In re Louisville Gas & Electric Co.

• Decision Date: 31 March 1948
• Docket Number: Civ. A. No. 1074.
• Citation: 77 F. Supp. 176
• Parties: In re LOUISVILLE GAS & ELECTRIC CO. (DELAWARE).
• Court: U.S. District Court — District of Delaware

77 F. Supp. 176

In re LOUISVILLE GAS & ELECTRIC CO. (DELAWARE).

Civ. A. No. 1074.

District Court, D. Delaware.

March 31, 1948.

Myron S. Isaacs, of Washington, D. C., Edward V. Ahern and Walter Glass, both of Philadelphia, Pa., for Securities & Exchange Commission.

A. Louis Flynn and H. P. Reynolds, both of Chicago, Ill., for Louisville Gas & Electric Co. (Delaware).

Charles W. Milner, of Louisville, for Louisville Gas & Electric Co. of Kentucky.

Alfred B. Teton, William J. Froelich and Henry A. Stanbury, all of Chicago, Ill., for Standard Gas & Electric Co.

Charles B. McGroddy, Jr., Lynne A. Warren and Warren & McGroddy, all of New York City, for Class A Stockholders of Louisville Gas & Electric Co. (Delaware).

LEAHY, District Judge.

This plan is filed by the Securities and Exchange Commission pursuant to §§ 11(e) and 18(f) of the Public Utility Holding Company Act of 1935, 15 U.S.C.A. §§ 79k (e), 79r(f), requesting enforcement and an order to carry out a plan for the liquidation of Louisville Gas and Electric Company, a Delaware corporation and a registered holding company (hereinafter referred to as "Delaware Company"). The holding company system of which Delaware Company is a part is described in the Commission's findings and opinion (Holding Company Act of 1935, Release No. 7789).

The outstanding securities of Delaware Company consist of 600,374 shares of Class A Common Stock, all held by the public, and 300,949 shares of Class B Common Stock of which 94.56% is held by its parent and the balance by the public. Delaware Company's sole income producing asset is the common stock of Louisville Gas and Electric Company, a Kentucky corporation (hereinafter referred to as "Kentucky Company"). This company is a public utility holding company.

The plan proposes the liquidation and dissolution of Delaware Company by distributing to its stockholders its holdings of Kentucky Company common stock. 1 1/14 shares of Kentucky Company common stock will be distributed per share of Class A Common Stock of Delaware Company, and 0.913 of a share of Kentucky Company common stock for each share of Class B Common Stock of Delaware Company. After a thorough and critical examination, the Commission found this proposed allocation fair and equitable to both classes of stock.

The objectors, representing certain holders of Class A Common Stock, contend the plan represents inadequate recognition of the priorities and preferences of the Class A Common Stock. The major basis of the objectors' attack is that the Commission erred in considering that the Class A Common Stock was not a cumulative preferred stock. The charter provides that the holders of the Class A Common Stock "shall be entitled to receive, when as and if declared by the Board of Directors, out of the net profits or surplus of the corporation, dividends at the rate of One Dollar and Fifty Cents ($1.50) per share per annum, payable quarterly at such times as the Board of Directors shall determine before any dividends shall be set apart or paid on Class B Common Stock." It further provides that upon dissolution the Class A Common Stock shall receive $25 per share before the Class B Common Stock receives anything. § 13 of the Delaware Corporation Law, Rev.Code, § 2045, which permits the issuance of one or more classes of stock, provides: "* * * with such designations, preferences and relative, participating, optional or other special rights and qualifications, limitations or restrictions thereof, as shall be expressed in the Certificate of Incorporation or of any amendment thereto, or in the resolution or resolutions providing for the issue of such stock adopted by the Board of Directors pursuant to authority expressly vested in it by the provisions of the Certificate of Incorporation or of any amendment thereto."¹

The objectors also urge that a further ground for objection is that the Class A Common Stock was entitled to receive over and above the value of the stock itself an additional 60¢, representing the principal of and interest upon a 1937 quarterly dividend of 37½¢ wrongfully unpaid. Moreover, the objectors urge an inadequate consideration has been given to the Class A Common Stock based on the criterion of value including the market and dividend history for the past 8 years and its past and projected earnings. As to this latter point, I think the Commission adequately treats it in its Findings and Opinion. In fact, I specifically adopt all of the Findings and differ with the Opinion only on what I consider to be a minor point of interpretation of Delaware law.

I shall comment briefly on the question as to whether the Class A Common Stock is a cumulative or non-cumulative preferred stock.

I think under Delaware law that the stock denominated Class A Common Stock is a cumulative preferred stock. The term "preferred stock" is not a term of art under the Delaware Corporation Law, and the nature of the security must be determined from its rights and character and not its name. In Starring v. American Hair & Felt Co., 21 Del.Ch. 380, 191 A. 887, 890, affirmed 21 Del.Ch. 431, 2 A.2d 249, preferred stock was defined as "a stock which in relation to other classes enjoys certain defined rights and privileges. These rights and privileges are generally associated with specified dividend and liquidation priorities." The Delaware Class A Stock comes exactly within this definition for it is entitled to a priority both as to earnings and in liquidation.

I think Garrett v. Edge Moor Iron Co., 22 Del.Ch. 142, 194 A. 15, affirmed sub nom. Pennsylvania Co. for Insurances on Lives and Granting Annuities v. Cox, 23 Del.Ch. 193, 199 A. 671 (followed and cited with approval in Waldner v. Equitable Loan Society, D.C.Del., 60 F.Supp. 372) would make such stock carry the attribute of a cumulative dividend. In the Garrett case 22 Del. Ch. 142, 194 A. 18, the Chancellor noted that the phrase in § 13, viz., "and such preferred dividends may be made cumulative * * *" requires "that the cumulative character of the dividends shall be made affirmatively to appear in the charter", but held that it was unnecessary under that clause "that the word `cumulative' shall be used in the language descriptive of the dividend preferences. Any language which describes with sufficient clarity that the dividends are to be cumulative, no matter what its phraseology may be, satisfies the clause." In the Garrett case the Court construed the following provisions of a certificate of incorporation: "The preferred stock shall primarily receive dividends, when and as declared out of the surplus or net earnings of the corporation, at the rate of six per centum per annum, payable semi-annually on the first day of April and October in each year; the dividends on the preferred stock...