PUBLIC SERVICE COM'N v. Securities and Exchange Com'n

• Decision Date: 05 March 1948
• Docket Number: No. 179,Docket 20892.,179
• Citation: 166 F.2d 784
• Parties: PUBLIC SERVICE COMMISSION OF NEW YORK et al. v. SECURITIES AND EXCHANGE COMMISSION.
• Court: U.S. Court of Appeals — Second Circuit

166 F.2d 784 (1948)

PUBLIC SERVICE COMMISSION OF NEW YORK et al. v. SECURITIES AND EXCHANGE COMMISSION.

No. 179, Docket 20892.

Circuit Court of Appeals, Second Circuit.

March 5, 1948.

Raymond J. McVeigh, of New York City, Sherman C. Ward, of Albany, N.Y. (Frank C. Bowers, of New York City, and George Kenny, and Richard Llope, both of Albany, N.Y. of counsel), for Public Service Commission.

Samuel A. Hirshowitz, of New York City, Nathaniel L. Goldstein, Atty. Gen., of State of New York, (Wendell P. Brown, Sol. Gen. of Albany, N.Y., of counsel), for Secretary of State.

Roger S. Foster, of Philadelphia, Pa., Sidney H. Willner, Associate Sol., Harry G. Slater, Chief Counsel, Public Utilities Division, and Solomon Freedman, and Alfred Hill, Attys., Securities and Exchange Commission, all of Washington 25, D. C., for Securities & Exchange Commission.

Milton Pollack and Unger & Pollack, all of New York City, for committee of preferred shareholders of Long Island Lighting Co.

Before L. HAND, AUGUSTUS N. HAND, and CLARK, Circuit Judges.

L. HAND, Circuit Judge.

This is an appeal from an order under § 11(e) of the Public Utility Holding Company Act of 1935, 15 U.S.C.A. § 79k(e), which approved a plan of reorganization of the Kings County Lighting Company, an intrastate operating public utility corporation, substantially all of whose common stock was owned by the Long Island Lighting Company, a "registered holding company" under the Act. Only two questions are at issue: (1) Whether the consent of the Public Service Commission of New York¹ is necessary to the approval of a plan presented by a subsidiary company of a "registered holding company" under subdivision 11(e); and (2) whether the plan approved by the SEC is "fair and equitable" and "appropriate to effectuate the provisions of § 11." On July 21, 1945, the Kings County Company filed with the PSC a petition, asking its approval of a plan for the reduction of its capital stock, and for an issue of new common and preferred shares. This the PSC refused to approve on February 5, 1946; but meanwhile, on August 25, 1945, the Kings County Company had filed a plan with the SEC under § 11 (e). After the PSC had refused its approval of the petition, the Kings County Company filed with it an amended petition on April 16, 1946, which it also filed with the SEC as an amendment to its original plan. The SEC held public hearings on this amended plan, and on December 13, 1946, disapproved it; but declared that it would approve it with certain specified amendments. The Kings County Company incorporated the suggested amendments on January 6, 1947, and on the 9th, the SEC approved the plan in this form and applied to the District Court for an order to carry it out. The order granted on that application is the order on appeal. On March 6, 1947, the PSC disapproved the amended petition before it, and the SEC so advised the judge, who had the amended plan still under consideration, which he later approved, as we have just said.

The Kings County Company had had outstanding three issues of preferred shares of a total par value of $4,400,000, and 50,000 shares of common stock without par value, having a "stated value of $2,000,000." The amended petition before the PSC and the amended plan before the SEC each proposed to substitute for these securities preferred shares of $2,200,000 par value, and 440,000 common shares without par value, having a "stated value of $2,200,000." All these securities were to be issued to the old preferred shareholders except seven and one-half per cent of the new common shares, which were to go to the old common shareholders. The PSC found that there was no equity in the Company's assets above the claim of the preferred shares if the accumulated unpaid dividends were included, and for that reason refused to approve the issue of seven and one-half per cent of the new common shares to the old common shareholders. The only difference between the two commissions upon the merits of the plan is whether this feature is "fair and equtable." The SEC did not differ as to the appraised value of the assets, but it did think that increased future earnings of the Company which were reasonably to be expected, gave a value to its assets above the preferred shares, which was fairly represented by seven and one-half per cent of the new common shares. It forecast an average net income of $326,500 a year, although the income of the Company for the year 1946 had been only $182,700. It now relies in part upon the fact that on April 6, 1947, the PSC had approved a proposed tariff increase which would have provided for the Company an income of $331,400.

The first position of the PSC is that § 7(g) of the Act, 15 U.S.C.A. § 79g(g), makes compliance with the laws of New York a condition upon plans initiated by a company under § 11(e). It calls attention to the fact that the SEC has itself recognized in several of its decisions² that other subsections of § 7 apply to the issue of securities provided for in such plans; and it can find no reason to except subsection (g). Moreover, it argues that "compliance" with the laws of New York cannot be "effected" by a decision of the SEC, but that it is part of those laws that only the PSC shall decided what does, and what not, "effect" compliance. In short, its position is that, so far as the laws of New York may impinge upon a plan, it has a veto. Further it argues that, since the plan at bar by its own terms provided for approval by the PSC, the plan which the judge approved was not the plan which the Company had submitted, and that therefore he in effect amended it before he approved it, which he had no power to do as he himself declared. The only lawful course for him was to remand the proceeding to the SEC for resubmission to the Company.

We will take up the last objection first. We may assume for argument that the judge's power was limited to an approval or a rejection of the plan, as it stood. He held that, nevertheless, the condition that the plan should be submitted to the PSC for its approval was not an "essential" part of the plan, and that for this reason he was free to disregard it. In this he was right, not indeed because he would have been free to change any of those provisions for the issue of securities or the alteration of shareholders' rights which made up the plan, which he thought not to be "essential"; but because, as we shall show, § 11(e) did not require the consent of the PSC, and because submission to that commission was not part of the plan at all; but, as it itself declared, only one of the "steps to be taken to make the amended plan effective."

That the consent of the PSC was not such a step appears for the following reasons. Section 11 starts with imposing upon the SEC the "duty" of ascertaining how far holding companies can be "simplified" and the "voting power fairly and equitably distributed"; and § 11(b) vests it with power to accomplish these ends. Section 11(e) makes it possible for the Company to forestall action by the Commission by taking the initiative; subject to such regulations as the Commission may promulgate, it may "submit a plan * * * for the purpose of enabling" it "to comply with the provisions of subsection (b)." Such a submission is a substitute for the performance of the Commission's "duty"; it is another way of realizing purposes recited in the preamble — § 1, 15 U.S.C.A. § 79a. Whether the Commission or the company begins is only a matter of procedure; the outcome will be precisely the same, for in either case the end sought is measured by subsection (b), an end whose realization the Act affirmatively prescribes. This once understood, it becomes to the highest degree unlikely that Congress should have set up a system of dual control over the fulfillment of this purpose; for it is scarcely necessary to expatiate upon the obvious defect of so organizing any official control; we have already declared ourselves on the matter in Phillips...