Protective Committee v. SECURITIES AND EXCH. COM'N, 14

• Citation: 184 F.2d 646
• Decision Date: 24 October 1950
• Docket Number: Docket 21592.,No. 14,14
• Parties: PROTECTIVE COMMITTEE FOR CLASS A STOCKHOLDERS OF INTERNATIONAL HYDRO-ELECTRIC SYSTEM et al. v. SECURITIES AND EXCHANGE COMMISSION.
• Court: United States Courts of Appeals. United States Court of Appeals (2nd Circuit)

184 F.2d 646 (1950)

PROTECTIVE COMMITTEE FOR CLASS A STOCKHOLDERS OF INTERNATIONAL HYDRO-ELECTRIC SYSTEM et al. v. SECURITIES AND EXCHANGE COMMISSION.

No. 14, Docket 21592.

United States Court of Appeals Second Circuit.

Argued October 6, 1950.

Decided October 24, 1950.

Mortimer A. Shapiro, Nemerov & Shapiro, New York City, Louis Kipnis, New York City, Leonard Brunner, Brooklyn, N. Y., on the brief, for petitioners.

Roger S. Foster, Washington, D. C., Harry G. Slater, Chief Counsel, Division of Public Utilities, Robert S. Keebler, Washington, D. C., W. Victor Rodin, Philadelphia, Pa., Attorneys, Securities and Exchange Commission, for respondent.

Before L. HAND, Chief Judge, and SWAN and CLARK, Circuit Judges.

PER CURIAM.

On July 21, 1942, the Securities and Exchange Commission in a proceeding under § 11 of the Public Utility Holding Company Act of 1935,¹ directed the dissolution and liquidation of the International Hydro-Electric System, a holding company, whose assets consisted for the most part of shares in other holding companies, some of which held shares in still other holding companies. Todd, a "Class A Stockholder," appealed from that order, but it was affirmed,² and the simplification of the holdings of the International Hydro-Electric System and of a number of its subsidiaries proceeded until 1949, when the trustee filed a second "plan for liquidation and dissolution." A few days after the trustee filed this plan, Todd filed an application with the Commission for a modification of the order of July 21, 1942, based upon the power granted the Commission by the last sentence of § 11(b) (2) of the Act to modify its orders if "it finds that the conditions upon which" they were "predicated do not exist." The Commission denied this petition upon the ground that the conditions had not changed; and Todd did not petition to review the denial; but the Protective Committee of the Class A Stockholders (Davis, McGrath and Barnett) and Kroese, an individual stockholder, did so, and it is their petition which now comes before us.

The petitioners' argument is that the original order of July 21, 1942, had proceeded on the theory that there was no "economic justification for existence as a holding company" of International Hydro-Electric System, and that "the economic function and purpose of a company in its holding company (sic) are proper subjects of inquiry." The petitioners argue that these are not proper standards under the Act; the Securities and Exchange Commission on the other hand argues that its power to "ensure that the corporate structure or continued existence of any company in the holding-company system does not unduly or unnecessarily complicate the structure,"³ makes exactly such considerations relevant, and that in the case at bar the conditions had not so changed as to require any modification of its order of July 21, 1942. We hold that the Commission is right in concluding that the elimination of undue and unnecessary complication in a corporate structure involves an inquiry into the "economic justification," if any, for the "continued existence" of a holding company; and that in the case at bar the Commission was right in finding that there was no such "justification" for the "continued existence" of the International Hydro-Electric System.

One provision of the trustee's second plan has been put through, resulting in a reduction of a series of debenture bonds, and no objection has been raised to that part of it. Another provision is for the International Hydro-Electric System to sell some of its shares in a Canadian operating company and to use the proceeds together with those of a $10,000,000 bank loan to pay off the remainder of its debentures. Lastly, the plan provides that the International Hydro-Electric System shall distribute its remaining assets among its preferred and "Class A" shareholders in a proportion not here involved. The remaining assets at their "book value" after the cancellation of the debentures will be as follows: about $4,000,000 of the Canadian shares; $57,000,000 — now much reduced in value — of shares of a holding company called the New England Electric System; about $10,000,000 of shares of the Eastern New York Power Corporation, an operating company; and all the shares in two other small operating companies. Although the New England Electric System is a holding company, yet, because the International Hydro-Electric System holds only eight per cent of its shares, it does not count in determining whether the International Hydro-Electric System is itself a holding company.

The first question, as we have said, is of the power to dissolve a holding company because it has ceased to have any "economic justification." Section 11(a) of the Act directs the Commission "to examine the corporate structure of every registered holding company" for three purposes: (1) "to determine the extent to which the corporate structure * * * may be simplified"; (2) to determine the extent to which "voting power" may be "fairly and equitably distributed"; and (3) to determine the extent to which "the...