The Securities and Exchange Commission approved as fair and
equitable an amended plan for dissolution submitted under § 11(e)
of the Public Utility Holding Company Act of 1935 by a solvent
holding company whose capital structure consisted of three classes
of preferred and one class of common stock. The plan provided for
payment to the preferred stockholders in cash; distribution of the
remaining assets to the common stockholders, and dissolution of the
company. The preferred stockholders were to be paid the voluntary
liquidation values (or call prices) fixed by the charter ($105,
$110, and $110, respectively), which the Commission found to be
less than their going concern or investment values but which were
more than their charter values on involuntary liquidation ($100 for
each of the three classes). On application by the Commission for
enforcement of the plan, the District Court concluded that it would
not be fair and equitable to pay the preferred stockholders more
than $100 per share, ordered the plan modified to provide for such
payment, and approved the plan as thus modified.
Held: the Commission's approval of the plan was not
contrary to law; its findings were supported by adequate evidence,
and its order should have been approved and enforced. Pp.
338 U. S.
99-113,
338 U. S.
155.
1. The Commission's findings as to valuation, which are based
upon expert judgment, discretion and prediction, as well as upon
"facts," are not subject to reexamination on judicial review in a
proceeding under § 11(e), unless they are not supported by
substantial evidence or were not made in accordance with legal
standard. Pp.
338 U. S.
113-127.
(a) The scope of judicial review over findings of fact and over
determinations in matters in which Congress has given the
Page 338 U. S. 97
Commission authority to act upon its expert knowledge and
experience is not different in a proceeding under § 11(e) from that
in a proceeding under § 24(a). Pp.
338 U. S.
113-127.
(b) The characterization of the reviewing court in § 11(e) as "a
court of equity" was not intended to define the scope of review to
be exercised over findings of fact or determinations in matters
committed to the Commission's expert judgment and discretion, or to
set up a different and conflicting standard of review from the one
to be applied in proceedings under § 24(a). P.
338 U. S.
125.
2. The equitable equivalents of the securities' investment
values on a going concern basis, rather than charter liquidation
provisions, provide the measure of stockholders' rights in
liquidations compelled by the Act.
Otis & Co. v. Securities
& Exchange Comm'n, 323 U. S. 624;
Schwabacher v. United States, 334 U.
S. 182. Pp.
338 U. S.
129-135.
(a) The "fair and equitable" standard requires that each
security holder be given the equitable equivalent of the rights
surrendered; in liquidations under the Act, equitable equivalence
is determined not by charter preferences, but by valuing the
security surrendered "on the basis of a going business, and not as
though a liquidation were taking place." Pp.
338 U. S.
130-131.
(b) There is no significant difference between the charter
provisions in this case and those in the
Otis case. Pp.
338 U. S.
131-132.
(c) The fact that, in this case, there is a dissolution of the
holding company enterprise by the liquidation of the last holding
company in the system, whereas, in the
Otis case, the
holding company system was to continue, does not require that the
charter involuntary liquidation preference replace investment
values as the measure of the preferred stockholders' rights.
Schwabacher v. United States, 334 U.
S. 182. Pp.
338 U. S.
132-135.
(d) A different result is not required by the fact that the plan
provides for payment of the preferred stockholders in cash, rather
than in securities of a new corporation. P.
338 U. S.
135.
(e) The doctrine of impossibility or frustration does not
provide a measure of the security holders' claims. Pp.
338 U. S.
136-139.
3. The Commission's application of the investment value
principle was free from errors of law, and the findings with
respect to value were based upon substantial evidence. Pp.
338 U. S.
139-152.
(a) The principle of compensating security holders by allowing
them the equitable equivalent of the present going concern value of
their securities as the measure of security satisfaction did
Page 338 U. S. 98
not, and was not intended to, destroy the charter right to
priority of satisfaction. P.
338 U. S.
140.
(b) When the Commission values a security interest by
determining the value that interest would have if it were not for
the present liquidation required by the Act, it substantially
complies with the statutory mandate. Pp.
338 U. S.
140-143.
(c) When the claims of senior security holders are to be paid in
cash, the Commission properly measures their claims in terms of the
cost of reinvestment in a security of comparable risk and return.
P.
338 U. S.
144.
(d) When it became apparent that the going concern value would
exceed the call prices of the stocks by a considerable amount, the
exact going concern value became immaterial, because the call price
(at which the corporation could always retire the preferred stock
without reference to the Act) marked the limits of the preferred
stocks' claims. P.
338 U. S.
145.
(e) The Commission's determination that the investment values of
the preferred stocks were in excess of their call prices has ample
support in the record. Pp.
338 U. S. 144-148.
(f) The Commission did not give the common stockholders less
than the investment value of their stock. Pp.
338 U. S.
148-151.
(g) Since the amended plan required the investment value of the
preferred stock to be measured by cash in this case, there is no
occasion for examination of the correlative rights of the preferred
and common stockholders; the rights of the common stockholders are
not entitled to recognition until the rights of the preferred
stockholders have been fully satisfied. P.
338 U. S.
151.
(h) In deciding the case on the assumption that the inquiry was
one of "relative rights based on colloquial equity," the District
Court erred insofar as, by "colloquial equities," it meant
considerations which do not bear upon the investment or going
concern value the preferred stocks would have absent the
liquidation compelled by the Act. Pp.
338 U. S.
151-152.
4. The escrow arrangement adopted by the District Court, whereby
there would be deposited in escrow the difference between the
involuntary liquidation price of $100 per share and the amount
which the Commission approved, was fair to the preferred
stockholders. Pp.
338 U. S.
152-155.
168 F.2d 722 reversed.
A plan under § 11(e) of the Public Utility Holding Company Act
of 1935 was approved by the Securities and Exchange Commission.
Holding Company Act Releases
Page 338 U. S. 99
Nos. 7041, 7119, and 7190. The District Court modified the plan
and approved it as modified. 71 F. Supp. 797. The Court of Appeals
vacated the decree of the District Court, with directions to remand
to the Commission. 168 F.2d 722. This Court granted certiorari. 335
U.S. 851.
Reversed and remanded, p.
338 U. S.
155.
MR. JUSTICE RUTLEDGE delivered the opinion of the Court.
The case involves an amended plan filed under § 11(e) of the
Public Utility Holding Company Act of 1935 [
Footnote 1] by Engineers Public Service Company. The
plan provided,
inter alia, for satisfying the claims of
Engineers' preferred stockholders in cash as a preliminary to
distributing the
Page 338 U. S. 100
remaining assets to common stockholders and dissolving the
company. Broadly, the question is whether the Securities and
Exchange Commission, in reviewing the plan, correctly applied the
"fair and equitable" standard of § 11(e) in determining the amounts
to be paid the preferred stockholders in satisfaction of their
claims.
As will appear, the ultimate effect of the Commission's
determination was to allow the holders of the three series of
Engineers' outstanding cumulative preferred stock to receive the
call (or voluntary liquidation and redemption) prices for their
shares, namely, $105 per share, $110 per share and $110 per share,
rather than the involuntary liquidation preference which, for each
of the three series, was $100 per share. Common shareholders oppose
the allowance to the preferred of the call price value, insisting
that the maximum to which the preferred are entitled is the
involuntary liquidation preference of $100.
In this view the District Court and, generally speaking, the
Court of Appeals have concurred, declining to give effect to the
plan as approved in this respect by the Commission. Consequently we
are confronted not only with issues concerning the propriety of the
Commission's action in applying the "fair and equitable" standard
of § 11(e), but with the further question whether its judgment in
these matters is to be given effect or that of the District Court,
either as exercised by it or as modified in certain respects by the
Court of Appeals.
The facts and the subsidiary issues involved in the various
determinations are of some complexity, and must be set forth in
considerable detail for their appropriate understanding and
disposition.
At the time the Public Utility Holding Company Act was enacted,
the holding company system dominated by Engineers consisted of 17
utility and nonutility companies.
Page 338 U. S. 101
Of these, nine were direct subsidiaries of Engineers and eight
were indirect subsidiaries. Integration proceedings under §
11(b)(1) of the Act were instituted with respect to Engineers and
its subsidiaries in 1940. In a series of orders issued in 1941 and
1942, the Securities and Exchange Commission directed Engineers to
dispose of its interests in all companies except either Virginia
Electric and Power Company or Gulf States Utilities Company, and
designated Virginia as the principal system if Engineers failed to
elect between it and Gulf States. [
Footnote 2] At the time the plan now under review was
filed, Engineers had complied with the divestment orders to the
extent of disposing of all its properties except its interest in
Virginia, consisting of 99.8 percent of that company's common
stock, and its interest in Gulf States and El Paso Electric
Company, consisting of all their common stock. Engineers' principal
assets were the securities representing its interest in these
companies and $14,650,000 in cash and United States Treasury
securities.
Engineers had no debts. It had outstanding three series of
cumulative preferred stock of equal rank: 143,951 shares of $5
annual dividend series, 183,406 shares of $5.50 series, and 65,098
shares of $6 series. As has been said,
Page 338 U. S. 102
all three series had involuntary liquidation preferences of $100
per share, call prices of $105 for the $5 series and $110 for the
$5.50 and $6 series, and voluntary liquidation preferences equal to
the call prices.
Proceedings before the Commission. The Plan as Originally
Filed. The plan as originally filed by Engineers provided for
the retirement of all three series of preferred stock by payment of
the involuntary liquidation preference of $100 per share, plus
accrued dividends to the date of payment. [
Footnote 3] The remaining properties of Engineers were
then to be distributed among the common stockholders, and Engineers
was to dissolve. [
Footnote
4]
In order to insure adequate presentation of the views of the
preferred stockholders, Engineers' board of directors authorized
one of its members, Thomas W. Streeter, who was primarily
interested in the preferred stock, to retain counsel partly at the
company's expense. Streeter and members of his family are
petitioners in No. 227. These preferred stockholders and
representatives of a group of institutional investors who held
preferred stock,
Page 338 U. S. 103
the Home Insurance Company and Tradesmens National Bank and
Trust Company, petitioners in No. 243, appeared before the
Commission in opposition to the plan. They contended that they
should receive amounts equal to the voluntary liquidation
preference of the preferred.
After summarizing the issuing prices, [
Footnote 5] the dividend history, [
Footnote 6] and the market history [
Footnote 7] of the three series of
preferreds, the Commission analyzed the assets coverage and
earnings coverage of the stock. The preferred stock of Engineers
represented 17.5 percent of the consolidated capitalization and
surplus of the system. That stock was junior to the 66.2 percent of
the consolidated capitalization and surplus which consisted of
securities of Engineers' subsidiaries held by the public, and
senior to 16.3 percent,
Page 338 U. S. 104
consisting of Engineers' total common stock and surplus.
The system's average earnings coverage of fixed charges and
preferred dividends for the last five years prior to the submission
of the plan was 1.4 times. For these five years, Engineers' average
earnings coverage of preferred dividends was 1.5 times.
Certain expert testimony concerning the going concern or
investment value of the preferred stock was adduced before the
Commission. Dr. Ralph E. Badger was an expert witness on behalf of
certain preferred stockholders. He made a detailed analysis of the
earnings and assets of Engineers and of the three series of
preferred stock. He then compared Engineers and the preferred stock
with relevant information concerning other comparable companies and
securities. [
Footnote 8] He
concluded that, apart from
Page 338 U. S. 105
their call provisions and on the basis of quality and yield, the
three series of preferred stock should be valued at $108.70,
$119.57, and $130.33 respectively, but that, because of the
redemption privilege, "the present investment values are
represented by their call price, plus a slight premium to account
for the time required to effect a call." The fair investment values
of the preferred, in view of the redemption privilege, were: $5
series -- $106.25; $5.50 series -- $111.38; $6 series -- $111.50.
No rebuttal testimony was introduced, and there was no serious
challenge to Badger's conclusions that the fair investment value of
each series of the preferred exceeded the call prices.
Donald C. Barnes, Engineers' president, testified that apart
from the impact of § 11 of the Act and taking into account the call
prices, the fair value of the preferreds,
i.e., "what a
willing buyer would pay and what a willing seller would take in
today's market for such securities," was somewhat above the
redemption prices. Barnes spoke of several factors,
viz.,
possibilities of continued inflation, of depression, government
competition, adverse changes in regulatory policy, or developments
in atomic
Page 338 U. S. 106
energy, all "common to the utilities industry generally," which
might have a future adverse effect on the value of Engineers
preferred. Both witnesses agreed, however, as Engineers stated in
its brief before the Commission, that
"the present value or investment worth of these three series of
stock, on a going concern basis and apart from the Act, under
prevailing yields applied to comparable securities"
was in excess of the call prices. Barnes also testified that the
preferred stock would have been called if it had not been for the
impact of § 11.
The Commission first held that "the dissolution of Engineers
[was]
necessary' under the standards of the Act." However,
since such a liquidation, under Otis & Co. v. Securities
and Exchange Commission, 323 U. S. 624,
"does not mature preferred stockholders' claims" the so-called
involuntary liquidation provision of Engineers' charter was not
operative. The Otis case ruled
"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."
323 U.S. at
323 U. S.
638.
After announcing that, in a § 11 reorganization
"a security holder must receive, in the order of his priority,
from that which is available for the satisfaction of his claim, the
equitable equivalent of the rights surrendered,"
the Commission considered all the charter provisions which
affected the preferred, "such as the dividend rate and the call
price as well as the liquidation preferences," and analyzed the
financial condition of the company "with particular regard to the
asset and earnings coverage of the preferred." On the basis of the
undisputed testimony, the Commission found that the going concern
or investment value of the preferred was at least equal to the
respective call prices. Since the call prices operated as ceilings
on the value of the security by providing with respect to each
Page 338 U. S. 107
series, "a means, apart from the Act, whereby the security can
be retired at a maximum price," [
Footnote 9] no attempt was made to determine whether the
investment value of any series of preferred would exceed the call
price if there were no call provision.
The Commission concluded that the payment of only $100 per
share, plus accrued dividends, would not be fair and equitable to
the preferred stockholders. It therefore refused to approve that
provision of the plan which provided for retirement of the
preferred at involuntary liquidation preferences.
Turning its attention to whether the plan was fair to the common
stock, the Commission stated that, because of the accumulation of
large amounts of idle cash, [
Footnote 10] elimination of preferred stock having fixed
dividend requirements was "highly beneficial to the common."
Moreover, by implementing adjustment of the system to compliance
with the Act, retirement of the preferred brought the common closer
to the time when it would begin receiving dividends.
Engineers' contended that payment to the preferred of any amount
in excess of $100 per share was unfair because certain divestments
required by the Act resulted in losses to the common stock and also
eliminated the advantages of a "diversified portfolio of
securities." In reply to this, the Commission noted that it did not
accept
Page 338 U. S. 108
the hypothesis that losses were incurred by divestments caused
by the Act, [
Footnote 11]
and stated that the preferred claims, measured by their going
concern value, were entitled to absolute priority, and that what
remained to junior security holders after satisfying this priority
was necessarily their fair share.
Certain mechanical features of the plan were also disapproved by
the Commission. [
Footnote
12]
The Amended Plan. Engineers then acquiesced in the
Commission's determination and submitted an amended plan. In
addition to meeting the Commission's mechanical objections to the
original plan, the amended plan provided
Page 338 U. S. 109
for payment of the preferred stocks at their voluntary
liquidation or call prices.
Over the objections of certain common stockholders, the
Commission approved the plan as amended. It stated that, in the
event the common stockholders continued to litigate the fairness of
the plan after approval by the district court, it would be
appropriate
"to achieve expeditious compliance with the Act and fairness to
the persons affected . . . for Engineers to make prompt payment of
$100 per share and accrued dividends in order to stop the accrual
of further dividends, and set up an escrow arrangement."
The escrow would secure the payment of the amount in issue and
also
"an additional amount to provide the preferred 'for the period
of the escrow a return on the amount in escrow which is measured by
the return which would have been received by it if the stock had
remained outstanding.'"
Such an escrow could be established under court supervision,
without returning the plan to the Commission. Holding Co. Release
No. 7119, p. 6. By later order, the Commission provided for the
establishment of such an escrow at the option of Engineers if it
appeared likely that common stockholders would litigate beyond the
district court. Holding Co. Release No. 7190. [
Footnote 13]
Proceedings in the District Court. The Commission
applied to the District Court for the District of Delaware for
approval of the plan as amended. § 11(e). Certain
Page 338 U. S. 110
common stockholders, respondents in Nos. 226, 227, and 243 and
petitioners in No. 266, filed objections to the plan, contending
that the Commission had erred in awarding to the preferred
stockholders the equivalent of the voluntary liquidation
preferences of their shares. The Streeter group of preferred
stockholders objected to the Commission's finding of the
appropriateness of an escrow arrangement to stop the accrual of
further dividends in the event of continued litigation.
The District Court considered the case on the record made before
the Commission. It preferred not to determine whether the
involuntary liquidation preferences controlled, but stated that,
"in each case, the inquiry is one of relative rights based on
colloquial equity." 71 F. Supp. 797, 802. That standard, thought
the court, necessitated consideration of various factors to which
it was thought the Commission had attached little or no importance.
Thus, it was important to consider not only the charter provisions,
but the issuing price in terms of what the company received for the
securities and the market history of the preferred. These factors
might more than offset the factor of investment value, the
testimony as to which the court accepted. In any event, thought the
court, several other considerations have this effect. The Act, in
addition to compelling the preferred stockholders to surrender
"this present enhanced value,"
Page 338 U. S. 111
worked hardships on the common. All classes of securities, the
court said, suffered losses as a result of the divestment orders
issued by the Commission under the Act. Earnings retained in the
system at a sacrifice to the common contributed to the enhancement
of the value of the preferred. These standards of "colloquial
equity," which the District Court conceived to be controlling in
our decision in
Otis & Co. v. Securities and Exchange
Commission, supra, compelled the conclusion that it would not
be fair and equitable to give the preferred more than $100 per
share. Arguments concerning the worth of the preferred in the
absence of a Public Utility Holding Company Act were thought not
profitable to consider, "for there is a Public Utility Holding
Company Act." In effect amending the plan to provide for payment of
the preferred at $100 per share, the District Court approved the
plan as thus amended. The escrow agreement prescribed by the
Commission was approved, the court concluding that there was no
merit in the preferred stockholders' objections to this feature. 71
F. Supp. 797.
Proceedings in the Court of Appeals. The Court of
Appeals for the Third Circuit regarded as a central issue in the
case the question whether the District Court had exceeded the scope
of review properly exercised by a district court reviewing a plan
under § 11(e) of the Public Utility Holding Company Act. It
concluded that the District Court was charged with the duty of
exercising a full and independent judgment as to the fairness and
equity of a plan, "to function as an equity reorganization tribunal
within the limitations prescribed by the Act." 168 F.2d 722,
736.
Turning to the various factors which should have been taken into
consideration in arriving at the equitable equivalent to the rights
surrendered by the preferred
Page 338 U. S. 112
shareholders, the Court of Appeals criticized the Commission for
finding the investment value of the preferred as if there were no
Holding Company Act while omitting to evaluate the common by the
same standard, and for failing to consider factors other than the
investment value. It was thought that the Commission should have
estimated the future earning power of Engineers, absent a Holding
Company Act, and apportioned that power between preferred and
common stockholders in accordance with their respective claims. It
was also thought that, in the process of valuing the preferred and
the common by the same approach, the Commission should have
considered "the substantial losses which occurred to Engineers by
virtue of divestitures compelled by the Act." [
Footnote 14] Losses of this nature "should be
returned to the credit side of the enterprise's balance sheet as a
matter of bookkeeping."
Id. at 737-738.
The District Court, however, was held to have erred in one
particular: it had amended the plan by substituting its own
valuation of $100 per share for the preferred stock for that of the
Commission. The court had no power to do this. It could only reject
the Commission's valuation, and return the case to the Commission
for further action in the light of the court's views.
But even an investment value figure properly arrived at is "only
one of a series of factors to be used in arriving at
equitable equivalents." The Commission was required to consider
"[a]ll pertinent factors and all substantial equities," which
presumably included the "colloquial equities" adverted to by the
District Court.
Id. at 738.
At the time the opinion of the Court of Appeals was rendered,
the plan had been consummated, with the exception of the payment of
the disputed amounts in
Page 338 U. S. 113
excess of the involuntary liquidation preferences of the
preferred. The escrow arrangement, which had been employed to
preserve the issue of the amount to which the preferred was
entitled after having been approved by the Commission and the
District Court, was held to be proper.
We granted certiorari because of the importance of the questions
presented in the administration of the Public Utility Holding
Company Act. 335 U.S. 851.
I
The Court of Appeals was of the view that the question of the
extent of "the power conferred on the district courts . . . by the
Act" was one which went "to the heart of the instant controversy."
168 F.2d at 729. The Commission apparently took the position before
that court that the District Court had erred in setting aside the
agency's conclusions unless those conclusions lacked "any rational
and statutory foundation." [
Footnote 15] This view was rejected by the Court of
Appeals. Distinguishing judicial review under § 24(a) as being
limited to the inquiry whether the Commission "has plainly abused
its discretion in these matters,"
Securities and Exchange
Commission v. Chenery Corp., 332 U. S. 194,
[
Footnote 16] the
Page 338 U. S. 114
Court of Appeals held that a § 11(e) court was charged with the
duty of exercising a full and independent judgment as to the
fairness and equity of a plan, "to function as an equity
reorganization tribunal within the limitations prescribed by the
Act." 168 F.2d at 736.
This position is maintained before this Court by the
representatives of the common stockholders. The preferred
stockholders' representatives urge that the Court of Appeals erred
in this regard, and that the conclusion of the Commission should
not have been disturbed by the District Court, because that
conclusion was supported by substantial evidence and was within the
agency's statutory authority. The District Court, in their view,
exceeded the proper scope of review.
The Commission apparently no longer takes so restrictive a view
of the District Court's function as it formerly held. It now
concedes that that court had power to review "independently" the
method of valuation employed. But it urges that, in this case, the
question whether a proper method of valuation was employed is one
of law, since Congress has itself prescribed the standard for
compensating the various classes of security holders instead of
delegating to the Commission the task of fixing that standard.
In the alternative, the Commission argues that,
"If, as the court below seemed to assume, the question is not
one of law, . . . the scope of review under Section 11(e) is
limited in the same manner as that applicable to determinations of
the Interstate Commerce Commission under Section 77 of the
Bankruptcy Act,"
which is said to embody a similar statutory scheme and under
which administrative determinations of valuation are sustained if
supported by substantial evidence and not contrary to law.
Ecker v. Western Pacific R. Corp., 318 U.
S. 448,
318 U. S. 473;
RFC v. Denver & Rio Grande W. R. Co., 328 U.
S. 495,
328 U. S.
505-509.
Page 338 U. S. 115
The problem of the scope of review which Congress intended the
district court to exercise under § 11(e) arises from, and is
complicated, by the fact that Congress provided not one, but two
procedures for reviewing Commission orders of the type now in
question.
The first is afforded by § 11(e) itself. It relates to orders
approving voluntary plans submitted by any registered holding
company or subsidiary for compliance with subsection (b). The
Commission is authorized to approve such a plan if, after notice
and opportunity for hearing, it
"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."
Then follows the provision that
"the Commission, at the request of the company, may apply to a
court . . . to enforce and carry out the terms and provisions of
such plan. If . . . 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 is authorized "as a court of equity" to take exclusive
jurisdiction and possession of the company or companies and their
assets, and to appoint a trustee, which may be the Commission, for
purposes of carrying out the plan. [
Footnote 17]
Page 338 U. S. 116
The alternative mode of review is provided by § 24(a). It
applies to all orders issued by the Commission under the Act, and,
in abbreviated form, is as follows:
"Any person or party aggrieved by an order issued by the
Commission . . . may obtain a review of such order in the circuit
court of appeals . . . by filing in such court, within sixty days .
. . , a written petition. . . . The Commission shall certify and
file in the court a transcript of the record upon which the order
complained of was entered. . . . [S]uch court shall have exclusive
jurisdiction to affirm, modify, or set aside such order in whole or
in part. No objection to the order of the Commission shall be
considered by the court unless such objection shall have been urged
before the Commission or unless there were reasonable grounds for
failure so to do. The findings of the Commission as to the facts,
if supported by substantial evidence, shall be conclusive.
[
Footnote 18] "
Page 338 U. S. 117
The District Court and the Court of Appeals, focusing their
attention primarily on § 11(e), emphasized the section's
requirement of approval by the District Court, that court's
declared status "as a court of equity," and the absence from §
11(e) of such explicit provisions as those of § 24(a) making the
Commission's findings of fact conclusive, if supported by
substantial evidence; limiting the court to consideration of
objections urged before the Commission in the absence of reasonable
grounds for failure to urge them, and restricting the court's
consideration to the record made before the Commission in the
absence of any showing requiring remand to the Commission for the
taking of additional evidence.
Page 338 U. S. 118
Chiefly from these factors, the two courts reached their
respective conclusions that the District Court was required to
exercise a full and independent judgment as to the fairness and
equity of the plan, functioning as an equity reorganization
tribunal within the limitations prescribed by the Act. However,
they differed, as has been noted, concerning the scope of those
limitations.
The District Court thought it was authorized to substitute its
own judgment for that of the Commission as to whether the plan was
"fair and equitable," after considering independently the various
matters it denominated as "colloquial equities." Accordingly, after
reaching numerous conclusions on those matters contrary to the
Commission's or not given final effect in its determinations, the
court arrived at an over-all judgment opposite to that of the
Commission, and held the plan not "fair and equitable" to the
common stockholders in awarding the preferred more than $100 per
share. Modifying the plan to allow the latter only that amount, the
court ordered it enforced as modified.
The Court of Appeals was in general agreement with the District
Court concerning its power to exercise a full and independent
judgment in giving or withholding approval of the plan as "fair and
equitable" and, on the whole, was in accord with the District
Court's dispositions of the matters of "colloquial equity."
Stressing statements appearing in the legislative history of § 11,
the court thought they gave basis for a strong analogy between the
functions of district courts under § 11(e) and those of such
courts
"when called upon under the Sherman and Hepburn Acts to effect
compulsory corporate readjustments required by the public policy
expressed in those acts. [
Footnote 19]"
The court's opinion then added:
"We think that it will not be contended that a district court .
. . adjudging a controversy arising under the Sherman Act would
function
Page 338 U. S. 119
other than as in an original equity proceeding, exercising all
the powers and duties inherent in a court of equity under such
circumstances."
168 F.2d at 729. Accordingly, the court upheld the District
Court's view that it had power, as a court of equity, to withhold
approval and enforcement of the plan upon its own independent
judgment of the "colloquial equities," notwithstanding the
Commission's contrary judgment, and apparently even though the
Commission's judgment involved no clear error of law or abuse of
discretion.
The Court of Appeals, however, viewed somewhat differently the
limitations placed by the Act upon the power of review.
"The proceedings before the equity reorganization court are not
strictly
de novo, since the district court can only
approve a plan when it has been approved by the Commission.
See
Application of Securities and Exchange
Commission, 50 F.
Supp. 965, 966."
168 F.2d at 732. The district court, it was said, could receive
evidence
aliunde the Commission's record, could decide on
that evidence and the Commission's record that the plan is unfair
and inequitable, and remand the cause to the Commission for further
consideration, or could remand without taking new evidence. The
District Court therefore was wrong in ordering enforcement of the
plan as modified by itself. It could only approve and enforce or
refuse approval and remand. Only a plan approved by the Commission
and by the court could be enforced.
These views were thought supported by the history of the law of
reorganization, including equity receiverships, reorganization of
insolvent companies under former § 77B of the Bankruptcy Act, 11
U.S.C. § 207, and Chapter X reorganizations (
id. at § 501
et seq.), although the court did not
"mean to imply that Congress intended to grant a Section 11(e)
court the same full and untrammeled scope that a court of
bankruptcy would have in a Chapter X proceeding."
168 F.2d at 735-736.
Page 338 U. S. 120
Nevertheless, "[a]ny question which goes to the issue of what is
fair and equitable may be raised, and must be passed upon." 168
F.2d at 735. Moreover, since
"the critical phrase employed alike by courts of equity and by
Congress in framing the test under which a plan shall be approved
or disapproved has always embraced the phrase 'fair and equitable'
or its substantial equivalent,"
the court thought that the power and functions of the district
courts in review of plans submitted did not "vary much from statute
to statute and from case to case," 168 F.2d at 734,
i.e.,
whether the plan was to be consummated by way of equity
receivership, by action under former § 77B, by suit under Chapter
X, by a proceeding under § 77, 11 U.S.C. § 205, or by petition to a
district court under § 11(e).
The variant views held respectively by the Commission, the
District Court, the Court of Appeals, and the parties to the
proceeding demonstrate the complexity of the problem. Each view has
a rational basis of support, but none is without its difficulties,
either in statutory terms, history and intent or in practical
consequences.
The legislative history of § 11(e) throws little light on the
problem. There was, surprisingly, only casual -- indeed, tangential
-- discussion of it. The analogy to proceedings under § 77 of the
Bankruptcy Act, drawn by the Commission and referred to by the
Court of Appeals, rests chiefly upon the statement of Senator
Wheeler, cosponsor of the bill, made during a colloquy in debate on
the Senate floor and set forth in the margin. [
Footnote 20] But that statement
Page 338 U. S. 121
did not occur in any detailed consideration of the scope and
incidence of judicial review. It arose only, as it were,
incidentally in the course of extended discussion which centered
about the receivership provisions of § 11(e) as it stood at the
time of the debate.
Moreover, the discussion did not and could not take account of
the fact that, under our subsequent decisions in the
Western
Pacific and
Denver & Rio Grande cases,
supra, matters of valuation in § 77 reorganizations have
been held to be exclusively for the Interstate Commerce Commission,
not for the district courts, except as stated above.
Ecker v.
Western Pacific R. Corp., supra; RFC v. Denver & Rio Grande W.
R. Co., supra. Significantly, this fact seems not to have been
taken into account when the Court of Appeals included the § 77
proceedings among its general grouping of reorganization procedures
for analogical purposes. And, in this respect, the Commission makes
clear its difference from the Court of
Page 338 U. S. 122
Appeals, pointing out that, under the
Western Pacific
and
Rio Grande decisions, the Commission decides questions
of valuation subject only to the narrow scope of review there
allowed.
But, as if to complicate the matter further, the Commission's
analogy is somewhat weakened by the fact that the
Western
Pacific and
Rio Grande rulings concerning review of
valuation matters rested upon language in § 77 not repeated in §
11(e) of the Act presently in question. That language, appearing in
subsection (e) of § 77, provided:
"If it shall be necessary to determine the value of any property
for any purpose under this section, the Commission shall determine
such value and certify the same to the court in its report on the
plan."
This, the Court held, left to the Interstate Commerce Commission
the determination of value
"without the necessity of a reexamination by the court, when
that determination is reached with material evidence to support the
conclusion and in accordance with legal standards."
318 U.S. at
318 U. S.
472-473.
On the other hand, the opposing analogy drawn by the Court of
Appeals from the history of the law of reorganization in general is
highly indiscriminate. Insofar as it includes equity receiverships,
e.g., pursuant to Sherman and Hepburn Act readjustments,
it ignores the important fact that, in such proceedings, there is
no effort to brigade the administrative and judicial processes. Nor
does it take account of the substantial differences "from statute
to statute,"
e.g., between proceedings under § 77 of the
Bankruptcy Act as construed in the
Western Pacific and
Rio Grande cases, on the one hand, and Chapter X
reorganizations, on the other. Moreover, and perhaps most
important, it substitutes analogy drawn from other statutes and
judicial proceedings, together with a reading of § 11(e) in
comparative isolation from the other provisions of the Act, for a
consideration of that section in the context of the Act, as a whole
and particularly with
Page 338 U. S. 123
reference to any effort toward harmonizing the section with §
24(a) and bringing the two as close together as possible in
practical operation.
Of course, Congress could provide two entirely dissimilar
procedures for review, depending on whether appeal were taken by an
aggrieved person to a Court of Appeals or the plan were submitted
by the Commission at the Company's request to a district court. But
it is hard to imagine any good reason that would move Congress to
do this deliberately. The practical effect of assuming that
Congress intended the review under § 11(e) to be conducted wholly
without reference to or consideration of the limitations expressly
provided for the review under § 24(a) certainly would produce
incongruous results which would be very difficult to impute to
Congress in the absence of unmistakably explicit command.
For one thing, the consequence would be, in effect, to create to
a very large possible extent differing standards for administration
and application of the act, depending upon which mode of review
were invoked. In the one instance, apart from reviewable legal
questions, the Commission's expert judgment on the very technical
and complicated matters to deal with which the Commission was
established would be controlling. In the other instance, it would
have to give way to the contrary view of whatever district court
the plan might be submitted to.
Conceivably, the same plan might be brought under review by both
routes. Indeed, in one instance, the District Court for Delaware,
to which the plan here was submitted, held that its determination
of the issues in a § 11(e) proceeding was precluded by a prior
affirmation of the same order by a Court of Appeals in a § 24(a)
review proceeding.
See L.J. Marquis & Co. v. Securities
& Exchange Commission, 134 F.2d 822, and
Application
of Securities and Exchange Commission, 50 F. Supp.
965. Presumably, under the views now taken by the District
Court and the Court of Appeals, if district court review
Page 338 U. S. 124
under § 11(e) could be had first, that determination likewise
would be conclusive as against contrary views held by the
Commission and a Court of Appeals in a later § 24(a)
proceeding.
Moreover, apart from legal questions, the controlling standard
would be fixed by the discretion of the district court to which the
plan might be submitted. And since such a court might be any of the
many district courts available for that purpose, there hardly could
be the uniform application of the "fair and equitable" standard
which Congress undoubtedly had in mind when it entrusted its
primary administration to the Commission's expert judgment and
experience, and when it drafted the detailed provisions of § 24(a)
for review. To the extent, at least, that the standard contemplated
an area of expert discretion, its content under the view taken by
the District Court and the Court of Appeals could not be uniform,
but would vary from court to court as the judicial discretion might
differ from that of the Commission or other courts.
In contrast with the specific limitations of § 24(a), the very
brevity and lack of specificity of § 11(e), together with the
paucity and tentative character of the legislative history,
concerning the scope of review under the latter section, give
caution against reading its terms as importing a breadth of review
highly inconsistent with the limitations expressly provided by §
24(a). Both sections are parts of the same statute, designed to
give effect to the same legislative policies and to secure uniform
application of the statutory standards. That statutory context and
those objects should outweigh any general considerations or
analogies drawn indiscriminately from differing statutes or from
the history of reorganizations in general, leading as these do to
incongruities and diversities in practical application of the Act's
terms and policies.
Page 338 U. S. 125
Indeed, we think it is fair to conclude that the primary object
of § 11(e) was not to provide a highly different scope of judicial
review from that afforded by § 24(a), but was to enable the
Commission, by giving it the authority to invoke the court's power,
to mobilize the judicial authority in carrying out the policies of
the Act. To do this, the court, "as a court of equity," was
authorized to "take exclusive jurisdiction and possession of" the
company or companies and their assets and to appoint a trustee to
hold and administer the assets under the court's direction.
True, the court was to approve the plan as fair and equitable,
but nothing was said expressly as to the scope of review or the
resolution of differences in discretionary matters between the
Commission and the court. The court's characterization as "a court
of equity" was appropriate in relation to the powers of enforcement
conferred. We do not think it was intended to define with accuracy
the scope of review to be exercised over matters committed to the
Commission's discretion and expert judgment, not involving
questions of law, or to set up a different and conflicting standard
in those matters from the one to be applied in proceedings under §
24(a). This view is not inconsistent with Senator Wheeler's
comparison with § 77 proceedings under the Bankruptcy Act, which
perhaps, despite its rather casual interjection, most nearly
approaches disclosure of the legislative intent as to the present
problem.
It may be added that, in general, the courts which have dealt
with the problem appear to have taken the view we take, [
Footnote 21] as against the one
prevailing in the District
Page 338 U. S. 126
Court and the Court of Appeals which reviewed this case,
[
Footnote 22] although in no
case has the question been so sharply focused as here. While §
11(e), as we have noted, does not contain language the equivalent
of subsection (e) of § 77 of the Bankruptcy Act upon which this
Court rested its ruling concerning review of valuations in the
Western Pacific case, that lack may be supplied in this
case by the correlation we think is required between the terms of §
11(e) and those of § 24(a). Accordingly, we are unable to accept
the conclusion of the Court of Appeals and the District Court that
the latter was free, in passing upon the Commission's valuations,
to disregard its judgment in the large areas of discretion
committed by the Act to that judgment.
Administrative finality is not, of course, applicable only to
agency findings of "fact" in the narrow, literal sense. The
Commission's findings as to valuation, which are based upon
judgment and prediction, as well as upon "facts," like the
valuation findings of the Interstate Commerce Commission in
reorganizations under § 77 of the Bankruptcy Act,
Ecker v.
Western Pacific R. Corp., supra, are not subject to
reexamination by the court unless they are not supported by
substantial evidence or were not arrived at "in accordance with
legal standards."
Page 338 U. S. 127
Administrative determinations of policy, often based upon
undisputed basic facts, in an area in which Congress has given the
agency authority to develop rules based upon its expert knowledge
and experience, are exemplified by
Securities and Exchange
Commission v. Chenery Corp., supra, in which the Commission
determined that preferred stock purchased by management in the over
the counter market during the formulation of a holding company
reorganization plan could not be exchanged for common stock
participation in the reorganized company, as could other preferred
stock; instead, management was to be paid cost plus interest for
the preferred stock so purchased.
The Commission's determination was made in the exercise of its
duty to determine that a plan is "fair and equitable" within the
meaning of § 11(e), and that it is not "detrimental to the public
interest or the interest of investors or consumers" within the
meaning of § 7(d)(6) and § 7(e). On certiorari to the Court of
Appeals which had reviewed the Commission's order under § 24(a) of
the Act, we held that the Commission's action was "an allowable
judgment which we cannot disturb."
332 U. S. 332 U.S.
194, at
332 U. S. 209.
This holding was not based upon the fact that the Commission's
order was reviewed under § 24(a) of the Act, rather than under §
11(e), but upon the ground that the Commission's determination was
made in an area in which Congress had delegated policy decisions of
this sort to the Commission, and therefore that the agency
determination was "consistent with the authority granted by
Congress." We think this view is applicable when review is had
under § 11(e) as much as when it arises under § 24(a).
Even with the latitude allowed by our present ruling for play of
the Commission's judgment, it remains to consider whether, in this
case, the Commission has complied
Page 338 U. S. 128
with the statutory standards in its determination that the plan
as amended by it is fair and equitable. The common shareholders
deny this. And, contrary to the preferred shareholders' position,
the Commission has argued, alternatively to its contentions
concerning the scope of review, that application of the "fair and
equitable" standard of § 11(e) in this case presents questions of
law which have been decided erroneously by the District Court and
the Court of Appeals.
Taken most broadly, this argument of the Commission seems to be
that the entire matter of applying the "fair and equitable"
standard involves only legal issues, with the result that each
subsidiary question raised and determined in that process becomes
independently reviewable and judicially determinable. If so, of
course, the question of the proper scope of review would become
irrelevant -- at any rate, for the purposes of this case -- since
it was determined solely on the record made before the
Commission.
But the Commission does not stop with this broad argument. It
goes on to consider particular questions which arose in the
valuation process, and to urge that they presented questions of law
which the reviewing courts erroneously determined. Among these are
whether the court's dispositions violated the "absolute priority"
standard attributed to the
Otis case; whether their
requirement that the Commission value the common stock in the same
manner as it did the preferred, rather than simply awarding to the
common shareholders all of Engineers' assets remaining after giving
the preferred the equitable equivalent of their shares as
determined, violated the statutory standard; whether the courts
rightly required the Commission to take into account alleged losses
incurred by Engineers in earlier dispositions of company properties
made to comply with the Act, and whether the Commission improperly
failed to take into
Page 338 U. S. 129
account other matters of "colloquial equity" the courts
considered not only proper, but essential, to a fair and equitable
determination.
We think at least some of these matters do raise legal issues,
particularly in the light of the
Otis decision, which
should now be considered and resolved. Accordingly, we turn to them
for that purpose.
II
Challenges to the Investment Value Theory of Valuation.
The principal effect of the
Otis decision was to rule
that, in simplification proceedings pursuant to §§ 11(b)(2) and (e)
of the Act, the involuntary charter liquidation preference does
not, of itself, determine the amounts shareholders are to receive,
but, instead, the amounts allocated should be the equitable
equivalent of the securities' investment value on a going concern
basis.
The common shareholders seek to avoid the effect of this ruling
by various arguments presently to be stated, which should be
considered and determined in the light of the
Otis
decision and the Commission's practice consistent with that
decision, a summary of which practice is set forth in the
338 U.S.
96app|>Appendix to this opinion.
In the
Otis case, the plan called for the dissolution
of the United Light and Power Company, the top holding company in
the system, in obedience to a Commission order requiring the
elimination of that company, whose existence violated the
"great-grandfather clause" of § 11(b)(2). Since both common and
preferred stockholders were to receive, in exchange for their stock
in United Power, stock in its subsidiary, the United Light and
Railways Company, which was itself a holding company, the effect of
the dissolution was to eliminate the top holding company in a
multi-tiered holding company system, leaving both classes of
security holders with an investment in a continuing holding company
enterprise.
Page 338 U. S. 130
The assets of United Power were insufficient to satisfy the
claims of the company's preferred stockholders, if the charter
liquidation preference of the preferred was applicable. The
Commission found, however, 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,"
323 U.S. at
323 U. S. 632,
and that only by forced liquidation could the common be deprived of
all right to future earnings and the preferred be given the right
to prospective earnings in excess of the dividends guaranteed by
charter. The Commission concluded 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."
Ibid. Relying on the legislative history of the Act,
323 U.S. at
323 U. S.
636-637, and upon the fact that the charter provision
was not drafted in contemplation of the legislative policy embodied
in the Act, 323 U.S. at
323 U. S.
637-638, we held that the Commission had not erred in
its method of valuation. By this ruling, we rejected the easier
solution of permitting liquidations or reorganizations compelled by
the Act to mature charter rights and thus to shift investment
values from one class of security holders to another.
In so ruling, this Court did not abandon the "absolute priority"
standard insofar as embodied in the requirement that the plan be
"fair and equitable." [
Footnote
23] That standard requires that each security holder be given
the equitable equivalent of the rights surrendered, but the
equitable equivalent is not invariably the charter liquidation
Page 338 U. S. 131
preference, as it is in the case of liquidations or
reorganizations brought about through the action of creditors or
stockholders. The principle of the
Otis case is that the
measure of equitable equivalence for purposes of simplification
proceedings compelled by the Holding Company Act is the value of
the securities "on the basis of a going business, and not as though
a liquidation were taking place." 323 U.S. at
323 U. S.
633.
The decisions of the Commission, from the commencement of its
enforcement of the Public Utility Holding Company Act to the
present time, show a consistent and developing application of the
investment value rule approved in the
Otis case. [
Footnote 24] At least since its
decision in that case, charter provisions have been held invariably
not to be determinative. Federal courts which have had occasion to
speak in this connection have recognized that charter liquidation
provisions are not the measures of stockholders' rights in
liquidations and reorganizations compelled by the Act. [
Footnote 25]
Seeking to distinguish the
Otis case, the
representatives of the common stockholders contend that here, the
charter liquidation provisions are applicable, from which, of
course, it would follow that those provisions are the measure of
equitable equivalence.
It is urged first that Engineers' charter liquidation provision
is phrased in more comprehensive terms than was the one in
Otis, and that the framers of Engineers' charter
Page 338 U. S. 132
contemplated the possibility of governmental act on of the kind
required by the Holding Company Act. A comparison of the two
charter provisions reveals no significant difference between them.
[
Footnote 26] Engineers'
charter was drafted some four years earlier than the
Otis
charter. Each contract was made at a time when the legislative
policy embodied in the Holding Company Act "was not foreseeable."
323 U.S. at
323 U. S. 638.
[
Footnote 27]
A further asserted distinction is that there is here a "genuine
liquidation" --
i.e., a termination of the holding company
enterprise by the liquidation of the last holding company in the
system -- while, in the
Otis case,
"the holding company enterprise continued essentially unchanged
even though the particular corporation there involved was being
dissolved pursuant to the mandate of the Act as an incident to the
simplification of the continuing system."
It would probably suffice to observe that the word
"liquidation," as used in Engineers' charter liquidation provision,
quite obviously means liquidation of Engineers, not liquidation of
other corporations or of the holding company enterprise of which
Engineers is a part. But there are more fundamental reasons which
require the rejection of this argument. The legislative history
relied
Page 338 U. S. 133
upon in the
Otis case, 323 U.S. at
323 U. S.
636-637, contains no hint that Congress intended to
preserve investment values only when the policy of the Act required
a reduction in the number of holding companies in a system, rather
than the elimination of the system's last holding company.
[
Footnote 28] And the
Otis opinion rejected the Commission's argument in that
case that the result there was justified by the fact that the
holding company enterprise was to continue. We said that the reason
for the inapplicability of charter provisions
". . . 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."
323 U.S. at
323 U. S.
638.
Page 338 U. S. 134
Far from aiding the distinction urged by the common
stockholders,
Schwabacher v. United States, 334 U.
S. 182, supports the conclusion that investment values,
rather than charter provisions, provide the measure of the
preferred stockholders' rights. In that case, the Court held that
the charter liquidation provision of a railroad corporation merging
with another railroad under § 5 of the Interstate Commerce Act was
not determinative of the amount to which holders of cumulative
preferred stock were entitled, and that,
"In appraising a stockholder's position in a merger as to
justice and reasonableness, it is not the promise that a charter
made to him, but the current worth of that promise, that governs;
it is not what he once put into a constituent company, but what
value he is contributing to the merger, that is to be made
good."
334 U.S. at
334 U. S.
199.
Again, this result depended not upon the fact that the merger
left a continuing enterprise, but upon the fact that Congress, in
its efforts to achieve a particular economic goal, wished to avoid
shifting investment values from one class of securities to another
by maturing contract rights which would not otherwise have matured.
As did the
Otis opinion, which was said to construe "a
federal statute of very similar purposes," [
Footnote 29] the
Schwabacher
opinion
Page 338 U. S. 135
assumed "that Congress intended to exercise its power with the
least possible harm to citizens."
Otis & Co. v. Securities
and Exchange Commission, supra, at
323 U. S.
638.
The final reason for rejecting the asserted distinction between
liquidation of the particular corporation and liquidation of the
holding company enterprise serves also to answer a further related
argument made by the representatives of the common stockholders. It
is said that payment of the preferred stockholders in cash, rather
than in securities of a new corporation, and the consequent
termination of these stockholders' investment, "matures" the
preferred claims and makes this a "genuine liquidation." These
arguments, which necessarily imply that the Commission may not
choose the elimination of one company in a system rather than
another, or payment in cash rather than securities, as means of
conforming the enterprise to the requirements of the Act, without
varying the standard by which stockholders are to be compensated,
are answered in the
Otis opinion. We held there that
security values should not
"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 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."
323 U.S. at
323 U. S.
637-638.
Page 338 U. S. 136
The common stockholders argue also that, even if the charter
liquidation provision by deemed inapplicable, the "fair and
equitable" standard requires the application of the "doctrine of
frustration." It is said that frustration of a contract by
governmental edict or any other supervening event not contemplated
by the parties requires that "the loss . . . lie where it falls.
Neither party can be compelled to pay for the other's disappointed
expectations." [
Footnote 30]
In such a case, it is said,
"the face amount of the security -- which theoretically mirrors
the senior security holder's contribution to the enterprise -- is
all that he is entitled to recover."
Again, the
Otis case is said to be distinguishable in
that there, the preferred stockholders were to receive a
participation in the continuing enterprise, while here, their
investment is terminated by payment in cash. But, as we observed
above, the Commission is not to be hampered in its enforcement of
the policies of the Act "by considerations of avoidance of harsh
effects on various stock interests."
The authorities relied upon in support of the frustration
argument would not compel the result for which the common
stockholders contend, even in the absence of the
Otis
decision. Considerable reliance is placed upon
The United Light
& Power Co., 10 S.E.C. 1215, and the affirmance of that
decision by the Court of Appeals for the Second Circuit in
New
York Trust Co. v. Securities and Exchange Commission, 131 F.2d
274. In that case, the plan, a different feature of which was
reviewed in the
Otis case, provided for payment to the
company's debenture holders in cash. The Commission, after deciding
that voluntary liquidation preferences were not payable and that
the bondholders had no right to receive the premium "by virtue of
any other recognized legal or
Page 338 U. S. 137
equitable principle," held that there was no right to
compensation for the termination of the investment, which, like the
termination of the stockholders' investments, had been "brought
about by the act of a sovereign power -- in this case, a
congressional mandate." 10 S.E.C. at 1223, 1228. In affirming the
Commission's determination, the Court of Appeals held that
"the contract is no longer binding, and further performance is
excused . . . [w]here, as here, the essential existence of one of
the parties to a contract has become illegal and impossible because
contrary to a new concept of public policy which was unforeseeable
when the contract was made."
131 F.2d at 276. Since the corporation was under no obligation
to call the bonds,
"it might well let the rights of those in interest be determined
as though there had been no call option. The order under review
was, accordingly, fair and reasonable to all parties in interest,
since it provided for the payment of the bonds in a way which
discharged in full the contract obligations of the dissolved
corporation."
Ibid.
Even if it is assumed that no distinction is to be made between
bonds and preferred stock, [
Footnote 31] neither the decision of the Court of Appeals
nor that of the Commission in the
New York Trust case is
inconsistent with the later
Otis decision or with the
position of the Commission in
Page 338 U. S. 138
this case, insofar as each holds that performance of the charter
contract is excused. [
Footnote
32] Engineers is no longer required by its contract either to
continue the payment of preferred dividends beyond the dissolution
date provided in the plan or to redeem the preferred at either
voluntary or involuntary charter liquidation prices.
Moreover, the
New York Trust case need not be construed
to fix the measure of the senior security holder's claim at the
face amount of his security. In
Massachusetts Mutual Life
Insurance Co. v. Securities and Exchange Commission, 151 F.2d
424, [
Footnote 33] the Court
of Appeals for the Eighth Circuit recognized that the doctrine of
impossibility or frustration applied in the
New York Trust
case excused the corporation from its contractual obligations, and
agreed with the Commission that it would not be fair and equitable
to pay redemption premiums in the circumstances of that case. But
the Court observed that
"whether, upon retirement of outstanding bonds . . . , payment
of principal, accrued interest, and redemption premiums is the
equitable equivalent of the bondholders' rights depends upon the
facts of each particular case."
151 F.2d at 430. [
Footnote
34]
Page 338 U. S. 139
The doctrine of impossibility or frustration explains the
conclusion that the corporation is excused from performing its
contract, but it does not provide a measure of the security
holders' claims. For that measure, we must look to the intention of
Congress, as we did in the
Otis case.
III
Application of the Investment Value Theory: The Commission's
Alleged Failure to Take Account of Prior Divestment Losses
Sustained by Engineers; Its Alleged Failure to Value the Common
Stock by the Same Method as Was Used in Valuing the Preferred;
"Colloquial Equities." It was the Commission's duty in passing
upon the fairness and equity of the plan to accord each security
holder, in the order of his priority, the investment or going
concern value of his security. Here, as in the
Otis case,
the manifest solvency of Engineers "simplifies the problem of
stockholders' rights. . . . The creditors are satisfied." 323 U.S.
at
323 U. S.
633-634. Valuation on the basis of a going concern
necessarily has primary relationship to value as of the time the
shareholders' surrender becomes effective, not as of some earlier,
remote period or one long afterward. Moreover,
"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,
Page 338 U. S. 140
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. [
Footnote
35]"
These are the governing principles to be applied in
consideration of the differences between the Commission and the
reviewing courts concerning the matters listed in the heading of
this paragraph. It is important to note that the doctrine of
allowing equitable equivalents on present going concern value to
replace stated charter liquidation value as the measure of security
satisfaction did not and was not intended to destroy charter or
contract right to priority of satisfaction.
A. The investment value or going concern value theory rests upon
the premise that Congress intended to exercise its power to
simplify holding company systems and to remove uneconomic companies
without destroying legitimate investment value. It is consistent
with this premise that the investment value determined by the
Commission by the investment value the securities would have if it
were not for the liquidation required by the Act. This does not
mean, however, that the agency must value the stock as if the Act
had never affected the holding company system of which the
particular company dealt with in the plan is a part. [
Footnote 36] When the Commission
values a security interest by determining the value that interest
would have if it were not for the present liquidation or
reorganization required by the Act, it substantially complies with
the statutory mandate.
Page 338 U. S. 141
There are at least two sufficient reasons, both of which are
illustrated by the present case. It would be administratively
impossible, in determining the investment value of securities in a
corporation being liquidated, to revaluate every transaction in the
gradual simplification of the system of which the company is a
part, as if the Act had never been passed. [
Footnote 37] If the Commission were required to
reconstitute Engineers' balance sheet as if the Act had never been
passed, it would be necessary, for example, retroactively to
evaluate the economic consequences of the compelled divestment of
Engineers' interest in Puget Sound Power and Light Corporation in
1943 and to determine whether and to what extent Engineers would
have gained or lost by retaining its interest in Puget Sound to the
present time. [
Footnote 38]
The difficulties of
Page 338 U. S. 142
going through such a procedure, multiplied by the number of
divestments compelled by the Act over many years, [
Footnote 39] would be insuperable.
Page 338 U. S. 143
The second reason lies in the basis for the
Otis rule
itself. Since Congress intended that investment values should be
preserved in each liquidation or divestiture required by the Act,
we may assume that it intended the Commission to value securities
in a particular liquidation as if that liquidation were not taking
place, but not as if the Act had never been passed; for if
investment values have been preserved in the early divestitures, it
is useless to reconstitute the balance sheet as if the divestitures
had not taken place. The Commission's determinations upon which the
various divestiture orders were based may not be collaterally
attacked.
B. We have observed that the standard of compensation to be
accorded security holders does not depend upon whether their
security interests are to be retired by exchanging them for new
securities in a continuing enterprise or by payment in cash.
However, these different methods of compensating the security
holder determine which of varying methods of arriving at investment
value will be employed by the Commission. Where the security holder
is to receive new securities, the Commission is faced with a dual
valuation problem. It must evaluate the security to be surrendered
and the securities to be received in exchange. Recognizing the
inherent complexity of this problem, this Court has held that a
security holder may be accorded the equitable equivalent of the
rights surrendered without placing a dollar valuation upon either
the rights surrendered or the securities given in compensation
therefor. [
Footnote 40] In
the
Otis case, in which the plan contemplated compensating
both preferred and common stockholders of United Power in common
stock of Power's sole subsidiary, the Commission
Page 338 U. S. 144
was required to apportion the Power common between the two
classes by evaluating the expectation of income from the new stock
and the risk factor of that stock in relation to the rights being
surrendered. In effect, the Commission's task was to apportion to
the new stock earning power substantially equivalent to that
surrendered.
But when the claims of the senior security holders are to be
satisfied by payment in cash, the Commission appropriately varies
its approach. In such a case, it holds that
"the most workable hypothesis for finding a fair equivalent
between cash received and the security surrendered under the
compulsion of the plan is that of reinvestment in a security of
comparable risk."
The question to which the Commission seeks the answer is "how
much money would it cost the preferred stockholders to replace
their securities with comparable ones?"
Badger sought to provide an answer to this question by deriving
from his analysis and comparison a proper yield basis for
Engineers' preferred, [
Footnote
41] which, taking into account the effect of the risk factor,
he found to be 4.6%. Capitalization of this rate gave the
preferreds values ranging from $108.70 per share to $130.33 per
share, amounts well in excess of the call prices. The testimony of
Engineers' president, Barnes, as to "what a willing buyer would pay
and what a willing seller would take in today's market for such
securities," absent a Public Utility Holding Company Act, coincided
with that of Badger as to the estimated going concern value in cash
of the preferred. [
Footnote
42]
The Commission did not rely exclusively on this expert
testimony, but made its own study of the market and
Page 338 U. S. 145
dividend history and the earnings coverage and assets coverage
of the preferred. This served not only as a check upon the accuracy
of Badger's premises, but as a basis for the Commission's exercise
of its independent judgment. The Commission found it unnecessary to
make its own independent estimate of the dollar value of the
preferred stock absent a Holding Company Act. [
Footnote 43] When it became apparent that the
going concern value would exceed the call prices of the stocks by a
considerable amount, the exact going concern value became
immaterial, because the call price at which the corporation could
always retire the preferred without reference to the Act, marked
the limits of the preferreds' claims.
The common stockholders contend that this method of valuation,
as employed in this case, produced only
"a hypothetical market value of the preferreds based on market
prices as of the time when the testimony of Badger and Barnes was
given (the first few months of 1946)."
They criticize Badger, whose evidence was undisputed and was
accepted by the Commission, for failing to employ, as a basis for
comparison, median prices and
Page 338 U. S. 146
yields of the securities chosen for comparison, computed on the
basis of prices covering a representative period of time; they
complain that the low yield rates and high market levels of
January, 1946, were abnormal. And it is said that the Commission
and Badger failed property to evaluate Engineers' economic future,
absent a Holding Company Act,
i.e., failed to make
"a prediction as to what will occur in the future, an estimate .
. . based on an informed judgment which embraces all facts relevant
to future earning capacity and hence to present worth, including,
of course, the nature and condition of the properties, the past
earnings record, and all circumstances which indicate whether or
not that record is a reliable criterion of future performance."
Consolidated Rock Products Co. v. Du Bois, 312 U.
S. 510,
312 U. S.
526.
We may concede that, even though the preferred is to be paid in
cash, and thus should receive cash sufficient to purchase a
comparable investment with a comparable yield, the Commission would
be wrong in selecting, as a basis for valuation, abnormal or highly
speculative market values of a transient nature. But this was not
done. Badger stated that
"The prices of preferred stocks today are predicated on
fundamental conditions prevailing in the money markets, conditions
which are of a permanent nature."
He added that the values he placed upon the preferreds were
"values of a permanent nature, and . . . not values of a temporary
or speculative nature." [
Footnote 44] His conclusion was supported by a
summary
Page 338 U. S. 147
of the pertinent economic considerations, including the effects
of Government financing and the large Government debt, together
with a comparison of yields of Government bonds, high grade
corporate bonds, and high grade preferred stocks from 1932 to 1945.
Finally, Badger's analysis of Engineers' economic status, absent a
Holding Company Act, of Engineers' preferred, and of comparable
securities of other companies was thorough and adequate.
The Commission made its own independent study of Engineers'
economic record. In evaluating Badger's testimony regarding the
quality of Engineers' preferreds, the proper yield basis for the
stock, and economic considerations underlying the prediction that
current yields and price levels were relatively permanent, the
Commission exercised its informed and expert judgment. At the time
it passed upon the plan, it was able to say that
"no serious challenge was made in the proceedings to Badger's
conclusion that the fair investment value of the preferred on a
going concern basis is in excess of the call price."
Holding Company Act Release No. 7041, p. 31. Engineers, in its
brief before the Commission, conceded that
"these amounts ($106.25, $111.38, $111.50, respectively) are
substantially the present value or investment worth of these three
series of stock, on a going concern basis and apart from the Act,
under prevailing yields applied to comparable securities."
Ibid. The Commission's determination that the
investment values of the preferreds were in excess of their call
prices has ample support in the record.
Page 338 U. S. 148
But the common stockholders contend that a drop in yield rates,
caused by a lowering of support levels of Government securities,
should be taken into consideration by this Court in appraising the
Commission's determination. Any changes which had occurred since
the date of consummation would, of course, be irrelevant, for the
preferred stockholders could not be required to surrender their
investment and their advantageous dividend rate and yet remain
subjected to the risk of fluctuation in the value of their
erstwhile investment. But the common stockholders have failed to
show that the investment values of the preferreds have fallen below
the call prices even after that date. [
Footnote 45]
An argument which has been variously articulated by the District
Court, the Court of Appeals, and the common stockholders runs to
the effect that the Commission's method of valuation, which
assigned no value to the common stock, amounts to giving the
preferred the investment value it would have had in the absence of
a § 11 liquidation, while giving the common something less than its
investment value apart from the liquidation. As the District Court
phrased it,
"The argument for payment of the premium is comparable to
dealing cards off the top of a deck. When full hands (based on
theoretical 'investment value') have been dealt to all the senior
security holders, the common would merely get whatever happens to
remain. Under the Act the interests of all investors must be
considered."
71 F. Supp. at 802. [
Footnote
46]
Page 338 U. S. 149
The initial error in this argument is its assumption that the
Commission deals from less than a full deck, that the impact of §
11 has caused losses to Engineers. For if investment values have
not been destroyed by the operation of § 11, giving the preferred
stockholders the investment value of their shares will not deprive
the common of any part of the investment value of their stock. We
have already dealt with the hypothesis accepted by the District
Court and the Court of Appeals that the impact of the Act prior to
the liquidation involved here has caused losses by forcing the
company to divest itself of its interests in numerous operating
companies. [
Footnote 47]
In addition, however, it is said that value disappeared in the
liquidation of Engineers itself, in spite of the fact that, when
Engineers' management came forward with a plan for the liquidation
of Engineers, they had asserted that there was no economic
justification for the continued existence of that corporation, in
fact, had characterized it as an "economic monstrosity." [
Footnote 48] In the light of the
present
Page 338 U. S. 150
record it seems futile to argue that the dissolution of
Engineers injured the common stockholders by depriving them of the
so-called advantages of "leverage," [
Footnote 49] diversity of investment, and a centralized
management, arguments which, incidentally, were largely rejected by
Congress at the time of the passage of the Act. [
Footnote 50] The record indicates
Page 338 U. S. 151
that whatever tax advantage would be derived from reporting
income on a consolidated basis was not commensurate with the cost
of preserving Engineers.
Even if we could find that investment value had been destroyed
by the liquidation of Engineers, or if we could find that the
operation of the Act prior to the formulation of Engineers' plan
had inflicted losses on the Engineers system and could take such
losses into account, these facts would be irrelevant except to the
extent that such losses had impaired the investment value of
Engineers' preferred by lowering its assets coverage or otherwise
adversely affecting the economic prospects of the company apart
from the Act. For the "fair and equitable" standard requires that,
before the junior security holder may share, the senior security
holder must receive the equitable equivalent of the rights
surrendered -- in this case the investment value. Since the
investment value of the preferred must be measured in cash in this
case, there is no occasion for "an examination of the correlative
rights of the preferred and common stockholders." The rights of the
common are not entitled to recognition until the rights of the
preferred have been fully satisfied.
C. The District Court, with the apparent approval of the Court
of Appeals, cast the standard of "fair and equitable" in the mold
of "colloquial equities." Making payment of the preferred in excess
of $100 per share unfair, it thought, were various "colloquial
equities" which may or may not have had an incidental bearing on
the investment value of the shares. The issuing price was one such
factor. The "important consideration" was "not what the preferred
security holders paid, but how much the company received for their
stock," and, since it was "practically certain" that the company
received no more than $98 per share for any of the three series of
preferreds, and that the public paid no more than $100 per share,
there was "no consideration of colloquial equity why the preferreds
should be paid a premium." 71 F.Supp.
Page 338 U. S. 152
at 801. Other "colloquial equities" were the market history of
the preferred, [
Footnote 51]
the fact that earnings had been retained in the system, thus
enhancing the value of the preferred at a sacrifice to the common,
[
Footnote 52] and the
hardship worked by the Act upon the common stock in the form of
forced divestitures [
Footnote
53] and frustration of the enterprise.
In deciding the case on the assumption that "the inquiry is one
of relative rights based on colloquial equity," and that the
Otis case accorded participation to security holders "in
accordance with the standard of colloquial equity," the District
Court erred insofar as, by "colloquial equities," it meant
considerations which do not bear upon the investment or going
concern value the preferred would have absent the liquidation
compelled by the Act. Congress, perhaps believing that the
application of such an amorphous standard as that of "colloquial
equity" was beyond the competence of courts and commissions, has
instead prescribed the requirement that investment values be
preserved.
IV
The Escrow Arrangement. As we have stated, the plan has
been consummated by the payment to the preferred of $100 per share,
and the difference between the amount paid and the amount which
would be payable under the plan approved by the Commission has been
deposited in escrow, together with an amount sufficient to give
the
Page 338 U. S. 153
preferred, during the period of the litigation, a return on the
sum in escrow "measured by the return which would have been
received by [the preferred stockholders] if the stock remained
outstanding." [
Footnote 54]
The preferred stockholders, who received $100 per share at the time
of the consummation of the plan, will thus receive, on the
additional $5 or $10 per share held in escrow, substantially the
same return they would have derived by the retention of $5 or $10
worth of Engineers' preferred stock.
But the preferred stockholders contend that the plan should not
have been consummated until such time as they were paid in full the
amounts due them in satisfaction of their claims; that, in addition
to the principal amount in escrow and interest thereon, they should
receive an amount equal to dividends on the $100 per share received
at the time of consummation, to the date of payment of the $5 or
$10 held in escrow. Their argument is a technical one: it is said
that the Commission actually applied the redemption provision to
limit the amount of payment to them, since, in the absence of that
provision, they would have been entitled to an investment value
higher than the call prices; that, by the terms of that provision,
the company had no right to terminate dividends except by payment
of the full call prices. The answer is that the Commission did not
apply the redemption provision, which, like the involuntary
liquidation provision, was inoperative, but held that fairness
required that the preferreds be paid no more than the
Page 338 U. S. 154
call price, since the company could have called the stock at
that price at any time, absent the Act.
The total sum in escrow is not sufficient to meet the preferred
stockholders' demand. It is not apparent how they could recover the
difference between the sum in escrow and the sum they claim in this
proceeding. But we need not learn, for the escrow provision adopted
by the District Court on the recommendation of the Commission in
order to expedite consummation of the plan was fair to the
preferred stockholders. [
Footnote 55] The $100 per share received at the time of
the consummation of the plan could have been invested in comparable
securities
Page 338 U. S. 155
at the current rate of return. On the $5 or $10 per share held
in escrow, the preferred stockholders will receive, for the period
between the date of consummation and the date of payment, a return
which approximates the favorable rate of return they received on
their preferred stock in Engineers. Their position is at least
substantially the same as it would have been had they received $105
or $110 per share at the time of the consummation of the plan.
Our specific consideration has applied to the major features of
difference between the Commission and the reviewing courts. In our
opinion, in these respects, the Commission's action has not been
contrary to law, and its findings were sustained by adequate
evidence. Consequently, in accordance with the views we have stated
concerning the scope of judicial review, the Commission's order
should have been sustained. We have considered other contentions
advanced by the parties, and find nothing in them which would
warrant a different conclusion.
The judgment of the Court of Appeals is reversed, and the case
is remanded to the District Court for further proceedings not
inconsistent with this opinion.
Reversed and remanded.
MR. JUSTICE DOUGLAS and MR. JUSTICE JACKSON took no part in the
consideration or decision of this case.
* Together with No. 227,
Streeter et al. v. Central-Illinois
Securities Corp. et al.; No. 243,
Home Insurance Co. et
al. v. Central-Illinois Securities Corp. et al., and No. 266,
Central-Illinois Securities Corp. et al. v. Securities and
Exchange Commission et al., also on certiorari to the same
Court.
[
Footnote 1]
49 Stat. 803, 822, 15 U.S.C. § 79k(e).
[
Footnote 2]
Engineers Public Service Co., 9 S.E.C. 764;
The
Western Public Service Co., 10 S.E.C. 904;
Engineers
Public Service Co., 12 S.E.C. 41;
Engineers Public Service
Co., 12 S.E.C. 268. The latter two orders were reviewed on the
petition of Engineers by the Court of Appeals for the District of
Columbia, which, on November 22, 1943, set aside those orders and
remanded the case to the Commission for further proceedings in
accordance with its opinion.
Engineers Public Service Co. v.
Securities and Exchange Commission, 78 U.S.App.D.C.199, 138
F.2d 936. On the applications of both Engineers and the Commission,
this Court granted certiorari. 322 U.S. 723. We were prevented by
lack of a quorum from deciding the case, and when we were advised
that the partial consummation of the plan now under consideration
rendered the question moot, we ordered the decision of the Court of
Appeals vacated. 332 U.S. 788.
[
Footnote 3]
The cash with which the preferred was to be paid was to consist
of treasury cash on hand, cash obtained by a stort term bank loan,
and $21,964,632 in cash which Engineer's common stockholders were
to pay into the company's treasury in exchange for warrants
entitling them to purchase one share of Gulf State's common stock
at $11.50 per share, for each share of Engineers owned. The
provision for the bank loan was deleted from the amended plan, by
requirement of the Commission, and the cash which would have been
thus obtained was to be obtained from special dividends declared by
the three operating subsidiaries.
[
Footnote 4]
After retirement of the preferred, the common stock of El Paso
and Virginia (the two remaining companies whose common stock was
owned by Engineers) was to be distributed among the 13,000 common
stockholders of Engineers as a final liquidation dividend, after
which Engineers and the system's service company were to
dissolve.
[
Footnote 5]
The $5 series was issued in March, 1928, and was sold, with a
conversion privilege which had since expired, to the public at $100
per share. The $5.50 preferred was issued in October of the same
year and was sold, with warrants (inoperative at the time the plan
was proposed) entitling holders to purchase common stock, to the
public at $99.50 per share. The $6 series was issued in September,
1930, and sold to the public at $100.
[
Footnote 6]
Except for the period from July 1, 1933, to July 31, 1936,
dividends on the preferred stock were never in arrears. The
arrearages for this single period of delinquency were satisfied in
1936 and 1937.
[
Footnote 7]
"The $5.00 series reached a high of $123 in 1929; its average
price with the conversion privilege was $60.94, and $80.50 since
the expiration of that privilege, its overall average since issue
is.$67.16. The $5.50 series had an average of $53.98 while its
warrant right existed, and an average of $85.23 since; it reached a
high of $109.00 in 1929, and its overall average since issue is
$64.52. The $6.00 preferred reached its highest market price in
1945; its average price since issue is $62.77. As of February 13,
1946, the latest date covered in the hearings, the $5.00 series was
selling at 105 1/8, the $5.50 series at 105 3/4, and the $6.00
series at 109."
"Engineers common, issued in 1925, reached a high of 79 5/8 in
1929 and a low of 1 1/8 in 1935. On February 13, 1946 it was
selling at 36."
Holding Company Act Release No. 7041, p. 27, n. 45. Quotations
in the text through
note 11 are
from this Release unless otherwise indicated.
[
Footnote 8]
The Commission summarized Badger's testimony as follows:
"After analyzing the earnings and assets of Engineers, he
[Badger] selected for comparison the preferred stocks of five
public utility holding companies which he believed to be similar to
Engineers. These companies were compared with Engineers for the
years 1940 to 1945 with reference to 'times all charges and
preferred dividends earned,' 'proportion of prior obligations to
total capitalization,' 'book value of equity per share of
preferred,' 'percent of net quick assets to prior obligations' and
'times parent company dividends were earned.' It appeared that, in
general, the position of Engineers' preferred was somewhat below
the average of the five other companies until the disposition of
Puget Sound in 1943. As a consequence of that disposition, its
position improved to slightly over the average for those companies.
Badger concluded that, on an overall basis, Engineers was in a
median or average position as compared to the five companies
studied. On the basis of a comparison of the yields of the five
securities studied, he concluded that the $5.00 preferred of
Engineers had an average value of $107.49 a share, the $5.50
preferred an average value of $118.31 a share, and the $6.00
preferred an average value of $129.07 a share."
"Badger also prepared a study of the preferred stocks of ten
operating and holding companies selected for the similarity of
their earnings to those of Engineers. These companies, on an
average, earned all charges and preferred dividends 1.49 times in
1943, as against 1.40 times for Engineers. In 1944, they earned
overall charges 1.48 times, as against 1.54 times for Engineers.
They covered preferred dividends 2.52 times in 1943, as against
2.48 for Engineers, and in 1944 covered preferred dividends 2.46
times, as against a similar coverage of 3.20 for Engineers. The
stocks selected sold at prices to yield between 3.9 and 5.4%, or an
average yield for the ten stocks of 4.5%. Badger applied this yield
to the several classes of Engineers' preferred and obtained
corresponding values of $111.11 for the $5.00 preferred, $122.22
for the $5.50 preferred, and $133.33 for the $6.00 preferred.
Badger concluded, however, that, in his opinion, and in view of the
'investment characteristics' of the company and the conditions of
the money market, a proper yield for the Engineers preferred,
absent a call price, would be 4.6%, so that the corresponding
investment worth per share of the three series would be . . ."
the amounts stated in the text. Holding Company Act Release No.
7041, p. 30.
[
Footnote 9]
The Commission cited several of its previous opinions for
support of this result:
Buffalo, Niagara & Eastern Power
Corp., Holding Co. Act Release No. 6083;
New England Power
Associates et al., Holding Company Act Release No. 6470;
American Power & Light Co., Holding Company Act
Release No. 6176.
[
Footnote 10]
At the time of the hearings, the company had on hand in its
treasury some $14,650,000 in idle cash, and it was estimated that,
by the end of 1946, this sum would reach $16,825,000. These funds
had accumulated from property dispositions and retained earnings,
the management having pursued a policy of withholding dividends on
the common until it was satisfied that the system had made the
adjustments required by the Act.
[
Footnote 11]
The Commission observed:
"In all of its divestments, Engineers has been free in its
choice of methods, and, within in limits, to choose the time for
divestment. All sales have been negotiated by Engineers at
arm's-length. If, as in the case of Puget Sound, the sale brought
less than the carrying value on the books of Engineers, the
indication is that the carrying value was excessive, and not that
the sales price was low. It is significant that the market price of
Engineers' common when the plan was filed was the highest since
1932, and that the price has been rising steadily since 1942, when
the program of simplification got under way. . . . Engineers'
common reached a low of 1 1/8 in 1935. By 1945, when the plan was
filed, it had reached a high of 37."
[
Footnote 12]
The bank loan which the plan proposed in order to raise cash
with which to pay off the preferred was found by the Commission to
be unnecessary.
See note
3 supra. Retention of $65,000,000 of Virginia stock by
a trusteeship arrangement which necessitated retention of a large
part of Engineers' staff was found unnecessary. All stock of
Virginia could be distributed immediately upon payment of the
preferred at $100 per share and creation of an appropriate escrow
to protect the preferred shareholders' rights to additional
payments found due. The plan was also found "incomplete and unfair"
because it failed to include a provision for supervision by the
Commission over the payment of fees and expenses incurred in
connection with the plan.
[
Footnote 13]
Counsel for the Commission has taken the position in these
proceedings that this provision regarding an escrow did not
constitute an "amendment" to the plan, stating that
"The Commission expressly refused to amend the plan, and said,
if an escrow turns out to be necessary, it can be done under the
aegis of the Court, and we have viewed the escrow device simply as
a device in connection with the mechanics of consummation."
Commissioner Caffrey, while joining fully in the Commission's
opinion, added that Engineers, as a holding company of a single
utility company, would have been subject to proceedings under §
11(b)(2) of the Act had it not come forward with a plan. Its
dissolution, therefore, was a logical step following the required
compliance with the Commission's orders under § 11(b)(1), and was
not voluntary. Commissioner Hanrahan concurred, but thought the
discussion of the investment values of the preferred wholly
unnecessary, for, in his view, the liquidation was voluntary, and
the preferred should therefore receive the voluntary liquidation
preferences provided in Engineers' charter. Holding Co. Release No.
7119.
[
Footnote 14]
[
Footnote 15]
"The Commission takes the position before us that,"
"Unless the conclusions of the Commission lack 'any rational and
statutory foundation,' they should not have been disturbed by the
court below for the 'fair and equitable' rule of Section 11(e) . .
. [was] inserted by the framers of the act in order to protect the
various interests at stake. . . . The very breadth of the statutory
language precludes a reversal of the Commission's judgment save
where it has plainly abused its discretion in these matters,"
citing, among other authorities,
Securities Commission v.
Chenery Corp. (the second
Chenery case),
332 U.
S. 194,
332 U. S. 195
at pages
332 U. S.
207-208.
[
Footnote 16]
The Court of Appeals held that the rule of review declared in
the
Chenery case was inapplicable in the present case
because
Chenery involved a proceeding for review under §
24(a) of the Act, while this is a proceeding under § 11(e).
But
see text
infra.
[
Footnote 17]
The pertinent part of § 11(e) is, in terms, as follows:
"If, after the 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."
[
Footnote 18]
The full text of § 24(a) is as follows:
"SEC. 24. (a) Any person or party aggrieved by an order issued
by the Commission under this title may obtain a review of such
order in the circuit court of appeals of the United States within
any circuit wherein such person resides or has his principal place
of business, or in the United States Court of Appeals for the
District of Columbia, by filing in such court, within sixty days
after the entry of such order, a written petition praying that the
order of the Commission be modified or set aside in whole or in
part. A copy of such petition shall be forthwith served upon any
member of the Commission, or upon any officer thereof designated by
the Commission for that purpose, and thereupon the Commission shall
certify and file in the court a transcript of the record upon which
the order complained of was entered. Upon the filing of such
transcript, such court shall have exclusive jurisdiction to affirm,
modify, or set aside such order in whole or in part. No objection
to the order of the Commission shall be considered by the court
unless such objection shall have been urged before the Commission
or unless there were reasonable grounds for failure so to do. The
findings of the Commission as to the facts, if supported by
substantial evidence, shall be conclusive. If application is made
to the court for leave to adduce additional evidence, and it is
shown to the satisfaction of the court that such additional
evidence is material and that there were reasonable grounds for
failure to adduce such evidence in the proceeding before the
Commission, the court may order such additional evidence to be
taken before the Commission and to be adduced upon the hearing in
such manner and upon such terms and conditions as to the court may
seem proper. The Commission may modify its findings as to the facts
by reason of the additional evidence so taken, and it shall file
with the court such modified or new findings, which, if supported
by substantial evidence, shall be conclusive, and its
recommendation, if any, for the modification or setting aside of
the original order. The judgment and decree of the court affirming,
modifying, or setting aside, in whole or in part, any such order of
the Commission shall be final, subject to review by the Supreme
Court of the United States upon certiorari or certification as
provided in sections 239 and 240 of the Judicial Code, as amended
(U.S.C. title 28, secs. 346 and 347)."
15 U.S.C. § 79x.
[
Footnote 19]
S.Rep. No.621, 74th Cong., 1st Sess. 13; 168 F.2d at 729.
[
Footnote 20]
79 Cong.Rec. 8845:
"Mr. BORAH. Mr. President, I desire to ask the Senator from
Montana a question."
"On page 50, beginning with line 2 the bill provides as
follows:"
"In any such proceeding, a reorganization plan for a registered
holding company or any subsidiary company thereof shall not become
effective unless such plan shall have been approved by the
Commission after opportunity for hearing prior to its submission to
the court."
"I do not exactly understand that language. Does it mean that
the court's jurisdiction with reference to the reorganization, or
what shall be permitted by decree of the court, is limited; or is
it simply recommendatory to the court?"
"Mr. WHEELER. We do exactly the same thing at the present time,
as I understand, with reference to the Interstate Commerce
Commission. A plan for the reorganization of a railroad is supposed
to be submitted to the Interstate Commerce Commission for its
approval before it is approved by the court. We put this provision
in here in practically the same manner, as I recall, as the
existing provision with reference to the Interstate Commerce
Commission in the case of railroad reorganizations. . . ."
"
* * * *"
"The Senator from Indiana (Mr. MINTON) has called my attention
to the fact that the provision does not oust the jurisdiction of
the court at all, because the court has to approve the plan even
though the Commission approves it. In other words, there is really
a double check upon the plan, and final determination rests as in
the past in the courts."
[
Footnote 21]
Lahti v. New England Power Assn., 160 F.2d 845 (1947),
aff'g In re New England Power Assn., 66 F. Supp. 378
(1946);
Massachusetts Mutual Life Ins. Co. v. SEC, 151
F.2d 424 (1944),
aff'g In re Laclede Gas Light
Co., 57 F.
Supp. 997 (1946);
In re Electric Bond & Share
Co., 73 F. Supp.
426 (1946);
In re Eastern Minnesota Power Corp., 74 F.
Supp. 528 (1947);
In re Kings County Lighting
Co., 72 F. Supp.
767 (1947),
aff'd sub. nom. Public Service Commission of
N.Y. v. SEC, 166 F.2d 784 (1948);
In re New England Public
Service Co., 73 F. Supp. 452 (1947).
[
Footnote 22]
In re Community Gas & Power Co., 168 F.2d 740
(1948),
aff'g 71 F. Supp. 171 (1947);
In re North West
Utilities Co., 76 F. Supp. 63 (1948);
In re Interstate
Power Co., 71 F. Supp.
164 (1947);
accord, Illinois Iowa Power Co. v. North
American Light & Power Co., 49 F.
Supp. 277 (1943);
but see In re Standard Gas & Electric
Co., 151 F.2d 326 (1945),
rev'g 59 F. Supp.
274 (1945).
[
Footnote 23]
Group of Investors v. Chicago, M., St. P. & P. R.
Co., 318 U. S. 523,
318 U. S. 565;
Northern Pacific R. 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;
Otis & Co. v. SEC, 323 U.
S. 624,
323 U. S.
634.
[
Footnote 24]
See the
338 U.S.
96app|>Appendix to this opinion.
[
Footnote 25]
Massachusetts Mutual Life Insurance Co. v. Securities and
Exchange Commission, 151 F.2d 424, 430. The Court of Appeals
in this case agreed that charter provisions were not determinative,
168 F.2d at 736. While the district judge declined to decide
whether the involuntary liquidation preference applied in this
case, he has elsewhere indicated his awareness that charter
provisions do not control in liquidations compelled by the Act.
In re Consolidated Electric & Gas Co., 55 F. Supp.
211, 216;
In re North Continent Utilities
Corp., 54 F. Supp.
527, 530-531.
[
Footnote 26]
Engineers' charter provides that preferred shareholders shall
receive $100 per share, plus accrued dividends, "[i]n the event of
any liquidation, dissolution or winding up of this Corporation." In
Otis, the liquidation preference was payable "[u]pon the
dissolution or liquidation of the corporation, whether voluntary or
involuntary." 323 U.S. at
323 U. S. 630,
note 6.
[
Footnote 27]
The conclusion that liquidation compelled by governmental edict
was not foreseen at the time Engineers' charter was drafted is
reenforced by a statement appearing in the record, made by counsel
for Engineers, one of the draftsmen of the charter, apparently in
connection with another case, that a § 11 liquidation
"is an arbitrarily and forced statutory termination of the
enterprise, and it has no relation whatsoever to any factors which
the parties could have had in mind when they entered the
enterprise."
[
Footnote 28]
The common stockholders contend that the repeated references in
the legislative history of the Holding Company Act to
Continental Insurance Company v. United States,
259 U. S. 156
(S.Rep. No. 621, 74th Cong., 1st Sess. 33; H.R. Rep. No. 1318, 74th
Cong., 1st Sess. 49-50; 79 Cong.Rec. 4607, 8432) "leave no doubt
that, at least when a genuine liquidation is compelled by the Act,"
charter provisions were intended to control. But these
congressional references to the
Continental case were in
support of propositions other than that charter liquidation
provisions are applicable to liquidations compelled by the Act. The
Otis opinion pointed out that the
Continental
case
"turned . . . on the charter rights of the preferred to share
equally with the common in earnings which had become assets, . . .
not on whether a right to share was matured or varied by
governmental action."
323 U.S. at
323 U. S. 639.
The opinion proceeds to refute expressly the contentions made by
the common stockholders here:
"We do not feel constrained by [the
Continental case's]
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."
Ibid.
[
Footnote 29]
The
Otis case was described as follows:
"In construing the words 'fair and equitable' in a federal
statute of very similar purposes, we have held that, although the
full priority rule applies in liquidation of a solvent holding
company pursuant to a federal statute, the priority is satisfied by
giving each class the full economic equivalent of what they
presently hold, and that, as a matter of federal law, liquidation
preferences provided by the charter do not apply. We said that,
although the company was, in fact, being liquidated in compliance
with an administrative order, the rights of the stockholders could
be valued 'on the basis of a going business and not as though a
liquidation were taking place.' Consequently, the liquidation
preferences were only one factor in valuation, rather than
determinative of amounts payable."
334 U.S. at
334 U. S.
199.
[
Footnote 30]
American Law Institute, Restatement, Contracts § 468, comment on
subsection 3.
[
Footnote 31]
The analogy between bonds and preferred stock,
cf. 2
Dewing, The Financial Policy of Corporations 1247, n.r. (4th ed.,
1941) is subject to obvious limitations. For example, if the claims
of bondholders, rather than preferred stockholders, had been in
issue in the
Otis case, United Power would have been an
insolvent, rather than a solvent, corporation, and so subject to
bankruptcy. At least with reference to the issue of whether amounts
in excess of the face value of a security are payable, we need not
distinguish between treatment to be accorded bonds and preferred
stock. The Commission's tendency has been to treat both the same.
See, e.g., The United Light & Power Co., 10 S.E.C.
1215, 1226-1227;
Cities Service Co., Holding Company Act
Release No. 4944.
[
Footnote 32]
The citation by the
Otis majority, "
Compare New
York Trust Co. v. Securities & Exchange Commission, 131
F.2d 274;
In re Laclede Gas Light Co., 57 F.
Supp. 997," is of no assistance to the common stockholders
here, for it is in support of and directly following the
sentence:
"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."
323 U.S. at
323 U. S.
638.
[
Footnote 33]
Affirming
In re Laclede Gas Light Co., 57 F.
Supp. 997.
[
Footnote 34]
Two other decisions in the courts of appeals, which cite and
purport to follow the
New York Trust case, reason that the
premium is payable only in the event of voluntary redemption of the
bond, that the redemption is not voluntary, and therefore that the
premium is not payable. Since this syllogism disposes of each case
without reference to the doctrine of frustration, the frustration
rationale of the
New York Trust case is an alternative
ground in both cases.
City National Bank & Trust Co. of
Chicago v. SEC, 134 F.2d 65;
In re Standard Gas &
Electric Co., 151 F.2d 326.
[
Footnote 35]
323 U.S. at
323 U. S. 634.
See also the quoted statement of the Commission's views,
as opposed to those of Commissioner Healy, set forth at
323 U. S. 635,
note 17; Holding Company Act Release No. 4215, p. 12.
[
Footnote 36]
The Court of Appeals took the Commission's method to be
valuation "as if the Act had never been passed." It criticized the
Commission for valuing the preferreds on this basis, but not
valuing the common in the same manner. 168 F.2d at 737-738.
[
Footnote 37]
The Court of Appeals thought that, if the Commission wished to
value the securities
"ex the Act, losses of the sort referred to in this paragraph
must be weighed into the calculation,
i.e., such losses
should be returned to the credit side of the enterprise's balance
sheet as a matter of bookkeeping."
168 F.2d at 738.
[
Footnote 38]
In the Puget Sound reorganization, Engineers received as of 1943
approximately a 3% interest in the new common stock in return for
its old 99.3% common stock interest. The old common was estimated
to be 18 to 34 years away from dividends in the absence of a
reorganization. 13 S.E.C. 226. As in the
Otis case, the
controversy was over the question of whether Engineers was entitled
to any participation in the new company, in view of the remote and
contingent character of its earnings expectations. Engineers
subsequently sold the interest it received in the reorganization
for $764,765.
The Court of Appeals' conclusion that Engineers lost through the
Puget Sound divestment is based upon the premise that actual
earnings of the new company were considerably higher during 1946
and the first half of 1947 than the estimated earnings upon which
the Commission based its reorganization allowance to Engineers. 168
F.2d at 737, citing Moody's Public Utility Manual (1947) 53, and
supp. Vol.19 at 1914.
The Commission correctly observes that this is an
oversimplification of the complex problems involved in the
valuation of Engineers' interest in Puget Sound, and of the
relationship between that interest in 1943 and its hypothetical
value today if no recapitalization and divestment had occurred. It
notes that the earnings figures taken from Moody's fail to reflect
the use of a much lower depreciation allowance that the Commission
thought appropriate in making its earnings estimate, capital
expenditures since 1943, and divestment of certain properties after
Puget Sound had ceased to be subject to the Act. The period taken
by the Court of Appeals can hardly be assumed to provide a reliable
average earnings figure. Absent the impact of the Act,
recapitalization of Puget Sound would probably have been necessary
in the exercise of sound business judgment, a consideration which
imports numerous additional uncertainties. Further, the evaluation
of the Puget Sound divestiture required by the Court of Appeals
would compel the Commission to estimate the effects of Engineers'
hypothetical lack of the $764,765 received from the sale of the
securities received in the Puget recapitalization, funds which were
actually used to purchase additional interests in other companies
and to make payments to Engineers' preferred stocks. Certain tax
advantages derived from the sale of Puget would have to be taken
into account.
The Court of Appeals also cited the El Paso Natural Gas Company
divestiture as an example of a loss to Engineers caused by the Act,
saying, "Under this divestiture, Engineers lost a profit of at
least $4,000,000." 168 F.2d at 737. In 1931, Engineers loaned El
Paso $3,500,000 and received in return $3,500,000 in bonds and an
option to purchase 192,119 shares of El Paso's common stock. As a
result of the exercise or assignment of some of these options and
the resale in 1936, 1937, and 1944 of stock acquired by their
exercise, Engineers realized a profit, in addition to the repayment
of the loan, of $2,700,000 on its El Paso investment. The statement
that these transactions involved a loss of $4,000,000 to Engineers
is based upon the assumptions that the timing of the sales was
compelled by § 11, and not by managerial judgment, that, in the
absence of § 11 management would have sold the stock at the very
peak of the market, and upon other equally dubious premises.
[
Footnote 39]
Engineers' system consisted of 17 companies before the
Commission began its integration proceedings.
See note 2 and text supra.
[
Footnote 40]
Ecker v. Western Pacific R. Corp., 318 U.
S. 448,
318 U.S.
482-483;
Group of Investors v. Chicago, M., & St. P.
R. Co., 318 U. S. 523,
318 U. S.
565-566;
Otis & Co. v. Securities and Exchange
Commission, 323 U. S. 624,
323 U. S.
639-640.
[
Footnote 41]
Badger's analysis, as summarized by the Commission, is stated in
note 8 supra.
[
Footnote 42]
See text
supra, paragraph following
note 8
[
Footnote 43]
The Court of Appeals stated that the Commission erred in failing
to
"give any substantial consideration to the future earning power
of Engineers and its subsidiaries which the Supreme Court has held
is one of the fundamental tests for reorganization valuation."
168 F.2d at 736-737. A precise finding as to prospective
earnings of a continuing Engineers would be the controlling
subsidiary finding upon which a precise finding as to going concern
value "ex the Act" would be based.
See Group of Investors v.
Chicago, M., St. P. & P. R. Co., 318 U.
S. 523,
318 U. S. 540;
Consolidated Rock Products Co. v. Du Bois, 312 U.
S. 510,
312 U. S. 525;
6 Collier, Bankruptcy 3849-3855 (14th ed., 1947). But where it is
clear that the prospective earnings of the corporation would be
more than enough to continue payment of preferred dividends and to
carry the going concern value, absent call provisions, well above
the call price, there is no necessity for making a precise forecast
of future earnings, for the call price marks the ceiling.
Cf.
Ecker v. Western Pacific R. Corp., 318 U.
S. 448,
318 U. S.
479-483.
[
Footnote 44]
The District Court made a finding with respect to Badger's
conclusion as to the permanence of the current yield rate, and
concluded that
"The extremely low money rates which resulted in Badger's
finding that the preferred stocks of Engineers have an 'investment
value' greater than $100 per share largely reflect artificial
factors which are clearly subject to changes at any time, and may
well be of purely transitory character."
It is difficult to reconcile this "finding" with the following
statement which appears in the court's published opinion:
"I accept Dr. Badger's values and, in the absence of a showing
of changed circumstances, I shall assume that those values are
applicable at the present time."
71 F. Supp. at 801. At any rate, this is predominately a
question of fact, and the Commission's determination, supported as
it was by substantial evidence, should not have been disturbed
absent supervening economic developments prior to the consummation
of the plan which clearly required reconsideration.
[
Footnote 45]
The changes in interest rates which had occurred at the time of
the decisions of the District Court and the Court of Appeals were
merely cited to indicate that future changes might affect the
accuracy of Badger's predictions.
[
Footnote 46]
The Court of Appeals states that the Commission "made no finding
as to the
value' of the common stock," and that "the Commission
ascribed `investment value' to the preferreds, but failed to make a
similar approach to the common." 168 F.2d at 737. Central-Illinois
Securities Corporation and Christian A. Johnson, representing the
common stockholders, complain that
"the Commission's determination of the equitable equivalent of
the rights surrendered by Engineers' stockholders failed utterly to
take account of the correlative rights of the preferred and
common."
[
Footnote 47]
See note 38 and
text supra.
[
Footnote 48]
The Commission stated in its opinion that
"Engineers has produced an abundance of evidence showing that,
once it has disposed of El Paso and Gulf, it will have no reason to
continue as a separate corporate entity, for it would then be the
parent of a single operating company, Virginia. In that situation,
Engineers admits that it would be an 'economic monstrosity,' and
all participants in this proceeding seem to be in agreement with
that conclusion. The record does not clearly indicate what it will
cost to maintain Engineers after Gulf States and El Paso have been
divested. Estimates range from $172,000 to $365,000 a year. The
company freely admits that Engineers could in no way justify any
such continuing expenditure. Virginia is able to undertake its own
financing and service, and is large enough to stand independently.
Any functions Engineers might perform should more properly be
carried out by Virginia's own management."
Holding Company Act Release No. 7041, p. 18.
[
Footnote 49]
"Leverage" is the term used to describe the advantage gained by
junior interests through the rental of capital at a rate lower than
the rate of return which they receive in the use of that borrowed
capital. Assuming that the hypothetical Engineers could have used
to advantage the $39,000,000 in capital supplied by the preferred
stockholders, the Commission could properly have found that such
"leverage" was not worth the risk that earnings might drop below
the amount required to pay dividends on the preferred, thereby
endangering the junior equity of $66,768, 148 (the market value of
the securities received by the common under the plan, as of the
date of consummation, less the amount paid in the exercise of Gulf
warrants).
In the light of the facts stated in the following quotation from
the Commission's opinion, it is highly unlikely that the
hypothetical Engineers would have had use for the capital supplied
by the preferred stockholders:
"The retirement of the preferred stock will be of immediate
benefit to the common stockholders. As indicated above, the
company, at the time of the hearings, had on hand idle treasury
cash of over $14,650,000, while it is estimated that this sum will
reach approximately $16,825,000 by the end of 1946. These funds
have been accumulated through property dispositions and retained
earnings. The management has pursued a policy of withholding
dividends on the common stock until it is satisfied that the system
has made all the adjustments that will be required of it under the
Holding Company Act. As a consequence, the company has now
accumulated a large amount of idle funds while it continues to have
outstanding three substantial issues of preferred stock having
fixed dividend requirements. Under the circumstances, the
elimination of this prior charge is highly beneficial to the
common."
Holding Company Act Release No. 7041, p. 32.
[
Footnote 50]
S.Rep. No. 621, 74th Cong., 1st Sess. 11-12; Additional Views by
Representative Eicher, H.R.Rep. No. 1318, 74th Cong., 1st Sess.
46-47; Statement of House Managers, H.R.Rep. No.1903, 74th Cong.,
1st Sess. 70-71; Committee of Public Utility Executives, Summary of
S. 2796, 74th Cong., 1st Sess., with Annotations, June, 1935, 5,
7.
[
Footnote 51]
See note 7
supra.
[
Footnote 52]
Cf. Continental Insurance Co. v. United States,
259 U. S. 156, in
which the principal issue was whether, when the charter provided
that preferred and common should share equally on dissolution in
the assets of the corporation, earnings retained in the systems
should be regarded as assets and shared with the preferred in a
dissolution forced by the antitrust laws. It was held that these
retained earnings were assets and should be shared by the
preferred.
[
Footnote 53]
[
Footnote 54]
In escrow is the sum of $4,000,000, comprised as follows:
$3,204,795, which is equal to $5, $10, and $10 per share
respectively of the three series of preferred; $484,325, which is
an amount equal to simple interest for three years at the rate of
4.76% on the $5 preferred, 5% on the $5.50 preferred, and 5.45% on
the $6 preferred; $310,880, which will cover all fees and other
compensation and all remuneration or expenses claimed in connection
with the plan.
[
Footnote 55]
The preferred stockholders object that the Commission failed to
give them notice and an opportunity to be heard on the
recommendation that an escrow be established. The escrow
recommendation was made by way of an amending order, Holding
Company Act Release No. 7190, and the Commission seems to have
insisted throughout that its recommendation did not have the effect
of amending the plan, but that the establishment of an escrow was
within the power of the District Court.
See note 13 supra. The District Court,
which ordered the creation of the escrow, afforded the preferred
stockholders a hearing on the propriety of that provision and upon
whether the plan should be consummated prior to a final
determination by the court of last resort of the amounts due the
preferred stock. Applications for stay of consummation were denied,
in turn, by the District Court, by the Court of Appeals and by a
Justice of this Court. There was no occasion to hold a hearing on
the question of whether the plan should be consummated by payment
of $100 and the creation of an escrow at the time the Commission
passed on the plan, for it approved the plan's provision for
payment of $105 and $110. The necessity of deciding whether there
should be consummation and an escrow first arose in the District
Court. It was proper for the Commission, when it became apprised of
determined opposition to the plan on the part of certain common
stockholders, to recommend that the plan be consummated and that an
escrow be created to protect the rights of the preferred, in the
interest of expeditiously bringing the remnant of the Engineers
system into compliance with the Act, without holding a hearing on
the propriety of its recommendation. In the District Court and in
the Court of Appeals, the preferred stockholders were accorded full
hearing.
|
338 U.S.
96app|
APPENDIX
SECURITIES AND EXCHANGE COMMISSION'S DEVELOPMENT
AND
APPLICATION OF INVESTMENT VALUE THEORY*
The Commission first applied the investment value standard in a
series of cases holding common stock entitled to participate with
preferred in the new securities
Page 338 U. S. 156
given to satisfy claims in the dissolving corporation, although
in each case the book value of the corporation's assets was
exceeded by the charter claims of the preferred. [
Footnote 2/1] This application of the standard was
approved by this Court in
Otis & Co. v. Securities and
Exchange Commission, 323 U. S. 624.
Satisfaction of preferred claims at less than their face amount by
payment partly in cash and partly in new securities has also been
approved by the Commission. [
Footnote
2/2] In other cases holding that, in the circumstances of the
particular case, retirement of preferred stock having a call or
voluntary liquidation price in excess of the involuntary
liquidation price by payment in cash at the latter price is fair
and equitable, the Commission has considered a number of factors
other than charter provisions. [
Footnote 2/3]
In a number of contemporaneous cases, the Commission approved
plans which provided for liquidation of bonds by payment in cash at
the face amount of the bonds
Page 338 U. S. 157
without premium. [
Footnote 2/4]
Even in the earliest of these cases, in addition to holding that
the indenture provision requiring payment of a premium in the event
of voluntary call was inapplicable, the Commission observed the
absence of other legal or equitable considerations which might have
made payment of a premium fair and equitable. [
Footnote 2/5] And, in the later cases, the
Commission's opinions
"emphasized such circumstances, not articulated in the earlier
cases, as the interest rate, maturity date, and risk factors
incident to the particular security which is to be prepaid as
bearing upon the fairness of the proposed discharge of the
security."
American Power & Light Co., Holding Company Act
Release No. 6176, p. 12.
In
American Power & Light Co., Holding Company Act
Release No. 6176, the Commission applied the investment value
theory to allow payment of premiums on bonds retired under
compulsion of § 11(e). After pointing out the trend observed in the
preceding paragraph and attributing it to experience gained in
considering a large number of cases, the Commission held that the
investment value theory should be applied where its application
resulted in the payment of the bonds at prices in excess of their
face value. Commissioner Healy, who had persistently dissented in
the line of cases finally approved by this Court in the
Otis case, [
Footnote 2/6]
dissented
Page 338 U. S. 158
vigorously. He contended that the
Otis case should be
limited to its facts. and that the earlier cases refusing to
require payment of premiums on bonds should be taken as holding
that payment of bonds at their face amount without premium "was
fair because . . . contract rights were satisfied, not because the
debentures were valued and found to be worth their principal."
Id. at 46. [
Footnote 2/7]
He thought it highly significant that a consistent application of
the investment value standard would require retirement of bonds at
less than their principal amount, in cases in which the bonds were
not "worth their principal," and that the Commission had not
suggested that its approach should extend so far.
Id. at
47-48. [
Footnote 2/8]
Less than one year later, the Commission made a parallel
application of the investment value theory to a case involving the
retirement of noncallable preferred stock, holding unfair a plan
providing for the retirement of that stock by payment in cash
equivalent to the liquidation preference.
The United Light and
Power Co., Holding Company Act Release No. 6603. Commissioner
Healy, who died November 16, 1946, dissented, stating for the last
time his view that the claim should be paid at its liquidation
preference,
i.e., that the contract controlled. [
Footnote 2/9] After this decision, in which
the Commission
Page 338 U. S. 159
divided 3-2, [
Footnote 2/10] a
rehearing was granted. While decision on rehearing was pending, the
company proposed a substitute voluntary proposal, which the
Commission approved.
The United Light and Power Co.,
Holding Company Act Release No. 7951.
The next application of the investment value theory employed by
the Commission's majority was made in this case, decided December
5, 1946. Since this decision and the decision of the Court of
Appeals on review, the Commission has again applied the investment
value theory to require payment of preferred stock in cash at
investment values equal to call prices.
Pennsylvania Edison
Co., Holding Company Act Release No. 8550.
In a number of cases, the Commission has approved plans which
provided for the payment of preferred stock at call prices, where
there was no contention that the premium was not payable. [
Footnote 2/11] But these cases have not
been regarded as precedents in cases in which the company resists
payment of the preferred stock or bonds in amounts in excess of the
face value or involuntary liquidation price.
The United Light
and Power Co., 10 S.E.C. 1215, 1227.
* This Appendix is merely a summary of Commission decisions, and
does not purport to declare any rulings of law.
[
Footnote 2/1]
Community Power and Light Co., 6 S.E.C. 182;
Federal Water Service Corp., 8 S.E.C. 893;
United
Power and Light Co., 13 S.E.C. 1 (the
Otis case);
Puget Sound Power & Light Co., 13 S.E.C. 226;
Southern Colorado Power Co., Holding Company Act Release
No. 4501;
Virginia Public Service Co., Holding Company Act
Release No. 4618. These cases are discussed in Dodd, The Relative
Rights of Preferred and Common Shareholders in Recapitalization
Plans Under the Holding Company Act, 57 Harv.L.Rev. 295.
Commissioner Healy, who concurred in the result in the Community
Power Case, dissented in the other cases, contending that the claim
of the preferred was measured by the contract right. His view of
the meaning of § 11(e) led him to dissent in cases involving
applications of the investment value rule which produced the
results reached in this case.
See Text at
338 U.S.
96fn2/6|>note 6,
infra.
[
Footnote 2/2]
In re New England Power Assn., Holding Company Act
Release No. 6470, 66 F. Supp. 378,
aff'd sub nom. Lahti v. New
England Power Assn., 160 F.2d 845.
[
Footnote 2/3]
Cities Service Co., Holding Company Act Release No.
4944, pp. 16-17;
Georgia Power & Light Co., Holding
Company Act Release No. 5568, pp. 16-17, 20-27.
[
Footnote 2/4]
The United Light and Power Co., 10 S.E.C. 1215, 1222,
aff'd sub nom. New York Trust Co. v. SEC, 131 F.2d 274;
North American Light & Power Co., 11 S.E.C. 820, 824,
aff'd sub nom. City National Bank & Trust Co. of Chicago v.
SEC, 134 F.2d 65;
In re North Continent Utilities
Corp., Holding Company Act Release No. 4686, p. 12, approved
and enforced,
54 F. Supp.
527;
Consolidated Electric & Gas Co., Holding
Company Act Release No. 4900, p. 7,
approved and enforced, In
re Laclede Gas Light Co., 57 F.
Supp. 997,
aff'd sub nom. Massachusetts Mutual Life
Insurance Co. v. SEC, 151 F.2d 424.
[
Footnote 2/5]
The United Light and Power Co., 10 S.E.C. 1215, 1222;
North American Light & Power Co., 11 S.E.C. 820,
824.
[
Footnote 2/6]
^6
See 338 U.S.
96fn2/1|>note 1,
supra.
[
Footnote 2/7]
While contending that the majority's approach was not consistent
with the cases refusing to allow premiums, he admitted
"that a close reading of the Commission's opinions in those
cases discloses some language which the investing public may or may
not have realized vaguely heralded the present doctrine."
Holding Company Act Release No. 6176 at p. 47.
[
Footnote 2/8]
The Commission, in its brief in the case at bar, declines to
predict what it would do if faced with the problem suggested by
Commissioner Healy, asserting that much would depend on the exact
nature of the security and the circumstances of the particular
case.
[
Footnote 2/9]
^9 Commissioner Healy's position is explained in the following
statement:
"When I signed the Report of the National Power Policy Committee
to President Roosevelt, I understood the much quoted reference to
preservation of investment values to refer to the values of
operating company securities in holding company portfolios. I did
not then and do not now believe it was intended as a basis for
denying the senior security holders their full priority rights or
for compelling common stockholders to pay premiums upon the
redemption or retirement of senior securities forced by federal
statute."
The United Light and Power Co., Holding Company Act
Release No. 6603, pp. 43-44.
[
Footnote 2/10]
Commissioner Caffrey thought the liquidation preference
applicable for a reason irrelevant here.
See El Paso Electric
Co., holding Company Act Release No. 5499.
[
Footnote 2/11]
E.g., Minnesota Power & Light Co., Holding Company
Act Release No. 5850;
Mississippi River Power Co., Holding
Company Act Release No. 5776;
The North American Co.,
Holding Company Act Release No. 5796.