Court Opinion

ID: 9426865
Source: CourtListenerOpinion
Date Created: 2023-08-02 23:19:08.204388+00
Date Added: 2024-06-11T17:23:03.517069
License: Public Domain

Mr. Justice Brennan,
dissenting.
Section 17 of the Investment Company Act of 1940, 15 U. S. C. § 80a-17, prohibits transactions between registered *58investment companies and “affiliated persons,” except as the Securities and Exchange Commission approves such transactions on application, if, inter alia, “the terms of the proposed transaction, including the consideration to be paid or received, are reasonable and fair and do not involve overreaching on the part of any person concerned.” § 80ar-17 (b). The SEC approved the application of Christiana Securities Co. (Christiana) to merge into E. I. du Pont de Nemours & Co. (Du Pont), finding that the proposed transaction met the statutory standard.
Christiana was created in 1915 to concentrate the Du Pont family’s holdings of Du Pont stock. Its assets consist almost entirely of Du Pont common stock, of which it holds 28.3% of the total outstanding. It is thus an investment company within the meaning of the Act, and an affiliate of Du Pont subject to the prohibitions of § 17. Although ownership of Christiana stock is essentially indirect ownership of Du Pont stock, Christiana stock is traded over-the-counter at a considerable discount from the market price of the corresponding shares of Du Pont.
For reasons unnecessary to elaborate- here, Christiana, is no longer regarded by its owners as a desirable control mechanism. Moreover, the tax laws make it expensive to maintain, since dividends from Du Pont are taxed when paid to Christiana, and again when passed on to the shareholders as dividends from Christiana. Elimination of Christiana is therefore desirable to its shareholders, and an agreement was reached to effectuate this goal by merging Christiana into Du Pont.1 The terms of this agreement are set forth in the Court’s opinion, ante, at 49-50, but in effect, Du Pont acquired its own shares from Christiana at about a 2.5% discount from *59their market price, while Christiana’s shareholders eliminated their costly holding company, without incurring any tax liability.2
It is conceded that while the primary concern of Congress in enacting the Act was the protection of investment company shareholders, § 17 (b) does not permit the SEC to authorize a transaction that is unfair to the affiliated person, any more than one that is unfair to the investment company. Fifth Avenue Coach Lines, Inc., 43 S. E. C. 635 (1967). See the opinion of the Court, ante, at 53 n. 11.3 The SEC found here that the transaction was fair to Du Pont’s shareholders, essentially because they paid slightly less than the net asset value of Christiana. In this sense, it is true that Du Pont paid for Christiana no more than it is intrinsically “worth,” and so the price could be considered “fair.” However, in a market economy, the value of any commodity is no more nor less than the price arm’s-length bargainers agree on. Chris-tiana and Du Pont were not arm’s-length bargainers,4 and it is obvious that if they had been, Du Pont would have insisted on, and would have had the bargaining power to obtain, a more favorable price. Instead, the directors of Du Pont accommodated the desires of Christiana, owner of a control block of Du Pont stock, without requiring the quid pro quo *60they would undoubtedly have demanded from any other seller.
I do not mean to suggest that the SEC should not, as a general rule, look to the net asset value of an investment company in evaluating the fairness of transactions such as this. At least where the result of the transaction is the elimination of the investment company, the party that acquires it gets the full value of its holdings, and not just a block of stock in the investment company; the asset value thus seems in the usual case a better measure of the investment company's value than the market price of its stock. On the other hand, in a situation such as this, the depressed market price of Christiana stock may well reflect its undesirability to its present holders.5 Even if the stock is for some reason still desirable to the purchaser, this undesirability can be translated into a benefit to him because it gives him bargaining leverage to obtain a better price.6
*61However accurate asset valuation may be in most contexts, each determination of what is fair and reasonable and free of overreaching must by the nature of the inquiry turn on the facts of the particular transaction involved.7 I would hold that the SEC applied an erroneous standard in this case by presuming that in the absence of actual detriment to the purchaser, a transaction that recognizes the net asset value of an investment company is fair and reasonable. In my view the correct standard required the SEC to compare the terms of the transaction with those that would have been reached by arm’s-length bargainers.8 Here, Du Pont’s directors, who were in the conflict-of-interest situation with which the Act is concerned because of Christiana’s position as a controlling shareholder of Du Pont, entered a transaction that handsomely benefited Christiana, without extracting the price for Du Pont that an arm’s-length negotiator would have demanded and received.9 I therefore disagree with the SEC’s *62holding that this behavior was fair and reasonable to Du Pont, or free from overreaching on the part of Du Pont’s controlling shareholder, Christiana. Accordingly, I would affirm the judgment of the Court of Appeals.

 Liquidation of Christiana would also have accomplished the desired result, without involving Du Pont or the prohibitions of § 17, but was apparently ruled out by Christiana because of disadvantageous tax consequences for its shareholders.

 In contrast to the disadvantageous tax consequences of alternative means of disposing of Christiana, see n. 1, supra, the Internal Revenue Service had ruled that the proposed merger with Du Pont would be tax free. Ante, at 50.

 In order to be approved, the transaction must “not involve overreaching on the part of any person concerned.” 15 U. S. C. §80a-17(b) (emphasis supplied).

 Christiana owned a potentially controlling share of Du Pont. As the Court concedes, ante, at 53, an arm's-length bargain “is rarely a realistic possibility” in such a situation. While “Du Pont did take some steps to simulate arm’s-length bargaining,” 532 F. 2d 584, 598 (1976), the Court of Appeals made short shrift of their significance, id., at 598-601, and the Court places no reliance on them.

 In addition to the tax on intercorporate dividends, as the Court recognizes, ante, at 49, other disadvantages to the continued maintenance of Christiana might have been reflected in the low market price of its stock, such as the potential for high capital-gains taxation and the relative illiquidity of Christiana stock, for which there is a more limited market than for Du Pont.

 The SEC’s argument that § 17 was intended “to prevent persons in a strategic position from getting more than fair value,” ante, at 51, is a mere play on words. As the legislative history, examined at length by the Court of Appeals, 532 F. 2d, at 591-592, makes plain, § 17 was intended to protect minority interests from exploitation by insiders of their “strategic position,” and to restore a situation in which “the directors of the several corporations involved in negotiations for a merger . . . are acting at arm’s length in an endeavor to secure the best possible bargain for their respective stockholders.” SEC, Report on Investment Trusts and Investment Companies, H. R. Doc. No. 279, 76th Cong., 1st Sess., 1414 (1940). Far from being intended to negate factors that would give one party a “strategic bargaining position” in arm’s-length bargaining in the free market, the Act was specifically intended to give those factors free play, uncorrupted by insiders’ desires to benefit themselves rather than the stockholders as a whole.

 Since this is so, one might well wonder what “special and important reasons” exist for this Court to decide “whether the Securities and Exchange Commission . . . reasonably exercised its discretion” in a particular case. Ante, at 47. See this Court’s Rule 19.

 Although the SEC did recognize the possibility that there might be cases in which an exception to the “net asset value” rule would be appropriate, its inquiry in this litigation turned entirely on the possible detriment of this transaction to Du Pont’s shareholders. No attempt was made to determine what the results of arm’s-length bargaining might have been. The Court of Appeals, correctly in my view, held that such an inquiry should have been made. Accordingly, the Court of Appeals held that the agency had applied an erroneous legal standard, and no question of invasion of the area of SEC expertise is presented.

 It may appear harsh to insist that, in the absence of actual detriment to its other shareholders, Du Pont press its advantage, rather than accommodate Christiana. But in accommodating Christiana, Du Pont’s directors were not merely being “nice guys” in a disinterested fashion, at no cost to anyone. They were giving special consideration to an investment company that holds a controlling share of Du Pont. This is precisely the evil at which § 17 was directed.