Laird v. I. C. C., 82-3076

• Decision Date: 14 October 1982
• Docket Number: No. 82-3076,82-3076
• Citation: 691 F.2d 147
• Parties: Frank J. LAIRD, Petitioner, v. INTERSTATE COMMERCE COMMISSION and United States of America, Respondents, The Kansas City Southern Railway Company, Intervenor.
• Court: U.S. Court of Appeals — Third Circuit

Page 147

691 F.2d 147

Frank J. LAIRD, Petitioner, v. INTERSTATE COMMERCE COMMISSION and United States of America Respondents The Kansas City Southern Railway Company, Intervenor.

No. 82-3076.

United States Court of Appeals Third Circuit.

Argued Sept. 28, 1982.

Decided Oct. 14, 1982.

William F. Baxter, Asst. Atty. Gen., John J. Powers, III, Kenneth P. Kolson, Attys., Dept. of Justice, Washington, D. C., Tom P. Monteverde, (argued), Albert W. Sheppard, Jr., Monteverde, Hemphill, Maschmeyer & Obert, Philadelphia, Pa., for petitioner.

John Broadley, Gen. Counsel, Ellen D. Hanson, Associate Gen. Counsel, Edward J. O'Meara (argued), Atty., I. C. C., Washington, D. C., for respondents.

Michael J. Glasheen (argued), Stephen W. Miller, Mary M. Rogers, Clark, Ladner, Fortenbaugh & Young, Philadelphia, Pa., for intervenor.

Before ALDISERT and HIGGINBOTHAM, Circuit Judges, and MEANOR, District Judge. ^*

OPINION OF THE COURT

ALDISERT, Circuit Judge.

This petition, filed by a protesting minority shareholder, asks us to review the Interstate Commerce Commission's approval of a transaction of the Kansas City Southern Railway Company involving a reverse stock split coupled with the purchase of any resulting fractional shares. We are required to decide: whether there is substantial evidence in the record as a whole to support the Commission's findings that the transaction was for a proper corporate purpose and that adequate compensation was offered for the fractional shares; whether the Commission selected the proper legal precepts in determining that the transaction was for a lawful corporate object; and whether the Commission abused its discretion in denying Petitioner's requests for extensive discovery and an oral hearing. Because we conclude that the Commission neither erred nor abused its discretion, we will deny the petition.

I.

The Kansas City Southern Railway Company, a Missouri corporation and Intervenor here, had 1,440,000 shares of stock outstanding; of these, 420,000 were preferred shares and 1,020,000 were common. Kansas City Southern Industries, Inc., the railway company's parent company, owned or controlled 98% of the preferred stock and 99% of common. Seventy minority shareholders held the remaining 7,418 preferred shares and twenty-eight minority shareholders held the remaining 1,948 common shares. On February 26, 1981, the railway company filed an application with the ICC, pursuant to 49 U.S.C. § 11301, for authority to reissue its securities to effect a reverse stock split. ¹ The proposal would allow the railway company to issue one share of new preferred stock for every 7,000 shares of old preferred and one share of new common stock for every 2,000 shares of old common. The plan also called for the purchase, by the railway company, of any resulting fractional shares at $30 per share for the preferred and $210 per share for the common. It is not disputed that this transaction would eliminate all minority shareholders.

Petitioner Frank J. Laird, a Pennsylvania resident, owned 1,069 shares of the railway company's common stock and opposed ICC approval of the transaction. He claimed that the evidence was insufficient to support a finding either that the transaction was for a proper "corporate purpose" or that the proposed compensation for fractional shares was adequate (and thus the transaction was not "reasonably appropriate" for that corporate purpose); that the transaction was not for a "lawful object"; and that the Commission abused its discretion in denying his motions for extensive discovery and an oral hearing. Laird argues these same points on appeal. The first two claims relate to the manner in which the Commission fulfilled its statutory duty under 49 U.S.C. § 11301. ² The third refers to the manner in which the Commission applied its own procedural rules.

On February 8, 1982, after determining that the transaction met federal statutory standards and was legal under the corporation law of Missouri, and after granting Laird limited discovery but denying his request for an oral hearing, the ICC approved the transaction. Laird then filed this petition for review.

This court has jurisdiction under 28 U.S.C. § 2342(5) to review the Commission's order. ³ We have permitted the railway company to intervene.

II.

A.

Laird first asserts that there was insufficient evidence to support the Commission's findings either that the stock split was for a proper corporate purpose of the carrier or that the compensation offered for fractional shares was adequate. In considering the sufficiency of evidence in support of an agency ruling our review is limited. The Commission's order will be upheld unless it is found to be arbitrary, capricious, an abuse of discretion, or unsupported by substantial evidence. 5 U.S.C. § 706(2)(A), (E); see Bowman Transportation, Inc. v. Arkansas-Best Freight System, Inc., 419 U.S. 281, 285, 95 S.Ct. 438, 441, 42 L.Ed.2d 447 (1974). Further, in reviewing an ICC order, this court will not reweigh the evidence presented before the Commission. It is for the Commission, as the trier of fact, to weigh the evidence and draw the appropriate inferences therefrom. Inwood Laboratories, Inc. v. Ives Laboratories, Inc., --- U.S. ----, ----, 102 S.Ct. 2182, 2190, 72 L.Ed.2d 606 (1982); Ralston Purina v. Louisville & N. R. R., 426 U.S. 476, 96 S.Ct. 2160, 48 L.Ed.2d 781 (1976); Universal Minerals, Inc. v. C. A. Hughes & Co., 669 F.2d 98, 103 (3d Cir. 1981). Our task is merely to determine if there is substantial evidence in the record to support the basic and inferred facts found by the administrative agency. Substantial evidence is "such relevant evidence as a reasonable mind might accept as adequate to support a conclusion." ⁴ Consolo v. Federal Maritime Commission, 383 U.S. 607, 620, 86 S.Ct. 1018, 1026, 16 L.Ed.2d 131 (1966) (quoting Consolidated Edison Co. v. NLRB, 305 U.S. 197, 229, 59 S.Ct. 206, 216, 83 L.Ed. 126 (1938)).

1.

Arguing to the ICC that the proposed transaction was for a proper corporate purpose, the railway company stated that the elimination of minority shareholders would (1) obviate the expense of maintaining the capability of communicating with, reporting to, keeping records for, transferring stock of, and otherwise continuing to maintain a support system for the small number of minority shareholders; (2) eliminate the possibility of any conflicts of interest between minority shareholders and the parent corporation; and (3) facilitate potential mergers or acquisitions involving the railway company as a target. As he contended to the ICC, Laird now objects that the railway company did not prove either that the freezeout of minority shareholders would effectuate anything more than minimal savings or that there had been any concrete evidence of a conflict of interest in the past. We find these objections meritless.

The railway company offered evidence to the Commission to support its contention that the transaction was for a proper corporate purpose. This evidence, consisting of the three arguments recited above, while not so substantial as to compel the ICC finding of proper corporate purpose, is sufficiently substantial to support that finding. Moreover, as the railway company points out, Laird does not now contest the accuracy of that evidence; his only contention is that it was, in his opinion, insufficient. Further, we can find no authority establishing either a requirement that elimination of an unnecessary expense (i.e., the minority shareholder support system) must effect anything more than minimal corporate savings in order to be deemed a proper corporate purpose, or that the avoidance of potential, as distinguished from actual, conflicts of interest is insufficient to be deemed a proper corporate purpose under § 11301.

We hold, therefore, that there is substantial evidence in the record as a whole to support the ICC findings that the reverse stock split was for a proper "corporate purpose" of the railway company.

2.

Laird also argues that even were the transaction for a proper corporate purpose, the evidence to support a finding that it was "reasonably appropriate" for that purpose was insufficient because the compensation offered for the fractional shares was inadequate. The compensation figures used by the railway company were based on a valuation report prepared for it by the investment banking firm of Kidder, Peabody & Co. Laird attacks this report on several grounds: (1) that the report was cursory and represented only a minimal undertaking, accomplished for only $5,000; (2) that Kidder, Peabody was biased in favor of the railway company because it had recently done work for the parent corporation; and (3) that instead of using the valuation methodologies it chose, Kidder, Peabody should have valued the railway company as a "going concern." We also find no merit in these objections.

The charges that the report was cursory and that Kidder, Peabody was biased are both groundless. First, Kidder, Peabody was able to prepare the report for only $5,000 precisely because it had done prior work for the parent corporation and was familiar with the operations of the railway company. Also, a report such as this, which fully explains the basis for its recommendations, can be judged on its own merits and thereby withstand an allegation of bias. Further, the charge that the report should have relied on a different valuation methodology ignores what Kidder, Peabody actually did. Kidder, Peabody used several standard valuation methods, including capitalization of earnings, and recommended a per share value range of $170 to $200 per share for the common stock and of $18 to $22 per share for the preferred stock. The railway company's board of directors then increased these amounts to $210 for common and $30 for preferred. The Commission found that both the Kidder, Peabody recommendations and the somewhat more generous board of directors offers were reasonable....