In re North Continent Utilities Corporation

• Decision Date: 29 February 1944
• Docket Number: No. 355.,355.
• Citation: 54 F. Supp. 527
• Parties: In re NORTH CONTINENT UTILITIES CORPORATION.
• Court: U.S. District Court — District of Delaware

54 F. Supp. 527

In re NORTH CONTINENT UTILITIES CORPORATION.

No. 355.

District Court, D. Delaware.

February 29, 1944.

David K. Kadane, of Philadelphia, Pa., for Securities and Exchange Commission.

Sidney K. Schiff (of Pam, Hurd & Reichmann), of Chicago, Ill., for North Continent Utilities Corporation.

Helmer Hansen, of Chicago, Ill., for Preferred Stockholders' Committee.

LEAHY, District Judge.

This matter is here on an application of the Securities and Exchange Commission pursuant to Section 11(e) of the Public Utility Holding Company Act of 1935, 15 U.S.C.A. § 79k(e), to approve a certain plan of North Continent Utilities Corporation as fair, equitable and appropriate to effectuate the provisions of Section 11(b) of the Act. At the hearing both the corporation and the Commission supported the plan. A preferred stockholders' committee opposed court approval on the ground that the plan was not a "plan" within the meaning of Section 11(e) of the Act; that the Commission has made no attempt to comply with Section 11(b) (2) in that it has allowed the voting power of the corporation to be unfairly and inequitably distributed; and that the proposed method of the pro rata distribution of the proceeds from the sale of assets is unfair to the preferred stockholders. The court, after hearing and an examination of the facts and the law, makes the following Findings of Fact.

1. North Continent Utilities Corporation (herein referred to as "the corporation") is a Delaware corporation and is a holding company under Section 2(a) (7) of the Public Utility Holding Company Act of 1935, 15 U.S.C.A. § 79b(a) (7). It has filed a notification of registration under Section 5(a) of the Act, 15 U.S.C. A. § 79e(a).

2. The subsidiaries of the corporation consist of utility and nonutility companies engaged in the electric, gas (manufactured and natural), water, ice, cold storage, coal, coke, oil, feed and telephone businesses. Its operations are scattered, i. e., it conducts its affairs in Arizona, Colorado, Illinois, Kansas, Minnesota, Montana, New Mexico, and in the Provinces of Ontario and Alberta, Canada.

3. The corporation has outstanding $3,417,500 principal amount of first lien collateral and refunding 5½% bonds due January 1, 1948; 43,821 shares of $7 preferred noncumulative convertible stock, each share entitled to one vote and entitled in liquidation to a preference of $100 per share; and 166,752 shares of no-par common stock, the stated value of which is $166,964.50, each share entitled to one vote.

4. On November 16, 1943, the Commission entered an order under Section 11 (b) (2) of the Act requiring the liquidation and dissolution of the corporation.

5. All of the issued and outstanding shares of capital stock of the corporation's subsidiaries owned by it (with the exception of the shares of Southern Arizona Public Service Company, 1,221 shares of North Continent Mines, Inc., and 1,221 shares of The S. W. Shattuck Chemical Company) and certain indebtedness owed to the corporation by several of its subsidiaries, are pledged as collateral security for its first lien collateral and refunding 5½% bonds.

6. On April 19, 1943, the corporation filed its application pursuant to Section 11 (e) for the approval of a plan. The plan has been from time to time amended. In its present form, dated as of August 2, 1943, it provides for the sale of the portfolio securities of the corporation and the distribution of the proceeds pro rata to the bondholders up to the principal amount of the bonds, and after the satisfaction of the bonds to the preferred stockholders. In the event that any assets remain after the satisfaction of the claims of the preferred stockholders, then common stockholders will participate. A provision is contained in the plan for distribution of portfolio assets in kind to bondholders and stockholders.

7. On November 16, 1943, the Commission approved the plan but reserved jurisdiction in regard to any distribution of portfolio assets in kind, and over the relative treatment of the preferred stockholders vis-a-vis the common stockholders.

8. After the corporation so requested, the Commission has applied to this court under Section 11(e) for enforcement of the plan.

9. The only pertinent provisions of the plan which call for judicial examination are: (a) The requirement that bondholders send their securities to the indenture trustee for registration, to be stamped with an appropriate legend and the detachment of interest coupons; (b) the requirement that cash proceeds of sales of portfolio securities of the corporation be sent to the trustee and distributed among the bondholders in multiples of 1% of the original principal amount thereof; (c) the provision that interest shall cease to accrue on the portion of the bonds so prepaid; and (d) the provision that the bonds shall be considered fully paid and the corporation's obligation discharged when the bondholders shall have received, exclusive of interest, the full principal amount of the bonds without payment of any premium.

10. The undisputed evidence before the Commission and introduced into the record before this court shows that the market for the bonds is what is known as a "thin market", so if the plan provided for market purchases of bonds (as urged by the preferred stockholders' committee) rather than pro rata distributions, and if any considerable amount of cash were available to make such purchases at market, it is extremely doubtful that the corporation would be able to acquire any substantial amount of bonds at prices below par. Thus, it appears that payment of the bonds as provided for in the plan will give the bondholders the fair equivalent of the rights represented by their bonds.

Discussion

I. The argument is rejected that we do not have "a plan" before us within the meaning of Section 11(e). While the plan may be "boiler-plate" in form, the problem of compliance with the Act by the corporation in the instant case is simple. The Commission having determined that liquidation is required is of itself sufficient to constitute the "plan" a plan under the Act, and a more elaborate ritual for the cremation cannot rationally be justified.

II. The common stock is without present value and every prognosis indicates it never will have value. The complaint of the preferred is that under these circumstances there is an unfair and inequitable distribution of voting power which the Commission should remedy under Section 11(b) (2) of the Act. In short, the argument is that the common stockholders' management should be deposed and the bondholders and preferred should control either a reorganized company or the liquidation because when the bondholders have been satisfied the preferred stockholders will be the sole remaining owners of the equity.

Once a plan has been filed with the Commission it need not be rejected or disapproved because it fails to provide for a redistribution of voting power among the security holders prior to a liquidation and dissolution. Under the particular facts of this case, it is difficult to see why fairness and equity to the preferred stockholders requires a redistribution of voting power. At the trial I put the question to the preferred stockholders: was it believed that the preferred stockholders' management could obtain higher prices or make better bargains in regard to the sale of the corporation's assets? The preferred frankly admitted they made no such contention. In fact, there was no evidence which indicated that a new management or a...