In re The United Corporation

• Decision Date: 17 January 1955
• Docket Number: Civ. No. 1650.
• Citation: 128 F. Supp. 725
• Parties: In the Matter of THE UNITED CORPORATION.
• Court: U.S. District Court — District of Delaware

128 F. Supp. 725

In the Matter of THE UNITED CORPORATION.

Civ. No. 1650.

United States District Court, D. Delaware, Wilmington.

January 17, 1955.

William S. Potter (of Berl, Potter & Anderson), of Wilmington, Del., and Richard Joyce Smith (of Whitman, Ransom & Coulson), and William T. Farley, New York City, for The United Corp.

Thomas Reath, John Mulford (of Drinker, Biddle & Reath), of Philadelphia, Pa., and M. Quinn Shaughnessy, of Washington, D. C., for Alfred A. Biddle, a warrant holder, and for the General Protective Committee for the Holders of Option Warrants.

Carlos L. Israels (of Berlack, Israels & Liberman), New York City, for Herbert M. Diamond, et al., other warrant holders.

Myron S. Isaacs, Ellwood L. Englander and William R. Nowlin, Washington, D. C., for the Securities and Exchange Commission.

Randolph Phillips, New York City, pro se, and Joseph B. Hyman, of Alexandria, Va., for Randolph Phillips, as Attorney-in-Fact for stockholders of The United Corporation, and for Edward R. Downing.

LEAHY, Chief Judge.

This is a suit by the Securities and Exchange Commission for approval and enforcement of a voluntary plan filed by the United Corporation under § 11(e) of the Public Utility Holding Company Act of 1935, 15 U.S.C.A. § 79 et seq., and approved by the SEC in 1951 which, among other things, cancels all United's outstanding warrants to purchase 3,732,059 shares of its own common stock, with no compensation to the warrant holders. United's transformation into a registered investment company will also be discussed. The Plan, as amended, was approved by order of the SEC on June 26, 1951. The only provisions of the Plan before the court for enforcement and approval are those requiring cancellations of the outstanding option warrants to purchase common stock of United, and amending United's charter and by-laws so as to permit cumulative voting and to increase the quorum at stockholders' meetings from 25% to 50% of the outstanding stock. Hearings on the Plan before the SEC took eight months. The transcript comprised 4,595 pages together with voluminous exhibits. The whole record has been introduced here.

On June 15, 1951, the SEC filed its Opinion and Findings approving the Plan, subject to certain suggested modifications. After United filed appropriate amendments, the SEC's order of final approval was entered on June 26, 1951.

The proceedings began with the filing of a voluntary plan with the SEC on November 6, 1949, by United under § 11(e). On August 14, 1943, the SEC had directed United to cease being a holding company and to change its capital structure to one class of stock.¹ At that time United had outstanding preference stock, common stock and warrants. United, with approval, had by November 15, 1949, retired its preference stock and disposed of all but two of its former subsidiaries. The next day United filed a plan which provided it would cease to be a holding company but would continue as an investment company. The plan provided for new 5-year warrants to purchase common stock at $7 per share, and to be issued in exchange for outstanding warrants at the rate of 1 new warrant for each 5 old ones. On June 13, 1950, United filed an amendment to the plan² which provided for the cancellation of all outstanding warrants without compensation to the holders. This was at the suggestion of the staff of the SEC and apparently at this time United did not take the position such a step was necessary or fair.

In July 1950, the General Protective Committee for the holders of option warrants was formed. It appeared before the hearings of the SEC on the forfeiture of the warrants, claimed the action unfair and unnecessary and introduced its evidence to that effect.

The SEC found presence of the warrants in United's structure constituted a corporate complexity which had to be eliminated under § 11(b) (2) and cancellation of the warrants would complete simplification of United's corporate structure. The SEC noted the right to buy common stock at $27.50 a share applies to the common stock "as such stock may be constituted at the time of purchase * * * irrespective of every change * * * by way of payment of stock dividends, sale, exchange or other distribution of any class of stock of the Company." The SEC discussed standards of valuation approved by the courts³ and the expert opinion evidence submitted before the Commission both by United and the Committee for the option warrant holders. Assets and earnings of United's portfolio securities and the market history of United's common stock were considered. The Committee's documentary proofs showing changes in net assets and in common stock market prices of closed-end management investment companies, were reviewed. The SEC stated it was unable to find any reasonable expectation United's earnings and assets in the foreseeable future would be such its common stock would increase so as to give the warrants a value whether the option price were to remain at $27.50 or be reduced to $19.25 per share.⁴ The SEC concluded the warrant holders "are not entitled, under the standards of fairness and equity, to any participation in the reorganization of United"; the continuance of the warrants "representing as they do such an extremely tenuous right, would be inherently deceptive to investors and perpetuate in the corporate structure useless and unnecessary complexities, in contravention of the requirements of Section 11(b) (2)"; and "elimination of the option warrants as proposed by the plan is appropriate under the standards of the Act." The SEC's approval of the cancellation of option warrants (and of the proposed amendments to the charter and by-laws) was conditional, pursuant to United's request, upon an order of approval and enforcement by an appropriate District Court.

On August 23, 1951, before any application to a District Court for enforcement had been made, Randolph Phillips, et al., stockholders of United, appealed under § 24(a) to the Court of Appeals for the District of Columbia from the SEC's order approving the Plan. On March 31, 1953, the Court affirmed the SEC's order,⁵ and on January 4, 1954, it was reversed in part by the Supreme Court,⁶ which held: the Court of Appeals had jurisdiction to review the order of the Commission approving so much of the Plan as did not call for enforcement by a District Court, i. e., United's continuance as an investment company. It denied a petition by Phillips for certiorari to this portion of the decision;⁷ but decided the Court of Appeals had no jurisdiction to review the Commission approval of those parts of the Plan — cancellation of warrants — which required District Court enforcement.

Phillips who had participated in the proceedings before the SEC, was a party in the § 24(a) appeal, took a position before the Court of Appeals it had jurisdiction to review all aspects of the Plan including all those which the SEC had expressly made subject to review only by the enforcement District Court.

The Committee had been permitted to intervene in the review proceedings before the Court of Appeals over the objections of the SEC and United and was heard in opposition to the proposed cancellation of the warrants. The Court of Appeals affirmed on the merits the opinion of the SEC and held "the findings of the Commission with respect to the warrants are supported by evidence which we regard as substantial."⁸ After referring to Niagara Hudson Power Corp. v. Leventritt, supra, Judge Wilbur K. Miller wrote: "We see no reason to disturb the Commission's findings that the plan of compliance submitted by United, including the provision for eliminating option warrants, is necessary to effectuate the purposes of § 11(b) and is fair and equitable to the persons affected thereby. Having so found, the Commission was under a statutory duty to approve the plan." The Court of Appeals held it had jurisdiction to review the provisions of the Plan which the SEC had made subject to District Court review and enforcement. It thought those provisions, however, should be submitted to a District Court for the purpose of enforcement only but stated, further, the SEC's findings on these matters were supported by substantial evidence within the SEC's administrative discretion.⁹ In the meantime, on July 15, 1952, United with SEC approval had sold all its stock in its last subsidiary, South Jersey Gas Company.¹⁰ Since then it has not owned 10% of the voting securities of any public utility company and has not been a holding company or a part of any such system.

During the § 24(a) review proceedings before the Court of Appeals, the Committee moved twice for leave to adduce additional evidence by way of testimony. That Court granted leave to file the motions but denied leave to adduce additional evidence. The second motion for such leave was filed after United's sale of the South Jersey Gas Corporation stock and on the ground United was no longer a part of a holding company system. This motion was denied in part. On the Committee's petition for rehearing, based on the alleged loss of jurisdiction, it was denied by the Court of Appeals on April 22, 1953. Reversing position, the Committee then petitioned the Supreme Court for certiorari to review the Court of Appeals decision it had jurisdiction to pass upon the merits of the SEC's holding the option warrants should be cancelled. In short, the Committee adopted the position taken by the SEC and United (reaffirmed by them on the pending application for certiorari) that the Court of Appeals was without jurisdiction to review the merits of the provisions of the Plan requiring District Court enforcement. It would appear the Supreme Court held the Court of Appeals had jurisdiction under § 24(a) to review all questions tendered to it, except those relating to cancellation of option warrants and the proposed amendments to the charter and by-laws of United.¹¹

The Supreme Court accepted the so-called "split...