Todd v. Securities and Exchange Commission

• Decision Date: 22 June 1943
• Docket Number: No. 9348.,9348.
• Citation: 137 F.2d 475
• Parties: TODD v. SECURITIES AND EXCHANGE COMMISSION (INTERNATIONAL HYDRO-ELECTRIC SYSTEM, Intervener).
• Court: U.S. Court of Appeals — Sixth Circuit

137 F.2d 475 (1943)

TODD v. SECURITIES AND EXCHANGE COMMISSION (INTERNATIONAL HYDRO-ELECTRIC SYSTEM, Intervener).

No. 9348.

Circuit Court of Appeals, Sixth Circuit.

June 22, 1943.

Howell Van Auken, of Detroit, Mich. (Howell Van Auken and Lucking, Van Auken, Schumann & Greiner, all of Detroit, Mich., on the brief), for petitioner.

Louis Loss, of Philadelphia, Pa. (John F. Davis, Milton V. Freeman, Roger S. Foster, Louis Loss, Robert F. Krause, and Joseph B. Levin, all of Philadelphia, Pa., on the brief), for respondent.

John R. Quarles, of Boston, Mass. (John R. Quarles and Ropes, Gray, Best, Coolidge & Rugg, all of Boston, Mass., on the brief), for intervenor.

Before HICKS, SIMONS, and ALLEN, Circuit Judges.

ALLEN, Circuit Judge.

This is a petition to review an order entered by the Securities and Exchange Commission. At the proceeding initiated by the Commission pursuant to Section 11(b) (2) of the Public-Utility Holding Company Act of 1935, 15 U.S.C. § 79a et seq., 15 U. S.C.A. § 79a et seq. the petitioner, a stockholder and director of the International Hydro-Electric System, a public utility holding company (hereinafter called the System), was permitted to participate in the proceedings, cross-examine, introduce evidence, file briefs and make oral argument.

The Commission, after extensive hearings, found that the continued existence of the System unduly and unnecessarily complicates the structure, and unfairly and inequitably distributes the voting power among the security holders of the System. It ordered the System "to liquidate and dissolve," and "to proceed with due diligence to submit to this Commission a plan for its liquidation and dissolution in a manner consistent with the provisions" of the Act. Jurisdiction over all subsequent steps in the process of liquidation was specifically preserved.

The pertinent part of the applicable statute, Section 11(a), (b) (2), provides:

"It shall be the duty of the Commission to examine the corporate structure of every registered holding company and subsidiary company thereof, the relationships among the companies in the holding-company system of every such company and the character of the interests thereof and the properties owned or controlled thereby to determine the extent to which the corporate structure of such holding-company system and the companies therein may be simplified, unnecessary complexities therein eliminated, voting power fairly and equitably distributed among the holders of securities thereof, and the properties and business thereof confined to those necessary or appropriate to the operations of an integrated public-utility system.

"(b) It shall be the duty of the Commission, as soon as practicable after January 1, 1938: * * *

"(2) To require by order, after notice and opportunity for hearing, that each registered holding company, and each subsidiary company thereof, shall take such steps as the Commission shall find necessary 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, or unfairly or inequitably distribute voting power among security holders, of such holding-company system. * * *"

The record reveals the following facts, which are not controverted:

The System is the top holding company in a four-tier group of utility companies consisting of 74 active corporations, of which seven are holding companies only, fifty are electric and gas utility companies, and seventeen are companies engaged in the business of water storage, transportation, real estate, and other activities. It was created under the laws of Massachusetts by a declaration of trust, and its companies fall into three groups: (1) The New England Power Association, which is also a holding company with sixty-three direct and indirect subsidiary companies engaged in the electric and gas utility business in all of New England except Maine; (2) the Gatineau Power Company, a Canadian holding company and its subsidiaries, operating an electric utility business in Quebec, Ontario, and New Brunswick; and (3) four direct subsidiaries carrying on business in New York State, Maine and New Hampshire.

The System has outstanding 121 issues of securities consisting of 26 debt issues, 21 preference stock issues, and 74 common stock issues, the debt and preferred stock being in general held by the public, and the common stock, representing the voting power, in general held by the System.

The record not only amply sustains the finding of the Commission that the continued existence of the System unduly and unnecessarily complicates the structure of its holding company system, but makes any other conclusion impossible. The System hires only six employees, four of them on a part time basis, with an annual pay roll of approximately $17,000. The New England Power Association, one of the constituent holding companies, in contrast has 9,300 employees with an annual pay roll of about $17,500,000. The System is not competent to aid its subsidiaries, and the subsidiaries are completely independent of the System and of each other in their operations. They neither exchange personnel nor pool the purchasing of supplies, equipment or insurance. The System's president admitted at the hearing that there would be no substantial loss to the two major groups, the New England Power Association and the Gatineau Power Company, if they were completely severed from the System. The three groups are not jointly operated and hence no economies result from joint operation. A minor tax saving of some $11,000 to two companies of the third group, due to their being able to file a consolidated return, is the only tangible benefit disclosed. In fact the expenses and taxes of the System have averaged over $182,000 for each of the past ten years, paid with no corresponding benefit resulting to the security holders. The Commission correctly found that the System serves no economic purpose and no useful function as a holding company with respect to its subsidiaries. It also correctly decided that this condition, which arose out of the existence of the System and not out of its corporate structure, could be remedied only by terminating the existence of the System as a holding company.

The finding was also inevitable that the continued existence of the System unfairly and inequitably distributes voting power among the security holders of the System. The holders of Class A stock, of which the petitioner is one, exercise complete voting control of all 74 companies in the System. But this class represents only 8.5 per cent of the consolidated capitalization. Clearly in violation of the statute, control of the subsidiary public utility companies is exerted by the holders of the Class A stock through disproportionately small investment. Section 1(b) (3).

The System has not challenged the findings nor attacked the order, but has filed with the Commission an outline of a program of liquidation, and has intervened in this review proceeding for the purpose of supporting the order of dissolution.

The petitioner likewise does not challenge the findings of fact, nor does he maintain that the dissolution order would not be in accordance with the statute under this record, if entered at a subsequent time and after the Commission has taken certain steps which he considers a prerequisite to dissolution. He claims that the order violates the statute because (1) it is made at an impracticable time in the midst of abnormal war conditions; (2) it is made in advance of adequate investigation of the property interests of the System; (3) immediate dissolution of the top holding company should not be ordered in advance of consideration by the Commission of action to be required of other companies within the System; (4) the order is vague and uncertain, and (5) the statute and the order are unconstitutional. In addition he asks that the record be returned to the Commission for the taking of further testimony with reference to certain valuable choses in action which he claims the System has against the International Paper Company and must be asserted prior to dissolution.

Respondent and the System contend that none of these points can be raised in this court upon the ground that Section 24(a) requires as a condition precedent to the right to review an order of the Commission that the objections made shall have been urged before the Commission or that there were "reasonable grounds for failure so to do." A similar statutory provision in the National Labor Relations Act, 29 U. S.C.A. § 151 et seq....