Source: https://supreme.justia.com/cases/federal/us/338/96/
Timestamp: 2019-04-21 20:14:48+00:00

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Justia › US Law › US Case Law › US Supreme Court › Volume 338 › SEC v. Central-Illinois Securities Corp.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
"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.
"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.
"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,"
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.
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.
for payment of the preferred stocks at their voluntary liquidation or call prices.
"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."
"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.'"
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,"
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.
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.
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.
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.
"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.
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.
"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, 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,"
"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] "
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.
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.
"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]"
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.
"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."
"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.
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.
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.
"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."
"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.
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.
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.
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.
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."
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).
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.
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.
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 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.
"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,"
"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.
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.
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.
"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."
". . . 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."
"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.
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.
"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.
"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 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."
"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."
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.
"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."
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.
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.
going through such a procedure, multiplied by the number of divestments compelled by the Act over many years, [Footnote 39] would be insuperable.
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.
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.
"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?"
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.
"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)."
"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.
"The prices of preferred stocks today are predicated on fundamental conditions prevailing in the money markets, conditions which are of a permanent nature."
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.
"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."
"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.
"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."
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.
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.
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.
call price, since the company could have called the stock at that price at any time, absent the Act.
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.
* 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.
49 Stat. 803, 822, 15 U.S.C. § 79k(e).
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.
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.
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.
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.
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.
"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.
"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.
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.
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.
"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."
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.
"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.
"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.
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.
"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."
"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)."
S.Rep. No.621, 74th Cong., 1st Sess. 13; 168 F.2d at 729.
"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."
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).
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).
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.
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.
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.
"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."
"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."
"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."
"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."
American Law Institute, Restatement, Contracts § 468, comment on subsection 3.
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.
"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."
Affirming In re Laclede Gas Light Co., 57 F.Supp. 997.
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.
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.
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.
"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."
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.
Engineers' system consisted of 17 companies before the Commission began its integration proceedings. See note 2 and text supra.
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.
Badger's analysis, as summarized by the Commission, is stated in note 8 supra.
"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.
"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."
"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.
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.
"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."
See note 38 and text supra.
"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.
"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).
"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.
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.
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.
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.
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.
"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.
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.
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 note 6, infra.
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.
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.
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.
The United Light and Power Co., 10 S.E.C. 1215, 1222; North American Light & Power Co., 11 S.E.C. 820, 824.
^6 See note 1, supra.
"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.
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.
"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.
Commissioner Caffrey thought the liquidation preference applicable for a reason irrelevant here. See El Paso Electric Co., holding Company Act Release No. 5499.
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.

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