In re Securities and Exchange Commission

• Decision Date: 20 April 1944
• Docket Number: No. 8463.,8463.
• Citation: 142 F.2d 411
• Parties: In re SECURITIES AND EXCHANGE COMMISSION (OTIS & CO., Intervener).
• Court: U.S. Court of Appeals — Third Circuit

142 F.2d 411 (1944)

In re SECURITIES AND EXCHANGE COMMISSION (OTIS & CO., Intervener).

No. 8463.

Circuit Court of Appeals, Third Circuit.

Argued December 23, 1943.

Decided April 20, 1944.

As Amended April 26, May 1 and May 24, 1944.

COPYRIGHT MATERIAL OMITTED

Arthur G. Logan, of Wilmington, Del. (Richard B. Hand, of New York City, on the brief), for appellant.

Roger S. Foster, Philadelphia, Pa. (John F. Davis, Homer Kripke, and John W. Christensen, all of Philadelphia, Pa., on the brief), for Securities and Exchange Commission.

Donald R. Richberg, of Washington, D. C. (John Dern, of Chicago, Ill., and Clarence A. Southerland, of Wilmington, Del., on the brief), for United Light & Power Co.

Before BIGGS, JONES, and McLAUGHLIN, Circuit Judges.

BIGGS, Circuit Judge.

The appeal at bar presents for our determination the question of the meaning of the phrase "fair and equitable" contained in Section 11(e) of the Public Utility Holding Company Act of 1935, 15 U.S.C.A. § 79k (e). In view of the exhaustive opinion of the Commission,¹ those of its concurring and dissenting members and that of the District Court² it is unnecessary to include here an extended statement of facts for the questions before us are primarily those of law.

The United Light & Power Company, a solvent registered holding company, a Maryland corporation, is at the top of the United Light & Power Company system.³ Immediately below "Power" is another registered holding company, the United Light & Railways Company. Most of the operating subsidiaries of the system are controlled by "Railways" and Power owns all of its common stock. The Commission has found that Power must be liquidated and dissolved in order to simplify the holding-company system as required by Section 11 (b) (2) of the Act, 15 U.S.C.A. § 79k(b) (2). Power has three classes of stock; a class A common, a class B common, and a class A preferred stock, the last being entitled to cumulative dividends. No issue is presented by the present review as to the rights of the common stockholders vis-a-vis each other. It is unnecessary, therefore, to describe these stocks except to say that the B common carries all voting rights in the company. Power's charter provides that on the dissolution or liquidation of the corporation whether "voluntary or involuntary" the holders of the preferred stock "shall be entitled to receive out of the net assets of the corporation, whether capital or surplus, for each share of such stock, one hundred dollars and a sum of money equivalent to all cumulative dividends on such share, both accrued and in arrears (whether or not the same shall have been declared or earned) including the full dividend for the then current quarterly period before any payment is made to the holders of any stock other than the * * * preferred stock in accordance with their rights at the time of distribution."

It is conceded that upon dissolution or liquidation of Power the preferred stock would have a principal claim of $60,000,000⁴ and that accumulated unpaid dividends, as of December 31, 1942, amounted to $38,700,000, a total of $98,700,000. Power's principal asset consists of common stock of Railways.⁵ It is also conceded by all the parties that the value of Railways' common stock does not amount to $98,700,000.⁶ Power and Railways none the less submitted to the Commission joint applications and declarations for the approval of a plan which provided that the common stock of Railways should be distributed to the preferred and common stockholders of Power in the respective ratios of 91.2% and 8.8% and that Power should then be dissolved. The Commission held a hearing on this plan and issued an opinion disapproving the proposed allocation of Railways stock as too generous to Power's common stockholders, but found, Commissioner Healy vigorously dissenting, that a distribution of 94.52% and 5.48% to Power's preferred and common stockholders respectively would be fair and equitable. The plan was modified to accord with the Commission's opinion, was then approved by the Commission and was brought on for hearing before the District Court for the District of Delaware as provided by Section 11(e) of the Act⁷ The court found that the plan was "fair and equitable" and entered an order approving it. The appeal at bar was taken by Otis & Co., a preferred stockholder, which had intervened in the proceedings before the District Court.

Certain apparent concessions made by the appellant disappear on examination. The Commission states in its brief that the only question which Otis & Co. has raised is the legal theory governing the allocations of the stock of Railways. This is not so in fact. In its brief the appellant "incorporates" and asserts the views of Commissioner Healy as set out in his dissenting opinion and those views cover almost every aspect of the case. The appellant therefore makes two major contentions which may be summed up as follows. First, it takes the position that the Commission is without authority to allocate to the common stockholders of Power any stock of Railways because the total value of that stock is insufficient to pay in kind the amount of the claims of the preferred stockholders of Power⁸ as they will mature upon the liquidation of Power; that the phrase "fair and equitable"⁹ being one of art, requires the application of the "absolute priority" rule of Case v. Los Angeles Lumber Co., 308 U.S. 106, 60 S.Ct. 1, 84 L.Ed. 110,¹⁰ and forbids the giving of any interest whatsoever to the common stockholders of Power. In other words when the bourne or goal of liquidation or dissolution of Power is reached, says the appellant, the preferred stockholders' rights will mature and they will become entitled to all the common stock of Railways. Second, the appellant asserts that the allotment to Power's common stockholders of an interest of 5.48% cannot be justified by Railways' earnings, or by those of the system, by the present value of Railways stock or in any other way. This last contention necessarily involves some discussion on our part of Power's earnings as well as those of the system.

The position of the Commission cannot be stated as briefly. It has found that "The assets of Power are * * * of insufficient value to satisfy the stated liquidation preference of the preferred stock in the amount of $100 per share for 600,000 shares, plus arrearages of $38,700,000, or a total of $98,700,000 as of December 31, 1942." The Commission points out that Railways' balance sheets indicate a pro forma book value of $77,954,874 for Railways' common stock on a corporate basis and $81,554,330 on a pro forma consolidated basis and states categorically that the "present book values of assets pro forma are clearly insufficient to cover the liquidation preferences of Power's preferred stock. Similarly, on the basis of a capitalization of reasonably anticipated earnings of the enterprise we are unable to find an over-all value for the assets which approaches $98,700,000." The Commission finds that, "If the amount of the liquidation preference of the preferred stock ($100 per share plus accumulated dividends) is controlling, our inquiry must perforce be ended at this point in a decision that the preferred stock is entitled to all the assets of the corporation to the exclusion of the common."

How then can the Commission reach the conclusion, in view of the Los Angeles Lumber Co. case, that Power's common stockholders may receive an interest of 5.48%? This question may be answered as follows. The Commission asserts that while the type of liquidation contemplated in the case at bar is "involuntary" it is of a type that could not have been foreseen by the draftsman of Power's charter or by the investors in its stock. Next, it points out that in the Los Angeles Lumber Co. case and in Northern Pacific Railway Co. v. Boyd, 228 U.S. 482, 33 S.Ct. 554, 57 L.Ed. 931, financial disaster had overtaken or threatened to overtake the corporate enterprises and that, therefore, reorganization securities had to be distributed among creditors and other claimants according to their contractual rights, determined as in liquidation; that in contrast Power is a company virtually without debt or financial embarrassments; that its existence is proscribed by the Public Utility Act of 1935, 15 U.S.C.A. § 79 et seq., and because of this fact Power's stockholders are prevented from maintaining their interests in a going concern; that for these reasons the "stockholders affected should be given participations according to their contractual or other rights determined as though in a continuing enterprise, and that the process of compliance with the statute should not be permitted to mature liquidation preferences * * * and that the measure of participation allowed should compensate for the substantive rights of security holders as they would exist apart from the reorganization * * *". The Commission states that in giving effect to the congressional mandate it should not allow the fact of liquidation "* * * to add value to one class of securities at the expense of another class." The Commission concludes that "Where simplification of a system is to be attained through elimination of an unnecessary corporate entity, it is our opinion that the `fair and equitable' standard does not require us to consider liquidation rights as having matured, and as the sole measure of participation for the preferred stockholders; and it should be immaterial whether the simplification process takes the form of recapitalization, merger or distribution of the assets of a holding company in liquidation. In other words, the `fair and equitable' standard requires the same recognition of substantive rights irrespective of the method employed in a particular case for obtaining the objectives of Section 11(b) (2)."

The Commission then asserts that "* * * if a class of preferred stock has a measurable interest in an enterprise absent the...