Phillips v. Securities and Exchange Commission, No. 19

CourtUnited States Courts of Appeals. United States Court of Appeals (2nd Circuit)
Writing for the CourtWATERMAN, FRIENDLY and SMITH, Circuit
Citation388 F.2d 964
Decision Date16 January 1968
Docket NumberDocket 30665.,No. 19
PartiesRandolph PHILLIPS, Petitioner, v. SECURITIES AND EXCHANGE COMMISSION, Respondent.

388 F.2d 964 (1968)

Randolph PHILLIPS, Petitioner,
v.
SECURITIES AND EXCHANGE COMMISSION, Respondent.

No. 19, Docket 30665.

United States Court of Appeals Second Circuit.

Argued November 16, 1967.

Decided January 16, 1968.


388 F.2d 965
COPYRIGHT MATERIAL OMITTED
388 F.2d 966
Randolph Phillips, New York City, pro se

J. Asa Rountree, New York City, (Debevoise, Plimpton, Lyons & Gates, New York City, Samuel E. Gates, New York City, of counsel), for intervenor Investors Diversified Services, Inc.

Arnold & Porter, Washington, D. C., G. Duane Vieth and James R. McAlee, Washington, D. C., of counsel, for intervenor Gamble-Skogmo, Inc.

Jenkens, Anson, Spradley & Gilchrist, Dallas, Tex., Holman Jenkens and Walter M. Spradley, Dallas, Tex., of counsel, for intervenor John D. Murchison.

Walter P. North, Associate General Counsel (Philip A. Loomis, Jr., General Counsel, Roy Nerenberg, Washington, D. C., Attorney), for respondent.

Before WATERMAN, FRIENDLY and SMITH, Circuit Judges.

FRIENDLY, Circuit Judge:

This petition to review an order of the Securities and Exchange Commission brings us a "chapter of Alleghany" immediately succeeding the one we studied in Willheim v. Murchison, 342 F.2d 33, 35 (2 Cir.), cert. denied, 382 U.S. 840, 86 S.Ct. 36, 15 L.Ed.2d 82 (1965). The Willheim chapter took us through the proxy contest resulting in the victory of the Murchison brothers over Allan P. Kirby at the annual meeting of the stockholders of Alleghany Corporation in May 1961. This one begins with a transaction between the Murchisons and Gamble-Skogmo, Inc. negotiated in August 1962, and put in definite terms in October. The issue, stated at this point in incomplete fashion, is whether Gamble-Skogmo thereby acquired control of Alleghany. The practical importance of this is that if it did, there was arguably a transfer "of a controlling block" of the stock of Alleghany's controlled subsidiary, Investors Diversified Services, Inc. (IDS) under § 2(a) (4) and consequent automatic termination of the investment advisory and principal underwriting contracts between IDS and various mutual funds under §§ 15(a) and (b). This, in turn, would mean that the funds would be entitled to recover the excess of the fees paid between the acquisition of control and the dates in April and May 1963 when new contracts were approved by their shareholders over the cost of performing the services — unless the Commission were to exempt the transactions from the Act's ban in whole or in part, see § 6(c), as it has sometimes done in the past. Investors Diversified Services, 30 SEC 273 (1949); T. I. S. Management Corp., 10 SEC 695 (1941); Management Associates, 9 SEC 645 (1941).

The agreements between the Murchisons, for themselves and as agents for others, and Gamble-Skogmo, Inc. and its subsidiary General Outdoor Advertising Co., here collectively referred to as the Gamble companies, contained the following principal provisions:

(1) The Murchisons would sell and the Gamble companies would buy 1,500,000 shares of Alleghany common stock at $10 per share;
(2) The Gamble companies were granted a nonassignable call on the Murchisons, exercisable until May 31, 1963, for an additional 2,000,000 shares (which the Murchisons could reduce to 1,500,000 shares) at $10 per share. For this the Gamble companies were to pay a fee equivalent to 5% per annum from September 20, 1962, to the date of purchase on the aggregate price of stock purchased up to 1,500,000 shares or, if neither the call
388 F.2d 967
nor the put referred to below should be exercised, then to May 31, 1963, on the same amount.
(3) If the call was not exercised, the Murchisons could put the shares to the Gamble companies at $10 per share between June 1 and June 30, 1963.
(4) Stock purchased under the call or the put was to be paid for in 5% notes payable one-half on January 31, 1964, and one-half on January 31, 1965, collateralized by a pledge of the stock.
(5) If either the call or the put were exercised, the Gamble companies would have the right during a 20-day period beginning on the 200th day after the transfer, to put to the Murchisons any additional Alleghany stock otherwise acquired prior to September 20, 1963, up to 1,000,000 shares, at cost but not in excess of $10 per share, provided the Gamble companies then owned shares in excess of the number acquired from the Murchisons by virtue of the provisions of the agreement that have been outlined.1

The agreements contained no provision for resignation of any of the directors.

The sale of the 1,500,000 Alleghany shares was consumated October 5, 1962. At an Alleghany directors' meeting on October 9, two of the ten directors who had been on the management slate at the uncontested 1962 stockholders' meeting resigned and were replaced by Bertin C. Gamble and one of his attorneys, James W. Deer; also a director resigned from the five-man Executive Committee and Gamble was chosen to fill the vacancy. On December 13, 1962, John D. Murchison resigned as president of Alleghany and Gamble succeeded him.

Section 2(a) (9) of the Investment Company Act provides:

Sec. 2(a) When used in this title, unless the context otherwise requires —
* * * * * *
(9) "Control" means the power to exercise a controlling influence over the management or policies of a company, unless such power is solely the result of an official position with such company.
Any person who owns beneficially, either directly or through one or more controlled companies, more than 25 per centum of the voting securities of a company shall be presumed to control such company. Any person who does not so own more than 25 per centum of the voting securities of any company shall be presumed not to control such company. A natural person shall be presumed not to be a controlled person within the meaning of this title. Any such presumption may be rebutted by evidence, but except as hereinafter provided, shall continue until a determination to the contrary made by the Commission by order either on its own motion or on application by an interested person. If an application filed hereunder is not granted or denied by the Commission within sixty days after filing thereof, the determination sought by the application shall be deemed to have been temporarily granted pending final determination of the Commission thereon. The Commission, upon its own motion or upon application, may by order revoke or modify any order issued under this paragraph whenever it shall find that the determination embraced in such original order is no longer consistent with the facts.

Phillips filed an application with the SEC under this section in mid-December 1962. He alleged, among other things, his stock ownership in four mutual funds with which IDS had investment advisory and principal underwriting contracts, the Gamble companies' purchase of approximately 15% of Alleghany's outstanding

388 F.2d 968
voting shares2 and, to such extent as he knew the details, the other facts stated above. He sought a determination that the Commission "should deem as rebutted the presumption that the Gamble Group does not control Alleghany Corporation and therefore IDS by reason of the fact that it does not presently own beneficially * * * more than 25% of the voting securities of Alleghany." On January 2, 1963, the SEC set the application for hearing. After denial of motions by various parties to dismiss on the grounds that Phillips was not an "interested person" and that § 2(a) (9) was not intended to be used in aid of a suit for the recovery of advisory or underwriting fees, IDS filed an application seeking determinations (a) that the presumption that the Murchisons did not have power to exercise a controlling influence over Alleghany had been rebutted, (b) that the presumption that Kirby, allegedly the owner, along with his associates, of more than 3,000,000 Alleghany common shares, had power to exercise a controlling influence was confirmed, and (c) that the presumption that Murray D. Lincoln, head of Nationwide Corporation, an insurance holding company, and/or companies controlled by or associated with him, who were believed to have acquired approximately 1,000,000 Alleghany shares "in partnership" with Kirby did not have power to control Alleghany had been rebutted.3 The Commission set the application for a hearing, to be consolidated with that already ordered on Phillips' petition; it also granted motions under § 6(c) of the Act exempting all affected persons from the 60-day provisions of § 2(a) (9) pending final determination. Hearings continued until September 16, 1963, and a vast record was accumulated. In June 1964 the Hearing Examiner rendered a recommended decision substantially denying Phillips' application and granting that of IDS. By opinion and order dated May 11, 1966, Investment Company Act Release No. 4595, the SEC agreed. Meanwhile new contracts between IDS and the funds had been approved by the stockholders in the spring of 1963, and in the fall of that year transactions...

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8 practice notes
  • NY, NH & HR CO., BONDHOLDERS'COMMITTEE v. United States, No. 68 Civ. 296
    • United States
    • United States District Courts. 2nd Circuit. United States District Courts. 2nd Circuit. Southern District of New York
    • 10 Julio 1968
    ...Committee for Holders of Option Warrants of United Corp. v. SEC, 346 U.S. 521, 74 S.Ct. 261, 98 L.Ed. 339 (1954); Phillips v. SEC, 388 F.2d 964, 969 (2 Cir. I. The Commission's Approach to the Valuation of NH. In determining fair and equitable terms for the sale of NH, the Commission was fa......
  • Securities & Exch. Com'n v. North American Research & D. Corp., No. 67 Civ. 3724.
    • United States
    • United States District Courts. 2nd Circuit. United States District Courts. 2nd Circuit. Southern District of New York
    • 8 Febrero 1968
    ...would be done with the controlling interest, is considered to be a control person within the meaning of § 2(11), but see Phillips v. SEC, 388 F.2d 964 (2d Cir.1968), however, or merely a person participating jointly with Johnson, a control person, the legal consequences are the same for the......
  • Haberman v. Murchison, No. 68 Civ. 3791.
    • United States
    • United States District Courts. 2nd Circuit. United States District Courts. 2nd Circuit. Southern District of New York
    • 13 Septiembre 1971
    ...1.5 million shares of the voting stock. The total number of voting shares was 9.8 million. As Judge Friendly said in Phillips v. S. E. C., 388 F.2d 964, 970 (2 Cir. 1968): "The put-call agreement does not grant Gamble the power to vote the additional Murchison stock." Without the shares whi......
  • Smith v. Murchison, No. 68 Civ. 3791.
    • United States
    • U.S. District Court — Southern District of New York
    • 24 Marzo 1970
    ...premium was not paid for transfer of control. These findings were affirmed by the Court of Appeals for this circuit in Phillips v. S.E.C., 388 F.2d 964 (2d Cir. Thereafter, the present action dealing with substantially the same transactions was brought by the plaintiff Smith for whose attor......
  • Request a trial to view additional results
8 cases
  • NY, NH & HR CO., BONDHOLDERS'COMMITTEE v. United States, No. 68 Civ. 296
    • United States
    • United States District Courts. 2nd Circuit. United States District Courts. 2nd Circuit. Southern District of New York
    • 10 Julio 1968
    ...Committee for Holders of Option Warrants of United Corp. v. SEC, 346 U.S. 521, 74 S.Ct. 261, 98 L.Ed. 339 (1954); Phillips v. SEC, 388 F.2d 964, 969 (2 Cir. I. The Commission's Approach to the Valuation of NH. In determining fair and equitable terms for the sale of NH, the Commission was fa......
  • Securities & Exch. Com'n v. North American Research & D. Corp., No. 67 Civ. 3724.
    • United States
    • United States District Courts. 2nd Circuit. United States District Courts. 2nd Circuit. Southern District of New York
    • 8 Febrero 1968
    ...would be done with the controlling interest, is considered to be a control person within the meaning of § 2(11), but see Phillips v. SEC, 388 F.2d 964 (2d Cir.1968), however, or merely a person participating jointly with Johnson, a control person, the legal consequences are the same for the......
  • Haberman v. Murchison, No. 68 Civ. 3791.
    • United States
    • United States District Courts. 2nd Circuit. United States District Courts. 2nd Circuit. Southern District of New York
    • 13 Septiembre 1971
    ...1.5 million shares of the voting stock. The total number of voting shares was 9.8 million. As Judge Friendly said in Phillips v. S. E. C., 388 F.2d 964, 970 (2 Cir. 1968): "The put-call agreement does not grant Gamble the power to vote the additional Murchison stock." Without the shares whi......
  • Smith v. Murchison, No. 68 Civ. 3791.
    • United States
    • U.S. District Court — Southern District of New York
    • 24 Marzo 1970
    ...premium was not paid for transfer of control. These findings were affirmed by the Court of Appeals for this circuit in Phillips v. S.E.C., 388 F.2d 964 (2d Cir. Thereafter, the present action dealing with substantially the same transactions was brought by the plaintiff Smith for whose attor......
  • Request a trial to view additional results

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