and other reserves. The plan is based upon the belief that this change, and others incidental to it, will bring the dividend requirements of the company into proper relation to earning power, and will effect a fair and equitable distribution of the voting power between the two classes of stock, a salient feature of the plan being that the present preferred stockholders will receive 396,000 shares (90%) of the new common stock, leaving only 44,000 shares (10%) in the hands of the present owners of the common stock of the company.2 So far as the amended plan itself is concerned, it is clear that the controversy between the Securities and Exchange Commission, on the one hand, and the Public Service Commission of the State of New York, on the other, springs perhaps not exclusively, but largely from this proposed redistribution of the common stock.
The Chronology of the Application.
I believe I can clarify the controversy to some extent by reviewing briefly here the history of the proceeding.
In 1936 the Securities and Exchange Commission granted the application of Long Island that it and its subsidiaries be exempt from the provisions of the statute (Long Island Lighting Company, 1 S.E.C. 345). In 1944 Long Island filed with the New York Public Service Commission a petition for reduction (and other changes) in its capital structure. The plan was opposed as unfair and inequitable by a Protective Committee for preferred stockholders. Under date of July 27, 1944, the Public Service Commission, after severely criticising the proposal of Long Island, pointed out that it (the Commission) had power only to approve or disapprove, and none to compel the company to readjust its stock, or its voting rights, in accord with sound finance and equitable considerations. In November, 1944 the Stockholders' Protective Committee petitioned the Securities and Exchange Commission to revoke or modify the 1936 exemption order, and on November 10, 1944, a hearing was ordered by the Securities and Exchange Commission. Meanwhile, and on December 14, 1944, the Public Service Commission approved an amended proposal of Long Island by a vote of 3 to 2. The majority pointed out that the plan was deficient in some respects, but again said that the authority of the Public Service Commission was limited to approval or disapproval: the commission could not formulate a new plan nor require the petitioning company (Long Island) to make changes which might be thought desirable. Thereupon the Securities and Exchange Commission attempted to restrain Long Island against carrying out the plan. I denied the application for a temporary injunction. Securities and Exchange Commission v. Long Island Lighting Co., D.C., 1944, 59 F.Supp. 610. And this determination was upheld by the Circuit Court of Appeals for the Second Circuit, Judge Clark dissenting. Securities and Exchange Commission v. Long Island Lighting Co., 2 Cir., 1945, 148 F.2d 252. The Supreme Court granted certiorari, but later dismissed the proceeding as moot, Securities and Exchange Commission v. Long Island Lighting Co., 1945, 325 U.S. 833, 65 S.Ct. 1085 89 L.Ed 1961, because, in the meantime, the Securities and Exchange Commission had modified the exemption order theretofore granted Long Island, Long Island Lighting Company et al., Holding Company Act Release No. 5746; order of April 21, 1945. The modification order was predicated on findings, among others, that the preferred and common stocks of Long Island were distributed among holders in some 49 states and foreign countries. The Securities and Exchange Commission also found that in a period of 12 months the common and preferred shares of Long Island had been extensively traded on the New York Curb Exchange. Kings, the subsidiary of Long Island here involved, at that time had listed on the New York Stock Exchange two series of bonds, and the preferred stock of Kings was traded through the New York Curb Exchange. Holders of the capital stock of Kings, as of January 15, 1947, are located in 28 states and in 3 foreign countries.
Kings filed its original plan for recapitalization on August 25, 1945. On February 5, 1946, the Public Service Commission of the State of New York adopted a memorandum setting forth 10 specific criticisms of the plan as filed. Kings thereupon amended its plan as of April 16, 1946, and filed that amended plan with the Public Service Commission of the State of New York on April 23, 1946, in an effort to comply with the criticisms theretofore made by the state commission. This amended plan (April 16, 1946) spoke throughout of balance sheets and other financial statements reflecting the condition of the company on April 30, 1946, the significance of which fact will be made clear at a later point.
On December 13, 1946, the Securities and Exchange Commission handed down findings and an opinion, indicating that it would approve Kings' amended plan only if it was further modified in four respects, namely: (a) by reduction of the proportion of new common stock to be issued to the present holders of common shares, (b) by amendment of the proposed certificate of incorporation to provide for cumulative voting in the election of directors by the holders of the new common stock, (c) by...
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