1. Whether a provision of a corporate charter granting the
preferred stock a specified preference upon liquidation applies to
a liquidation in a simplification pursuant to § 11(b)(2) and (e) of
the Public Utility Holding Company Act of 1935 is a question of
federal law. P.
323 U. S.
636.
2. A provision of a corporate charter granting the preferred
stock a specified preference upon liquidation, adopted six years
prior to the enactment of the Public Utility Holding Company Act of
1935,
held inoperative in a simplification by liquidation
under § 11(b)(2) of that Act. P.
323 U. S.
637.
Congress did not intend that its exercise of power to simplify
holding company systems should mature rights which were created
without regard to the possibility of such exercise of power and
which otherwise would mature only by voluntary action of
stockholders or involuntarily through action of creditors.
Page 323 U. S. 625
3.
Continental Insurance Co. v. United States,
259 U. S. 156,
distinguished. P.
323 U. S.
638.
4. In a liquidation pursuant to § 11(b)(2) of the Public Utility
Holding Company Act of 1935, allocation of the assets a between
different classes of securities may be made without dollar
valuation so long as each security holder in the order of his
priority receives the equitable equivalent of rights surrendered.
P.
323 U. S.
639.
142 F.2d 411 affirmed.
Certiorari, 322 U.S. 724, to review the affirmance of a judgment
approving a plan for the liquidation and dissolution of a holding
company pursuant to an order of the Securities & Exchange
Commission under the Public Utility Holding Company Act of
1935.
MR. JUSTICE REED delivered the opinion of the Court.
An important although narrow legal point in the interpretation
of the Public Utility Holding Company Act of 1935 [
Footnote 1] is involved in this case. This is
whether a plan under section 11(e) of that act may be "fair and
equitable" to preferred stockholders within the meaning of those
words as used in that section, which allows a participation by
junior common stockholders in the distribution of the assets of a
registered holding company, which is liquidated in compliance with
section 11(b)(2), before the senior preferred stockholders receive
securities whose present value equals the preferred's full
liquidation preferences.
Page 323 U. S. 626
The Securities and Exchange Commission approved the Plan,
Holding Company Act Release No. 4215, April 5, 1943. The United
States District Court of Delaware approved the Plan,
51 F. Supp.
217, and the Circuit Court of Appeals affirmed this action.
This Court has jurisdiction under Judicial Code, Section 240, and
Section 25 of the Holding Company Act. Certiorari was granted
because of the importance of the question raised in administration
of the act. 322 U.S. 724.
The United Light and Power Company, a Maryland corporation, is a
registered holding company under the Act. Section 5. It is the top
holding company of a large system with twenty-four other corporate
associates. Section 2(a)(10). Its place in the system violates the
prohibition of the Act against a registered holding company's being
a "holding company with respect to [any] of its subsidiary
companies (Sec. 2(a)(8)) which itself has a subsidiary company
which is a holding company." Section 11(b)(2). This prohibition is
known as the "great-grandfather clause."
In proceedings for the simplification of the system, after
finding that Power violated the great-grandfather clause, an order
was entered on March 20, 1941, directing that Power be liquidated
and dissolved. [
Footnote 2] The
order authorized Power to submit to the Commission a plan for
compliance with the order "on a basis which is fair and equitable
to its security holders." Power, with its registered holding
company subsidiary, The United Light and Railways Company, a
Delaware corporation, all of whose common stock was owned by Power,
submitted such a plan and, after examination by the Commission and
modification, it was approved by order of April 5, 1943. The Plan
was held specifically to be fair and equitable to all security
holders. By the application and order, Railways' participation
Page 323 U. S. 627
in the Plan was accepted. Holding Company Act Release No. 4215.
This is the order which is before us.
It approved the Plan for the liquidation and dissolution of
Power as "necessary to effectuate the provisions of Section 11(b)
of the" Act. [
Footnote 3] It
directed counsel for the Commission to apply to an appropriate
federal court for an order enforcing the Plan. [
Footnote 4] The central feature of the Plan
Page 323 U. S. 628
and the one here in issue was Power's proposed distribution of
its assets to its preferred and common stockholders. Power's chief
asset was its holdings of common stock in its subsidiary, Railways.
It represented over $72,000,000 of its total gross assets of a
little more than $81,000,000. All other property of Power which
remained after the satisfaction of its obligations was to be
distributed by Power to Railways. Thus, this residual property of
Power would inure to the benefit of Railways' new common
stockholders, the former stockholders of Power.
Distribution of Power's common stock holdings in Railways was to
be effected on the basis of 5 shares of Railways' common stock for
one share of Power's preferred and one share of Railways' common
for 20 shares of Power's common, an allocation of 94.52% to Power's
preferred stockholders and 5.48% to Power's common stockholders. As
Railways was the only company in the tier below Power of the
holding company system, it would become, by the dissolution of
Power, the top holding company, and Power's preferred and common
stockholders, by the distribution to them of all of Railways'
common, would have in the aggregate the same rights in Railways and
in the holding
Page 323 U. S. 629
company system that Power had. The rights and preferences of
Power's stockholders would, of course, disappear with the
distribution of Railways' common and the dissolution of Power. As
holders of Railways' single class of common, a new relationship of
equality would arise between Power's preferred and common
stockholders.
This order was preceded by an examination by the Commission into
the situation of this holding company system. [
Footnote 5] For a clear understanding of the
single issue as to whether, in the liquidation of a holding company
by order of the Commission under section 11(e), a participation by
junior security holders in the assets is permissible before
preferred security holders have received the entire liquidating
preference secured to them by the company's charter, it is
sufficient to state only the following facts, about which there is
no controversy between the litigants. Power is a solvent company.
As of April 30, 1942, and there is no intimation that its condition
has worsened, its balance sheet showed assets of $81,159,075 and
liabilities of only $6,132,976, without consideration of its
capital stock structure. Its principal asset, the Railways common
stock heretofore referred to, has a book value in excess of the
$72,000,000 plus, at which it is carried on Power's balance sheet,
and an actual value which makes Power unquestionably solvent with
large equity values in its stock.
Power has outstanding 600,000 shares of Class A Preferred. This
preferred stock has a liquidation value of $100 per share or
$60,000,000, plus arrearages of $38,700,000 as of December 31,
1942, or a total liquidating value ahead of the common, as of the
time of the order
Page 323 U. S. 630
of $98,700,000. [
Footnote 6]
There are 2,421,192 shares of Class A common and 1,055,576 shares
of Class B common. [
Footnote
7]
The Commission found the balance sheet value of all Railways'
common on a
pro forma corporate basis to be $77,954,874,
and when using a
pro forma consolidated basis for the
entire system, to be $81,554,330. On a capitalization of reasonably
anticipated earnings of the system, the Commission was unable to
find a value for Railways' common "which approaches
$98,700,000.00." [
Footnote
8]
Page 323 U. S. 631
If the liquidation preference of Power's preferred stock is
applicable, under the Commission's conclusions on present
valuations, all of the Railways' common would go on distribution to
Power's preferred. The Commission determined that the liquidation
preference was not applicable and for these reasons.
The Commission's order of March 20, 1941, for the liquidation
and dissolution of Power was a step in the simplification of the
holding company system which simplification was enjoined by section
11(b)(2) of the Act. Satisfaction of the great-grandfather clause
might have been obtained in this or other holding company systems
by an order for merger, consolidation, or recapitalization between
top holding companies or between associate companies in the lower
tiers of the corporate hierarchy. Such procedure would avoid the
liquidation of Power.
Cf. Windhurst v. Central Leather
Co., 105 N.J.Eq. 621, 149 A. 36;
Porges v. Vadsco Sales
Corp., 32 A.2d 148, 151. The selection by the Commission of
one method of system adjustment to accomplish simplification,
rather than another, is an incident which ought not to affect
rights. The exercise of legislative power by Congress through
section 11(b)(2) to accomplish simplification as a matter of public
policy and the Commission's administration of the Act by
dissolution of this particular company results in a type of
liquidation which is entirely distinct from the "liquidation of the
corporation, whether voluntary or involuntary" envisaged by the
charter provisions of Power for preferences to the senior stock.
[
Footnote 9]
This conclusion permitted the Commission to examine the
investment values of the common and preferred stocks of Power. The
rights of the preferred stock to $6 annual cumulative dividends in
the going business [
Footnote
10] and to full priority in liquidation other than by operation
of the Act were treated as factors in valuation, rather than
determinative
Page 323 U. S. 632
of amounts payable in a traditional dissolution. Upon analysis
of the Holding Company System's experience and upon an estimate of
future earnings, the Commission assumed earnings of $6,185,000
annually which would be applicable to Railways' common and, as a
consequence of the distribution, to Power's preferred and common
stockholders. Since the annual preferred dividend requirements were
$3,600,000, there appeared a balance of $2,585,000 available for
the reduction of preferred stock arrearages of $38,700,000 as of
December 31, 1942. The Commission noted that, if all the assumed
earnings materialized and were applied to liquidating the preferred
current and deferred dividends, in approximately fifteen years, the
arrearages would be paid and the common would be in a position to
receive dividends. [
Footnote
11] Furthermore, only by forced liquidation could the common
stock be deprived of its possibility for future earnings. Only by
means of forced liquidation and the receipt of all Railways' common
could Power's preferred gain a right to prospective earnings above
its guaranteed dividends. The deferred dividends do not bear
interest. While recognizing that the common stock participation was
remote, the Commission determined that, in its "overall judgment,"
Power's common had a legitimate investment value of a proportion of
5.48 percent of Power's assets to the preferred's value of 94.52
percent. Such a conclusion is not "susceptible of mathematical
demonstration," [
Footnote
12] any more than any other valuation of a utility's worth. The
Commission determined this allocation was fair and equitable within
section 11(e).
Petitioner does not challenge the above allocation of values
between the preferred and common stock of Power, if the Commission
is correct in treating the stock rights
Page 323 U. S. 633
as though in a continuing enterprise, instead of in liquidation.
Petitioner relies upon the charter rights which on liquidation of
Power give to the preferred $100 and the cumulated and accrued
dividends.
Note 6
supra. It relies upon the authorities of this and other
courts which hold that, under a full priority rule, junior
securities in bankruptcy or equity reorganizations may not
participate in the assets until the rights of the holders of senior
securities are satisfied in full. [
Footnote 13] Petitioner says:
"When the Plan, whatever the device used, contemplates the
surrender of outstanding securities for new securities, either in
the same or a different company, it is not 'fair and equitable' to
force senior security holders to accept less than that which they
are contractually entitled to receive."
To petitioner, no distinction is to be drawn between liquidation
under bankruptcy or reorganization and liquidation under the Public
Utility Holding Company Act by virtue of sections 11(b)(2) and
11(e).
We reach the conclusion that the Securities and Exchange
Commission applied the correct rule of law as to the rights of the
stockholders
inter sese. That is to say, when the
Commission proceeds in the simplification of a holding company
system, the rights of stockholders of a solvent company which is
ordered by the Commission to distribute its assets among its
stockholders may be evaluated on the basis of a going business, and
not as though a liquidation were taking place.
The manifest solvency of Power simplifies the problem of
stockholders' rights with which we are here concerned.
Page 323 U. S. 634
The creditors are satisfied. [
Footnote 14] No possibility exists that simplification of
structure is employed here to evade or nullify creditors' rights in
reorganization or to take the place of traditional reorganization.
[
Footnote 15]
Like the bankruptcy and reorganization statutes, the Public
Utility Holding Company Act, in providing that plans for
simplification be "fair and equitable," incorporates the principle
of full priority in the treatment to be accorded various classes of
security interests. This right to priority in assets which exists
between creditors and stockholders exists also between various
classes of stockholders. When, by contract as evidenced by charter
provisions, one class of stockholders is superior to another in its
claim against earnings or assets, that superior position must be
recognized by courts or agencies which deal with the earnings or
assets of such a company. Fairness and equity require this
conclusion. Even before our decision in
Case v. Los Angeles
Lumber Products Co. on November 6, 1939, recent federal cases
had recognized this priority. [
Footnote 16] That has been their view since the
Case decision,
In re Porto Rican American Tobacco
Co., 112 F.2d 655, 656, 657. This is the rule applied by the
Commission
Page 323 U. S. 635
in the simplification of corporate structure. The Commission
recognizes and applies the doctrine of full priority by giving
value to the rights of the preferred in a going concern, rather
than as if by sale and distribution. Its views are stated below.
[
Footnote 17] The issue in
this case is not whether full priority should be given to preferred
over common stockholders, but whether the priority which is
established by the charter,
note
6 is applicable to a simplification by liquidation under §
11(b)(2) and (e). There is an argument that, if the charter
provision applies to this situation, it cannot be disregarded, and
that, in such a liquidation, "fair and equitable" would require the
distribution
Page 323 U. S. 636
of assets only to the preferred. We do not reach that question.
The point at issue is whether this charter provision applies.
The applicability of the charter provision under the Public
Utility Holding Company Act of 1935 is a matter of federal law.
[
Footnote 18]
When the President sent to Congress the report of the National
Power Policy Committee which placed the suggestions of the
Executive on holding companies before the legislative body, he said
of the pending Public Utility Holding Company bill:
"Such a measure will not destroy legitimate business or
wholesome and productive investment. It will not destroy a penny of
actual value of those operating properties which holding companies
now control and which holding companies securities represent
insofar as they have any value. On the contrary, it will surround
the necessary reorganization of the holding company with safeguards
which will in fact protect the investor."
S.Rep. No. 621, 74th Cong., 1st sess., p. 2.
That report urged the same care to investors:
"Simplification and reorganization of holding company
structures, making possible within a reasonable period the
practical elimination of the holding company, should be conducted
under the Commission's supervision over a period of time to prevent
undue losses to security holders from investment dislocations."
Id., p. 60. Of course, Congress would wish, in
simplifying a holding company system capital structure, to preserve
values to
Page 323 U. S. 637
investors, not to destroy them. [
Footnote 19] Consequently, while giving the Commission
power to compel the elimination of holding companies, deemed
uneconomic, it allowed the affected companies to propose plans to
the Commission to effectuate the objects and the Commission to
approve such plans when they were considered "fair and equitable."
Sections 11(b)(2) and (e), notes
3
and 4
It may be that, if the charter liquidation preference were held
to cover this situation, it would not frustrate the simplification
of the holding company system to the same degree that the gold
clause agreements interfered with the power of Congress to regulate
the gold content of the dollar.
Norman v. Baltimore & O. R.
Co., 294 U. S. 240,
294 U. S. 306
et seq., and cases cited. Distribution to preferred
stockholders only with disregard of common's interest would
eliminate Power and cure the system's present inconsistency with
the great-grandfather clause. We think, however, the charter
preference is inoperative in simplification under section 11(b)(2).
The provision having been adopted in 1929, six years prior to
enactment of the Public Utility Holding Company Act, a
"simplification" under this Act, having as an incident to it the
dissolution of one company in a holding company system, was not an
anticipated "liquidation" within the meaning of Power's charter
provision. Enforcement of an overriding public policy should not
have its effect visited on one class with a corresponding windfall
to another class of security holders. Nor should common stock
values be made to depend on whether the Commission, in enforcing
compliance with the Act, resorts to dissolution of a particular
company in the holding company system, or resorts instead to the
devices of merger
Page 323 U. S. 638
or consolidation, which would not run afoul of a charter
provision formulated years before adoption of the Act in question.
The Commission, in its enforcement of the policies of the Act,
should not be hampered in its determination of the proper type of
holding company structure by considerations of avoidance of harsh
effects on various stock interests which might result from
enforcement of charter provisions of doubtful applicability to the
procedures undertaken. Where preexisting contract provisions exist
which produce results at variance with a legislative policy which
was not foreseeable at the time the contract was made, they cannot
be permitted to operate.
Compare New York Trust Co. v.
Securities and Exchange Commission, 131 F.2d 274;
In re
Laclede Gas Light Company, 57 F. Supp.
997. The reason does not lie in the fact that the business of
Power continues in another form. That is true of bankruptcy and
equity reorganization. It lies in the fact that Congress did not
intend that its exercise of power to simplify should mature rights,
created without regard to the possibility of simplification of
system structure, which otherwise would only arise by voluntary
action of stockholders or, involuntarily, through action of
creditors. We must assume that Congress intended to exercise its
power with the least possible harm to citizens.
But it is said that such a conclusion is at variance with this
Court's ruling in
Continental Ins. Co. v. United States,
259 U. S. 156. In
that case, a liquidation of the Reading Company, a holder of
interests in railroads and coal mines, was compelled by
governmental prosecution so that it would not be operating in
violation of the Sherman Anti-Trust Act or the Hepburn Act.
[
Footnote 20] Its coal
properties, corporate assets, were passed to a newly organized
Page 323 U. S. 639
coal company, the value of whose stock, by negotiable
certificates of interest, came into possession of Reading's old
stockholders individually. The distribution gave equal
participation in the coal properties to the common and preferred
stock in accordance with the charter agreement as to assets on
liquidation, pages
259 U. S.
177-181. The common stock contended that as the value of
the coal properties was surplus, all of the coal certificates
should go to the common stockholders as in a continuing business.
Thus, by its approval of the distribution, this Courts handled the
liquidation, which was forced by law, says petitioner, in
accordance with the charter provisions and not as though it were a
continuing business.
The
Continental or
Reading case turned,
however, on the charter rights of the preferred to share equally
with the common in earnings which had become assets, pages
259 U. S.
179-180, not on whether a right to share was matured or
varied by governmental action. Contrary to the situation in this
present case, the charter provisions of the Reading Company were
adopted with knowledge of the sanctions of the Sherman Act against
monopoly. 259 U.S. at
259 U. S. 177
and
259 U. S. 171.
We do not feel constrained by its dealing with charter rights as in
a normal liquidation to hold that, where liquidation is adopted as
a matter of administrative routine, the preferences are thereby
matured.
As indicated earlier in this opinion, we have not undertaken to
review the facts to determine whether the allocation of stock
between the preferred and common is in proper proportion. That
issue is not made. It was vigorously discussed by Commissioner
Healey in the dissenting opinion. Holding Company Act Release 4215,
p. 39
et seq. See Dodd, Holding Company Act
Recapitalizations, 57 Harv.L.Rev. 295, 319. The allocation properly
may be made without dollar valuation so long as
"each security holder in the order of his priority receives
Page 323 U. S. 640
from that which is available for the satisfaction of his claim
the equitable equivalent of the rights surrendered."
Group of Investors v. Chicago, M., St. P. & P. R.
Co., 318 U. S. 523,
318 U. S. 565,
supra; Consolidated Rock Products Co. v. Du Bois,
312 U. S. 510,
312 U. S. 529;
Ecker v. Western Pacific R. Corp., 318 U.
S. 448,
318 U.S.
482;
Kansas City R. v. Cent. Union Tr. Co.,
271 U. S. 445,
271 U. S. 455,
supra.
As the parties have not challenged them, we have not considered
in any way the constitutionality of the sections of the Holding
Company Act involved.
Affirmed.
MR. JUSTICE DOUGLAS took no part in the consideration or
decision of this case.
[
Footnote 1]
49 Stat. 803.
[
Footnote 2]
The findings and opinion which led to this order are found in
In the Matter of The United Light and Power Company, 8
S.E.C. 837.
[
Footnote 3]
"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. In carrying out the provisions of this
paragraph, the Commission shall require each registered holding
company (and any company in the same holding company system with
such holding company) to take such action as the Commission shall
find necessary in order that such holding company shall cease to be
a holding company with respect to each of its subsidiary companies
which itself has a subsidiary company which is a holding company. .
. ."
49 Stat. 820-821, sec. 11(b)(2).
[
Footnote 4]
"(e) In accordance with such rules and regulations or order as
the Commission may deem necessary or appropriate in the public
interest or for the protection of investors or consumers, any
registered holding company or any subsidiary company of a
registered holding company may, at any time after January 1, 1936,
submit a plan to the Commission for the divestment of control,
securities, or other assets, or for other action by such company or
any subsidiary company thereof for the purpose of enabling such
company or any subsidiary company thereof to comply with the
provisions of subsection (b). If, after notice and opportunity for
hearing, the Commission shall find such plan, as submitted or as
modified, necessary to effectuate the provisions of subsection (b)
and fair and equitable to the persons affected by such plan, the
Commission shall make an order approving such plan, and the
Commission at the request of the company, may apply to a court, in
accordance with the provisions of subsection (f) of section 18, to
enforce and carry out the terms and provisions of such plan. If,
upon any such application, the court, after notice and opportunity
for hearing, shall approve such plan as fair and equitable and as
appropriate to effectuate the provisions of section 11, the court
as a court of equity may, to such extent as it deems necessary for
the purpose of carrying out the terms and provisions of such plan,
take exclusive jurisdiction and possession of the company or
companies and the assets thereof, wherever located, and the court
shall have jurisdiction to appoint a trustee, and the court may
constitute and appoint the Commission as sole trustee, to hold or
administer, under the direction of the court and in accordance with
the plan theretofore approved by the court and the Commission, the
assets so possessed."
49 Stat. 822, sec. 11(e).
[
Footnote 5]
The details are fully covered in 8 S.E.C. 837 and Application
14, Release No. 4215.
[
Footnote 6]
Power's charter provides:
"Upon the dissolution or liquidation of the corporation, whether
voluntary or involuntary, the holders of the Class A Preferred
stock shall be entitled to receive out of the net assets of the
corporation, whether capital or surplus, for each share of such
stock, one hundred dollars and a sum of money equivalent to all
cumulative dividends on such share, both accrued and in arrears
(whether or not the same shall have been declared or earned),
including the full dividend for the then current quarterly period,
before any payment is made to the holders of any stock other than
the Class A Preferred stock. Any assets thereafter remaining shall
be distributable among holders of stock other than the Class A
Preferred stock in accordance with their rights at the time of the
distribution."
The amended charter (1929) also contains the following:
"The Common Stock of the Company shall be subject to the rights
of the holders of the Class A Preferred stock."
[
Footnote 7]
The two classes are entitled to the same rights, except the B
has votes. As there is no dispute before us as to the relative
rights or priorities of the common, the two classes will be treated
in this opinion as a single class of common.
[
Footnote 8]
"In order to show a value of as much as $98,700,000, it would be
necessary to capitalize 1942 consolidated net earnings applicable
to the common stock of Railways (the highest earnings since 1931)
at a rate of 6.9%, a times-earnings ratio of 14.5. Even if the most
liberal estimate of earnings made by the management, in the amount
of $7,000,000, be taken as the measure of prospective earning
power, capitalization of such earnings at a rate producing a
times-earnings ratio of 14.1 is necessary to reach an over-all
value of $98,700,000."
Release No. 4215, pp. 7-8.
The Commission illustrated the market valuation by
times-earnings ratio by pointing out that for nine representative
public utility holding companies it had averaged from a high of
12.5 in 1937 to a low of 5.1 in 1942 with 1943 at 7.1.
Id.
[
Footnote 9]
Release No. 4215, pp. 9-12.
[
Footnote 10]
8 S.E.C. 842.
[
Footnote 11]
Release No. 4215, p. 18.
[
Footnote 12]
Id., p. 19.
[
Footnote 13]
Northern Pacific Railway Co. v. Boyd, 228 U.
S. 482;
Case v. Los Angeles Lumber Products
Co., 308 U. S. 106;
Consolidated Rock Products Co. v. Du Bois, 312 U.
S. 510;
Marine Harbor Properties v. Manufacturers'
Trust Co., 317 U. S. 78;
Ecker v. Western Pacific R. Corp., 318 U.
S. 448;
Group of Institutional Investors v. Chicago,
M., St. P. & P. R. Co., 318 U. S. 523.
[
Footnote 14]
Creditors' contracts also have been declared subject to
equitable adjustment in corporate reorganizations so long as they
receive "full compensatory treatment," whether the reorganization
is in bankruptcy (
Kansas City Terminal R. v. Central Union
Trust Co., 271 U. S. 445,
271 U. S. 455;
Consolidated Rock Products Co. v. Du Bois, 312 U.
S. 510,
312 U. S. 528;
Group of Investors v. Chicago, M., St. P. & P. R. Co.,
318 U. S. 523,
318 U. S. 565,
566,
supra) or in compliance with regulatory statutes.
Continental Ins. Co. v. United States, 259 U.
S. 156,
259 U. S. 170,
259 U. S. 176.
The full priority rule applies to reorganizations of solvent
companies.
Consolidated Rock Products Co. v. Du Bois,
312 U. S. 510,
312 U. S.
527.
[
Footnote 15]
See In the Matter of Jacksonville Gas Company, Holding
Company Act Release No. 3570,
In re Jacksonville Gas
Co., 46 F. Supp.
852, 856.
[
Footnote 16]
In re New York Railways Corp., 82 F.2d 739, 743, 744;
In re National Food Products Corp., 23 F. Supp.
979, 985;
In re Utilities Power & Light
Corp., 29 F. Supp.
763, 769.
[
Footnote 17]
"It is pointed out in Commissioner Healy's separate opinion that
the words 'fair and equitable' embodied in Section 11 have a
settled meaning, as determined by the courts, and that an
application of the 'absolute priorities' doctrine must result in no
distribution to Power's common stock in this case. But that is
because he measures the rights of the preferred stock as they would
be measured in bankruptcy cases, and not merely because he follows
the 'absolute priorities' doctrine in determining the consequences
of the measurement. In other words, we can agree with him when he
says that absolute priorities must be respected, because we think
that doctrine simply means that the common stock must not be
accorded any participation unless the preferred stock has been
fully compensated for its rights and priorities. But there the area
of agreement stops, because he says further that the rights and
priorities of the preferred stockholders are the same here as in
bankruptcy cases, where their claims to liquidation preferences
(including dividend arrearages) are treated as matured. In our
view, it would be unconscionable and contrary to the plain
intention of Congress to so hold."
Holding Company Act Release No. 4215, p. 12.
"Under the circumstances, fair and equitable compensation will
be given to all of the claimants if their rights are measured not
in terms of the situation created by the statute, but rather in
terms of the situation terminated by it --
i.e., as though
no liquidation were to take place. In this way, each class of stock
will be accorded its proportionate share of the benefits to be
gained from the elimination of a useless and expensive corporate
entity and from the receipt of a security representing a more
direct investment in the underlying assets and earnings of the
system."
Id., p. 13.
[
Footnote 18]
Jerome v. United States, 318 U.
S. 101,
318 U. S. 104;
Wragg v. Federal Land Bank, 317 U.
S. 325,
317 U. S. 328;
Chicago Board of Trade v. Johnson, 264 U. S.
1,
264 U. S. 10;
Sola Electric Co. v. Jefferson Electric Co., 317 U.
S. 173,
317 U. S. 176;
Labor Board v. Hearst Publications, 322 U.
S. 111,
322 U. S. 120,
322 U. S. 129;
Clearfield Trust Co. v. United States, 318 U.
S. 363,
318 U. S. 366;
O'Brien v. Western Union Telegraph Co., 113 F.2d 539,
541.
[
Footnote 19]
"Such disposition as may be necessary can be accomplished by
reorganization which will equitably redistribute securities among
existing security holders." S.Rep. No. 621, 74th Cong., 1st Sess.,
p. 16; H.Rep. No. 1318, 74th Cong., 1st Sess. pp. 49, 50.
[
Footnote 20]
259 U. S. 259 U.S.
156 at
259 U. S. 177;
United States v. Reading Co., 253 U. S.
26; 26 Stat. 209; 34 Stat. 584.
MR. CHIEF JUSTICE STONE, dissenting.
MR. JUSTICE ROBERTS, MR. JUSTICE FRANKFURTER, and I think the
judgment below should be reversed.
The United Light and Power Company, the subject of this
litigation, is a holding company subject to provisions of the
Public Utility Holding Company Act of August 26, 1935, 49 Stat.
803. It was $60,000,000 par value of Class A preferred stock, of
which petitioner holds some shares, and two classes of common
stock. The corporate charter provides:
"Upon the dissolution or liquidation of the corporation, whether
voluntary or involuntary, the holders of the Class A Preferred
Stock shall be entitled to receive out of the net assets of the
corporation, whether capital or surplus, for each share of such
stock, one hundred dollars and a sum of money equivalent to all
cumulative dividends on such share, both accrued and in arrears
(whether or not the same shall have been declared or earned),
including the full dividend for the then current quarterly period,
before any payment is made to the holders of any stock other than
the Class A Preferred stock. "
Page 323 U. S. 641
The dividends on the preferred stock accrued and unpaid amount
to $64.50 per share, and the total priority of the preferred stock
as provided by the corporate charter is $98,700,000.
Sections 1(c) and 11(a) and (b)(2) of the Act authorize the
Commission, after an examination of their corporate structures, "to
compel the simplification of public utility holding company
systems" and to require any such holding company
"to take such action as the Commission shall find necessary in
order that such holding company shall cease to be a holding company
with respect to each of its subsidiary companies which itself has a
subsidiary company which is a holding company."
Section 11(e) requires any plan of reorganization approved by
the Commission to be "fair and equitable to the persons affected by
such plan."
Acting under these provisions of § 11 the Commission has ordered
that United be "liquidated and dissolved" as a step in the
simplification of the holding company structure, so that United
shall cease to be a holding company as commanded by § 11(b)(2), and
its stockholders shall become stockholders in its subsidiary,
Railways Co. The Commission, in ordering dissolution and
liquidation of the company and providing for the distribution of
its assets, found that the stipulated priority of the preferred
stock is far in excess of the present value of the company's
assets. It said that, if the stipulated priority
"is controlling, our inquiry must perforce be ended at this
point in a decision that the preferred stock is entitled to all the
assets of the corporation to the exclusion of the common."
Nevertheless, the Commission has ordered, and this Court
sustains the order, that only 94.52% of the assets of the company
be allocated to the preferred stock upon liquidation, and 5.48% to
the common. For purposes of liquidation, the Commission measured
the rights of the different classes of stockholders in terms of the
estimated
Page 323 U. S. 642
value of their interests as though the liquidation which the
Commission had ordered were not to take place and the corporation
were to continue as a going concern. In short, in liquidating the
corporation, it determined, as the opinion of the Court declares,
that, in distributing the assets of the corporation among its
stockholders, the rights of the stockholders "may be evaluated on
the basis of a going business, and not as though a liquidation were
taking place."
Peering into the future with almost clairvoyant percipience, the
Commission prophesied that, if the company now being liquidated and
dissolved were allowed to continue its operations, it would,
fifteen years hence, have paid all arrears of dividends on the
preferred, and would then be able to pay an estimated annual return
on the common stock in excess of $2,500,000. This prophecy assumed
average future earnings in excess of $6,000,000 a year, a sum which
"actual earnings . . . have never in the past ten years exceeded .
. except in 1942." This prognosis, the Commission thought, afforded
justification for distributing the assets of the corporation upon
its liquidation and dissolution not according to the stipulated
priority of the preferred stock upon liquidation, which is in fact
taking place, or indeed in conformity to its priority right to
current earnings if the company were to continue unliquidated. For,
by the Commission's order, the preferred is required to surrender
to the common what is the equivalent of more than 5% of its fixed
priority right to the annual earnings from the assets of the
company, which earnings of a "going business" would be required to
satisfy dividends on the preferred before any payment of dividends
on the common. The preferred stockholders are thus denied the
priority for which they have stipulated on liquidation, and also
the priority with respect to current earnings to which they would
be entitled by virtue of their position as preferred stockholders
if the company,
Page 323 U. S. 643
which has been in fact condemned to death by the Commission, is,
as the Commission at the same time supposes, to be regarded as
living and functioning as "a going business."
The judgment of the court below sustaining so extraordinary a
result should, in our opinion, be reversed because the Commission,
without authority in law and contrary to the command of the
statute, has disregarded the plain terms of the corporate charter
controlling priority of the preferred stock upon liquidation of the
company, whether voluntary or involuntary.
The opinion of the Court adopts for its support a ground which
the Commission declined to adopt, and the decision of the
Commission rested upon a second ground on which the Court appears
not to rely. We think it clear that neither ground is supportable.
The first is that the charter provision fixing the priority of the
preferred stock in the event of "liquidation" was not intended to
apply and is inapplicable to a "liquidation" like the present. For
here, it is insisted, the liquidation, which has in fact been
ordered and is being enforced, is nevertheless to be regarded as a
fiction, and the interests of the different classes of stockholders
are to be measured by resort to the fiction that they are
continuing interests in a corporation which is not to be
liquidated, but is to be continued as a going concern. The other
ground, adopted by the Commission, is that, if the charter
provision does apply, the Commission is free to override it by any
plan of distribution which it finds to be "fair and equitable."
As to the first, it is plain that the company is now being
liquidated and dissolved; that the liquidation is involuntary, and
that some of the corporation's assets are being distributed to the
common stock before satisfaction of the stipulated priority of the
preferred, and this with full knowledge of all concerned that the
company is without assets to satisfy the priority. Since these are
the precise
Page 323 U. S. 644
conditions on which the priority provision was, according to its
terms, to operate, it is not apparent why this "liquidation" is not
a "liquidation" within the meaning of the charter provision.
It is said that, although the liquidation is involuntary, it is
not within the charter provision, and that the stipulation for
priority on liquidation may be disregarded because the Holding
Company Act was enacted after the adoption of the charter, and
hence the parties to the incorporation could not have contemplated
a compulsory liquidation under its provisions. We find it difficult
to suppose that a stockholder who stipulates for priority upon
liquidation, whether voluntary or involuntary, is at all concerned
with the particular source of the power which may compel the
liquidation of his investment or with the purpose of its exercise.
Unless words have lost their meaning, the stipulation for priority
in this case cannot fairly be taken not to include any kind of a
liquidation which would compel the surrender of the stockholder's
investment and force him to sever his connection with the
corporation in which he has invested.
When the preferred stock of United was issued in 1929, there
were numerous statutes, state and federal, which authorized
liquidation and dissolution of corporations by government
compulsion.
See, for example, Continental Insurance Co. v.
United States, 259 U. S. 156. It
is the veriest fiction to say that investors in corporate
securities at that time could not or did not consider the
possibility of the addition of a single statute to this list, or
that the stockholders of United, by the stipulation for priority
upon liquidation, voluntary or involuntary, intended to exclude
from its operation any method of involuntary liquidation which
would affect their interests. To conclude that the present
stipulation for priority upon involuntary liquidation did not
envisage a liquidation such as this one seems like saying that an
insurance policy
Page 323 U. S. 645
payable on the death of the insured creates no obligation if the
insured dies from a disease which was unknown when the policy was
written.
We cannot assent to the proposition advanced by the Commission
that, even though the priority stipulation was intended to be
applicable to any kind of an involuntary liquidation, including one
such as the present, the Commission can nevertheless override it.
Such provisions for priority in a corporate charter constitute a
contract among the stockholders, which is entitled to
constitutional protection,
Bedford v. Eastern Building &
Loan Assn., 181 U. S. 227;
Hopkins Federal Savings & Loan Assn. v. Cleary,
296 U. S. 315;
Treigle v. Acme Homestead Assn., 297 U.
S. 189,
297 U. S. 194,
196, impairment of which is not lightly to be attributed to
Congress. No constitutional issue is raised here, but we find no
provision of the statute which purports to confer on the
Commission, in the exercise of its power to liquidate a
corporation, any authority to set aside a lawful stipulation in
which the stockholders have joined fixing their relative rights in
the event of liquidation.
On the argument of this case, counsel for the respondent
referred to the Commission's action in setting aside the contract
as an exercise of its power to "remold" the contract. Whether this
characterization of the Commission's action may be thought to
render it more palatable to the preferred stockholders whose lawful
contract has been set aside by the Commission, it is plain that, in
the absence of some controlling direction of the statute, there are
no circumstances here which call for the exercise of any implied
power of the Commission or court to readjust or restate the rights
of the stockholders without regard to their contract. There is no
suggestion that the present stipulation is unlawful, oppressive or
inequitable, or subject to any other infirmity, or that it is
incapable of being carried out in the present liquidation to which
it applies.
Page 323 U. S. 646
Hence, there is no basis for the exercise of equity powers to
adjust the rights of parties to a contract which has been set
aside; or for the Commission's argument, which the Court of Appeals
below seems to have sustained, 142 F.2d 411, 419, that the action
of the Commission is supportable as an exercise of the judicial
power to make an equitable disposition of the rights of the parties
to a frustrated contract.
Cf. New York Trust Co. v. Securities
and Exchange Commission, 131 F.2d 274.
So far as the Commission has authority to liquidate any
corporation, liquidation is only a step in the simplification of a
holding company system or the elimination of an undesirable holding
company, which are the avowed purposes of the Act. The Commission
does not reveal how the distribution of the corporate assets, upon
which the stockholders have agreed, would hamper the simplification
or the elimination of the liquidated company, or how the different
distribution ordered by the Commission would facilitate them. It
seems wholly irrelevant to the achievement of these, which are the
avowed purposes of the Act, whether the stockholders of the
dissolved corporation share in its assets in one proportion or
another. Neither the Commission, the public, nor the stockholders
have any ground for complaint so long as the agreed priority rights
to the distributed assets remain unaltered.
The Commission has found its authority for setting aside the
priority stipulation in the requirement of § 11(e) that the
Commission must find that any plan it approves for elimination of a
holding company is "fair and equitable." As we have already
indicated, the Commission has said that it is "fair and equitable"
to deprive preferred stockholders, in the event of liquidation, of
the rights for which they have stipulated and paid in order to
compensate the common stockholders for rights which they are said
to have lost because of the liquidation. But such compensation of
the common stockholders at the expense
Page 323 U. S. 647
of the preferred is contrary to the priority stipulation by
which both are bound. The common stockholders, like the preferred,
have no right not to have the company liquidated, and are entitled
to no compensation merely because it is liquidated. Their rights as
stockholders cannot survive liquidation and dissolution of the
company, and, in that event and because of it, and because of the
stipulation, neither can assert rights which they could enjoy only
if the corporation were to continue as a going concern.
We can find no basis for saying that it is not fair and
equitable, both in a technical as well as a general and
nontechnical sense, to require the stockholders to abide by their
agreement in the very circumstances to which it was intended to
apply, and where, as we have said, there is no contention that the
contract when made was or is now oppressive, unfair, inequitable or
illegal. But, beyond this, we think it is quite clear that the
requirement of § 11(e) that the plan be "fair and equitable,"
instead of furnishing authority for the deprivation of shareholders
of their priority in liquidation, is a prohibition against it.
The phrase "fair and equitable," as applied to any form of
corporate reorganization, has long been recognized as signifying
the requirement of the rule sanctioned by this Court in
Northern Pacific R. v. Boyd, 228 U.
S. 482, and the many cases following it. The rule is
that any arrangement or plan enforced without the consent of the
parties affected by it, by which the subordinate rights and
interests of stockholders are attempted to be secured at the
expense of the prior rights of other security holders, is unfair
and inequitable, and will not be judicially sanctioned.
See
Case v. Los Angeles Lumber Co., 308 U.
S. 106, and cases cited. This rule is applicable with
respect to the priorities of different classes of stockholders, as
well as to priorities between creditors and stockholders, and for
the same reasons.
Case v. Los Angeles Lumber Co., supra,
308 U. S. 119,
note 14.
Page 323 U. S. 648
In the
Los Angeles case, supra, we held that the words
"fair and equitable" had so long been recognized and applied as
signifying this rule of priority among security holders in
corporate reorganizations as to have become words of art, and that
their adoption by § 77B of the Bankruptcy Act, as applicable to
reorganizations under that section, must be taken to have
incorporated the rule of the
Boyd case in the statute, in
the absence of any context requiring a contrary construction. We
think no other constitution of § 11(e) of the present Act can be
sustained. Neither the context of the statute nor the legislative
history suggests any other. The Commission hints at no reason for
not giving these terms of art, "fair and equitable" other than
their long settled and hitherto accepted meaning.
The Commission justifies its departure from the rule here only
by recurrence in its brief to the proposition that "the essence of
the reorganization process is the remolding of contract rights and
the substitution therefor of equitable equivalents." To this, the
answer is that the Commission in this case is liquidating and
dissolving, not reorganizing, United, and that it is without
authority in such a case more than in a reorganization to alter or
disregard a contract fixing the priorities of stockholders, and
that, in depriving the preferred stockholders of their priority
rights, the Commission has substituted no equivalent for them,
either legal or equitable. In fact, it has substituted nothing for
the priority rights which its order destroys.
The Gold Clause Cases,
Norman v. B. & O. R. Co.,
294 U. S. 240,
supra, afford no analogy and lend no support to what is
now adjudged. There, Congress, with the authority of an express
provision of the Constitution, explicitly altered existing
contracts. Here, Congress has commanded the Commission to respect
contract rights by requiring that its action conform to the well
defined meaning of the phrase "fair and equitable." Congress seems
to have recognized that the stipulated priorities of stockholders
were
Page 323 U. S. 649
not to be disturbed in liquidations ordered under the Public
Utility Holding Company Act. The report of the Senate Committee
(S.Rep. No. 621, 74th Cong., 1st Sess., p. 33) recommending the
enactment of the present statute and proponents of the Bill
(H.R.Rep. 1318, 74th Cong.1st Sess., pp. 49-50; 79 Cong.Rec. 4607,
8432) repeatedly cited
Continental Insurance Co. v. United
States, supra, in which it was held that the distribution in a
liquidation compelled by the enforcement of the Sherman and Hepburn
Acts must preserve the stipulated priorities of the several classes
of stockholders of the offending corporation.
The intimation that the priority stipulation can be disregarded
in the present liquidation because the Commission could have
effected the simplification of the holding company structure by
merger, consolidation, or recapitalization is merely to say that
such procedure would not involve liquidation, voluntary or
involuntary, or, what comes to the same thing, that the preferred
stockholders could not claim that protection of the priority
stipulation in situations to which it does not and was not intended
to apply. By buying preferred stock, the preferred stockholders
paid for the privilege of membership in the corporation and for
participation in the fruits of the corporate enterprise, to
continue, with full priority of dividends, so long as the
corporation should continue as a going concern. But, in the event
of liquidation, they stipulated and paid for the specified priority
over the common stockholders in the distribution of the net
corporate assets. The preferred stockholders here assert only the
rights to which that stock is entitled on liquidation by the terms
of the priority stipulation. Calling the preferred stockholders'
right of priority a "windfall" will not serve as an apology,
explanation, or justification for the Commission's action in
appropriating the priority of the preferred in order to give a
windfall to the common. It is no answer to say that their claim on
liquidation might have been avoided by not liquidating, or to say,
as the Commission has ordered, that they must
Page 323 U. S. 650
accept on liquidation less than their stipulated priority on
liquidation and less than the rights to which they would have been
entitled if the corporation had continued as a going concern.
The judgment should be reversed.