1. The Interstate Commerce Commission, under § 5 of the
Interstate Commerce Act as amended, approved and authorized a
voluntary merger of two railroad companies into one corporation.
The Commission found that the public interest would be served by
the merger and unification of their properties and operations, and
that the plan as a whole, and as applied to each group of
shareholders, was just and reasonable; but it disclaimed
jurisdiction to pass upon the claims of dissenting stockholders who
owned a small percentage of one class of stock of one of the
companies and who had intervened and claimed that the terms of the
merger deprived them of charter rights under the law of the
incorporation of their company. The Commission considered that the
amount involved in the claims of the dissenting stockholders,
however settled, was not sufficient to affect the solvency of the
new company or jeopardize its operations.
Held: the Commission was not free to renounce or
delegate its power to settle finally the amount of capital
liabilities of the new company and the proportion or amount thereof
which each class of stockholders should receive on account of its
contributions to the new entity. Pp.
334 U. S.
184-202.
2. The jurisdiction of the Commission under both § 5 and § 20a
is made plenary and exclusive and independent of all other state or
federal authority. P.
334 U. S.
197.
3. The Commission may not leave claims growing out of the
capital structure of one of the constituent companies to be added
to the obligations of the new company, contingent upon the decision
of some other tribunal or agreement of the parties themselves, but
must pass upon and approve all capital liabilities which the merged
company will assume and discharge as a result of the merger. Pp.
334 U. S.
197-198.
4. The Commission must look for standards in passing on a
voluntary merger only to the Interstate Commerce Act. P.
334 U. S.
198.
5. The rights of shareholders of railroads merging voluntarily
under the Interstate Commerce Act are governed by federal, not
state,
Page 334 U. S. 183
law, and, apart from meeting the test of the public interest,
the merger terms, as to stockholders, must be found to be just and
reasonable. Pp.
334 U. S.
198-199.
6. In appraising a stockholder's position in a merger as to
justice and reasonableness, it is not the promise that a corporate
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. P.
334 U. S.
199.
7. It would be inconsistent to allow state law to apply a
liquidation basis to what federal law designates as a basis for
continued public service. P.
334 U. S.
200.
8. When stockholders are given what it is just and reasonable
they should have, the Interstate Commerce Act does not permit state
law to impose greater obligations on the financial structure of the
merging railroads, with consequent increased calls upon their
assets or earning capacity. P.
334 U. S.
201.
9. No rights alleged to have been granted to dissenting
stockholders by state law provision concerning liquidation survive
the merger agreement approved by the requisite number of
stockholders and approved by the Commission as just and reasonable.
Any such rights are, as a matter of federal law, accorded
recognition in the obligation of the Commission not to approve any
plan which is not just and reasonable. P.
334 U. S.
201.
72 F. Supp. 560, reversed.
A suit to set aside an order of the Interstate Commerce
Commission approving and authorizing a voluntary merger of two
railroads was dismissed by a District Court of three judges. 72 F.
Supp. 560. A direct appeal was taken to this Court.
Reversed
and remanded, p.
334 U. S.
202.
Page 334 U. S. 184
MR. JUSTICE JACKSON delivered the opinion of the Court.
This controversy grows out of the voluntary merger of Chesapeake
& Ohio Railway Company and Pere Marquette Railway Company,
which companies, together with Alleghany Corporation, sought
approval by the Interstate Commerce Commission. Pere Marquette is
incorporated under the laws of Michigan, while Chesapeake &
Ohio is chartered by Virginia. Chesapeake & Ohio acquired and
for some years exercised active control of Pere Marquette, whose
properties and operations complement, rather than compete with,
those of Chesapeake & Ohio. Late in 1945, merger proceedings
were commenced under enabling statutes of the two states, and were
consummated with approval of considerably more than the number of
shares made necessary by statutes of the respective states. The
Interstate Commerce Commission found, and there is no attack upon
the findings, that the public interest is served by merger and
unification of these properties and operations. The Commission also
concluded that the plan as a whole, and as applied to each group of
shareholders, is just and reasonable, and there is no attack upon
this conclusion except that by the appellants, which is treated
fully herein. Consequently, details of the plan are of little
importance to this litigation.
Appellants are owners of 2,100 shares of $100 par 5% cumulative
preferred stock of Pere Marquette. Their interests aggregate a
little less than 2% of the outstanding stock of this class.
Dividends on this stock have been unpaid since 1931, and, as of the
commencement of this
Page 334 U. S. 185
controversy, were in arrears in the sum of $72.50 per share, an
amount that is increasing with time. The Pere Marquette charter
provides for full payment of the stock at par, plus accrued unpaid
dividends,
"in the event of dissolution, liquidation, or winding up of the
company, voluntary or involuntary . . . before any amounts are paid
to holders of the . . . common stock."
The appellants contend that the merger hereinafter described
terminates the corporate existence and, under this clause as
construed by Michigan law, amounts to a "winding up." They insist
that, since the merger makes provision for some compensation to
common stockholders, these appellants have the right, under
Michigan law, to have their shares recognized on the basis of at
least $172.50 each. The Commission found the market value per share
ranged at different times, from $87 to $99, while the merger terms
give stocks in exchange which would have realized about $90 and
$111 per share on the same dates. Appellants dissented from the
merger, but Michigan law provides no specific right or procedure
for appraisal and retirement of the holdings of a stockholder
dissenting from a railroad merger.
When application was filed with the Interstate Commerce
Commission under § 5 of the Interstate Commerce Act as amended (49
U.S.C. § 5), for approval and authorization of the merger,
[
Footnote 1] as well as for
other relief,
Page 334 U. S. 186
appellants intervened and asked that body to determine,
recognize, and protect their asserted right to the full legal
liquidation figure. The Commission approved the merger and the
merger terms, finding them just and
Page 334 U. S. 187
reasonable as to each class of stockholders. However, it
disclaimed jurisdiction to pass upon the further claims of the
appellants asserted on the basis of their interpretation of
Michigan law. It reviewed at some length the economic position of
the stock. It recited that these shares had received no dividends
since 1931, and that appellants' witnesses agreed that these
stockholders could not expect to receive any dividends for many
years, apart from the merger. The Commission also pointed out the
deficit in operations of Pere Marquette for the first quarter of
1946 as contrasted with the net income of Chesapeake and Ohio, and
concluded that,
"On the whole, it would seem that the prospects of Pere
Marquette stockholders for returns on their investments would be
enhanced by the merger of their company into Chesapeake &
Ohio."
The Commission did not question that the stockholders, on
liquidation, dissolution, or winding up of Pere Marquette, would be
entitled to be paid in full the par value of their shares and
accumulated dividends before any payment to holders of common
stock. It did not undertake to determine
Page 334 U. S. 188
the ultimate worth of these stocks in case of an actual
liquidation, but it considered their present intrinsic value on a
capitalized earnings basis, an actual yield basis, and its present
market position, and concluded:
"Accordingly, considering Pere Marquette's investment according
to its books, other property values, the company's history as to
earnings, its future prospects, and the market appraisal of its
stocks, all as set forth above, we find that, as to the
stockholders of both parties generally, the proposed ratios of
exchange, stock issues, and assumptions of indebtedness are just
and reasonable."
The Commission then noted the contention of the appellants that,
as to them, the terms were not just and reasonable, because they
are deprived of contract rights under Michigan law, which they have
not waived. It is contended that the Commission should not remit
the dissenting stockholders to remedies in state courts, as the
Commission would thereby decline the jurisdiction conferred by § 5
and § 20a of the Act. [
Footnote
2] But the Commission considered that it was entrusted with
authority to decide the public interest aspects of the merger of
these transportation facilities, and that it could not be expected
to enter into the question of "compensation of dissenting
stockholders on specified bases" before approval and merger. It
thought that, having found the treatment of each class to be just
and reasonable, it had done its full duty "when we make certain
that all stockholders of the same class are to be treated alike."
It declined to decide the Michigan law question as to what rights
of dissenting stockholders were and whether the merger was
equivalent to a liquidation, but said:
"This does not mean that the Chesapeake & Ohio and the Pere
Marquette do not remain free to settle controversies with
dissenting stockholders through negotiation and litigation in the
courts. "
Page 334 U. S. 189
Taking into account the small percentage of the dissenting
shares, the current assets position of the Chesapeake & Ohio,
and the maximum possible cost to the merged company of the
settlement of these claims on the basis most favorable to
appellants, it considered that the company was amply able to
bear
"any probable expenditure of cash that it might be required to
make in connection with the merger. Accordingly, it appears that
consummation of the merger will not involve a burden of excessive
expenditure."
The Commission thus left in a state of suspense, subject to
further litigation or negotiation, these claims concerning the
extent of the capital obligations of a constituent company, after
examining them sufficiently to determine only that, however
settled, they did not involve enough to affect the solvency of the
new company or jeopardize its operations.
The Commission denied appellants' petition for rehearing, and
they filed suit in the United States District Court for the Eastern
District of Virginia to set aside the order authorizing the merger.
A court of three judges, convened as required by law, [
Footnote 3] sustained the Commission,
72 F. Supp. 560. Appellants bring to us [
Footnote 4] the question whether the Commission, in
view of its authority over mergers, which is declared to be
exclusive and plenary, could decline to determine just what the
dissenting stockholders' legal rights were under the Michigan law
and the Pere Marquette charter, and to recognize them in full by
the terms of the merger.
The disposition of appellants' claims, as well as the nature of
the claims themselves, requires consideration of the relative
function and authority of federal and state law in regulating and
approving voluntary railroad mergers. The appellants contend that
their share in the merged company is to be measured by, or their
remedies
Page 334 U. S. 190
as dissenters are to be found in, state law, but that the
federal agency is bound to determine and apply that law. The
Commission, on the other hand, refuses either finally to foreclose
or to allow these claims. It apparently leaves it open to the state
courts, or to the parties by negotiation, to add to the surviving
carrier's capital obligations, which the Commission has found to be
just and reasonable, others founded only in state law and as to
which it has made no such findings. We conclude that neither
position is wholly consistent with the federal statutory plan for
authorization and approval of mergers.
It is not for us to adjudicate the existence or the measure of
any rights that Michigan law may confer upon dissenting
stockholders. Neither the Commission nor this Court can make a
plenary and exclusive decision as to what the law of a state may
be, for the function of declaring and interpreting its own law is
left to each state of the Union. But the effect of the state law in
relation to a constitutional Act of Congress, in view of the
constitutional provision, art. 6, cl. 2, that the latter shall be
"the supreme Law of the Land," "Laws of any State to the Contrary
notwithstanding," is for us to determine. Our first inquiry here,
therefore, is whether the Interstate Commerce Act accords
recognition to those state law rights, if any exist. To determine
this federal question, we assume, but do not decide, that Michigan
law would consider this merger to be a liquidation, and would
regard the recognition given to the common stock as entitling these
dissenters to "full payment" in cash or its equivalent for both the
par value of their preferred shares and accrued unpaid dividends
thereon. Assuming such to be their rights under the law of the
State, we must decide whether approval of a railroad merger under
the Transportation Act of 1940 [
Footnote 5] is conditioned upon observance of
Page 334 U. S. 191
such state law rights or can be made by the Commission
contingently subject to them. A resume of the history of that Act
throws light on the problem dealt with by that legislation.
The basic railroad facilities of the United States were
constructed under state authorization and restrictions by
corporations whose powers and limitations were prescribed by state
legislatures or resulted from limitations on the states themselves.
Construction in reference primarily to local or regional
transportation needs created duplicating and competing facilities
in some areas, and provided inadequate ones in others. Expansion
necessary to serve advancing national frontiers was stimulated by
extensive subsidies from the Federal Government, largely in the
form of land grants. But the stress and strain of World War I
brought home to us that the railroads of the country did not
function as a really national system of transportation. That crisis
also made plain the confusions, inefficiencies, inadequacies, and
dangers to our national defense and economy flowing from the
patchwork railroad pattern that local interests under local law had
created.
The demand for an integrated, efficient, and coordinated system
of rail transport, equal to the needs of our national economy and
defense, resulted in the Transportation Act of 1920. [
Footnote 6] In a series of decisions on
particular problems, this Court defined the general purposes of
that Act to be the establishment of a new federal railway policy
[
Footnote 7] to insure adequate
transportation service by means of securing a fair return on
capital devoted to the service, restoration of impaired railroad
credit, and regulation of rates, security issues, consolidations,
and mergers in the
Page 334 U. S. 192
interest of the public. The tenor of all of these was to confirm
the power and duty of the Interstate Commerce Commission,
regardless of state law, to control rate and capital structures,
physical makeup and relations between carriers, in the light of the
public interest in an efficient national transportation system.
Railroad Commission of Wisconsin v. Chicago, B. & Q. R.
Co., 257 U. S. 563;
New England Divisions Case, 261 U.
S. 184;
Dayton-Goose Creek R. Co. v. United
States, 263 U. S. 456;
Railroad Commission of California v. Southern Pac. R. Co.,
264 U. S. 331;
Texas & P. R. Co. v. Gulf, c. & S.F. R. Co.,
270 U. S. 266.
[
Footnote 8]
As a means to this end, the 1920 Act required [
Footnote 9] the Commission to prepare and
adopt a plan for nationwide consolidations of the railway
properties of the country. It made this master plan the governing
consideration in approving voluntary consolidations of
railroads
Page 334 U. S. 193
which were permitted only if in harmony with and in furtherance
of the Commission's overall plans. [
Footnote 10] If they met that test, Congress provided
that mergers could be consummated notwithstanding any restraint or
prohibition by state authority. [
Footnote 11]
By 1940, it had become apparent that the ambitious nationwide
plan of consolidation was not bearing fruit. Various studies and
investigations [
Footnote 12]
led to the conclusion that it was a case where the best was an
enemy of the good, and waiting for the perfect official plan was
defeating or postponing less ambitious but more attainable
voluntary iprovements. The Transportation Act of 1940 relieved the
Commission of formulating a nationwide plan of consolidations.
Instead, it authorized approval by the Commission of
carrier-initiated, voluntary plans of merger or consolidation if,
subject to such terms, conditions, and modifications as the
Commission might prescribe, the proposed transactions met with
certain tests of public interest, justice, and reasonableness, in
which case they should become effective regardless of state
authority. [
Footnote 13] The
Act does not specify every consideration to which the Commission
must give weight in determining whether or not any plan meets the
tests. Section 5(2) provides only that, "among others," the
Commission shall consider the effect upon adequate transportation
service, the effect of inclusion or failure to include other
railroads, total fixed charges, and the interests of the carrier
employees affected. This Court has recently and unanimously said in
reference to this Act,
"Congress has
Page 334 U. S. 194
long made the maintenance and development of an economical and
efficient railroad system a matter of primary national concern. Its
legislation must be read with this purpose in mind."
Seaboard Air Line R. Co. v. Daniel, 333 U.
S. 118. [
Footnote
14]
So reading the legislation relevant to this merger, we find that
approval of a voluntary railroad merger which is within the scope
of the Act is dependent upon three, and upon only three,
considerations: First, a finding that it "will be consistent with
the public interest." (§ 5(2)(b).) Second, a finding that, subject
to any modification made by the Commission, it is "just and
reasonable." (§ 5(2)(b).) Third, assent of a
"majority, unless a different vote is required under applicable
State law, in which case the number so required shall assent, of
the votes of the holders of the shares entitled to vote."
(§ 5(11).) When these conditions have been complied with, the
Commission-approved transaction goes into effect without need for
invoking any approval under state authority, and
Page 334 U. S. 195
the parties are relieved of
"restraints, limitations, and prohibitions of law, Federal,
State, or municipal, insofar as may be necessary to enable them to
carry into effect the transactions so approved or provided for in
accordance with the terms and conditions, if any, imposed by the
Commission, and to hold, maintain, and operate any properties and
exercise any control or franchise acquired through such
transaction."
(§ 5(11).)
The Commission, under this Act as well as the Act of 1920, was
also given complete control of the capital structure to result from
a merger. [
Footnote 15] The
carrier, even if permitted
Page 334 U. S. 196
by state law which created it, may issue no stock, bond, or
evidence of indebtedness without approval. It may assume no
obligation in respect of the securities of another person or
corporation except with approval. And the approval is to be given
only on a finding that it
"(a) is for some lawful object within its corporate purposes,
and compatible with the public interest, which is necessary or
appropriate for or consistent with the proper performance by the
carrier of service to the public as a common carrier, and which
will not impair its ability to perform that service, and (b) is
reasonably necessary
Page 334 U. S. 197
and appropriate for such purpose."
49 U.S.C. § 20a(2).
The jurisdiction of the Commission under both § 5 and § 20a is
made plenary and exclusive, and independent of all other state or
federal authority. § 5(11); [
Footnote 16] § 20a(7). [
Footnote 17]
The Commission, as we have seen, has found that the liabilities
asserted by appellants, if settled by litigation or negotiation,
will not impair the carrier's ability to perform its service, but
it has not found the assumption of such liabilities to be
compatible with the public interest under § 5 and § 20a. Indeed,
since these claims exceed what the Commission has found to be just
and reasonable, it could hardly find that assumption of such claims
would be compatible with the public interest.
It appears to us inconsistent with the Interstate Commerce Act
[
Footnote 18] for the
Commission to leave claims growing out of the capital structure of
one of the constituent companies to be added to the obligations of
the surviving carrier, contingent upon the decision of some other
tribunal or agreement of the parties themselves. We think
Page 334 U. S. 198
that the Commission must pass upon and approve all capital
liabilities which the merged company will assume or discharge as a
result of merger. If some greater amount than that specified in the
agreement is to be allowed to any class of stockholders, it must
either deplete the cash or inflate the liabilities or capital
issues of the new company. It may be that, in this case, the merged
company will be strong enough to carry this burden and still
perform its public service. But that is not the sole purpose of the
supervision provided by statute. It is also in the public interest
that no capitalization or indebtedness be carried over except that
which meets the test of the Act in all other respects. We think the
Commission was in error in assuming that it did not have, or was at
liberty to renounce or delegate, power finally to settle the amount
of capital liabilities of the new company and the proportion or
amount thereof which each class of stockholders should receive on
account of its contributions to the new entity.
We think it is equally clear that the Commission must look for
standards in passing on a voluntary merger only to the Interstate
Commerce Act. In matters within its scope, it is the supreme law of
the land. Its purpose to bring within its scope everything
pertaining to the capital structures of such mergers could hardly
be made more plain. Indeed, the very fact on which appellants rely
heavily, that the Commission's jurisdiction is "plenary" and
"exclusive," argues with equal force that federal law is also
plenary and exclusive. The Commission likely would not, and
probably could not, be given plenary and exclusive jurisdiction to
interpret and apply any state's law. Whatever rights the appellants
ask the Commission to assure must be founded on federal, not on
state, law.
Apart from meeting the test of the public interest, the merger
terms, as to stockholders, must be found to be just
Page 334 U. S. 199
and reasonable. These terms would be largely meaningless to the
stockholders if their interests were ultimately to be settled by
reference to provisions of corporate charters and of state laws.
Such charters and laws usually have been drawn on assumptions that
time and experience have unsettled. Public regulation is not
obliged, and we cannot lightly assume it is intended, to restore
values, even if promised by charter terms, if they have already
been lost through the operation of economic forces.
Cf. Market
St. Ry. Co. v. Railroad Commission, 324 U.
S. 548. 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.
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 was taking place." Consequently, the liquidation
preferences were only one factor in valuation, rather than
determinative of amounts payable.
Otis & Co. v. Securities
and Exchange Commission, 323 U. S. 624.
The appellants here, although the enterprise is to continue,
insist on a valuation according to the letter of the charter. By
this method, the longer their stock is in default of dividends or
earnings, the greater interest it
Page 334 U. S. 200
would have in the merged properties if the common stock was to
be recognized at all. The Commission, however, did not consider
that a long continued default and the prospect of further default
added greatly to the present intrinsic or market value of the stock
in exchange. Its measuring rod was an economic, rather than a
legalistic, one. The Commission considered the stock's past yield,
present market value, and future prospects. It found that, all
things considered, the merger terms gave to these appellants in new
stock the fair economic equivalent of what they already held. It
considered the deal just and reasonable on an exchange basis for a
continuing enterprise. But it did not undertake to say whether,
under the letter of their charter as construed under the law of
Michigan, the preferred stockholders may not have a contract that
would exact more than an economic equivalent.
Since the federal law clearly contemplates merger as a step in
continuing the enterprise, it follows that what Michigan law might
give these dissenters on a winding-up or liquidation is irrelevant,
except insofar as it may be reflected in current values for which
they are entitled to an equivalent. It would be inconsistent to
allow state law to apply a liquidation basis to what federal law
designates as a basis for continued public service. Federal law
requires that merger terms be just and reasonable to all groups of
stockholders, in contemplation of the continued use of their
capital in the public calling to which it has been dedicated.
Congress has made no provision by which minority stockholders,
dissatisfied with a proposed railroad merger, may block it or
compel retirement of their capital, as statutes often permit to be
done in the case of private corporations where the public interest
is not much concerned with its effect on the enterprise. And since
Congress dealt with the subject of stockholders' consent, its
failure to provide for withdrawal of nonconsenting
Page 334 U. S. 201
capital cannot be considered an oversight to be supplied by us.
A part of the capital dedicated to a railroad enterprise cannot
withdraw itself without authorization any more than all of the
capital can withdraw itself and abandon the railroad without
approval. It must submit to regulations and to readjustments in the
public interest on just and reasonable terms.
In determining whether each class of stockholder receives an
equivalent of what it turns in, the Commission, of course, is under
a duty to see that minority interests are protected, especially
when there is an absence of arm's length bargaining or the terms of
the merger have been imposed by management interests adverse to any
class of stockholders. The Commission indicates both awareness and
discharge of this duty in this case. Its finding that this plan is
just and reasonable is not challenged here except on the basis of
Michigan law. When stockholders are given what it is just and
reasonable they should have, the Interstate Commerce Act does not
permit state law to impose greater obligations on the financial
structure of the merging railroads, with consequent increased calls
upon their assets or earning capacity.
We therefore hold that no rights alleged to have been granted to
dissenting stockholders by state law provision concerning
liquidation survive the merger agreement approved by the requisite
number of stockholders and approved by the Commission as just and
reasonable. Any such rights are, as a matter of federal law,
accorded recognition in the obligation of the Commission not to
approve any plan which is not just and reasonable. In making that
determination, those rights are to be considered to the extent that
they may affect intrinsic or market values. While the Commission
has found that what the appellants are given in this plan is just
and reasonable, the record indicates that it may have declined to
consider these claims, even if they are found to have
Page 334 U. S. 202
some effect on the intrinsic value of the stock, because it
thought it lacked jurisdiction. Under these circumstances, we
cannot be sure that, in arriving at its conclusion that the plan
was just and reasonable, it did not exclude some factors that it
should consider under the views set out in this opinion. We
therefore reverse the judgment below and remand the case to the
Commission for reconsideration under the principles herein
expressed.
Reversed and remanded.
MR. JUSTICE REED took no part in the consideration or decision
of this case.
[
Footnote 1]
Section 5 as amended provides in part as follows:
"(2)(a) It shall be lawful, with the approval and authorization
of the Commission, as provided in subdivision (b) --"
"(i) for two or more carriers to consolidate or merge their
properties or franchises, or any part thereof, into one corporation
for the ownership, management, and operation of the properties
theretofore in separate ownership . . ."
"
* * * *"
"(b) Whenever a transaction is proposed under subparagraph (a),
the carrier or carriers or persons seeking authority therefor shall
present an application to the Commission, and thereupon the
Commission shall notify the Governor of each State in which any
part of the properties of the carriers involved in the proposed
transaction is situated, and also such carriers and the applicant
or applicants, . . . and shall afford a reasonable opportunity for
interested parties to be heard. . . . If the Commission finds that,
subject to such terms and conditions and such modifications as it
shall find to be just and reasonable, the proposed transaction is
within the scope of subparagraph (a) and will be consistent with
the public interest, it shall enter an order approving and
authorizing such transaction, upon the terms and conditions, and
with the modifications, so found to be just and reasonable . .
."
"(c) In passing upon any proposed transaction under the
provisions of this paragraph (2), the Commission shall give weight
to the following considerations, among others: (1) the effect . . .
upon adequate transportation service to the public; (2) the effect
upon the public interest of the inclusion, or failure to include,
other railroads in the territory . . . ; (3) the total fixed
charges resulting from the proposed transaction, and (4) the
interest of the carrier employees affected. . . ."
"
* * * *"
"(e) No transaction which contemplates a guaranty or assumption
of payment of dividends or of fixed charges shall be approved by
the Commission under this paragraph (2) except upon a specific
finding by the Commission that such guaranty or assumption is not
inconsistent with the public interest. . . ."
"(4) It shall be unlawful for any person, except as provided in
paragraph (2), to enter into any transaction within the scope of
subparagraph (a) thereof . . ."
"
* * * *"
"(11) The authority conferred by this section shall be exclusive
and plenary, and any carrier or corporation participating in or
resulting from any transaction approved by the Commission
thereunder, shall have full power (with the assent, in the case of
a purchase and sale, a lease, a corporate consolidation, or a
corporate merger, of a majority, unless a different vote is
required under applicable State law, in which case the number so
required shall assent, of the vote of the holders of the shares
entitled to vote of the capital stock of such corporation at a
regular meeting of such stockholders, the notice of such meeting to
incu de such purpose, or at a special meeting thereof called for
such purpose) to carry such transaction into effect and to own and
operate any properties and exercise any control or franchises
acquired through said transaction without invoking any approval
under any State authority, and any carriers or other corporations,
and their officers and employees and any other persons,
participating in a transaction approved or authorized under the
provisions of this section shall be and they are hereby relieved
from the operation of the antitrust laws and of all other
restraints, limitations, and prohibitions of law, Federal, State,
or municipal, insofar as may be necessary to enable them to carry
into effect the transaction so approved or provided for in
accordance with the terms and conditions, if any, imposed by the
Commission, and to hold, maintain, and operate any properties and
exercise any control or franchises acquired through such
transaction. Nothing in this section shall be construed to create
or provide for the creation, directly or indirectly, of a Federal
corporation, but any power granted by this section to any carrier
or other corporation shall be deemed to be in addition to and in
modification of its power under its corporate charter or under the
laws of any State."
[
Footnote 2]
For pertinent provisions of § 5 and § 20a,
see notes
1 and |
1 and S. 182fn15|>15, respectively.
[
Footnote 3]
28 U.S.C. § 47.
[
Footnote 4]
28 U.S.C. § 47a; 28 U.S.C. § 345.
[
Footnote 5]
Act of September 18, 1940, 54 Stat. 898.
[
Footnote 6]
Act of February 28, 1920, 41 Stat. 456.
[
Footnote 7]
"It is manifest . . . that the act made a new departure. . . ."
Chief Justice Taft, in
Railroad Commission of Wisconsin v.
Chicago, B. & Q. R. Co., 257 U. S. 563,
257 U. S.
585.
[
Footnote 8]
In
Dayton-Goose Creek R. Co. v. United States,
263 U. S. 456,
263 U. S. 478,
in referring to the
Wisconsin case,
257 U. S. 257 U.S.
563, and the
New England Divisions Case, 261 U.
S. 184, the late Chief Justice said:
"In both cases, it was pointed out that the Transportation Act
adds a new and important object to previous interstate commerce
legislation which was designed primarily to prevent unreasonable or
discriminatory rates against persons and localities. The new act
seeks affirmatively to build up a system of railways prepared to
handle promptly all the interstate traffic of the country. It aims
to give the owners of the railways an opportunity to earn enough to
maintain their properties and equipment in such a state of
efficiency that they can carry well this burden. To achieve this
great purpose, it puts the railroad systems of the country more
completely than ever under the fostering guardianship and control
of the Commission which is to supervise their issue of securities,
their car supply and distribution, their joint use of terminals,
their construction of new lines, their abandonment of old lines,
and by a proper division of joint rates, and by fixing adequate
rates for interstate commerce, and in case of discrimination, for
intrastate commerce, to secure a fair return upon the properties of
the carriers engaged."
[
Footnote 9]
§ 407(4).
[
Footnote 10]
§ 407(6)(a).
[
Footnote 11]
§ 407(8).
[
Footnote 12]
See, for example, report and recommendations by the
President's Committee of Six, appointed September 20, 1938, whose
report dated December 23, 1938, is considered part of the
legislative history of the Transportation Act of 1940.
[
Footnote 13]
See note 1
supra.
[
Footnote 14]
The Act itself included a statement of the "National
Transportation Policy" in these terms:
"It is hereby declared to be the national transportation policy
of the Congress to provide for fair and impartial regulation of all
modes of transportation subject to the provisions of this Act, so
administered as to recognize and preserve the inherent advantages
of each; to promote safe, adequate, economical, and efficient
service and foster sound economic conditions in transportation and
among the several carriers; to encourage the establishment and
maintenance of reasonable charges for transportation services,
without unjust discriminations, undue preferences or advantages, or
unfair or destructive competitive practices; to cooperate with the
several States and the duly authorized officials thereof, and to
encourage fair wages and equitable working conditions -- all to the
end of developing, coordinating, and preserving a national
transportation system by water, highway, and rail, as well as other
means, adequate to meet the needs of the commerce of the United
States, of the Postal Service, and of the national defense. All of
the provisions of this Act shall be administered and enforced with
a view to carrying out the above declaration of policy."
[
Footnote 15]
Repeated recommendations of the Commission that the federal
government occupy the field of regulation of railroad security
issues and assumption of obligations were followed in 1920 by
addition of § 20a to the Interstate Commerce Act (§ 439 of the
Transportation Act of 1920, 41 Stat. 494).
As early as 1907, the Commission had stated that
"the time has come when some reasonable regulation should be
imposed upon the issuance of securities by railways engaged in
interstate commerce."
12 I.C.C. 277, 306. This recommendation was renewed in the
Commission's annual report for 1907, p. 24, and in every succeeding
annual report up to and including 1919. The Commission incorporated
in the 1919 report the statement concerning recommended legislation
it had submitted to the Senate Interstate Commerce Committee, which
included a recommendation for regulation of security issues.
House Report No. 456, 66th Cong., 1st Sess. (November 10, 1919),
said with respect to the section which later became § 20a:
". . . The enactment of the pending bill will put the control
over stock and bond issues exclusively in the hands of the Federal
Government, and will result in uniformity and greater promptness of
action."
Section 20a, as enacted in 1920, remained unchanged by the
Transportation Act of 1940, and provides in part as follows:
"(2) . . . it shall be unlawful for any carrier to issue any
share of capital stock or any bond or other evidence of interest in
or indebtedness of the carrier . . . or to assume any obligation or
liability as lessor, lessee, guarantor, indorser, surety, or
otherwise, in respect of the securities of any other person,
natural or artificial, even though permitted by the authority
creating the carrier corporation, unless and until, and then only
to the extent that, upon application by the carrier, and after
investigation by the commission of the purposes and uses of the
proposed issue and the proceeds thereof, or of the proposed
assumption of obligation or liability in respect of the securities
of any other person, natural or artificial, the commission by order
authorizes such issue or assumption. The commission shall make such
order only if it finds that such issue or assumption: (a) is for
some lawful object within its corporate purposes, and compatible
with the public interest, which is necessary or appropriate for or
consistent with the proper performance by the carrier of service to
the public as a common carrier, and which will not impair its
ability to perform that service, and (b) is reasonably necessary
and appropriate for such purpose. . . ."
"
* * * *"
"(6) Upon receipt of any such application for authority, the
commission shall cause notice thereof to be given to and a copy
filed with the governor of each State in which the applicant
carrier operates. The railroad commissions, public service, or
utilities commissions, or other appropriate State authorities of
the State shall have the right to make before the commission such
representations as they may deem just and proper for preserving and
conserving the rights and interests of their people and the States,
respectively, involved in such proceedings. The commission may hold
hearings, if it sees fit, to enable it to determine its decision
upon the application for authority. . . ."
"(7) The jurisdiction conferred upon the commission by this
section shall be exclusive and plenary, and a carrier may issue
securities and assume obligations or liabilities in accordance with
the provisions of this section without securing approval other than
as specified herein. . . ."
[
Footnote 16]
For text of § 5(11),
see note 1
[
Footnote 17]
For text of § 20a(7),
see note 15
[
Footnote 18]
In an early case (
Pittsburgh & W.V. R. Co. v. Interstate
Commerce Commission, 54 App.D.C. 34, 293 F. 1001, 1004,
appeal dismissed, 266 U.S. 640) in which the
constitutionality of § 20a had been upheld, the Court said:
"If 'a fair return on capital devoted to the transportation
service' [
New England Divisions Case, 261 U. S.
184,
261 U. S. 189] was to be
insured the railway companies, and at the same time proper service
and equitable rates accorded the public, the supervision of the
issuance of stock, the incurring of bonded indebtedness, the
extension and consolidation of railway lines becomes of the utmost
importance. Without this power to supervise the issue of stocks and
bonds, and thus limit the dividend and interest obligations of the
carriers, as well as the expenditures in extensions and
improvements, the fixing of adequate rates to insure a just return
to the carrier, and at the same time equitable protection to the
public, would be impossible. . . ."
MR. JUSTICE FRANKFURTER, dissenting.
The railroads of this country are operated by not less than 693
corporations. These exist by virtue of charters granted by the
several States,
* the laws of
which govern their internal affairs, and, more particularly, the
rights and liabilities of their stockholders. The Chesapeake &
Ohio is chartered by Virginia, the Pere Marquette by Michigan. The
laws of Virginia and Michigan respectively determine the conditions
under which each may combine with other corporations. The votes of
sufficient stockholders of these two corporations to satisfy the
laws of their respective States were in favor of a voluntary
agreement for the absorption of the Pere Marquette by the
Chesapeake & Ohio. To consummate this agreement, however,
required the authorization of the Interstate Commerce Commission
under the terms of § 5(2) of the Interstate Commerce Act, as
amended by the
Page 334 U. S. 203
Transportation Act of 1940. The agreement provided, in short,
that the total outstanding securities of the Pere Marquette,
amounting to 450,460 shares of common, 124,290 of cumulative
preferred, and 112,000 of prior preference, were to be exchanged
for 211,429.4 shares of Chesapeake & Ohio common and 312,272.2
preferred. All but 9% of the security holders of the Pere Marquette
cumulative preferred assented to this arrangement. The appellants,
holding less than 2% of that class of stock, stood on their rights
under Michigan law, claiming that they were entitled to the
dividends unpaid since 1931, amounting to $72.50 per share.
The Interstate Commerce Commission approved the proposed merger,
but refused to pass on the legal claims thus asserted under
Michigan law by the appellants. The Commission ruled that it was
not called upon to pass upon individual rights against a merged
road when the potential recognition of such rights, under
appropriate State law, could not affect the public interest which
it is requisite for the Commission to safeguard before authorizing
a merger. For the Commission held that, even if the appellants'
claims were sustained by Michigan law, the amount involved would in
nowise affect either the security structure or the cash position of
the Chesapeake & Ohio.
The Chesapeake & Ohio is capitalized at $191,433,919. An
additional $28,949,745 of stock is to be issued, under the merger
plan, for Pere Marquette shareholders, making a total
capitalization for the Chesapeake & Ohio, after merger, of
$220,383,595. The appellants own 2,100 shares of Pere Marquette
cumulative preferred. The merger agreement offered them securities
found by the Commission to be worth $111.60 per share, or $234,360.
If their claim for full book value of $172.50 per share were
honored, it would amount to $362,250. This contingent liability of
$127,890, the Commission concluded, did not
Page 334 U. S. 204
affect its finding as to the soundness, from the point of view
of the "public interest," of the financial structure devised and
approved for this merger. The Commission further pointed out that,
even if 2% of each class of Pere Marquette stock -- the maximum
number contemplated by the agreement -- were to refuse to
participate, the difference between the value of the Chesapeake
& Ohio shares offered to them and the book value of their Pere
Marquette shares could, if required, readily be absorbed by a
soundly based quarter-billion dollar carrier.
Both the Chesapeake & Ohio and the Interstate Commerce
Commission here urge this view of the law. The Court, however,
reads the Commission's duty under the Act quite differently,
although in reaching its conclusion the Commission applied its
settled administrative practice.
I think that the Commission was right in the view it took of its
powers and duties. Even if the matter were doubtful, the Court does
not seem to me to give to the Commission's construction of the Act
the weight to be accorded its experienced judgment, which we held
in
United States v. American Trucking Assns., 310 U.
S. 534,
310 U. S. 549,
to be required. Since the Commission disclaims, rather than
asserts, a power, there is all the more reason to feel assured of
its disinterestedness and to resolve ambiguity in favor of its
choice of construction.
Until the Transportation Act of 1920, carriers, while subject to
the Sherman law, could combine without leave of the Interstate
Commerce Commission.
See Northern Securities Co. v. United
States, 193 U. S. 197. The
Transportation Act of 1920 required the authorization of the
Commission for acquisition by one carrier of the control over
another, to the extent defined by § 5 of the Interstate Commerce
Act, as amended. By the Transportation Act of 1940, the voluntary
merger of the properties of two or more carriers into one
corporation was
Page 334 U. S. 205
sanctioned, subject, however, to the scrutiny of the Interstate
Commerce Commission for the due protection of the "public
interest." Congress defined with particularity the factors that
constituted the "public interest" put into the Commission's
keeping.
The Court now holds that State law governing the relations
between State-chartered carriers and their stockholders is
impliedly supplanted as to those who have refused to assent to a
merger, even when the Commission finds that to leave the
adjudication of those rights to the law that created them in nowise
touches the "public interest" that is the sole condition to
carrying out a wholly voluntary arrangement, and even though such a
voluntary arrangement, by itself, could not affect the rights of
dissenters. I have no doubt that Congress could compel the
unification of railroad properties theretofore in separate
ownership, and, in so doing, override State-created legal rights of
stockholders of the constituent carriers. In the case of
financially embarrassed carriers, Congress, in the exercise of its
bankruptcy powers, has empowered the Interstate Commerce Commission
to formulate plans of reorganization the terms of which, if fair
and equitable, may override State-created legal rights of
stockholders who do not assent. In the interests of a more
efficient national railroad system, Congress may accomplish like
results under the Commerce Clause. But that is precisely what
Congress has refused to do. It was besought to eliminate the waste
and inefficiencies due to the congeries of corporate
instrumentalities through which the railroads of the United States
operate by providing for compulsory consolidations. It was also
besought to do away with the complexities and confusion resulting
from State corporations' conducting the country's interstate
railroad business by requiring federal incorporation. Congress
rejected both demands.
See H.R.Rep. No. 650, 66th Cong.,
2d Sess., pp. 63-64. It
Page 334 U. S. 206
left mergers of separate railroad properties into larger units
to the will of their private owners, merely lodging a veto power in
the Commission if such voluntary mergers run counter to the defined
public interest. And Congress explicitly negatived the possibility
of construing such supervision by the Commission as the creation,
"directly or indirectly, of a federal corporation."
The Commission was charged with seeing to it that the very
limited requirements of § 5(2) were observed, and, to that end, was
given "exclusive and plenary" authority. § 5(11). The purpose was
to authorize a voluntary arrangement, to sanction an agreement, not
to formulate a plan and to coerce its adoption, as is true of § 77.
The law specifically enumerates the requirements that constitute
the "public interest" which the voluntary agreement must satisfy to
secure the Commission's approval. These are: the effect of the
proposal on the public transportation service; the effect of
including or failing to include other railroads in the plan; the
resulting fixed charges, and the interest of the carrier employees
affected. These factors have no bearing on whether the appellants'
claim should be allowed. The great difference between these
requirements and the detailed and comprehensive provisions of § 77,
11 U.S.C. § 205, carries a sharp legal contrast between the
authorization which Congress required for voluntary mergers and the
coercion of an imposed plan of reorganization in the case of
insolvent roads.
Appropriate accommodation between federal and State interests in
the construction of the Interstate Commerce Act is needlessly
sacrificed by adding to the detailed provisions whereby the
Commission is merely authorized to approve voluntary mergers an
implied abrogation of State law in no respect inconsistent with
such limited power of authorization, since the Commission found
that survival of a claim under State law would not impinge
Page 334 U. S. 207
upon "the public interest." It ignores the salutary principle of
construction, so strikingly illustrated by the
Los Angeles
Terminal cases from which it was drawn,
"that the Congress may circumscribe its regulation and occupy a
limited field, and that the intention to supersede the exercise by
the state of its authority as to matters not covered by the federal
legislation is not to be implied unless the Act of Congress, fairly
interpreted, is in conflict with the law of the State."
Atchison, T. & S.F. R. Co. v. Railroad Commission,
283 U. S. 380,
283 U. S.
392-393.
See also Palmer v. Massachusetts,
308 U. S. 79.
Since it is needless, it is undesirable to draw in implication
so destructive of State law from the Congressional scheme for
allowing voluntary mergers. In fact, Congress has manifested not an
intention to abrogate State law where the Commission finds no
collision with the public interest; it has manifested an intention
not to abrogate State law unless it interferes with carrying out an
approved merger. Thus, it made the necessary proportion of
assenting stockholders dependent on State law. It hardly seems
congruous to provide that State law should determine when the
opposition of stockholder may prevent a voluntary merger, but
should have no effect on the rights which such dissenters have
under State law, even where the Interstate Commerce Commission
finds no national interest involved in determining and enforcing
such rights. Again, while § 5(11) relieves parties to an approved
merger from the restraints of other laws, "Federal, State, or
municipal," it does so only
"insofar as may be necessary to enable them to carry into effect
the transaction so approved or provided for in accordance with the
terms and conditions, if any, imposed by the Commission. . . ."
This paragraph further contains an expressed disclaimer of
authorization of federal incorporation. The prohibition of federal
incorporation surely implied a desire to retain to the fullest
possible extent the
Page 334 U. S. 208
ties between the States and their chartered corporations. One of
the vital consequences of incorporation in a given State is the
subjection of the relationship between stockholders and their
corporation to the law of that State except insofar as federal law
unmistakably overrides it.
The considerations relevant to voluntary railroad mergers
sharply differ from those that control liquidations and
reorganizations under § 77 of the Bankruptcy Act. (
See
also Railroad Reorganization Act of 1948 Pub.L. No. 478, 80th
Cong., 2d Sess., April 9, 1948, 62 Stat. 162.) A railroad in
reorganization is administered by a bankruptcy court, which has
control of all its assets. The power of dealing with all claims is
inevitably concentrated in that court. In merger proceedings,
however, there is no obstacle to the practice pursued by the
Commission of deciding what is "just and reasonable" and in "the
public interest" as to each class of securities, while at the same
time permitting any dissenter to stand on the terms of the
particular stock issue, leaving to State law to determine what
those terms are, provided only that the function of the new
corporation, as part of an economic and efficient national railroad
system, would not be affected by allowance of such claims. The
Commission has here ruled that the appellants assert an
unliquidated claim against the Pere Marquette sufficiently
negligible not to affect the financial position of its successor,
even if it be ultimately allowed in full. I fail to see that the
effect on the Chesapeake & Ohio will be any different than that
of negligence claims for the same amount. Every operating railroad
is likely to have such claims outstanding against it at all times.
Their existence does not interfere with the consummation of a
voluntary merger. A reasonable amount of contingent obligations may
easily be allowed for. In any event, the determination whether or
not eventual liability for contingent claims of dissenting
stockholders are such as to affect "the public interest" required
to be protected by authorization
Page 334 U. S. 209
of a proposed merger is precisely the function of the Interstate
Commerce Commission, and should appropriately be left to the
exercise of its informed discretion.
The Commission has control, under § 20a, over securities, which,
of course, it does not have over a contingent demand for
compensation for loss resulting from negligence. But differences in
the foundation of contingent claims do not determine their
relevance to the Commission's authority in approving a merger and
in leaving the determination of such claims to State law. While the
rights asserted by the appellants arise out of their holding of
securities, they may be paid off in cash, if their claims turn out
to be well founded, and need not be satisfied out of the securities
of the successor corporation.
Neither what Congress has written nor what it has implied by the
purpose underlying what it has written persuades me that a power
which the Commission itself has vigorously disclaimed, it must now
exercise. The Commission has consistently declined to adjudicate as
a matter of State law -- or what is now found to be federal law --
contested claims not deemed relevant to its determination of "the
public interest."
E.g., Sullivan -- Purchase -- Service Freight
Line, Inc., 38 M.C.C. 621;
Jessup -- Control -- Safeway
Trails, Inc., 39 M.C.C. 233, 241;
Lee -- Control; Carolina
M. Exp. Lines, Inc. -- Lease and Purchase -- Reed, 40 M.C.C.
405, 407.
See also New York Central Securities Corporation v.
United States, 287 U. S. 12,
287 U. S. 26-27;
Cleveland, C., c. & St.L. R. Co. v. United States,
275 U. S. 404,
275 U. S.
414.
The Court is holding, in essence, that, while State law governs
the rights of railroad stockholders before and after voluntary
merger proceedings, it is supplanted during such proceedings. In
thus thrusting upon the Commission a jurisdiction which it itself
has rejected, the Court is depriving the States of a measure of
control over their own corporations when this is not required by a
fair reading of
Page 334 U. S. 210
the Transportation Act, and although the survival of such State
law does not interfere with the national interest as found by the
agency selected by Congress for determining that interest.
I would affirm the judgment.
THE CHIEF JUSTICE and MR. JUSTICE BURTON join in this
dissent.
* According to the annual reports of Class I and Class II
carriers on file with the Interstate Commerce Commission, there is
at present only one operating carrier chartered by Congress: the
Texas and Pacific Railway.
See the Act of March 3, 1871,
16 Stat. 573, as amended by the Act of February 9, 1923, 42 Stat.
1223.