In re United Light & Power Co.

• Decision Date: 04 October 1943
• Docket Number: Civil Action No. 303.
• Citation: 51 F. Supp. 217
• Parties: In re UNITED LIGHT & POWER CO.
• Court: U.S. District Court — District of Delaware

51 F. Supp. 217

In re UNITED LIGHT & POWER CO.

Civil Action No. 303.

District Court, D. Delaware.

July 29, 1943.

As Amended October 4, 1943.

COPYRIGHT MATERIAL OMITTED

John F. Davis, Sol., Roger S. Foster, Counsel, Robert M. Blair-Smith, Executive Assistant, and John W. Christensen, all of Philadelphia, Pa., for the Securities and Exchange Commission.

Donald R. Richberg (of Davies, Richberg, Beebe, Busick & Richardson), of Washington, D. C., John Dern (of Sidley, McPherson, Austin & Burgess), of Chicago, Ill., and Clarence A. Southerland (of Southerland, Berl & Potter), of Wilmington, Del., for United Light & Power Co.

Richard B. Hand of New York City, and Arthur G. Logan (of Logan & Duffy), of Wilmington, Del., for Otis & Co., intervener.

Townsend, Elliott & Munson, of Philadelphia, Pa., for Committee of Preferred Stockholders of Commonwealth & Southern Corporation, amicus curiae.

LEAHY, District Judge.

This matter is here on an application of the Securities and Exchange Commission pursuant to Sections 11(e) and 18 (f) of the Public Utility Holding Company Act of 1935¹ "to enforce and carry out the terms and provisions of" a plan of action by The United Light and Power Company for the purpose of enabling Power to comply with the provisions of Section 11(b) of the Act. This court's jurisdiction is based on the fact that Power transacts a substantial portion of its corporate business in this district and thus comes within Sections 18(f) and 25.

The amended plan designed to effectuate the dissolution of Power in accordance with the Commission's order of March 20, 1941, was approved by the Commission on April 5, 1943. It provides in substance for the contribution of cash and certain investments of Power to its subsidiary, The United Light and Railways Company, for the reclassification of the preferred and common stocks of Power into a single class of new common stock by way of the distribution of all the common stock of Railways in the ratio of 94.52% to Power's preferred stockholders, and 5.48% to its common stockholders, the assumption of Power's liabilities by Railways, the transfer of Power's remaining assets to Railways, and, finally, the formal dissolution of Power. The distribution to the common stockholders of Power approved by the Commission is less than was originally proposed by the management of Power, who had suggested an 8.8% allocation to Power's present common stockholders. This distribution of a portion of the equity to the old common stock of Power caused one Commissioner² to dissent vigorously. Otis & Company, owner of 10 preferred shares, seeks to intervene and objects to approval of the plan, while a committee for the preferred shareholders of the Commonwealth & Southern Corporation, a stranger to these proceedings, filed a brief as amicus curiae in opposition to the plan.

Under the amended plan, Railways' authorized common of 1,000,000 shares with a par of $35 — all owned by Power — will be increased to 3,500,000 with a par of $7, each share to have one vote. The outstanding 708,520 shares of Railways' common will then be exchanged by Power for 3,173,838 shares of Railways' new stock. The change in par value of Railways' common will reduce the amount of capital from $24,798,200 to $22,216,866, and the difference of $2,581,334 will be credited to Railways' paid-in surplus account.

The objections to the plan raise no issues of fact. The objections merely endorse the views of Commissioner Healy who broke from the majority of the Commission on an issue of law. That issue will be discussed shortly.

I. Intervention. Otis & Co. once acted as an underwriter for the preferred stock and presently owns 10 shares. The Commission thinks it appropriate to permit Otis & Co. to be heard on their objections to the plan on the ground that Sec. 11(e) entitles a security holder to have his objections considered by the district court. Power objects to intervention because notice was given on April 21, 1943, under order of this court, that the hearing on the plan would occur on June 15, 1943, and any persons who opposed approval and enforcement were required to file their objections on counsel for the Commission and Power on or before June 1, 1943. This, Otis & Co. failed to do. And Power further claims that no excuse for such default or delay has been presented, although Otis & Co. has had knowledge of the proceedings before the Commission for some years. Moreover, Power points out that at no time did Otis & Co. appear in the proceedings before the Commission. Accordingly, Power argues that Otis & Co. should have utilized the opportunity for administrative relief before appealing for judicial relief to correct an error of law on the Commission's part. Finally, Power contends that Otis & Co. should have sought review of the Commission's order of April 5, 1943, in a circuit court of appeals under Sec. 24(a), which provision requires a party who wishes to exercise his right of appeal to show he is a "party aggrieved" and limits his objections to those urged before the Commission.

I think it may fairly be argued that the appeal provided by Sec. 24(a) and an opportunity to be heard before the district court under Sec. 11(e) with the concomitant right to appeal under Sec. 25 to, as here, the Third Circuit Court of Appeals, from the District Court's finding, are alternative rights of appeal.

Otis & Co. relies wholly on the ultimate issue of law which split the Commission; and that was a substantial issue of law which must be determined regardless of whether Otis & Co. is in or out of these proceedings. Whether this court should demand strict compliance with its order of April 16, 1943, and refuse to hear a party who failed to file his objections by June 1, 1943, is obviously a matter resting in the discretion of the court. In this case I think the exercise of discretion should be in favor of Otis & Co.

Procedural analogies on the right of stockholders to be heard and to appeal in 77B and Chapter X, 11 U.S.C.A. § 207, proceedings in bankruptcy offer some help³; but I hardly think them applicable here. In my view, I think Sec. 11(e) of the Act supports Otis & Co.'s right to intervene, file its proposed answer — containing its objections to the plan — and be heard. In fact, all this is a fait accompli, as I have already heard Otis & Co. at length. Its right to appeal is a matter which does not have my immediate concern. That is a matter which the circuit court may some day be called upon to answer.

II. The Plan. We have merely two issues: (a) is the plan "appropriate to effectuate the provisions of Sec. 11"; and (b) is the plan "fair and equitable".

(a) Power is the apex holding company at the top of a pyramid system. There are subholding companies between Power and the base. One of the principal of these is Railways. The common stock of Railways and cash constitute Power's assets. Railways own the securities representing Power's interest and control in the lower companies. Power will eliminate its stock liability through a distribution of its assets in kind, a method, the Commission has found, which will be both economical and appropriate to effect compliance with Sec. 11(b).

Prior to the entry of its order of dissolution on March 20, 1941, extensive hearings were had. No appeal was taken from the order and the time for seeking a judicial review has long since expired. Really the question of necessity for the plan is no longer with us; and critical reexamination of such question is, I think properly, beyond my judicial ken. However, it is clear that the plan is "appropriate to effectuate the provisions of Sec. 11". After review, I accept the findings of the Commission that there is necessity for the plan and for Power to liquidate pursuant to Sec. 11(b) (2).

(b) Is the plan fair and equitable? The charter of Power provides, inter alia, that "Upon the dissolution or liquidation of the corporation, whether voluntary or involuntary the holders of the Class A 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 Class A Preferred stock in accordance with their rights at the time of distribution." Admittedly, preferred has a principal claim of $60,000,000 and an accumulated dividend charge of $38,700,000. If the dividend claim is capitalized as a matured obligation, the total claim of preferred will be $98,700,000. All parties agree also that the assets represented by the common stock of Railways have not a present value equal to that amount. If the contractual preferences are operative it is clear there will be nothing for the common shareholders.

The problem for determination is whether the plan is "fair and equitable". Concededly the plan does not satisfy the "absolute priority" rule which is applied in equity and bankruptcy reorganizations.⁴ Under that rule, no plan can be fair and equitable which permits a junior security to retain an interest in the reorganized corporate enterprise before the securities senior to it have been paid in full (but not necessarily in cash) for the rights which they surrender. The value of the reorganized concern is projectively determined by a capitalization of the "guess" earnings of the new concern and comparing the valuation so arrived at with the total claims of the old senior securities. The present plan fails to meet this test, as junior interests are allowed to participate in the new capital structure of Railways when it is conceded that Railways' common is not worth $98,700,000 on any basis of valuation. If the claims of the preferred stockholders are to...