Document: 432 U.S. 46 97 S.Ct. 2229 53 L.Ed.2d 100 E. I. du PONT de NEMOURS AND COMPANY et al., Petitioners,v.Richard J. COLLINS, Jr., al. SECURITIES EXCHANGE COMMISSION, Petitioner, v. Richard Nos. 75-1870 and 75-1872. Argued March 2, 1977. Decided June 16, Syllabus In approving the merger of a closed-end investment company (Christiana), 98% whose assets consisted Du Pont & Co. common stock, into an affiliate (Du Pont), Securities Exchange Commission (SEC) held to have reasonably exercised its discretion under § 17(b) Investment Company Act 1940, as amended, in valuing Christiana essentially on basis market value stock rather that lower Christiana's outstanding stock. Since record before SEC clearly reveals substantial evidence support findings since agency's conclusions law were based construction statute consistent with legislative intent, Court Appeals erred rejecting SEC's conclusion substituting own judgment for SEC. Chenery Corp., 332 194, 209, 67 1575, 1583, 91 L.Ed. 1995. Pp. 52-57. 8 Cir., 532 F.2d 584, reversed. David Ferber, Washington, D. C., petitioner No. Daniel M. Gribbon, petitioners 75-1870. Collins, Lewis C. Murtaugh, Chicago, Ill., respondents both cases. Mr. Chief Justice BURGER delivered opinion Court. 1 We granted certiorari1 these cases determine whether Commission, company, 54 Stat. 789, 15 U.S.C. 80a-1 seq. The valued securities which constituted substantially all than 2 statutory scheme here is relatively straightforward. Section 17 80a-17, forbids "affiliated person," defined Act,2 purchase any or other property from registered unless finds, inter alia, "evidence establishes . terms proposed transaction, including consideration be paid received, are reasonable fair do not involve overreaching part person concerned ."3 3 (1) this litigation involves Co., closed-end, nondiversified management Nemours large industrial operating engaged principally manufacture chemical products. was formed 1915 order preserve family control At time present negotiations announced April 1972, stock.4 This block turn comprised approximately 28.3% Pont.5 For purposes litigation, has been presumed at least potential Pont, although it submits "this lies dormant unexercised there no actual relationship." Release 8615 (1974), 5 S.E.C. Docket 745, 747 (1974). 4 itself 11,710,103 shares outstanding6 about 8,000 shareholders. Unlike traded actively New York national exchanges, over-the-counter market. virtually price reflects However, often case companies, historically sold discount holdings.7 Apparently, primarily tax related pays federal intercorporate dividends. Its stockholders also subject capital-gains unrealized appreciation very low base. Additionally, limited likely influences discount. concluded that, because disadvantages sold, should liquidated become direct owners board directors liquidation by means tax-free Pont. would issuing shareholders new certificates more concrete terms, acquire $2.2 billion assume liabilities $300,000. so doing, 13,417,120 then issue 13,228,620 directly holders. 188,500 less receive Christiana. As result merger, each share converted 1.123 That ratio ascertained taking assets, subtracting nominal liabilities, making certain minor adjustments. Direct ownership increase shareholders' holdings acquired 2.5% their net value. Internal Revenue Service ruled free. 6 (2) filed joint application exemption Act. Administrative proceedings followed. Commission's Division Management Regulation supported application. A small number shareholders, case, opposed transaction. Their basic argument much unfair provides greater benefits objecting argued benefit realized elimination 23% asset selling. They depress place 13 million marketable hands 7 After hearing, parties waived initial administrative recommendations submitted Commission. unanimously Basically, viewed transaction exchange equivalents issued It 17(b), proper guide evaluating stock: "Here justice requires ventures unknown unknowable. An consist entirely almost prices determined active continuous markets, can normally worth simple, readily usable tool does job better accurate gauge (sic) impact (were one) could." Docket, 751. 9 fact might obtained favorable strategic bargaining position use alternative methods liquidating considered relevant view, purpose prevent persons getting found detriment shares. Any depressing effects brief duration intrinsic altered merger. Moreover, valuation involving significant departure "run afoul 17(b)(1) Act"; strip long-term investors companies like underlie holdings. 10 panel United States Eighth Circuit divided setting aside determination. Collins SEC, 584 (1976).8 majority had erred, matter law, determining presumptively principal asset, "(I)n judging transactions between dominant subservient parties, test 'whether circumstances carries earmarks arm's length bargain.' Pepper Litton, 308 295, 306-307, 60 238, 84 281 (1939)." Id., 592. Employing standard, did finding "reasonable fair" "economic immediate substantial," id., 601, while "benefits minimal." 602. court Pont's viewpoint, "the degree (control) dispersion attained justify premium stock." 603. failing give weight "occasional shareholders," 605, caused available B 11 correctly set we begin examining nature regulatory process leading decision required review. National Assn. Dealers, 422 694, 95 2427, 45 486 (1975), noted seq., "vests broad authority over business practices companies." U.S., 704-705, S.Ct., 2436. product congressional concern existing legislation field afford adequate protection purchasers securities. Prior enactment legislation, Congress mandated intensive study industry.9 One problems specifically identified numerous affiliated them resulted distinct advantage "insiders" public investors.10 specific response problem.11 therefore charged scrutinizing such this, take account peculiar characteristics industry. Recognizing "arm's bargain," cf. 307, 245, (1939), rarely realistic possibility substituted, effect, informed determine, alia (did) concerned."12 12 Given wide variety possible affiliates, Congress, quite understandably, made attempt define standard precision. Instead, followed practice frequently employed schemes. language cast designed encompass situations falling within scope statute; agency great experience industry given task applying those criteria particular manner intent.13 C turned upon assigned evaluation, "(t)he single, impact. ." reasoned, portfolio individual forces marketplace. situations, "asset value" thus applicable corporate entities. surrendered is, basically, real received transferee. 14 (1, 2) reviewing must consider facts agency. review proceedings, facts, if evidence, shall conclusive." 80a-42. guided "venerable principle execution compelling indications wrong Red Lion Broadcasting FCC, 395 367, 381, 89 1794, 1802, 23 371 (1969). "(C)ontemporaneous entitled even though applied settled consent litigation." FTC Mandel Bros., 359 385, 391, 79 818, 823, 893 (1959). Here, however, held, method passing but ignoring limitations judicial action. long recognized key factor underlying contemplated, intimate familiarity instance, advisory report District pursuant 173 Chapter X Bankruptcy Act, advised "it natural fundamental criterion used field." Central Electric 30 680, 700 (1949), approved sub nom. Corp. Austrian, 183 879, 884 (CA4 1950), cert. denied, 340 917, 71 350, 662 (1951). Similarly, mergers one presented "net touchstone analysis. See, e. g., Delaware Realty 40 469, 473 (1961); Harbor Plywood 1002 (1962); Eastern Releases 5693 5711 (1969).14 16 despite characterization contrary, employ mechanical rule "presumption." carefully contentions warranted case. Upon analysis, central controlling aspect remained stock; receiving claim adversely affected extended period volume selling, indication adverse investors. There stockholders, who years indirect now change essential investment. (3) reliance consequent determination met standards rested "squarely area where judgments greatest amount appellate courts. experience, complexities problem, realization policies, responsible treatment uncontested facts." 1995 (1947). substituted responsibility. 18 note after briefs hearing oral argument, objection Christiana, undertook unique procedure employing university professor assist understanding prepare reports memoranda court. Thus, relied included data economic observations examined tested traditional adversary process. cited statute, rule, authorizing Appeals. Cf. Fed.Rule App.Proc. 16. 19 (4) our departed function erroneous accord procedures intent. Accordingly, 20 Reversed. 21 REHNQUIST took 22 BRENNAN, dissenting. prohibits persons," except approves application, if, concerned." 80a-17(b). (Christiana) merge standard. 24 created concentrate family's holds total outstanding. meaning prohibitions 17. Although considerable corresponding 25 reasons unnecessary elaborate here, longer regarded desirable mechanism. laws make expensive maintain, dividends taxed when again passed Elimination agreement reached effectuate goal merging Pont.1 forth Court's opinion, ante, 49-50, price, eliminated costly holding without incurring liability.2 26 conceded primary enacting permit authorize person, company. Fifth Avenue Coach Lines, Inc., 43 635 (1967). See Court, n. 11.3 they slightly sense, true intrinsically "worth," could "fair." economy, commodity nor arm's-length bargainers agree on. bargainers,4 obvious been, insisted on, power obtain, price. accommodated desires owner requiring quid pro quo undoubtedly demanded seller. 27 I mean suggest not, general look fairness this. party acquires gets full holdings, just company; seems usual measure company's On hand, situation depressed may well reflect undesirability holders.5 Even some reason still purchaser, translated him gives leverage obtain price.6 28 However most contexts, what free inquiry involved.7 hold presuming absence recognizes reasonable. my view correct compare bargainers.8 directors, conflict-of-interest shareholder entered handsomely benefited extracting negotiator received.9 disagree behavior shareholder, affirm 429 815, 56, 50 75 (1976). Title 80a-2(a)(3) defines person" follows: "(3) 'Affiliated person' another (A) indirectly owning, controlling, vote, per centum voting person; (B) owned, controlled, (C) controlled by, with, (D) officer, director, partner, copartner, employee (E) adviser thereof member thereof; (F) unincorporated having depositor thereof." policy concerned, title." §§ 80a-17(b)(2), (3). These contested here. owns preferred two daily newspapers Wilmington, Del., 3.5% Wilmington Trust which, turn, one-half trustee. According applicants' Notice Filing Application, 7402 (1972), 47,566,694 224,964 Ninety-five percent 338 people. 8615, supra. preceding date announcement negotiations, generally range 20%-25%. Ibid. petition rehearing en banc denied equally Public Utility Holding 49 837, 79z-4, undertake study. 704, 2435, (1975). Report Companies, H.R.Doc.No.279, 76th Cong., 1st Sess., 1017-1561 (1940). While House Senate Reports indicate Congress' chief S.Rep.No.1775, 3d 11-12 (1940); H.R.Rep.No.2639, (1940), construed well. 635, 639 80a-17(b)(1). different confronted earlier Term Piper Chris-Craft Industries, 430 1, 926, 51 124 (1977). There, narrow legal issue" implying private right action "one peculiarly reserved resolution" question "limited value." 41 27, 949 27. By contrast, assessment arrangement compatible administer. similarly ELT, 8675 8714 (1975); Chemical Fund, 8773 8795 Citizens Southern Capital 7755 7802 (1973); Detroit Cleveland Nav. 3082 3099 (1960); Cheapside Dollar Ltd., 9038 9085 has, course, valuations adjusted factors expenses considerations. Talley 5953 (1970); Bond Share 5215 (1967), Appeals, rely amounted only 2% assets. Liquidation accomplished desired result, 17, apparently out disadvantageous consequences contrast disposing see supra, Ante, 50. approved, "not 80a-17(b) (emphasis supplied). owned potentially concedes, 53, bargain "is possibility" situation. "Du steps simulate bargaining," 598 (1976), short shrift significance, 598-601, places them. addition dividends, recognizes, 49, continued maintenance reflected high taxation relative illiquidity intended "to value," 51, mere play words. history, F.2d, 591-592, makes plain, protect minority interests exploitation insiders "strategic position," restore several corporations involved acting endeavor secure best respective stockholders." Trusts H.R.Doc. 279, 1414 Far being negate position" market, play, uncorrupted insiders' themselves whole. so, wonder "special important reasons" exist decide "whether discretion" 47. Rule 19. recognize exception appropriate, No results been. made. invasion expertise presented. appear harsh insist press advantage, accommodate But accommodating merely "nice guys" disinterested fashion, cost anyone. giving special precisely evil directed.

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