Court Opinion

ID: 9419576
Source: CourtListenerOpinion
Date Created: 2023-08-02 22:50:16.94924+00
Date Added: 2024-06-11T17:22:19.099373
License: Public Domain

Mr. Chief Justice Stone,
dissenting.
Mr. Justice Roberts, Mr. Justice. Frankfurter and I think the judgment below should be reversed.
The United Light and Power Company, the subject of this litigation, is a holding company subject to provisions of the Public Utility Holding Company Act of August 26, 1935, 49 Stat. 803. It has $60,000,000 par value of Class A preferred stock, of which petitioner holds some shares, and two classes of common stock. The corporate charter provides:
“Upon the dissolution or liquidation of the corporation, whether voluntary or involuntary, the holders of the Class A Preferred stock shall be entitled to receive out of the net assets of the corporation, whether capital or surplus, for each share of such stock, one hundred dollars and a sum of money equivalent to all cumulative dividends on such share, both accrued and in arrears (whether or not the same shall have been declared or earned), including the full dividend for the then current quarterly period, before any payment is made to the holders of any stock other than the Class A Preferred stock.”
*641The dividends on the preferred stock accrued and unpaid amount to $64.50 per share, and the total priority of the preferred stock as provided by the corporate charter is $98,700,000.
Sections 1 (c) and 11 (a) and (b) (2) of the Act authorize the Commission, after an examination of their corporate structures, “to compel the simplification of public-utility holding-company systems” and to require any such holding company “to take such action as the Commission shall find necessary in order that such holding company shall cease to be a holding company with respect to each of its subsidiary companies which itself has a subsidiary company which is a holding company.” Section 11 (e) requires any plan of reorganization approved by the Commission to be “fair and equitable to the persons affected by such plan.”
Acting under these provisions of § 11 the Commission has ordered that United be “liquidated and dissolved” as a step in the simplification of the holding company structure, so that United shall cease to be a holding company as commanded by § 11 (b) (2), and its stockholders shall become stockholders in its subsidiary, Railways Co. The Commission, in ordering dissolution and liquidation of the company, and providing, for the distribution of its assets, found that the stipulated priority of the preferred stock is far in excess of the present value of the company’s assets. It said that if the stipulated priority “is controlling, our inquiry must perforce be ended at this point in a decision that the preferred stock is entitled to all the assets of the corporation to the exclusion of the common.”
Nevertheless, the Commission has ordered, and this Court sustains the order, that only 94.52% of the assets of the company be allocated to the preferred stock upon liquidation and 5.48% to the common. For purposes of liquidation the Commission measured the rights of the different classes of stockholders in terms of the estimated *642value of their interests as though the liquidation which the Commission had ordered were not to take place and the corporation were to continue as a going concern. In short, in liquidating the corporation it determined, as the opinion of the Court declares, that in distributing the assets of the corporation among its stockholders the rights of the stockholders “may be evaluated on the basis of a going business and not as though a liquidation were taking place.”
Peering into the future with almost clairvoyant percipience the Commission prophesied that if the company now being liquidated and dissolved were allowed to continue its operations it would, fifteen years hence, have paid all arrears of dividends on the preferred and would then be able to pay an estimated annual return on the common stock in excess of $2,500,000. This prophecy assumed average future earnings in excess of $6,000,000 a year, a sum which “actual earnings . . . have never in the past ten years exceeded . . ., except in 1942.” This prognosis, the Commission thought, afforded justification for distributing the assets of the corporation upon its liquidation and dissolution, not according to the stipulated priority of the preferred stock upon liquidation, which is in fact taking place, or indeed in conformity to its priority right to current earnings if the company were to continue unliquidated. For by the Commission’s order the preferred is required to surrender to the common what is the equivalent of more than 5% of its fixed priority right to the annual earnings from the assets of the company, which earnings of a “going business” would be required to satisfy dividends on the preferred before any payment of dividends on the common. The preferred stockholders are thus denied the priority for which they have stipulated on liquidation, and also the priority with respect to current earnings to' which they would be entitled by virtue of their position as preferred stockholders if the company, *643which has been in fact condemned to death by the Commission, is, as the Commission at the same time supposes, to be regarded as living and functioning as “a going business.”
The judgment of the court below sustaining so extraordinary a result should, in our opinion, be reversed because the Commission, without authority in law and contrary to the command of the statute, has disregarded the plain terms of the corporate charter controlling priority of the preferred stock upon liquidation of the company whether voluntary or involuntary.
The opinion of the Court adopts for its support a ground which the Commission declined to adopt, and the decision of the Commission rested upon a second ground on which the Court appears not to rely. We think it clear that neither ground is supportable. The first is that the charter provision fixing the priority of the preferred stock in the event of “liquidation” was not intended to apply and is inapplicable to a “liquidation” like the present. For here, it is insisted, the liquidation, which has in fact been ordered and is being enforced, is nevertheless to be regarded as a fiction, and the interests of the different classes of stockholders are to be measured by resort to the fiction that they are continuing interests in a corporation which is not to be liquidated, but is to be continued as a going concern. The other ground, adopted by the Commission, is that if the charter provision does apply the Commission is free to override it by any plan of distribution which it finds to be “fair and equitable.”
As to the first it is plain that the company is now being liquidated and dissolved; that the liquidation is involuntary; and that some of the corporation’s assets are being distributed to the common stock before satisfaction of the stipulated priority of the preferred, and this with full knowledge of all concerned that the company is without assets to satisfy the priority. Since these are the precise *644conditions on which the priority provision was, according to its terms, to operate, it is not apparent why this “liquidation” is not a “liquidation” within the meaning of the charter provision.
It is said that although the liquidation is involuntary, it is not within the charter provision, and that the stipulation for priority on liquidation may be disregarded because the Holding Company Act was enacted after the adoption of the charter, and hence the parties to the incorporation could not have contemplated a compulsory liquidation under its provisions. We find it difficult to suppose that a stockholder who stipulates for priority upon liquidation, whether voluntary or involuntary, is at all concerned with the particular source of the power which may compel the liquidation of his investment or with the purpose of its exercise. Unless words have lost their meaning, the stipulation for priority in this case cannot fairly be taken not to include any kind of a liquidation which would compel the surrender of the stockholder’s investment and force him to sever his connection with the corporation in which he has invested.
When the preferred stock of the United was issued in 1929 there were numerous statutes, state and federal, which authorized liquidation and dissolution of corporations by government compulsion. See for example Continental Insurance Co. v. United States, 259 U. S. 156. It is the veriest fiction to say that investors in corporate securities at that time could not or did not consider the possibility of the addition of a single statute to this list, or that the stockholders of United by the stipulation for priority upon liquidation, voluntary or involuntary, intended to exclude from its- operation any method of involuntary liquidation which would affect their interests. To conclude that the present stipulation for priority upon involuntary liquidation did not envisage a liquidation such as this one seems like saying that an insurance policy *645payable on the death of the insured creates no obligation if the insured dies from a disease which was unknown when the policy was written.
We cannot assent to the proposition advanced by the Commission that even though the priority stipulation was intended to be applicable to any kind of an involuntary liquidation, including one such as the present, the Commission can nevertheless override it. Such provisions for priority in a corporate charter constitute a contract among the stockholders, which is entitled to constitutional protection, Bedford v. Eastern Building & Loan Assn., 181 U. S. 227; Hopkins Federal Savings & Loan Assn. v. Cleary, 296 U. S. 315; Treigle v. Acme Homestead Assn., 297 U. S. 189, 194-6, impairment of which is not lightly to be attributed to Congress. No constitutional issue is raised here, but we find no provision of the statute which purports to confer on the Commission, in the exercise of its power to liquidate a corporation, any authority to set aside a lawful stipulation in which the stockholders have joined fixing their relative rights in the event of liquidation.
On the argument of this case counsel for the respondent referred to the Commission’s action in setting aside the contract as an exercise of its power to “remold” the contract. Whether this characterization of the Commission’s action may be thought to render it more palatable to the preferred stockholders whose lawful contract has been set aside by the Commission, jt is plain that in the absence of some controlling direction of the statute there are no circumstances here which call for the exercise of any implied power of the Commission or court to readjust or restate the rights of the stockholders without regard to their contract. There is no suggestion that the present stipulation is unlawful, oppressive or inequitable, or subject to any other infirmity; or that it is incapable of being carried out in the present liquidation to which it applies. *646Hence there is no basis for the exercise of equity powers to adjust the rights of parties to a contract which has been set aside; or for the Commission’s argument, which the Court of Appeals below seems to have sustained, 142 F. 2d 411, 419, that the action of the Commission is supportable as an exercise of the judicial power to make an equitable disposition of the rights of the parties to a frustrated contract. Cf. New York Trust Co. v. Securities & Exchange Commission, 131 F. 2d 274.
So far as the Commission has authority to liquidate any corporation, liquidation is only a step in the simplification of a holding company system or the elimination of an undesirable holding company, which are the avowed purposes of the Act. The Commission does not reveal how the distribution of the corporate assets, upon which the stockholders have agreed, would hamper the simplification or the elimination of the liquidated company; or how the different distribution ordered by the Commission would facilitate them. It seems wholly irrelevant to the achievement of these, which are the avowed purposes of the Act, whether the stockholders of the dissolved corporation share in its assets in one proportion or another. Neither the Commission, the public, nor the stockholders have any ground for complaint so long as the agreed priority rights to the distributed assets remain unaltered.
The Commission has found its authority for setting aside the priority stipulation in the requirement of § 11 (e) that the Commission must find that any plan it approves for elimination of a holding company is “fair and equitable.” As we have already indicated, the Commission has said that it is “fair and equitable” to deprive preferred stockholders, in the event of liquidation, of the rights for which they have stipulated and paid in order to compensate the common stockholders for rights which they are said to have lost because of the liquidation. But such compensation of the common stockholders at the expense *647of the preferred is contrary to the priority stipulation by which both are bound. The common stockholders, like the preferred, have no right not to have the company liquidated and are entitled to no compensation merely because it is liquidated. Their rights as stockholders cannot survive liquidation and dissolution of the company, and in that event and because of it and because of the stipulation neither can assert rights which they could enjoy only if the corporation were to continue as a going concern.
We can find no basis for saying that it is not fair and equitable, both in a technical as well as a general and nontechnical sense, to require the stockholders to abide by their agreement in the very circumstances to which it was intended to apply, and where, as we have said, there is no contention that the contract when made was or is now oppressive, unfair, inequitable or illegal. But beyond this we think it is quite clear that the requirement of § 11 (e) that the plan be “fair and equitable,” instead of furnishing authority for the deprivation of shareholders of their priority in liquidation, is a prohibition against it.
The phrase “fair and equitable” as applied to any form of corporate reorganization has long been recognized as signifying the requirement of the rule sanctioned by this Court in Northern Pacific R. Co. v. Boyd, 228 U. S. 482, and the many cases following it. The rule is that any arrangement or plan enforced without the consent of the parties affected by it, by which the subordinate rights and interests of stockholders are attempted to be secured at the expense of the prior rights of other security holders, is unfair and inequitable and will not be judicially sanctioned. See Case v. Los Angeles Lumber Co., 308 U. S. 106, and cases cited. This rule is applicable with respect to the priorities of different classes of stockholders as well as to priorities between creditors and stockholders, and for the same reasons. Case v. Los Angeles Lumber Co., supra, 119, note 14.
*648In the Los Angeles case, supra, we held that the words “fair and equitable" had so long been recognized and applied as signifying this rule of priority among security holders in corporate reorganizations as to have become words of art, and that their adoption by § 77B of the Bankruptcy Act, as applicable to reorganizations under that section, must be taken to have incorporated the rule of the Boyd case in the statute, in the absence of any context requiring a contrary construction. We think no other construction of § 11 (e) of the present Act can be sustained. Neither the context of the statute nor the legislative history suggests any other. The Commission hints at no reason for not giving these terms of art, “fair and equitable," other than their long settled and hitherto accepted meaning.
The Commission justifies its departure from the rule here only by recurrence in its brief to the proposition that “the essence of the reorganization process is the remolding of contract rights and the substitution therefor of equitable equivalents.” To this the answer is that the Commission in this case is liquidating and dissolving, not reorganizing, United, and that it is without authority in such a case more than in a reorganization to alter or disregard a contract fixing the priorities of stockholders, and that in depriving the preferred stockholders of their priority rights the Commission has substituted no equivalent for them, either legal or equitable. In fact it has substituted nothing for the priority rights which its order destroys.
The Gold Clause Cases, Norman v. B. & O. R. Co., 294 U. S. 240, afford no analogy and lend no support to what is now adjudged. There Congress, with the authority of an express provision of the Constitution, explicitly altered existing contracts. Here Congress has commanded the Commission to respect contract rights by requiring that its action conform to the well defined meaning of the phrase “fair and equitable.” Congress seems to have recognized that the stipulated priorities of stockholders were *649not to be disturbed in liquidations ordered under the Public Utility Holding Company Act. The report of the Senate Committee (S. Rep. No. 621, 74th Cong., 1st Sess., p. 33) recommending the enactment of the present statute and proponents of the Bill (H. R. Rep. 1318, 74th Cong., 1st Sess., pp. 49-50; 79 Cong. Rec. 4607, 8432) repeatedly cited Continental Insurance Co. v. United States,, supra, in which it was held that the distribution in a liquidation compelled by the enforcement of the Sherman and Hepburn Acts must preserve the stipulated priorities of the several classes of stockholders of the offending corporation.
The intimation that the priority stipulation can be disregarded in the present liquidation because the Commission could have effected the simplification of the holding company structure by merger, consolidation or recapitalization, is merely to say that such procedure would not involve liquidation, voluntary or involuntary, or, what comes to the same thing, that the preferred stockholders could not claim the protection of the priority stipulation in situations to which it does not and was not intended to apply. By buying preferred stock the preferred stockholders paid for the privilege of membership in the corporation and for participation in the fruits of the corporate enterprise, to continue, with full priority of dividends so long as the corporation should continue as a going concern. But in the event of liquidation they stipulated and paid for the specified priority over the common stockholders in the distribution of the net corporate assets. The preferred stockholders here assert only the rights to which that stock is entitled on liquidation by the terms of the priority stipulation . Calling the preferred stockholders’ right of priority a “windfall” will not serve as an apology, explanation, or justification for the Commission’s action in appropriating the priority of the preferred in order to give a windfall to the common. It is no answer to say that their claim on liquidation might have been avoided by not liquidating or to say, as the Commission has ordered, that they must *650accept on liquidation less than their stipulated priority on liquidation and less than the rights to which they would have been entitled if the corporation had continued as a going concern.
The judgment should be reversed.