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Matched Legal Cases: ['§ 11', '§ 11', '§ 11', '§ 11', '§ 11', '§ 24', '§ 11', '§ 11', '§ 11', '§ 24', '§ 77', '§ 77', '§ 205', '§ 11', '§ 11', '§ 77', '§ 11', '§ 77', '§ 77', '§ 77', '§ 11', '§ 24', '§ 11', '§ 24', '§ 11', '§ 24', '§ 24', '§ 11', '§ 24', '§ 11', '§ 77', '§ 11', '§ 24', '§ 77', '§ 11', '§ 11', '§ 11', '§ 11']

SEC v. Central-Illinois Securities Corp. (full text) :: 338 U.S. 96 (1949) :: Justia U.S. Supreme Court Center Log In
U.S. Supreme CourtSEC v. Central-Illinois Securities Corp., 338 U.S. 96 (1949)Securities and Exchange Commission v.Central-Illinois Securities Corp.No. 226Argued January 12-13, 1949Decided June 27, 1949*338 U.S. 96CERTIORARI TO THE UNITED STATES COURT OF APPEALS
The case involves an amended plan filed under § 11(e) of the Public Utility Holding Company Act of 1935 [Footnote 1] by Engineers Public Service Company. The plan provided, inter alia, for satisfying the claims of Engineers' preferred stockholders in cash as a preliminary to distributing the Page 338 U. S. 100 remaining assets to common stockholders and dissolving the company. Broadly, the question is whether the Securities and Exchange Commission, in reviewing the plan, correctly applied the "fair and equitable" standard of § 11(e) in determining the amounts to be paid the preferred stockholders in satisfaction of their claims.
At the time the Public Utility Holding Company Act was enacted, the holding company system dominated by Engineers consisted of 17 utility and nonutility companies. Page 338 U. S. 101 Of these, nine were direct subsidiaries of Engineers and eight were indirect subsidiaries. Integration proceedings under § 11(b)(1) of the Act were instituted with respect to Engineers and its subsidiaries in 1940. In a series of orders issued in 1941 and 1942, the Securities and Exchange Commission directed Engineers to dispose of its interests in all companies except either Virginia Electric and Power Company or Gulf States Utilities Company, and designated Virginia as the principal system if Engineers failed to elect between it and Gulf States. [Footnote 2] At the time the plan now under review was filed, Engineers had complied with the divestment orders to the extent of disposing of all its properties except its interest in Virginia, consisting of 99.8 percent of that company's common stock, and its interest in Gulf States and El Paso Electric Company, consisting of all their common stock. Engineers' principal assets were the securities representing its interest in these companies and $14,650,000 in cash and United States Treasury securities.
Engineers had no debts. It had outstanding three series of cumulative preferred stock of equal rank: 143,951 shares of $5 annual dividend series, 183,406 shares of $5.50 series, and 65,098 shares of $6 series. As has been said, Page 338 U. S. 102 all three series had involuntary liquidation preferences of $100 per share, call prices of $105 for the $5 series and $110 for the $5.50 and $6 series, and voluntary liquidation preferences equal to the call prices.
In order to insure adequate presentation of the views of the preferred stockholders, Engineers' board of directors authorized one of its members, Thomas W. Streeter, who was primarily interested in the preferred stock, to retain counsel partly at the company's expense. Streeter and members of his family are petitioners in No. 227. These preferred stockholders and representatives of a group of institutional investors who held preferred stock, Page 338 U. S. 103 the Home Insurance Company and Tradesmens National Bank and Trust Company, petitioners in No. 243, appeared before the Commission in opposition to the plan. They contended that they should receive amounts equal to the voluntary liquidation preference of the preferred.
After summarizing the issuing prices, [Footnote 5] the dividend history, [Footnote 6] and the market history [Footnote 7] of the three series of preferreds, the Commission analyzed the assets coverage and earnings coverage of the stock. The preferred stock of Engineers represented 17.5 percent of the consolidated capitalization and surplus of the system. That stock was junior to the 66.2 percent of the consolidated capitalization and surplus which consisted of securities of Engineers' subsidiaries held by the public, and senior to 16.3 percent, Page 338 U. S. 104 consisting of Engineers' total common stock and surplus.
Certain expert testimony concerning the going concern or investment value of the preferred stock was adduced before the Commission. Dr. Ralph E. Badger was an expert witness on behalf of certain preferred stockholders. He made a detailed analysis of the earnings and assets of Engineers and of the three series of preferred stock. He then compared Engineers and the preferred stock with relevant information concerning other comparable companies and securities. [Footnote 8] He concluded that, apart from Page 338 U. S. 105 their call provisions and on the basis of quality and yield, the three series of preferred stock should be valued at $108.70, $119.57, and $130.33 respectively, but that, because of the redemption privilege, "the present investment values are represented by their call price, plus a slight premium to account for the time required to effect a call." The fair investment values of the preferred, in view of the redemption privilege, were: $5 series -- $106.25; $5.50 series -- $111.38; $6 series -- $111.50. No rebuttal testimony was introduced, and there was no serious challenge to Badger's conclusions that the fair investment value of each series of the preferred exceeded the call prices.
Donald C. Barnes, Engineers' president, testified that apart from the impact of § 11 of the Act and taking into account the call prices, the fair value of the preferreds, i.e., "what a willing buyer would pay and what a willing seller would take in today's market for such securities," was somewhat above the redemption prices. Barnes spoke of several factors, viz., possibilities of continued inflation, of depression, government competition, adverse changes in regulatory policy, or developments in atomic Page 338 U. S. 106 energy, all "common to the utilities industry generally," which might have a future adverse effect on the value of Engineers preferred. Both witnesses agreed, however, as Engineers stated in its brief before the Commission, that
the Commission considered all the charter provisions which affected the preferred, "such as the dividend rate and the call price as well as the liquidation preferences," and analyzed the financial condition of the company "with particular regard to the asset and earnings coverage of the preferred." On the basis of the undisputed testimony, the Commission found that the going concern or investment value of the preferred was at least equal to the respective call prices. Since the call prices operated as ceilings on the value of the security by providing with respect to each Page 338 U. S. 107 series, "a means, apart from the Act, whereby the security can be retired at a maximum price," [Footnote 9] no attempt was made to determine whether the investment value of any series of preferred would exceed the call price if there were no call provision.
Engineers' contended that payment to the preferred of any amount in excess of $100 per share was unfair because certain divestments required by the Act resulted in losses to the common stock and also eliminated the advantages of a "diversified portfolio of securities." In reply to this, the Commission noted that it did not accept Page 338 U. S. 108 the hypothesis that losses were incurred by divestments caused by the Act, [Footnote 11] and stated that the preferred claims, measured by their going concern value, were entitled to absolute priority, and that what remained to junior security holders after satisfying this priority was necessarily their fair share.
The Amended Plan. Engineers then acquiesced in the Commission's determination and submitted an amended plan. In addition to meeting the Commission's mechanical objections to the original plan, the amended plan provided Page 338 U. S. 109 for payment of the preferred stocks at their voluntary liquidation or call prices.
Proceedings in the District Court. The Commission applied to the District Court for the District of Delaware for approval of the plan as amended. § 11(e). Certain Page 338 U. S. 110 common stockholders, respondents in Nos. 226, 227, and 243 and petitioners in No. 266, filed objections to the plan, contending that the Commission had erred in awarding to the preferred stockholders the equivalent of the voluntary liquidation preferences of their shares. The Streeter group of preferred stockholders objected to the Commission's finding of the appropriateness of an escrow arrangement to stop the accrual of further dividends in the event of continued litigation.
The District Court considered the case on the record made before the Commission. It preferred not to determine whether the involuntary liquidation preferences controlled, but stated that, "in each case, the inquiry is one of relative rights based on colloquial equity." 71 F.Supp. 797, 802. That standard, thought the court, necessitated consideration of various factors to which it was thought the Commission had attached little or no importance. Thus, it was important to consider not only the charter provisions, but the issuing price in terms of what the company received for the securities and the market history of the preferred. These factors might more than offset the factor of investment value, the testimony as to which the court accepted. In any event, thought the court, several other considerations have this effect. The Act, in addition to compelling the preferred stockholders to surrender "this present enhanced value," Page 338 U. S. 111 worked hardships on the common. All classes of securities, the court said, suffered losses as a result of the divestment orders issued by the Commission under the Act. Earnings retained in the system at a sacrifice to the common contributed to the enhancement of the value of the preferred. These standards of "colloquial equity," which the District Court conceived to be controlling in our decision in Otis & Co. v. Securities and Exchange Commission, supra, compelled the conclusion that it would not be fair and equitable to give the preferred more than $100 per share. Arguments concerning the worth of the preferred in the absence of a Public Utility Holding Company Act were thought not profitable to consider, "for there is a Public Utility Holding Company Act." In effect amending the plan to provide for payment of the preferred at $100 per share, the District Court approved the plan as thus amended. The escrow agreement prescribed by the Commission was approved, the court concluding that there was no merit in the preferred stockholders' objections to this feature. 71 F.Supp. 797.
Turning to the various factors which should have been taken into consideration in arriving at the equitable equivalent to the rights surrendered by the preferred Page 338 U. S. 112 shareholders, the Court of Appeals criticized the Commission for finding the investment value of the preferred as if there were no Holding Company Act while omitting to evaluate the common by the same standard, and for failing to consider factors other than the investment value. It was thought that the Commission should have estimated the future earning power of Engineers, absent a Holding Company Act, and apportioned that power between preferred and common stockholders in accordance with their respective claims. It was also thought that, in the process of valuing the preferred and the common by the same approach, the Commission should have considered "the substantial losses which occurred to Engineers by virtue of divestitures compelled by the Act." [Footnote 14] Losses of this nature "should be returned to the credit side of the enterprise's balance sheet as a matter of bookkeeping." Id. at 737-738.
At the time the opinion of the Court of Appeals was rendered, the plan had been consummated, with the exception of the payment of the disputed amounts in Page 338 U. S. 113 excess of the involuntary liquidation preferences of the preferred. The escrow arrangement, which had been employed to preserve the issue of the amount to which the preferred was entitled after having been approved by the Commission and the District Court, was held to be proper.
The Court of Appeals was of the view that the question of the extent of "the power conferred on the district courts . . . by the Act" was one which went "to the heart of the instant controversy." 168 F.2d at 729. The Commission apparently took the position before that court that the District Court had erred in setting aside the agency's conclusions unless those conclusions lacked "any rational and statutory foundation." [Footnote 15] This view was rejected by the Court of Appeals. Distinguishing judicial review under § 24(a) as being limited to the inquiry whether the Commission "has plainly abused its discretion in these matters," Securities and Exchange Commission v. Chenery Corp., 332 U. S. 194, [Footnote 16] the Page 338 U. S. 114 Court of Appeals held that a § 11(e) court was charged with the duty of exercising a full and independent judgment as to the fairness and equity of a plan, "to function as an equity reorganization tribunal within the limitations prescribed by the Act." 168 F.2d at 736.
which is said to embody a similar statutory scheme and under which administrative determinations of valuation are sustained if supported by substantial evidence and not contrary to law. Ecker v. Western Pacific R. Corp., 318 U. S. 448, 318 U. S. 473; RFC v. Denver & Rio Grande W. R. Co., 328 U. S. 495, 328 U. S. 505-509. Page 338 U. S. 115
the court is authorized "as a court of equity" to take exclusive jurisdiction and possession of the company or companies and their assets, and to appoint a trustee, which may be the Commission, for purposes of carrying out the plan. [Footnote 17] Page 338 U. S. 116
"Any person or party aggrieved by an order issued by the Commission . . . may obtain a review of such order in the circuit court of appeals . . . by filing in such court, within sixty days . . . , a written petition. . . . The Commission shall certify and file in the court a transcript of the record upon which the order complained of was entered. . . . [S]uch court shall have exclusive jurisdiction to affirm, modify, or set aside such order in whole or in part. No objection to the order of the Commission shall be considered by the court unless such objection shall have been urged before the Commission or unless there were reasonable grounds for failure so to do. The findings of the Commission as to the facts, if supported by substantial evidence, shall be conclusive. [Footnote 18] "Page 338 U. S. 117
The District Court and the Court of Appeals, focusing their attention primarily on § 11(e), emphasized the section's requirement of approval by the District Court, that court's declared status "as a court of equity," and the absence from § 11(e) of such explicit provisions as those of § 24(a) making the Commission's findings of fact conclusive, if supported by substantial evidence; limiting the court to consideration of objections urged before the Commission in the absence of reasonable grounds for failure to urge them, and restricting the court's consideration to the record made before the Commission in the absence of any showing requiring remand to the Commission for the taking of additional evidence. Page 338 U. S. 118
"We think that it will not be contended that a district court . . . adjudging a controversy arising under the Sherman Act would function Page 338 U. S. 119 other than as in an original equity proceeding, exercising all the powers and duties inherent in a court of equity under such circumstances."
168 F.2d at 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.
168 F.2d at 735-736. Page 338 U. S. 120 Nevertheless, "[a]ny question which goes to the issue of what is fair and equitable may be raised, and must be passed upon." 168 F.2d at 735. Moreover, since
the 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 legislative history of § 11(e) throws little light on the problem. There was, surprisingly, only casual -- indeed, tangential -- discussion of it. The analogy to proceedings under § 77 of the Bankruptcy Act, drawn by the Commission and referred to by the Court of Appeals, rests chiefly upon the statement of Senator Wheeler, cosponsor of the bill, made during a colloquy in debate on the Senate floor and set forth in the margin. [Footnote 20] But that statement Page 338 U. S. 121 did not occur in any detailed consideration of the scope and incidence of judicial review. It arose only, as it were, incidentally in the course of extended discussion which centered about the receivership provisions of § 11(e) as it stood at the time of the debate.
Moreover, the discussion did not and could not take account of the fact that, under our subsequent decisions in the Western Pacific and Denver & Rio Grande cases, supra, matters of valuation in § 77 reorganizations have been held to be exclusively for the Interstate Commerce Commission, not for the district courts, except as stated above. Ecker v. Western Pacific R. Corp., supra; RFC v. Denver & Rio Grande W. R. Co., supra. Significantly, this fact seems not to have been taken into account when the Court of Appeals included the § 77 proceedings among its general grouping of reorganization procedures for analogical purposes. And, in this respect, the Commission makes clear its difference from the Court of Page 338 U. S. 122 Appeals, pointing out that, under the Western Pacific and Rio Grande decisions, the Commission decides questions of valuation subject only to the narrow scope of review there allowed.
On the other hand, the opposing analogy drawn by the Court of Appeals from the history of the law of reorganization in general is highly indiscriminate. Insofar as it includes equity receiverships, e.g., pursuant to Sherman and Hepburn Act readjustments, it ignores the important fact that, in such proceedings, there is no effort to brigade the administrative and judicial processes. Nor does it take account of the substantial differences "from statute to statute," e.g., between proceedings under § 77 of the Bankruptcy Act as construed in the Western Pacific and Rio Grande cases, on the one hand, and Chapter X reorganizations, on the other. Moreover, and perhaps most important, it substitutes analogy drawn from other statutes and judicial proceedings, together with a reading of § 11(e) in comparative isolation from the other provisions of the Act, for a consideration of that section in the context of the Act, as a whole and particularly with Page 338 U. S. 123 reference to any effort toward harmonizing the section with § 24(a) and bringing the two as close together as possible in practical operation.
Conceivably, the same plan might be brought under review by both routes. Indeed, in one instance, the District Court for Delaware, to which the plan here was submitted, held that its determination of the issues in a § 11(e) proceeding was precluded by a prior affirmation of the same order by a Court of Appeals in a § 24(a) review proceeding. See L.J. Marquis & Co. v. Securities & Exchange Commission, 134 F.2d 822, and Application of Securities and Exchange Commission, 50 F.Supp. 965. Presumably, under the views now taken by the District Court and the Court of Appeals, if district court review Page 338 U. S. 124 under § 11(e) could be had first, that determination likewise would be conclusive as against contrary views held by the Commission and a Court of Appeals in a later § 24(a) proceeding.
In contrast with the specific limitations of § 24(a), the very brevity and lack of specificity of § 11(e), together with the paucity and tentative character of the legislative history, concerning the scope of review under the latter section, give caution against reading its terms as importing a breadth of review highly inconsistent with the limitations expressly provided by § 24(a). Both sections are parts of the same statute, designed to give effect to the same legislative policies and to secure uniform application of the statutory standards. That statutory context and those objects should outweigh any general considerations or analogies drawn indiscriminately from differing statutes or from the history of reorganizations in general, leading as these do to incongruities and diversities in practical application of the Act's terms and policies. Page 338 U. S. 125
It may be added that, in general, the courts which have dealt with the problem appear to have taken the view we take, [Footnote 21] as against the one prevailing in the District Page 338 U. S. 126 Court and the Court of Appeals which reviewed this case, [Footnote 22] although in no case has the question been so sharply focused as here. While § 11(e), as we have noted, does not contain language the equivalent of subsection (e) of § 77 of the Bankruptcy Act upon which this Court rested its ruling concerning review of valuations in the Western Pacific case, that lack may be supplied in this case by the correlation we think is required between the terms of § 11(e) and those of § 24(a). Accordingly, we are unable to accept the conclusion of the Court of Appeals and the District Court that the latter was free, in passing upon the Commission's valuations, to disregard its judgment in the large areas of discretion committed by the Act to that judgment.
Administrative finality is not, of course, applicable only to agency findings of "fact" in the narrow, literal sense. The Commission's findings as to valuation, which are based upon judgment and prediction, as well as upon "facts," like the valuation findings of the Interstate Commerce Commission in reorganizations under § 77 of the Bankruptcy Act, Ecker v. Western Pacific R. Corp., supra, are not subject to reexamination by the court unless they are not supported by substantial evidence or were not arrived at "in accordance with legal standards." Page 338 U. S. 127
Even with the latitude allowed by our present ruling for play of the Commission's judgment, it remains to consider whether, in this case, the Commission has complied Page 338 U. S. 128 with the statutory standards in its determination that the plan as amended by it is fair and equitable. The common shareholders deny this. And, contrary to the preferred shareholders' position, the Commission has argued, alternatively to its contentions concerning the scope of review, that application of the "fair and equitable" standard of § 11(e) in this case presents questions of law which have been decided erroneously by the District Court and the Court of Appeals.
But the Commission does not stop with this broad argument. It goes on to consider particular questions which arose in the valuation process, and to urge that they presented questions of law which the reviewing courts erroneously determined. Among these are whether the court's dispositions violated the "absolute priority" standard attributed to the Otis case; whether their requirement that the Commission value the common stock in the same manner as it did the preferred, rather than simply awarding to the common shareholders all of Engineers' assets remaining after giving the preferred the equitable equivalent of their shares as determined, violated the statutory standard; whether the courts rightly required the Commission to take into account alleged losses incurred by Engineers in earlier dispositions of company properties made to comply with the Act, and whether the Commission improperly failed to take into Page 338 U. S. 129 account other matters of "colloquial equity" the courts considered not only proper, but essential, to a fair and equitable determination.
In the Otis case, the plan called for the dissolution of the United Light and Power Company, the top holding company in the system, in obedience to a Commission order requiring the elimination of that company, whose existence violated the "great-grandfather clause" of § 11(b)(2). Since both common and preferred stockholders were to receive, in exchange for their stock in United Power, stock in its subsidiary, the United Light and Railways Company, which was itself a holding company, the effect of the dissolution was to eliminate the top holding company in a multi-tiered holding company system, leaving both classes of security holders with an investment in a continuing holding company enterprise. Page 338 U. S. 130
In so ruling, this Court did not abandon the "absolute priority" standard insofar as embodied in the requirement that the plan be "fair and equitable." [Footnote 23] That standard requires that each security holder be given the equitable equivalent of the rights surrendered, but the equitable equivalent is not invariably the charter liquidation Page 338 U. S. 131 preference, as it is in the case of liquidations or reorganizations brought about through the action of creditors or stockholders. The principle of the Otis case is that the measure of equitable equivalence for purposes of simplification proceedings compelled by the Holding Company Act is the value of the securities "on the basis of a going business, and not as though a liquidation were taking place." 323 U.S. at 323 U. S. 633.
It is urged first that Engineers' charter liquidation provision is phrased in more comprehensive terms than was the one in Otis, and that the framers of Engineers' charter Page 338 U. S. 132 contemplated the possibility of governmental act on of the kind required by the Holding Company Act. A comparison of the two charter provisions reveals no significant difference between them. [Footnote 26] Engineers' charter was drafted some four years earlier than the Otis charter. Each contract was made at a time when the legislative policy embodied in the Holding Company Act "was not foreseeable." 323 U.S. at 323 U. S. 638. [Footnote 27]
It would probably suffice to observe that the word "liquidation," as used in Engineers' charter liquidation provision, quite obviously means liquidation of Engineers, not liquidation of other corporations or of the holding company enterprise of which Engineers is a part. But there are more fundamental reasons which require the rejection of this argument. The legislative history relied Page 338 U. S. 133 upon in the Otis case, 323 U.S. at 323 U. S. 636-637, contains no hint that Congress intended to preserve investment values only when the policy of the Act required a reduction in the number of holding companies in a system, rather than the elimination of the system's last holding company. [Footnote 28] And the Otis opinion rejected the Commission's argument in that case that the result there was justified by the fact that the holding company enterprise was to continue. We said that the reason for the inapplicability of charter provisions
323 U.S. at 323 U. S. 638. Page 338 U. S. 134
Again, this result depended not upon the fact that the merger left a continuing enterprise, but upon the fact that Congress, in its efforts to achieve a particular economic goal, wished to avoid shifting investment values from one class of securities to another by maturing contract rights which would not otherwise have matured. As did the Otis opinion, which was said to construe "a federal statute of very similar purposes," [Footnote 29] the Schwabacher opinion Page 338 U. S. 135 assumed "that Congress intended to exercise its power with the least possible harm to citizens." Otis & Co. v. Securities and Exchange Commission, supra, at 323 U. S. 638.
323 U.S. at 323 U. S. 637-638. Page 338 U. S. 136
The authorities relied upon in support of the frustration argument would not compel the result for which the common stockholders contend, even in the absence of the Otis decision. Considerable reliance is placed upon The United Light & Power Co., 10 S.E.C. 1215, and the affirmance of that decision by the Court of Appeals for the Second Circuit in New York Trust Co. v. Securities and Exchange Commission, 131 F.2d 274. In that case, the plan, a different feature of which was reviewed in the Otis case, provided for payment to the company's debenture holders in cash. The Commission, after deciding that voluntary liquidation preferences were not payable and that the bondholders had no right to receive the premium "by virtue of any other recognized legal or Page 338 U. S. 137 equitable principle," held that there was no right to compensation for the termination of the investment, which, like the termination of the stockholders' investments, had been "brought about by the act of a sovereign power -- in this case, a congressional mandate." 10 S.E.C. at 1223, 1228. In affirming the Commission's determination, the Court of Appeals held that
Even if it is assumed that no distinction is to be made between bonds and preferred stock, [Footnote 31] neither the decision of the Court of Appeals nor that of the Commission in the New York Trust case is inconsistent with the later Otis decision or with the position of the Commission in Page 338 U. S. 138 this case, insofar as each holds that performance of the charter contract is excused. [Footnote 32] Engineers is no longer required by its contract either to continue the payment of preferred dividends beyond the dissolution date provided in the plan or to redeem the preferred at either voluntary or involuntary charter liquidation prices.
151 F.2d at 430. [Footnote 34] Page 338 U. S. 139
"Like the bankruptcy and reorganization statutes, the Public Utility Holding Company Act, in providing that plans for simplification be 'fair and equitable,' incorporates the principle of full priority in the treatment to be accorded various classes of security interests. This right to priority in assets which exists between creditors and stockholders, exists also between various classes of stockholders. When, by contract as evidenced by charter provisions, Page 338 U. S. 140 one class of stockholders is superior to another in its claim against earnings or assets that superior position must be recognized by courts or agencies which deal with the earnings or assets of such a company. Fairness and equity require this conclusion. [Footnote 35]"
A. The investment value or going concern value theory rests upon the premise that Congress intended to exercise its power to simplify holding company systems and to remove uneconomic companies without destroying legitimate investment value. It is consistent with this premise that the investment value determined by the Commission by the investment value the securities would have if it were not for the liquidation required by the Act. This does not mean, however, that the agency must value the stock as if the Act had never affected the holding company system of which the particular company dealt with in the plan is a part. [Footnote 36] When the Commission values a security interest by determining the value that interest would have if it were not for the present liquidation or reorganization required by the Act, it substantially complies with the statutory mandate. Page 338 U. S. 141
There are at least two sufficient reasons, both of which are illustrated by the present case. It would be administratively impossible, in determining the investment value of securities in a corporation being liquidated, to revaluate every transaction in the gradual simplification of the system of which the company is a part, as if the Act had never been passed. [Footnote 37] If the Commission were required to reconstitute Engineers' balance sheet as if the Act had never been passed, it would be necessary, for example, retroactively to evaluate the economic consequences of the compelled divestment of Engineers' interest in Puget Sound Power and Light Corporation in 1943 and to determine whether and to what extent Engineers would have gained or lost by retaining its interest in Puget Sound to the present time. [Footnote 38] The difficulties of Page 338 U. S. 142 going through such a procedure, multiplied by the number of divestments compelled by the Act over many years, [Footnote 39] would be insuperable. Page 338 U. S. 143
B. We have observed that the standard of compensation to be accorded security holders does not depend upon whether their security interests are to be retired by exchanging them for new securities in a continuing enterprise or by payment in cash. However, these different methods of compensating the security holder determine which of varying methods of arriving at investment value will be employed by the Commission. Where the security holder is to receive new securities, the Commission is faced with a dual valuation problem. It must evaluate the security to be surrendered and the securities to be received in exchange. Recognizing the inherent complexity of this problem, this Court has held that a security holder may be accorded the equitable equivalent of the rights surrendered without placing a dollar valuation upon either the rights surrendered or the securities given in compensation therefor. [Footnote 40] In the Otis case, in which the plan contemplated compensating both preferred and common stockholders of United Power in common stock of Power's sole subsidiary, the Commission Page 338 U. S. 144 was required to apportion the Power common between the two classes by evaluating the expectation of income from the new stock and the risk factor of that stock in relation to the rights being surrendered. In effect, the Commission's task was to apportion to the new stock earning power substantially equivalent to that surrendered.
The Commission did not rely exclusively on this expert testimony, but made its own study of the market and Page 338 U. S. 145 dividend history and the earnings coverage and assets coverage of the preferred. This served not only as a check upon the accuracy of Badger's premises, but as a basis for the Commission's exercise of its independent judgment. The Commission found it unnecessary to make its own independent estimate of the dollar value of the preferred stock absent a Holding Company Act. [Footnote 43] When it became apparent that the going concern value would exceed the call prices of the stocks by a considerable amount, the exact going concern value became immaterial, because the call price at which the corporation could always retire the preferred without reference to the Act, marked the limits of the preferreds' claims.
They criticize Badger, whose evidence was undisputed and was accepted by the Commission, for failing to employ, as a basis for comparison, median prices and Page 338 U. S. 146 yields of the securities chosen for comparison, computed on the basis of prices covering a representative period of time; they complain that the low yield rates and high market levels of January, 1946, were abnormal. And it is said that the Commission and Badger failed property to evaluate Engineers' economic future, absent a Holding Company Act, i.e., failed to make
He added that the values he placed upon the preferreds were "values of a permanent nature, and . . . not values of a temporary or speculative nature." [Footnote 44] His conclusion was supported by a summary Page 338 U. S. 147 of the pertinent economic considerations, including the effects of Government financing and the large Government debt, together with a comparison of yields of Government bonds, high grade corporate bonds, and high grade preferred stocks from 1932 to 1945. Finally, Badger's analysis of Engineers' economic status, absent a Holding Company Act, of Engineers' preferred, and of comparable securities of other companies was thorough and adequate.
Ibid. The Commission's determination that the investment values of the preferreds were in excess of their call prices has ample support in the record. Page 338 U. S. 148
71 F.Supp. at 802. [Footnote 46] Page 338 U. S. 149
In addition, however, it is said that value disappeared in the liquidation of Engineers itself, in spite of the fact that, when Engineers' management came forward with a plan for the liquidation of Engineers, they had asserted that there was no economic justification for the continued existence of that corporation, in fact, had characterized it as an "economic monstrosity." [Footnote 48] In the light of the present Page 338 U. S. 150 record it seems futile to argue that the dissolution of Engineers injured the common stockholders by depriving them of the so-called advantages of "leverage," [Footnote 49] diversity of investment, and a centralized management, arguments which, incidentally, were largely rejected by Congress at the time of the passage of the Act. [Footnote 50] The record indicates Page 338 U. S. 151 that whatever tax advantage would be derived from reporting income on a consolidated basis was not commensurate with the cost of preserving Engineers.
C. The District Court, with the apparent approval of the Court of Appeals, cast the standard of "fair and equitable" in the mold of "colloquial equities." Making payment of the preferred in excess of $100 per share unfair, it thought, were various "colloquial equities" which may or may not have had an incidental bearing on the investment value of the shares. The issuing price was one such factor. The "important consideration" was "not what the preferred security holders paid, but how much the company received for their stock," and, since it was "practically certain" that the company received no more than $98 per share for any of the three series of preferreds, and that the public paid no more than $100 per share, there was "no consideration of colloquial equity why the preferreds should be paid a premium." 71 F.Supp. Page 338 U. S. 152 at 801. Other "colloquial equities" were the market history of the preferred, [Footnote 51] the fact that earnings had been retained in the system, thus enhancing the value of the preferred at a sacrifice to the common, [Footnote 52] and the hardship worked by the Act upon the common stock in the form of forced divestitures [Footnote 53] and frustration of the enterprise.
The Escrow Arrangement. As we have stated, the plan has been consummated by the payment to the preferred of $100 per share, and the difference between the amount paid and the amount which would be payable under the plan approved by the Commission has been deposited in escrow, together with an amount sufficient to give the Page 338 U. S. 153 preferred, during the period of the litigation, a return on the sum in escrow "measured by the return which would have been received by [the preferred stockholders] if the stock remained outstanding." [Footnote 54] The preferred stockholders, who received $100 per share at the time of the consummation of the plan, will thus receive, on the additional $5 or $10 per share held in escrow, substantially the same return they would have derived by the retention of $5 or $10 worth of Engineers' preferred stock.
But the preferred stockholders contend that the plan should not have been consummated until such time as they were paid in full the amounts due them in satisfaction of their claims; that, in addition to the principal amount in escrow and interest thereon, they should receive an amount equal to dividends on the $100 per share received at the time of consummation, to the date of payment of the $5 or $10 held in escrow. Their argument is a technical one: it is said that the Commission actually applied the redemption provision to limit the amount of payment to them, since, in the absence of that provision, they would have been entitled to an investment value higher than the call prices; that, by the terms of that provision, the company had no right to terminate dividends except by payment of the full call prices. The answer is that the Commission did not apply the redemption provision, which, like the involuntary liquidation provision, was inoperative, but held that fairness required that the preferreds be paid no more than the Page 338 U. S. 154 call price, since the company could have called the stock at that price at any time, absent the Act.
The total sum in escrow is not sufficient to meet the preferred stockholders' demand. It is not apparent how they could recover the difference between the sum in escrow and the sum they claim in this proceeding. But we need not learn, for the escrow provision adopted by the District Court on the recommendation of the Commission in order to expedite consummation of the plan was fair to the preferred stockholders. [Footnote 55] The $100 per share received at the time of the consummation of the plan could have been invested in comparable securities Page 338 U. S. 155 at the current rate of return. On the $5 or $10 per share held in escrow, the preferred stockholders will receive, for the period between the date of consummation and the date of payment, a return which approximates the favorable rate of return they received on their preferred stock in Engineers. Their position is at least substantially the same as it would have been had they received $105 or $110 per share at the time of the consummation of the plan.
"* * * *" "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."
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.
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 Court of Appeals states that the Commission "made no finding as to the value' of the common stock," and that "the Commission ascribed `investment value' to the preferreds, but failed to make a similar approach to the common." 168 F.2d at 737. Central-Illinois Securities Corporation and Christian A. Johnson, representing the common stockholders, complain that
The Commission first applied the investment value standard in a series of cases holding common stock entitled to participate with preferred in the new securities Page 338 U. S. 156 given to satisfy claims in the dissolving corporation, although in each case the book value of the corporation's assets was exceeded by the charter claims of the preferred. [Footnote 2/1] This application of the standard was approved by this Court in Otis & Co. v. Securities and Exchange Commission, 323 U. S. 624. Satisfaction of preferred claims at less than their face amount by payment partly in cash and partly in new securities has also been approved by the Commission. [Footnote 2/2] In other cases holding that, in the circumstances of the particular case, retirement of preferred stock having a call or voluntary liquidation price in excess of the involuntary liquidation price by payment in cash at the latter price is fair and equitable, the Commission has considered a number of factors other than charter provisions. [Footnote 2/3]
In a number of contemporaneous cases, the Commission approved plans which provided for liquidation of bonds by payment in cash at the face amount of the bonds Page 338 U. S. 157 without premium. [Footnote 2/4] Even in the earliest of these cases, in addition to holding that the indenture provision requiring payment of a premium in the event of voluntary call was inapplicable, the Commission observed the absence of other legal or equitable considerations which might have made payment of a premium fair and equitable. [Footnote 2/5] And, in the later cases, the Commission's opinions
In American Power & Light Co., Holding Company Act Release No. 6176, the Commission applied the investment value theory to allow payment of premiums on bonds retired under compulsion of § 11(e). After pointing out the trend observed in the preceding paragraph and attributing it to experience gained in considering a large number of cases, the Commission held that the investment value theory should be applied where its application resulted in the payment of the bonds at prices in excess of their face value. Commissioner Healy, who had persistently dissented in the line of cases finally approved by this Court in the Otis case, [Footnote 2/6] dissented Page 338 U. S. 158 vigorously. He contended that the Otis case should be limited to its facts. and that the earlier cases refusing to require payment of premiums on bonds should be taken as holding that payment of bonds at their face amount without premium "was fair because . . . contract rights were satisfied, not because the debentures were valued and found to be worth their principal." Id. at 46. [Footnote 2/7] He thought it highly significant that a consistent application of the investment value standard would require retirement of bonds at less than their principal amount, in cases in which the bonds were not "worth their principal," and that the Commission had not suggested that its approach should extend so far. Id. at 47-48. [Footnote 2/8]
Less than one year later, the Commission made a parallel application of the investment value theory to a case involving the retirement of noncallable preferred stock, holding unfair a plan providing for the retirement of that stock by payment in cash equivalent to the liquidation preference. The United Light and Power Co., Holding Company Act Release No. 6603. Commissioner Healy, who died November 16, 1946, dissented, stating for the last time his view that the claim should be paid at its liquidation preference, i.e., that the contract controlled. [Footnote 2/9] After this decision, in which the Commission Page 338 U. S. 159 divided 3-2, [Footnote 2/10] a rehearing was granted. While decision on rehearing was pending, the company proposed a substitute voluntary proposal, which the Commission approved. The United Light and Power Co., Holding Company Act Release No. 7951.
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.