Pont Nemours and Company v. Collins Securities and Exchange Commission v. Collins

• Decision Date: 16 June 1977
• Docket Number: Nos. 75-1870 and 75-1872,s. 75-1870 and 75-1872
• Citation: 432 U.S. 46,97 S.Ct. 2229,53 L.Ed.2d 100
• Parties: E. I. du PONT de NEMOURS AND COMPANY et al., Petitioners, v. Richard J. COLLINS, Jr., et al. SECURITIES AND EXCHANGE COMMISSION, Petitioner, v. Richard J. COLLINS, Jr., et al
• Court: U.S. Supreme Court

432 U.S. 46

97 S.Ct. 2229

53 L.Ed.2d 100

E. I. du PONT de NEMOURS AND COMPANY et al., Petitioners,

v Richard J. COLLINS, Jr., et al.

SECURITIES AND EXCHANGE COMMISSION, Petitioner,

v. Richard J. COLLINS, Jr., et al.

Nos. 75-1870 and 75-1872.

Argued March 2, 1977.

Decided June 16, 1977.

Syllabus

In approving the merger of a closed-end investment company (Christiana), 98% of whose assets consisted of Du Pont & Co. common stock, into an affiliate company (Du Pont), the Securities and Exchange Commission (SEC) held to have reasonably exercised its discretion under § 17(b) of the Investment Company Act of 1940, as amended, in valuing Christiana essentially on the basis of the market value of Du Pont stock rather that on the lower basis of Christiana's outstanding stock. Since the record before the SEC clearly reveals substantial evidence to support the findings of the SEC and since that agency's conclusions of law were based on a construction of the statute consistent with the legislative intent, the Court of Appeals erred in rejecting the SEC's conclusion and substituting its own judgment for that of the SEC. SEC v. Chenery Corp., 332 U.S. 194, 209, 67 S.Ct. 1575, 1583, 91 L.Ed. 1995. Pp. 52-57.

8 Cir., 532 F.2d 584, reversed.

David Ferber, Washington, D. C., for petitioner in No. 75-1872.

Daniel M. Gribbon, Washington, D. C., for petitioners in No. 75-1870.

Richard J. Collins, Jr., and Lewis C. Murtaugh, Chicago, Ill., for respond- ents in both cases.

Mr. Chief Justice BURGER delivered the opinion of the Court.

We granted certiorari ¹ in these cases to determine whether the Securities and Exchange Commission, in approving the merger of a closed-end investment company into an affiliate company, reasonably exercised its discretion under the Investment Company Act of 1940, 54 Stat. 789, as amended, 15 U.S.C. § 80a-1 et seq. The Commission valued the investment company essentially on the basis of the market value of the securities which constituted substantially all of its assets rather than on the lower basis of its own outstanding stock.

The statutory scheme here is relatively straightforward. Section 17 of the Investment Company Act of 1940, 15 U.S.C. 80a-17, forbids an "affiliated person," as defined in the Act,² to purchase any securities or other property from a registered investment company unless the Commission finds, inter alia, that the "evidence establishes that . . . the terms of the proposed transaction, including the consideration to be paid or received, are reasonable and fair and do not involve overreaching on the part of any person concerned . . . ." ³

(1) The merger in this litigation involves Christiana Securities Co., a closed-end, nondiversified management investment company, and E. I. du Pont de Nemours & Co., a large industrial operating company engaged principally in the manufacture of chemical products. Christiana was formed in 1915 in order to preserve family control of Du Pont & Co. At the time the present merger negotiations were announced in April 1972, 98% of Christiana's assets consisted of Du Pont common stock.⁴ This block of Du Pont stock in turn comprised approximately 28.3% of the outstanding common stock of Du Pont.⁵ For purposes of this litigation, Christiana has been presumed to have at least the potential to control Du Pont, although it submits that "this potential lies dormant and unexercised and that there is no actual control relationship." SEC Investment Company Act Release No. 8615 (1974), 5 S.E.C. Docket 745, 747 (1974).

Christiana itself has 11,710,103 shares of common stock outstanding ⁶ and has about 8,000 shareholders. Unlike Du Pont stock, which is traded actively on the New York and other national stock exchanges, Christiana shares are traded in the over-the-counter market. Since virtually all of its assets are Du Pont common stock, the market price of Christiana shares reflects the market price of Du Pont stock. However, as is often the case with closed-end investment companies, Christiana's own stock has historically sold at discount from the market value of its Du Pont holdings.⁷ Apparently, this discount is primarily tax related since Christiana pays a federal intercorporate tax on dividends. Its stockholders are also subject to potential capital-gains tax on the unrealized appreciation of Christiana's Du Pont stock which has a very low tax base. Additionally, the relatively limited market for Christiana stock likely influences the discount.

In 1972, Christiana's management concluded that, because of the tax disadvantages and the discount at which its shares sold, Christiana should be liquidated and its stockholders become direct owners of Du Pont stock. Christiana's board of directors proposed liquidation of Christiana by means of a tax-free merger into Du Pont. Du Pont would purchase Christiana's assets by issuing to Christiana shareholders new certificates of Du Pont stock. In more concrete terms, Du Pont would acquire Christiana's $2.2 billion assets and assume its liabilities of approximately $300,000. In so doing, Du Pont would acquire from Christiana 13,417,120 shares of its own common stock. Du Pont would then issue 13,228,620 of its shares directly to Christiana holders. This would be 188,500 shares less than Du Pont would receive from Christiana. As a result of the merger, each share of Christiana common stock would be converted into 1.123 shares of Du Pont common stock. That ratio was ascertained by taking the market price of Christiana's Du Pont stock and its other assets, subtracting Christiana's relatively nominal liabilities, and making certain other minor adjustments. Direct ownership of Du Pont shares would increase the market value of the Christiana shareholders' holdings and Du Pont would have acquired Christiana's assets at a 2.5% discount from their net value. The Internal Revenue Service ruled the merger would be tax free.

(2) Du Pont and Christiana filed a joint application with the Commission for exemption under § 17 of the Investment Company Act. Administrative proceedings followed. The Commission's Division of Investment Management Regulation supported the application. A relatively small number of Du Pont shareholders, including the respondents in this case, opposed the transaction. Their basic argument was that, since Christiana was valued on the basis of its assets, Du Pont stock, rather than the much lower market price of its own outstanding stock, the proposed merger would be unfair to the shareholders of Du Pont since it provides relatively greater benefits to Christiana shareholders than to shareholders of Du Pont. The objecting stockholders argued that Du Pont & Co. should receive a substantial share of the benefit realized by Christiana shareholders from the elimination of the 23% discount from net asset value at which Christiana stock was selling. They also argued that the merger would depress the market price of Du Pont stock because it would place more than 13 million marketable Du Pont shares directly in the hands of Christiana shareholders.

After the hearing, the parties waived the initial administrative recommendations and the record was submitted directly to the Commission. The Commission unanimously granted the application. Basically, it viewed the proposed transaction as an exchange of equivalents Christiana's Du Pont stock to be acquired by Du Pont in exchange for Du Pont stock issued directly to Christiana shareholders. It held that, for purposes of § 17(b), the proper guide for evaluating Christiana was the market price of Christiana's holdings of Du Pont stock:

"Here justice requires no ventures into the unknown and unknowable. An investment company, whose assets consist entirely or almost entirely of securities the prices of which are determined in active and continuous markets, can normally be presumed to be worth its net asset value. . . . The simple, readily usable tool of net asset value does the job much better than an accurate gauge (sic) of market impact (were there one) could." 5 S.E.C. Docket, at 751.

The fact that Du Pont might have obtained more favorable terms because of its strategic bargaining position or by use of alternative methods of liquidating Christiana was considered not relevant by the Commission. In its view, the purpose of § 17 was to prevent persons in a strategic position from getting more than fair value. The Commission found no detriment in the transaction to Du Pont or to the value of its outstanding shares. Any depressing effects on the price of Du Pont would be brief in duration and the intrinsic value of an investment in Du Pont would not be altered by the merger. Moreover, in the Commission's view, any valuation involving a significant departure from net asset value would "run afoul of Section 17(b)(1) of the Act"; it would strip long-term investors in companies like Christiana of the intrinsic worth of the securities which underlie their holdings.

A panel of the United States Court of Appeals for the Eighth Circuit divided in setting aside the Commission's determination. Collins v. SEC, 532 F.2d 584 (1976).⁸ The majority held that the Securities and Exchange Commission had erred, as a matter of law, in determining that Christiana should be presumptively valued on the basis of the market value of its principal asset, common stock of Du Pont. "(I)n judging transactions between dominant and subservient parties, the test is 'whether or not under all the circumstances the transaction carries the earmarks of an arm's length bargain.' Pepper v. Litton, 308 U.S. 295, 306-307, 60 S.Ct. 238, 84 L.Ed. 281 (1939)." Id., at 592. Employing this standard, the Court of Appeals majority concluded that the record did not support the Commission's finding that the terms of the merger were "reasonable and fair" since the "economic benefits to Christiana shareholders from the merger are immediate and substantial," id., at 601, while "benefits to present Du Pont shareholders are...