Petitioners Brief — EI Du Pont De Nemours & Co. v. Collins

TT

| P= Supreme Gourt, U. 3.

FILED

NOV 18 1978

*

IN THE MICHAEL RODAK, JR., CLERK

Supreme Court of the United States

OcToBER TERM, 1976

No. 75-1870

E. I. pu Pont pE NEMOURS AND COMPANY, ET AL.,

Petitioners,

Vv.

Ricuarp J. CoLurns, JR., ET AL., Respondents.

No. 75-1872

SECURITIES AND EXCHANGE CoMMIssion, Petitioner,

v.

Ricwarp J. Couuins, JR., ET AL., Respondents.

On Writs of Certiorari to the United States

Court of Appeals for the Eighth Circuit

BRIEF OF PETITIONERS E. I. du PONT

de NEMOURS AND COMPANY AND

CHRISTIANA SECURITIES COMPANY

DANIEL M. Grippon

Of Counsel Cyrit V. Sirs, Jr.

James M, McHAaney, JR.

Covington & Bur' ng

888 Sixteenth Street, N.W.

Washington, D.C. 20006

CHARLES E. WeLcu

Rocer W. ARRINGTON

7038 Du Pont Building

Wilmington, Delaware 19898

Attorneys for Petitioner

EI. du Pont de Nemours

and Company

MattTrHuew J. Broperick

RIcHarp S. SELTZER

Epwarp J. McINTYRE

Dechert Price & Rhoads

3400 Centre Square West

Philadelphia, Pa. 19102

Attorneys for Petitioner

Christiana Securities Company

TABLE OF CONTENTS

Page

rT rn Perr eer. 1

BP eee terre Ty reer eo Te Te 2

SNE. BOUND oo cc ccknctnisuceceneceucénepesas 2

Cpmemiens PUMGUD occ cccccccnctcveceeveccescens 3

RRR GH GR TAMER. «ovo ccicteocvctessctsanaees 3

DUMMANE GH ROUUUIGEE oo c ceive cendcdccsactssescete 8

POTS ok. bcc nck cs 0 0b6esantecscesectencsasenes 11

I. In Appityinc to Tuts Mercer THe Crirerta Set

Fortu IN THE INVESTMENT Company Act THE Com-

MISSION FaIrHFULLY DiscHARGED THE RESPONSIBIL-

ITY DeLeGaTeD To It By ConGress ............... 11

A. The Commission Correctly Perceived That the

Proposed Merger Consists in Substance of an

Exchange of Du Pont Common Stock for Du

Pe CS THE. 5. hes owneeecedbesucndcn 13

B. The Commission Properly Attached Primary

Significance to the Value of Christiana’s As-

sets—Essentially Du Pont Common Stock—in

Approving the Proposed Merger Terms ..... 15

C. On the Basis of Reasoned Analysis, the Com-

mission Rejected Contentions That the Merger

Terms Should Not Refleet the Value of Chris-

tiana’s Holding of Du Pont Common Stock .. 22

Market Price of Christiana Stock ........... 23

Senta 65 Gb TOO oss < vindevivdesecoecs 23

Earmarks of an Arm’s Length Bargain ...... 26

Impact on Market Price of Du Pont Stock .... 32

il Table of Contents Continued

Page

Il. Tae Court or Appeats Dip Not Accorp THE J UDG-

MENT OF THE COMMISSION THE DEFERENCE REQUIRED

BY THE INvesTMENT Company Act AND DECISIONS

Oe RU TI ov icc citi do ucecaneutsenaenseerans 36

NN oe i. cs os cb buhd ane ee nehee eae 40

EE EE bv cence snubs unectp sas eedhecucetasscan A-1

EE TD 5 bi ease es 10k b4h Seb 0 8540068 eRe B-1

TABLE OF AUTHORITIES

CASES:

Camp v. Pitts, 411 U.S. 188 (1973) «2.2... eee ee ee eee 39

Central States Elec. Corp. v. Austrian, 183 F.2d 879

(4th Cir. 1950), cert. denied, 340 U.S. 917 (1951) .. 21

Federal Power Commission v. Transcontinental Gas

Pipe Line Corp., 423 U.S, 326 (1976) .......... 39, 40

Federal Trade Commission v. Mandel Brothers, 359

if @ Fi Beeeeerrrerrrrrrrere tere re 21

Harriman v. E. 1. du Pont de Nemours and Co., 411

F. Supp. 133 (D. Del. 1975) ...........8, 18, 19, 27, 31

National Labor Relations Board vy. Boeing Co., 412

Ce GEE, noo. 6c0c shen nnvesdesekehedweuasn’s 21

Niagara Hudson Power Corp. v. Leventritt, 340 US.

EEE builded d6-Vobs steed ceesebaaucecaeeae 14,15

Norwegian Nitrogen Products Co, v. United States,

SP Te, Ge SED ond bead cas ckcecnenei chines 22

Olis & Co. v. Securities and Exchange Commission, 323

Oe eo cueuds ihag tes bonuaeas 30

Pepper v. Litton, 308 U.S, 295 (1989) ........-- 27, 28, 29

Red Lion Broadcasting Co, v. Federal Communica-

tions Commission, 395 U.S. 367 (1969) .......... 21-22

Sarbe v. Bustos, 419 U.S. 65 (1974)... .........2006- 21

Table of Authorities Continued iii

Page

Securities and Exchange Commission v. Central-Illinois

Securities Corp., 338 U.S. 96 (1949) ............ 30

Securities and Exchange Commission v. Chenery Corp.,

ee Was Ge CRONE hsb eect ees sxcees 10, 12, 36, 38, 40

Trafficante v. Metropolitan Life Ins. Co., 409 U.S. 205

(EPEEE vsunneseenéienas, resus weskeawerenpesnen 21

United States vy. National Ass’n of Securities Dealers,

SUR, Te ee Ge CE hs n0cness Kote ean 16, 21

United States v. Republic Steel Corp., 362 U.S. 482

CRUE: 5a sk onRewannavn band dss0dehdenssvaawuens 21

ADMINISTRATIVE AGENCY:

Central States Elec. Corp., 30 S.E.C. G80 (1949) ...19, 20

Century Investors, Inc., 40 S.E.C. 319 (1960) 2.2.22... 20

Delaware Realty and Inv. Co., 40 S.C. 469 (1961). .18, 25

Detroit and Cleveland Nav. Co., Investinent Company

Act Release Nos. 3082 and 3099 (July 27 and Au-

th Te, Sek 0a004dadaskebe cobesunsdvaenenes 1S

Eastern States Corp., Investment Company Act Re-

lease Nos. 5693 and 5711 (May 28 and June 16,

GONE sanvedsi ctoeunncekdeadentebeniesseraen 18

Electric Bond and Share Co., Investment Company Act

Release No. 5215 (December 28, 1967) .......... 20

Harbor Plywood Corp., 40 S.1.C. 1002 (1962) ...... 18, 25

Huyler’s Investment Company Act Release Nos. 5773

and 5809 (August 13 and September 9, 1969) . ik

New York Dock Co., 38 S.F.C. 754 (1958). 2.2.2... <

Southeastern Capital Corp., Investment Company Act

Release Nos. 4110 and 4133 (December 23, 1964

Oe GRE TE TOD 6066s cs ersakevéebansasies 20

Southport Commercial Corp., Investment Compeny Act

Release Nos. 4165 and 4180 (February 17 and

PU Eh TD oui kn dd wae anaecuciees teaeaus. 18

Talley Industries, Inc., Investment Company Act Re-

lease No. 5953 (January 9, 1970) ............... 19

Townsend Corp., Investment Company Act Release

No. 4045 (September 2, 1964) .................. i9

iv Tabie « Aai» rities Continued

Page

STATUTES:

Investment Company Act of 1940, 15 U.S.C. §§ 80a-1

ef 2eq.:

Section 2, 15 U.S.C. § 80a-2 ................ 4

Section 9, 15 U.S.C. § 80a-9 ................ 11

Section 10, 15 U.S.C. § 80a-10 .............. 11

Section 15, 15 U.S.C. § 80a-15 .............. 11

Section 16, 15 U.S.C. § 80a-16 .............. 11

Section 17, 15 U.S.C. § 80a-17 .. 2, 4,5, 6,9, 10, 11,

12, 13, 17, 18, 19, 20, 21, 24, 26, 27, 28, 31, 32

Section 18, 15 U.S.C. § 80a-18 ............. 11,17

Section 22, 15 U.S.C. § 80a-22 ............. 16, 21

Section 23, 15 U.S.C. § 80a-33 ............. 11,17

Section 43, 15 U.S.C. § 8Ga-42 ........... 2, 38, 39

Public Utility Holding Company Act of 1935, 15 U.S.C.

$$ 79 et seq.:

section 11, 15 U.S.C, § 79k ...........5... 15

Ee 2

ADMINISTRATIVE REGULATIONS:

Treasury Regulation § 20.2031-1(b) ................ 31

LEGISLATIVE MATERIAL:

Securities and Exchange Commission Report on In-

vestment Trusts and Investment Companies, Part

One, H.R. Doe. No. 707, 75th Cong., 3d Sess.

(1938); Part Two, H.R. Doc. No. 70, 76th Cong.,

Ist Sess. (1939); Part Three, H.R. Doe. No. 279,

76th Cong., Ist Sess. (1939); Parts Four and Five,

Hi.R. Doe. No. 246, 77th Cong., Ist Sess. (1941) .. 16

IN THE

Supreme Court of the United States

OcToBER TERM, 1976

No. 75-1870

E. I. pu Pont pz NEMOURS AND COMPANY, ET AL.,

Petitioners,

Vv. ’

Ricuarp J. Coins, JR., ET AL., Respondents.

No. 75-1872

SECURITIES AND EXCHANGE CoMMISSION, Petitioner,

v.

Ricuarp J. CoLuins, JR., ET AL., Respondents.

On Writs of Certiorari to the United States

Court of Appeals for the Eighth Circuit

BRIEF OF PETITIONERS E. I. du PONT

de NEMOURS AND COMPANY AND

CHRISTIANA SECURITIES COMPANY

OPINIONS BELOW

The opinions and orders of the Securities and Ex-

change Commission (‘‘Commission’’), the majority

and dissenting opinions of the Court of Appeals for

the Eighth Cireuit, the judgment of that Court, and

the order of that Court denying, by an equally divided

vote, petitions for rehearing and suggestions for re-

hearing in bane are set out in the Appendix to the

Commission’s petition for a writ of certiorari in No.

75-1872.* The opinions and orders of the Commission

were issued on December 13, 1974 and February 27,

1975 (Investment Company Act Release Nos. 8615

and 8692) and are not vet officially reported. The

majority and dissenting opinions of the Court of Ap-

peals were rendered on January 23, 1976 and are

reported at 532 F.2d 584.

JURISDICTION

The judgment of the Court of Appeals was entered

on January 23, 1976, and timely petitions for rehear-

ing and suggestions for rehearing in bane were denied

on February 26, 1976. The Commission and the peti-

tioners were granted an extension of time to file peti-

tions for writs of certiorari until June 25, 1976. The

petition of E. I. du Pont de Nemours and Company

(“Du Pont’) and Christiana Securities Company

(**Christiana’’) was filed on that day. The Commis-

sion was granted a further extension and filed its

petition on June 26, 1976. Both petitions were granted

on October 4, 1976, and the cases were ordered to be

consolidated. The jurisdiction of the Court is invoked

under 28 U.S.C. § 1254(1).

STATUTES INVOLVED

Sections 17 and 43 of the Investment Company Act,

15 U.S.C. §§ 80a-17, 42 are set out in relevant part in

Appendix A to this brief.

* That appendix will be referred to as ‘“‘Pet. App.’’ The Joint

Appendix of the parties will be referred to as *“a.""s

ee

3

QUESTION PRESENTED

Whether the Court of Appeals was warranted in re-

jecting the Commission’s determination that the terms

of the proposed merger of Christiana, a registered

investment company, and its operating affiliate, Du

Pont, are fair and reasonable and involve no over-

reaching, as required by the Investment Company Act

of 1940, because they reflect the value of Christiana’s

assets, consisting almost exclusively of Du Pont com-

mon stock, which would be exchanged for Du Pont

common stock in the merger; the Court of Appeals

being of the view that the merger terms should reflect

the price at which Christiana’s common stock is traded

in the market.

STATEMENT OF THE CASE

Du Pont and Christiana have entered into an agree-

ment to merge. Christiana’s principal holding, which

constitutes in excess of 98 percent of its assets, is

Du Pont common stock with a value of approximately

$2 billion as of the date of the merger agreement,

representing 28 percent of the total Du Pont com-

mon stock outstanding. The merger terms provide

that Du Pont will receive for retirement all the Du

Pont common stock held by Christiana, as well as

Christiana’s miscellaneous assets.’ In return, Du Pont

will issue in a tax-free exchange new shares of Du

Pont common stock equal in value to 97.5 percent

* Such assets consist of cash, a 3 percent interest in the Wilming-

ton Trust Company, all the stock of a newspaper, The News-Journal

Company, and a small holding of Du Pont preferred stock, which

had, as of the time of tle merger agreement, an aggregate net value

of some $26 million, That valuation is not contested in these pro-

ceedings.

4

of Christiana’s net asset value. Such value represents

the market or appraised value of Christiana’s assets

less liabilities and minor adjustments for the expense

of disposing of certain of those assets other than Du

Pont stock. The manner in which net asset value was

computed is set forth in Appendix B to this brief.

Neither Christiana nor Du Pont is under any com-

pulsion—legal or otherwise—to merge. The merger

was proposed by Christiana because its management,

consisting of large stockholders who had been closely

assvciated with Du Pont, coneluded that Christiana

had outlived its usefulness as a holding company for

Du Pont stock. Because of the taxes incurred in con-

tinuing as a corporation and the discount from net

asset value at which Christiana stock traded, it seemed

desirable that Christiana stockholders become direct

instead of indirect owners of Du Pont stock (Pet.

App. 10a-13a; A. A104). The Du Pont management

perceived no disadvantages to either Du Pont or its

stockholders in the proposed merger and considered

highly desirable, as a protection against uncertainties

in the future, the dispersion of the ownership and

vote of Du Pont stock that would be accomplished

by the merger (A. A573).

Christiana is an investment company subject to regu-

lation by the Commission under the Investment Com-

pany Act of 1946, 15 U.S.C. §§ 80a-1 et seq. Christiana

and Du Pont are considered ‘‘affiliated persons’’ of

each other under Section 2(a)(3) of the Act inasmuch

as Christiana owns more than 5 percent of the out-

standing stock of Du Pont. Section 17 of the Act

makes it unlawful for an affiliated person of an in-

vestment company to purchase from that investment

company any security or other property but provides

an OO Oe

5

that the Commission shall issue an order granting an

exemption from such prohibition if the evidence es-

tablishes that:

‘the terms of the proposed transaction, including

the consideration to be paid or received, are rea-

sonable and fair and do not involve overreaching

on the part of any person concerned... .’’ 15

U.S.C. § 80a-17(b) (1).

Under long-standing Commission interpretation of the

Act, not contested here, a merger transaction is sub-

ject to Section 17. Accordingly, the terms of the pro-

posed merger were negotiated and agreed upon with

full realization that they would have to be approved

by the Commission.

Christiana and Du Pont filed with the Commission

a Joint Application for approval which was subse-

quently supplemented by six amendments (A. A81).

The Notice of Application issued by the Commission

to allow interested persons to file requests for hearing

was sent by Christiana and Du Pont, respectively, to

each of the approximately 8,000 Christiana stock-

holders and 225,000 Du Pont stockholders (A. A974).

The Commission ordered a hearing on the appli-

cation, which was held before an Administrative Law

Judge and extended over seven days. Three stock-

holders of Du Pont and one stockholder of Christiana

participated in the hearing. Only the former objected

to the merger terms. The evidence received at the

hearing, in addition to the comprehensive application

and amendments, included testimony from the parties’

financial advisors,’ members of the special committees

* Morgan Stanley & Co., The First Boston Corporation and Kid-

der, Peabody & Co., Incorporated.

6

of each company’s Board of Directors who had nego-

tiated the terms of the merger, a senior Du Pont finan-

cial officer who was responsible for preparation of the

merger documents, and a senior trust officer of Manu-

facturers Hanover Trust Company, which had a fiduci-

ary responsibility for approximately 258,000 shares of

Du Pont common stock, all in support of the merger

terms. No witnesses were presented in opposition.

The Commission, acting unanimously in a ecompre-

hensive and reasoned Opinion, determined that the

terms of the proposed merger were fair and reason-

able and did not involve overreaching on the part of

any person concerned, and granted the exemption pro-

vided for in Section 17(b).

The Commission took into account these salient fae-

tors in approving the merger terms. Christiana is

owned by approximately 8,000 investors (Pet. App.

4a). Du Pont is a diversified chemical enterprise with

approximately 47.5 million shares of common stock

held by some 225,000 stockholders (Pet. App. 13a

fn.34, 16a). Du Pont common stock is traded on the

New York and other stock exchanges. Christiana

stock, which is traded in the over-the-counter mar-

ket (Pet. App. 4a), has historically sold at a diseount

of 20 to 25 percent from the market value of its assets

(Pet. App. 13a). That discount appears to reflect the

7.2 percent federal income tax on intereorporate divi-

dends that is payable by Christiana (Pet. App. 12a),

the substantial potential capital gains tax that would

be payable should Christiana sell its Du Pont stock

for cash (Pet. App. 14a) and the comparatively thin

trading in Christiana stock (Pet. App. 30a fn.51).

The discount from the market value of Christiana’s

assets—which approximated $450 million prior to an-

— eee 2

7

nouncement of the merger negotiations—will be elimi-

nated when the merger is consummated. Inasmuch as

Du Pont will be issuing stock equal in value to 97.5

percent of Christiana’s net asset value, the merger will

benefit Du Pont stockholders by some $55 million (A.

A94).

The Commission viewed the proposed merger as es-

sentially an exchange of equivalents: Du Pont stock to

be issued by Du Pont for the Du Pont stock presently

owned by Christiana (Pet. App. 9a). It reasoned that

an investment company, such as Christiana, whose as-

sets consist of securities the values of which are deter-

mined in active markets, can normally be presumed to

be worth its net asset value (Pet. App. 32a). The Com-

mission, acting on the recommendation of its Division

of Investment Management Regulation, considered and

rejected the contentions advanced by the three object-

ing Du Pont stockholders as to why such value should

not be looked to in this case. It found that the market °

value of Christiana common stock was not determina-

tive of the merger terms, and that the merger would

result in no detriment to Du Pont or its stockholders

(Pet. App. 32a fn.57, 28a-31a). Moreover, the Com-

mission concluded that any significant departure from

net asset value as the basis for merger terms would

be unfair because it would strip Christiana stockhold-

ers of some of th. intrinsic value of their investment

(Pet. App. 33a).’

* The Commission approved the 2.5 percent discount from net

asset value proposed by Du Pont and agreed to by Christiana, as

being within the range of fairness (Pet. App. 35a-36a) ; that dis-

count in favor of Du Pont stockholders was somewhat higher than

any discount previously approved by the Commission (1.5%) or

found in comparable transactions not subject to Commission ap-

proval (1.8%) (A. A244-A247, A687-A688).

a

In response to petitions for review filed by two of

the objecting Du Pont stockholders, the Court of Ap» .

peals, in a 2-1 decision, joined in by a Senior District

Judge from outside the Cireuit, set aside the order of

the Commission and thereafter declined to rehear the

matter in bane, A majority of the Court of Appeals

differed with the Commission in the following prinei-

pal respects, The majority rejected net asset value as

the lodestar in investment company valuation (Pet,

App, 53a, 58a, Gla, 72a), rewarded the market value of

Christiana common stock as determinative (Pet, App.

58a), eviticived the Commission for not ascertaining

whether the merger terms bore the earmarks of an

arm's length bargain (Pet, App, 61a), and found that

fairness required the Christiana stockholders to sur-

render to Du Pont a signifleant portion of the tax sav-

ings achieved by the merger because, in the court's

view, the “du Pont family” had retained over the years

‘the eeonomie, political and social advantages that ae-

companies control of one of America’s largest indus.

trial concerns,’** (Pet, App, 87a),

SUMMARY OF ARGUMENT

The Commission's action in approving the terms of

the proposed merger of Du Pont and Christiana as

fair and reasonable and reflecting no overreaching

*One of the respondents herein, Lewis C, Murtangh, while the

matter was under consideration by the Commission, brought a

stoekholder's derivative action claiming a violation of Delaware

State Law and also of Seetion 10(b) of the Seeuritios Exchange

Aet of 14 (15 USC, § 7T8j(b)), Following a full evidentiary

hearing, that challenge was rejected by the United States Distelet

Court for Delaware in a comprehensive opinion that deals with

the factual contentions advanced by the respondents and econ:

sidered by the Court of Appeals, Marriman v, B, 1, du Pont de

Nemours and Co, 411 F.Supp, 188 (D, Del, 1975),

1)

should be upheld, Those terms reflect in substance the

exchange of equivalenta—Du Pont eommon stock now

owned by Christiana is to be exchanged for Du Pont

common stock to be issued by Du Pont,

The Commission correctly determined that since the

Investment Company Act was designed to protect the

stockholders of investment companies against dilution

of the inherent value of their investment, fairness

under the Act requires that the merger terms be based

upon the net asset value of Christiana, Sueh value

consists almost exclusively of Du Pont common stock

which is what Christiana is giving up and Du Pont

in receiving in the merger,

The market price of Christiana common stock—

whieh discounts ite holding of Du Pout common stoek

by some 20 to 25 percent-—does not measure Christi

ana’s contribution to the merger, The medium of ex-

change for both parties to the merger is Du Pont com.

mon stock, The tax and market appreciation benefits

that will flow to Christiana stockholders from the mer-

ger will constitute no detriment to Du Pont; that the

benefits flowing to Du Pont are lesser in magnitude

does not require that Christiana turn over to Du Pont

a large portion of the tax savings and market appre.

clation that may accrue to Christiana stockholders, The

Commission properly determined that its informed

judgment as to fairness, reasonableness and over.

reaching, rather than the parties’ bargain-—however

arm’s length—should control in transactions subject

to Section 17, Respondent Murtaugh's predictions

that the merger would bring about massive selling with

an adverse impact on the price of Du Pont common

stock have, as the Commission found, no basis in faet,

They reflect in large part a serious misconception on

10

his part as to the nature of this tax-free merger which,

unlike a taxable divestiture, creates no need to sell

atock either to pay taxes or to comply with a court

order,

The Commission's action carries out the objectives

of the Investment Company Aet, is wholly consistent

with the Commission's long-standing interpretation of

Section 170b), and finds support in other decisions by

the Commission and eourts in the regulation of publie

utility holding companies, It is not inconsistent with

any decision of the Commission or that of any court,

It constitutes the reasoned exercise by the Commins.

sion, based on its administrative experience and ex.

pertixe, of a judgment in a matter, ie, fairness, as

to which the Congress has delegated to the Commis.

sion broad authority, It is thus a judgment whieh is

‘entitled to the greatest amount of weight by appel-

late courta,”’ Securities and Bvchange Commission vy,

Chenery Corp, S82 US, 194, 2090 (1947), Tn addition,

none of the considerations relied upon by the Court

of Appeals or the respondents detracts from the con-

clusion that the merger terms agreed to by the parties

and approved by the Commission are fair, reasonable

and involve no overreaching,

The decision of the Court of Appeals setting aside

the Commission's action is vitiated not only by that

Court's failure to aecord the Commission's judgment

the deference required by Congress and by decisions

of this*Court, particularly Chenery, but also by its

failure to follow proper appellate procedure,

ol

I, IN APPLYING TO THIS MERGER THE CRITERIA SET FORTH

IN THE INVESTMENT COMPANY ACT THE COMMISSION

FAITHFULLY DISCHARGED THE RESPONSIBILITY DELE-

GATED TO IT BY CONGRESS.

Congress has delegated to the Commission reaponsi-

bility for the administration of the Investment Com-

pany Aet, Under that Aet, investment companies are

subject to comprehensive federal regulation, The Act

spenks to such basic matters as issuance of stock and

debt securities (Seetions 18 and 23), approval of un-

derwriting contracts and investment advisory agree

ments (Section 15), relationships with affiliated per-

sons (Section 17), and composition of boards of direc.

tors (Sections 9, 10 and 16), Aecordingly, for over

thirty-five years the Commission has been intimately

invelved in every phase of financial activity of every

registered investment company, Virtually no impor.

tant corporate decision can be made by a registered

investment company without the oversight of the Com-

mission, Often, as here, a specific Commission order is

required before action may be taken,

This comprehensive pattern of regulation rests upon

a perception by Congress of the special character of

investment companies, They differ in almost every

relevant respect from industrial enterprises, Their

earning power, for example, is not based on productive

assets, research, development of products and market-

ing techniques; it is instead directly dependent upon

dividends or interest from portfolio securities, The

unique nature of investment companies and the special

role of the Commission in their regulation were brushed

aside by the Court of Appeals, Rather than reviewing

the determination of the Commission as to fairness, the

12

Jourt below approached the merger of Christiana and

Du Pont as if it involved two operating companies,

wholly free from governmental regulation,

The decision of this Court in Securities and Rea-

change Commission ¥, Chenery Corp, 382 U.S, 194

(1947), aptly describes the special competence of the

Commission to make the Section 17(b) inquiry and

determination in this case;

The Commission's conclusion here — to the fair-

ness of a reorganization under the Publie Utility

Holding Company Act] rests squarely in that area

where administrative judgments are entitled to the

greatest amount of weight by appellate courts, It

in the product of adaalustretive experionee, ap.

preciation of the complexities of the problem,

realization of the statutory policies, and responsl-

ble treatment of the uncontested facta, It ia the

type of judgment which administrative agencies

ave beat equipped to make and which justifies the

use of the administrative process, See Republic

Aviation Corp, ¥. Labor Board, 524 U8, 793, 800,

Whether we agree or disagree with the result

reached, it is an allowable judgment whieh we ean.

not disturb’? 3382 U.S, at 209,

The Commission, as appears from, its reasoned analy.

sis of all aspects of the proposed nierger, appreciated

the problema presented, properly diseerned the rele.

vant statutory policies and brought to bear ite consid.

erable administrative experience in concluding that the

merger terms are fair and reasonable and do not retleet

overreaching on the part of any person,

Bi)

A. The Commission Correctly Perceived That the Proposed

Merger Consists in Substonce of an Exchange of Du Pont

Common Stock for Du Poni Common Stock.

Christiana now owns approximately 13.4 million

shares of Du Pont common stock, In the merger it will

surrender those shares to Du Pont along with certain

miscellaneous assets, Du Pont will retire the shares

received and in return issue slightly fewer shares of its

own common stock——about 13.2 million—for distribu.

tion to Christiana stockholders, The Commission, in

considering the terma of the proposed merger, con.

cluded that “substantially, all that we are dealing with

is an exchange of equivalents,”’ (Pet, App, 9a), Ae

cordingly, it found that the value of the Du Pont shares

owned by Christiana, ic, net asset value, whieh it had

uniformly looked to in similar transactions, was the

appropriate measure of Christiana’s contribution to

the proposed merger and should be the basis for the

merger terms,’

The Court of Appeals disagreed, In its view it was

the market price of the Christiana common stock that

should determine the merger terma, Lt thus viewed the

relevant exchange as being Du Pont common stock for

Christiana stock ;

“Tt is the current worth of the Christiana stock

iven in exchange for the Du Pont stock that must

wv determined in order to pass on the reasonable.

ness and fairness of the merger,’ (Pet, App, 58a),

°Tt in siwnifieant that under the operative language of Seetion 17

Du Pont, as an affiliated person of Christiana, may not poreline

from (Christiana] ,. . any seeurity or other property... °° Thus,

the transaction passed upon by the Commission infolves in essence

Du Pont's proposed acquisition of the Du Pont stock held by Chrin

tiana, and accordingly it is the value of such stock to whieh the

Commission muat look,

4

This statement seriously misconceives the nature of the

proposed merger, If two operating companies were to

merge the relative market prices of their stock would

be an important consideration, together with compara.

tive earnings, dividends and other finaneial faetorsa, in

jesessing the fairness of merger terma, The market

price of an operating company's stock reflects the ap

praisal by the investment community of the operating

assets, the skill of management, the potential for new

products and inereased earnings and other factors

deemed important by investors,

The market price of Clhristiona common stock is de-

termined by none of the foregoing factors or it would

he cawentially equal to the market priee of the under

lying Du Pont shares owned by Christiana, The din.

count, or difference between the net asset value and the

market price of Christiana common stock, reflects the

intercorporate dividend tax, the large eapital gains

tux which Christiana would be required to pay were it

ever to sell ite Du Pont holdings for eash and the rela.

tively thin trading market for Christiana stock, All of

these factors disappear in the merger, None of them

detracts from the inherent value of Christiona’s hold.

ing of Du Pont stock, which is what Du Pont receives

in the merger,

The Court of Appeals’ insistence that the merger

terme vefleet the market price of Christiana sh‘, and

its refusal to aecept the Commission's informes judg

ment as to fundamental investment values, is pleinty

at oddse with this Court's decision in Niagara Iudson

Power Corp, \. Leventritt, 340 US, 886° C151),

There, in upholding the Commission's determination

that a plan of reorganization of a public utility holding

15

company was ‘fair and equitable’ under Section 11 of

the Public Utility Holding Company Act, the Court

held that market prices were not controlling.

"The informed judgment of the Commission,

rather than that of the market, has been desig-

nated by the Act as the appropriate guide to fair-

ness and equity within the meaning of the Act.”’

40 U.S. at 346-47,

As has been shown, the consideration to be exchanged

hy both Christiana and Du Pont consists essentially of

shares of Du Pont common stock. Accordingly, the

value of such shares should determine the terms of

exchange, as the Commission held. The terms thus com-

port precisely with the test the Court of Appeals prop-

erly recognized but misapplied:

(T]he Commission must look to the value given

and received by the respective shareholders to a

merger. ...’’ (Pet. App. 58a).

B. The Commission Properly Attached Primary Significance to

the Value of Christiana’s Assets—Essentially Du Pont Com-

mon Stock—in Approving the Proposed Merger Terms.

The significance attached by the Commission to

(‘hristiana’s net asset value, 7.¢., its holding of Du

Pont common stock, is fully in accord with the basic

objectives of the Investment Company Act. The Con-

gressional declaration of policy, the structure of the

Act, and judicial and Commission interpretations sup-

port the conclusion that investment company stock-

holders are to be protected against dilution of net asset

value.

A comprehensive study of investment companies by

the Commission, carried out pursuant to a specific

16

Congressional directive, laid the groundwork for the

Act. Report on Investment Trusts and Investment

Companies.’ In Part Three of that Report, the Com-

mission stated that net asset value is the fundamental

basis for investment company valuation, and Congress

accepted net asset value as the cornerstone of the Act.

‘To the investor not coneerned with the imme-

diate salability of his investment company secur-

ity, asset value represents the actual value of his

interest in his company ; it constitutes the value of

his property interest in the company, were it to be

immediately dissolved.’’ Report on Investment

Trusts and Investment Companies—Part Three,

Abuses and Deficiencies in the Organization and

Operation of Investment Trusts and Investment

., Companies, H.R. Doe. No. 279, 76th Cong., Ist

’ Sess. (1939) at 1396-97.

In United States y. National Ass’n of Securities Deal-

ers, Inc., 422 U.S. 694 (1975), this Court, in reviewing

the legislative history of Section 22 of the Act, noted

that one of the abuses at which it was aimed was sell-

ing practices under which the ‘‘equity- interests of

shareholders would suffer a... dilution.’’ 422 U.S. at

709. The Court of Appeals accepted the importance of

protecting net asset value in investment company regu-

lation but only for open-end investment companies,

which have outstanding securities redeemable at net

asset value at the option of the holder. The Court of

Appeals believed that the Commission had confused

® Part One of the Report is printed as H.R. Doe. No. 707, 75th

Cong., 3d Sess. (1938). Part Two of the Report is printed as H.R.

Dee. No. 70, 76th Cong., Ist Sess. (1939). Part Three is printed

as H.R. Doe. No. 279, 76th Cong., Ist Sess. (1939). Parts Four and

Five are printed as H.R. Doe. No, 246, 77th Cong., Ist Sess. (1941).

17

open-end investment companies with closed-end invest-

ment companies (Pet. App. 57a).

The Commission was well aware, however, of the dis-

tinction between the two types of investment companies

but found no pelicy distinction which justified different

treatment under Section 17. As the Commission noted,

at the time the Act was passed, the phenomenon of

market discount from net asset value was a factor that

was common to closed-end companies such as Christi-

ana, which do not extend a standing offer to redeem

their securities (Pet. App. 32a fn. 57). Congress pro-

vided that this market phenomenon would not result

in the dilution of the interest of stockholders in closed-

end companies. Thus, Section 23(b) of the Act directs

that no closed-end company ‘‘shall sell any common

stock of which it is the issuer at a price below the cur-

rent net asset value of such stock’’ with certain excep-

tions not here relevant. In addition, Section 18(a) of

the Act strictly limits the issuance of debt or preferred

stock by a closed-end company. The purpose of this

limitation is to prevent undue dilution of net asset

value in a falling market by reason of ‘‘leverage’’ at-

tributable to senior securities.’ Section 18(d), more-

over, makes it unlawful for all investment companies to

issue warrants or rights to purchase their own stock

except exclusively and ratably to their own stockhold-

ers and further subject to the requirement that such

rights may not extend beyond 120 days. Stockholders

of investment companies are the only persons who may

share in option benefits; to the extent that options ex-

*In a leveraged investment company, the net asset value of

common stock would fall more rapidly in a declining market than

the decline in the market value of the company ’s assets since senior

securities would retain a fixed interest in those assets,

18

tending over the limited period permitted may involve

some dilution of net asset value, outsiders may not

benefit. The structure of the Act thus supports the

Commission’s view, rather than that of the Court of

Appeals, that protection of net asset value extends to

closed-end investment companies as well as open-end

companies.

In requiring that the merger terms reflect the value

of Christiana’s assets the Commission also drew upon

its own substantial experience in comparable transae-

tions under Section 17(b) of the Act. In at least six

earlier cases the Commission had passed upon the re-

organization of a closed-end investment company and

its affiliate when the principal sccurities holding of the

investment company was stock of the affiliate.* In each

ease, the Commission determined that merger terms

based on net asset value were fair, notwithstanding

that the market price of the investment company’s own

stock, wherever a market existed, was significantly

below such value.’ In reviewing the Commission’s es-

tablished practice in these cases, the District Court in

Harriman Vv. E. I. du Pont de Nemours and Co., supra,

noted that:

* Huyler’s, Investment Company Act Release Nos, 5773 and 5809

(August 15 and September 9, 1969) ; Eastern States Corp., Invest-

ment Company Act Release Nos, 5693 and 5711 (May 28 and June

16, 1969) ; Southport Commercial Corp., Investment Company Act

Release Nos. 4165 and 4180 (February 17 and Mareh 5, 1965) ;

Harbor Plywood Corp., 40 S.E.C, 1002 (1962); Delaware Realty

and Iny. Co., 40 S.E.C, 469 (1961); Detroit and Cleveland Nav.

Co., Investment Company Act Release Nos, 3082 and 3099 (July

27 and August 19, 1960).

* Stock of Delaware Realty and Southport was closely held and

had no publie market.

19

“The Securities and Exchange Commission, the

agency authorized by Congress to implement the

1940 Act and pass upon otherwise prohibited

transactions between investment companies and

their affiliates ... has consistently utilized net as-

set value as the controlling factor in section 17

proceedings. ... This has been true notwithstand-

ing the fact that the market value of the applicant

investment company’s stock was significantly lower

than its net asset value. ... Net asset value has

also been utilized where no market existed for the

common stock of an applicant investment com-

pany.’’ 411 F.Supp. at 160.”

The Court of Appeals refused to accord any weight to the

Commission's long-standing position heeause of other Section 17(b)

decisions, involving different types of companies, where net asset

value was not the controlling factor. In the decisions cited by the

Court of Appeals, however, the Commission was dealing with valua-

tion not of investment eompanies whose sole assets consisted of

marketable securities but of either ‘‘hybrid’’ investment companies

which had operating assets or pure operating companies which fell

within the ambit of Section 17 because of their affiliation with

an investment company.

For example, the Court of Appeals cited Townsend Corp., Invest-

ment Company Act Release No. 4045 (September 2, 1964), in sup-

port of its position that the Commission has approved the valuation

of an investment company on the basis of factors other than net

asset value. In fact, the investment company’s earnings there were

used solely to compute the value of some of the investment com-

pany ’s assets which did not have an active market—its 100 percent

ownership of certain radio stations. The Court of Appeals cited

Central States Elee. Corp., 30 S.E.C. 680 (1949), as a case where

net asset value was adjusted for the potential capital gains tax on

unrealized appreciation of assets. The adjustment in that case re-

lated to assets that were to be sold in taxable transactions; here

Christiana’s holding of Du Pont stock is to be exchanged in a tax-

free merger. Other decisions cited by the Court of Appeals in which

the Commission departed from net asset value either involved the

valuation of operating companies, Talley Industries, Inc., Invest-

ment Company Act Release No. 5953 (January 9, 1970), or in-

volved the valuation of companies which were a tually part invest-

20

Recognition of net asset value as the proper basis

for investment company reorganizations has not been

limited to transactions subject to Section 17(b). In

Central States Elec. Corp., 30 S.E.C. 680 (1949), the

Commission recommended that net asset value, which

it characterized as a ‘‘basie requirement”’ of valuation

under the Investment Company Act, be used for bank-

ruptey reorganization purposes as well.

‘In the case of investment companies, such as the

Debtor and its subsidiaries, which invest, reinvest,

and deal in marketah'e securities, market prices

are customarily used in appraising the value of

their assets as well as their outstanding securities.

** * There are no fixed assets or equipment dedi-

cated to a particular function; a specialized service

is rendered only in the sense that the company of-

fers diversification of investment and management

of assets. In view of these characteristics, it is

natural that net asset value based upon market

prices should be the fundamental valuation cri-

terion used by and large in the investment com-

pany field. In the absence of special circumstances,

these characteristics constitute compelling reasons

for considering net asset value as the primary

measure of value of an investment company for

reorganization purposes also.’’ 30 S.E.C. at 700

(footnote omitted).

The District Court approved a plan of reorganization

that reflected net asset value. The Court of Appeals

affirmed its action, quoting with approval the language

ment company business and part operating business. Electric

Bond and Share Co., Investment Company Act Release No. 5215

(December 28, 1967); Southeastern Capital Corp., Investment

Company Act Release Nos. 4110 and 4133 (December 23, 1964 and

January 12, 1965); New York Dock Co., 38 S.E.C. 754 (1958) ;

Century Investors, Ine., 40 S.E.C. 319 (1960).

ee ——

a Se

21

of the Commission set forth above. Central States Elec.

Corp. v. Austrian, 183 F.2d °79, 884 (4th Cir. 1959),

cert. denied, 340 U.S. 917 (1951).

It is well established that the long-standing adminis-

trative policy of the Commission is entitled to great

weight." Most recently, in United States vy. National

Ass’n of Securities Dealers, Ine., supra, the Court de-

ferred to the Commission’s consistent interpretation

of the term ‘‘dealer’’ in Section 22(d) of the Act, as

reflected in official statements of the Commission as

well as determinations under the Act:

“This consistent and longstanding interpretation

by the agency charged with administration of the

Act, while not controlling, is entitled to consider-

able weight.’’ 422 U.S. at 719."

" The Court of Appeals rejected the Commission’s interpretation

in part because many of the Section 17(b) proceeding: were un-

contested or not reviewed by any court (Pet. App. 62a-63a). As

this Court has held, however, administrative interpretation.may be

established in many ways other than formal decisions following

contested proceedings. In FTC v. Mandel Brothers, 359 U.S, 385

(1959), a consistent administrative construction that a sales slip

constituted an invoice for purposes of the Fur Products Labeling

Act was accorded great weight ‘‘even though it was applied in

eases settled by consent rather than in litigation.’’ 359 U.S, at 391.

See also, United States v. Republie Steel Corp., 362 U.S, 482 (1960)

(informal construction of Rivers and Harbors Act by Corps of

Engineers) : Trafficante v. Metropolitan Life Ins. Co., 409 U.S, 205

(1972, (informal construction of Civil Rights Act by Department

of Housing and Urban Development) ; Saxbe v. Bustos, 419 U.S.

65 (1974) (informal interpretation of Immigration and Nationality

Act by Immigration and Naturalization Service).

* Deference to a long-standing administrative position is not, of

course, unique to the Commission or the Investrt*nt Company Act.

It has been applied by this Court in upholding administrative.

construction of a wide variety of statutes. See, e.g., NLRB v.

Boeing Co., 412 U.S. 67, 74-75 (1973) (NLRB lacks authority to

regulate reasonableness of union fines); Red Lion Broadcasting

99

The utilization of the value of Christiana’s assets to

determine the terms of the proposed merger imple.

ments both the poliey and language of the Investment

Company Act, is consistent with the Commission's

long-standing interpretations and should be approved

by this Court under established principles of review,

C., On the Basis of Reasoned Analysis, the Commission Re-

jected Contentions That the Merger Terms Should Not Reflect

the Value of Christiana'’s Holding of Du Pont Common Stock.

While the Commission econeluded that fairness under

the Investment Company Act required that the merger

terms in this transaction reflect net asset value (Pet,

App. 17a, 35a-36a), it reached that conclusion after

consideration of an evidentiary record that set forth

all other possible indieia of value, eg, market price,

earnings, book value, ete, Because those factors were so

clearly inappropriate ina transaction involving an ex:

change of equivalents, the Commission reached the ult

mate conelusion that in this ease tho governing stand.

ard preclided use of any criterion other than net asset

value,

The Commission carefully considered whether any

of the contentions advanced by the respondents

Which the Court of Appeals accepted in substance

warranted a departure from the use of net asset

value in approving the terms of the proposed merger,

The Commission analyzed those contentions and con

eluded that none of them altered the central and

controlling facet that the merger would consist) of

Co. vo FCC, 895 US, 867, S80-817 (19690) CROs view that fairness

doctrine is in the public interest upheld); and Norwegian Nitrogen

Produets ce % Lnited States, JSS US Ud, who Cros (Tariff

Board poliey of maintaining confidentiality of production costs of

individual firms under investigation upheld),

a

23

an exchange of Du Pont common stock for Du Pont

common stock, As the Commission viewed the matter,

only if the merger could reasonably be expected to

ceatise some harm or detriment to Du Pont or its stock-

holders should the Christiana stockholders receive sig

nifleantly leas than the value of their assets,

“Only if [the] decision to dismantle Christiana

infliets cognizable harm on Du Pont and on its

stockholders unrecompensed by the proposed dis-

count, can we insist on terms harsher for them

than those now before us."’ (Pet, App, 2la-23a),""

Market Price of Christiana Stock, At the forefront

of the Commission's consideration of the proposed mer-

ger termes was clear recognition that the market price

of Christiana common stock was from 20 to 25 pereent

helow the market value of Christiana’s assets, The fae-

tors creating the discount are, however, tax and market

factors——peenliar to Christiana as a corporate entity —

whieh would disappear in the merger, Moreover, as has

hoen shown Caapra, pp, 18-15), it was not Christiana

stock but Du Pont stock whieh Du Pont was receiving

in the merger, The Commission also reasoned that

Christiana stock was held prineipally by long-term in-

vestors and that to utilize its market price would have

the effect of stripping from those investors a signifi.

cant portion of the intrinsic value of their investment

(Pet, App, S2a-33a),

Benefits of the Merger, The Commission was fully

aware that there was an imbalance in the benefits flow

ing from the merger:

' Becau-e Christiana stockholders would share in the discount as

Du Pont stockholders, the actual dilution incurred by Christiana

stockholders would be 1,8 pereent (Pet, App, 13a),

24

“The very slight reduction in the amount of Du

Pont’s outstanding common and the resulting in-

erease in earnings per Du Pont common share is

incommensurate with the tax and the market value

henefits inuring to the Christiana stoekholders,”’

(Pet, App, 18a),

As the Commission found, the benefits to Christiana

arise principally as the result of federal tax laws and

stock market phenomena (Pet, App, 10a-11a), Its divi-

dend income is taxed at a 7.2 percent federal tax rate,

In addition, it does not appear to have immediately

available to it any alternative course of action whereby

its Du Pont stock could be distributed direetly to its

stockholders without signifleant and perhaps immeas-

urable tax effect,” Hence the final terms of the pro-

posed merger, as well as the Commission's decision,

reflect a recognition that the merger would be the only

way of terminating Christiana’s existence without ad-

verse tax impact,”

"During the course of merger negotiations the parties devoted

considerable attention to the possibility that Christiana might utilize

i special form of liquidation under Section 833 of the Internal

Revenue Code which would have reduced the tax impact of a dis.

tribution of Du Pont stock to its stockholders, Ultimately it was

coneluded that this route was too uncertain to pursue because there

was no way to determine in advanee the potential tax liabilities of

the Christiana stockholders (A, AS877-A879),

" The Court of Appeals erved in asserting that the Commission's

use of net asset value in applying Section 17(b) was limited to

situations in which the investment company had available alterna.

tive methods of placing its assets in the hands of its stockholders

without signifleant tax cost or other expenses (Pet, App, 63a-64a),

Nothing in the language of the Act, the legislative history or the

Commission's decisions would so limit the use of net asset value

under Section 17, Moreover, in at least two instances the Commis.

sion has held merger terms based on net asset value to be fair not-

Withstanding the fact that, as here, there were no feasible alterna.

25

The Court of Appeals held that the Commission was

required in its consideration of the proposed merger

terms to allocate to Du Pont a share of the tax savings

that Christiana and its stockholders might achieve by

reason of the merger on the ground that ‘fairness re-

quires that Du Pont share in the tax savings that result

from its cooperation,”’ (Pet, App, 86a fn.35),

Tn expressly rejecting this approach, the Commission

said:

“The heart of the matter is that the tax benefits to

he reaped by the Christiana people will infliet no

corresponding detriment on Du Pont or on its

stockholders,”’ (Pet, App, 23a fnd4),

This is not a taxable transaction, but a tax-free

merger, The Internal Revenue Service has issued a

ruling that the receipt of Du Pont stock by the

stockholders of Christiana will not be a taxable trans-

action under the Internal Revenue Code,"" Under

the Court of Appeals’ view, Christiana stockholders

— —.- == =

tives to merger, In Harbor Plywood, supra, the evidence submitted

at hearings indieated that liquidation was not financially feasible as

an alternative to the merger because of tax and other considerations,

Delaware Realty and Iny, Co, supra, involved a 1961 merger of

Delaware Realty into Christiana, Delaware Realty owned approxi-

mately 33 pereent of outstanding Christiana common stock, account:

ing for the bulk of its assets, Christiana’s holdings then, as now,

were principally in Du Pont common stock, Delaware Realty 's net

asset value was computed, not with respect to the market value of

its block of Christiana stock, but rather as if Delaware Realty owned

direetly the Du Pont common stock held by Christiana, Both Dela-

ware Realty and Christiana would have had to liquidate or to adopt

exchange plons for Delaware Realty stockholders to achieve by

other means underlying net asset value in terms of Du Pont stock,

and, as the Commission opinion indicated, such alternatives would

have involved tax problems, 40 8.6.0, at 473,

Pet, App, 93a fn, 4,

26

would be required to pay to Du Pont some major por-

tion of the capital gains tax whieh would have been

payable were this not a tax-free transaction,’” As the

Commission held, Du Pont has no property interest in

the tax saving achieved by any Christiana stockholder

(Pet, App, 24a),

Karmarks of an Arm’s Length Bargain, The Court

of Appeals miseonceived the essential purpose of the

Investment Company Act in its demand that the Come

mission disapprove the merger terms unless it found

that they would have been reached in an arm's leneth

bargain (Pet, App, Gla), The Commission quite prop.

erly viewed its responsibility as being to determine

whether the proposed terms were fair and reasonable

ov reflected overreaching, as Seetion 17 provides, It

declined to rely upon the substantial evidence that

showed, despite the long and close relationship be.

tween the parties, complete independence of aetion by

both Christiana and Duo Pont in the negotiation of

the merger terms.” It held that the manner in which

—————

"It should be noted that the asserted savings of eapital gains

tax to Christiana stoekholders are in reality deferrals of tax, Any

former Christiana stockholder who sells Du Pont stock received in

the merger will be required to pay a full capital gains tax based

on the difference between the amount realized on sueh sale and the

tax basis for the Christiana stock which is presently owned, More.

over, approximately 11 percent of Christiana stock is held by tux:

exempt institutions that would pay no capital waing tax (A, ASH),

* The evidence before the Commission establishes that the trans

action did in faet earry the earmarks of an arm's length bargain,

Among the factors supporting this conelusion ave the following:

(a) The judgment of three independent financial advisers re-

tained by the parties, The First Boston Corporation, Morgan Stan-

ley & Co, and Kidder, Peabody & Co,, Incorporated, was that the

merger terms should approximate net asset value (A, AG9S-AGDD,

AT05-AT06; A, AGSL-AGB82, AGSO-AGST; A, AS42-AS44),

27

such terms were arrived at was of no consequence;

What was significant was whether the ultimate termes

met the statutory standard (Pet, App, 35a fn.62),

What the Court of Appeals failed to reeognize was

that Congress, in Seetion 17 of the Act, substituted

the Commission's informed impartial judgement and

the “fair, reasonable and no overreaching by any

person” test for the results of arm's length bargain-

ing. Cf, Pepper vy, Litton, 308 Uys, 295 (1989), Arm's

length bargaining is at best a erude and inexact

—= ——— a — s e 2 ee oe

(b) Christiana had been valued at net asset value for purposes

of Section 17(b) on at least three prior oveasions: its own merger

With Delaware Realty and Investment Co,, whieh held 4% percent

of Christiana stoek, 40 SEC 469 (1961) and two exchanee offers of

portfolio securities with its stockholders (Pet, App, 64a),

(e) The Du Pont Negotiating Committee consisted of two senior

evecutives who had no affiliation with Christiana, The Christiana

negotiators held no positions with Du Pont, Those members of Du

Pont's Board of Directors affiliated with Christiana took no part

in the negotiations of the terms or the approval by the Du Pont

Board (A, ADLAQ2),

(1) The 2.5 pereent discount which was demanded by Du Pont is

the largest diseount ever accepted as fair by the Commiasion under

Seetion 17(h), and is wreater than the diseount refleeted in any

comparable transaction not requiring Commission approval (A,

AGST.AGSS),

(¢) Christiana, whieh was under no compulsion to merge, would

not have accepted a discount greater than 2.5 percent (A, ASG),

The Distriet Court in Harriman vy, B. 1. du Pont de Nemours and

(‘o,, supra, expressly rejected the allegation of the plaintiffs in that

case that Du Pont did not bareain at arm's length,

Since plaintiffs did not prosace a seintilla of evidence that

improper motivations or divided loyalties were responsible for

what the Court regards asx a sound negotiating strategem whieh

ultimately resulted in a discount higher than any previously

approved by the SEC, they cannot sueeced on this facet of thelr

ease,"’ 411 F, Supp, at 164,

28

method of determining fairness, It is little more than

the law of the commercial and financial jungle, In

applying the eriteria of Seetion 17, the Commission

recognized that its duty was to determine fairness

objectively and not to be satistied if the transaction

merely “carries the earmarks of an arm's length

bargain.’ Pepper vy, Litton, 308 U.S, at 306-07,

Du Pont and Christiana were aware, too, from tie

outset of negotiations that neither was free to bargain

in the spirit of a pawnbroker, Section 17 requires

that the terms be fair to all concerned, In transactions

not subject to Section 17 or a similar fairness standard,

each party can attempt to utilize its strategic bargain-

Ing position with no holds barred, In this ease the

parties were advised that both finaneial and legal

precedents dietated terms that reflected net asset value

with a modest discount, In examining the terms

agreed to by the parties the Commission speeulated

that Du Pont “in the course of bargaining between

Wholly unrelated parties’ might have exacted a higher

price for its agreement to merge (et, App, 24a), It

observed, however, that a principal reason why See-

tion 17 was enacted was “to prevent persons in a

strategic position from using that position to effect

transactions for other than fair value,"” (Pet, App.

24a-25a), Its reasoning makes clear why the Court of

Appeals erred in demanding an arm's length inquiry

rather than that provided in Section 17;

It is precisely because transactions of this char-

acter are replete with inherent confliets of in-

terest that the Act requires that they be submitted

to us, As we said in Atlas Corporation, 37 SEC,

72, SO-86 (1956); "It is evident that Section 17

of the Act was not designed to prohibit trans-

actions solely for the reason that they are not

29

negotiated at arm’s-length. On the contrary, Sec-

tion 17(b) of the Act directs us to exempt trans-

actions between controlling or affiliated persons

where the evidence establishes that the terms

thereof are reasonable and fair and do not involve

overreaching on the part of any person concerned.

Clearly, Section 17 contemplates that transactions

meeting these standards will be permitted although

arm’s-length bargaining may not have been pres-

ent or, indeed, may have been impossible in view

of the relationship of the parties.’’’ (Pet. App.

$5a fn.62).

An arm’s length bargain may involve such factors as

negotiating tactics, strength of position, and so forth.

Rarely is such a bargaining process concerned with

fundamental investment values. It is the latter to

which the Commission’s judgment must, under the

Act, be directed. Thus it would have been inappro-

priate for the Commission to attempt to ascertain

whether the parties had bargained as if this were an

ordinary commercial transaction, rather than a funda-

mental corporate realignment.

It may be that the fault found by the Court of Ap-

peals in the Commission’s inquiry into the proposed

merger terms rests largely on semantics. In extolling

Pepper Vv. Litton and related cases and urging that

the arm’s length bargaining principle is of ‘‘general

application to corporate law and equity,’’ the court

concluded that such a principle *‘characterizes the type

of unbiased scrutiny’’ that is essential in reviewing

reorganizations (Pet. App. 6la fn.15). It cannot be

questioned that in this case the Commission gave the

proposed merger a full measure of ‘‘unbiased seru-

tiny.’’ That it employed the relevant statutory test

30

rather than a more genera'ized judge-made test only

means that the transaction received the searching in-

quiry determined appropriate by Congress.

In any event it is well established by decisions of

this Court that in the discharge of ‘ts special statu-

tory responsibilities the Commission is to develop and

apply criteria of fairness suitable to the Acts of Con-

gress that it administers. Otis & Co. v. Securities and

Exchange Commission, 323 U.S. 624 (1945): Seeuri-

ties and Exchange Commission v. Central-Illinois Se-

curities Corp., 338 U.S. 96 (1949). The teaching of

such cases is that, in determining what is fair and

equitable under the Publie Utility Holding Company

Act, the Commission must develop its own fairness

standard based on the purposes of that Act. The Tn-

vestment Company Act calls for a similar independent

exercise of informed judgment by the Commission.

In Otis, although the plan of reorganization involved

a liquidation in which the common stockholders would

not have participated under the corporate charter pro-

visions or *‘striet priority’? rules applicable in bank-

ruptey, the Commission valued the interests of the com-

mon stockholders as though the company were a con-

tinuing enterprise. This Court upheld the Commis-

sion’s determination of fairness:

‘Of course, Congress would wish, in simplifying

a holding company system capital structure, to

preserve values to investors, not to destroy them.

Consequently, while giving the Commission power

to compel the elimination of holding companies

deemed uneconomic, it allowed the affected com-

panies to propose plans to the Commission to ef-

fectuate the objects and the Commission to ap-

31

prove such plans when they were considered ‘fair

and equitable.’ ’’ 323 U.S. at 636-37."

In administering Section 17 of the Investment Com-

pany Act the Commission is under a mandate from

Congress to approve merger terms between an invest-

ment company and its affiliate if such terms are fair

and reasonable and do not reflect overreaching on the

part of any person.” In earrying out this mandate, the

1% As the Commission recognized (Pet. App. 2la fn. 42), the

termination of Christiana’s existence which would be accomplished

by the proposed merger constitutes voluntary and desirable cor-

porate simplification of a major industrial company similar to that

which Congress has mandated for publie utility companies. The

Antitrust Division of the Department of Justice has urged in this

Court the desirability of terminating the existence of Christiana

(A, A694).

2° While the Internal Revenué Code and the Delaware appraisal

law are essentially irrelevant to the Commission's role in determin-

ing fairness under the 1940 Act, there is not, as the Court of Ap-

peals suggested (Pet. App. 68a-72a), any inconsistency between the

result reached here and the applicable provisions of those laws. In

Harriman v. E. I. du Pont de Nemours and Co., supra, the District

Court in passing upon the fairness of this proposed merger under

Delaware law held that, since an appraisal proceeding is concerned

with the statutory demand of the dissenter for an immediate cash

payment for his stock, market price rather than net asset value may

be the appropriate measure of value, but such market price does

not govern the determination of fairness where the stockholder

continues to have an on-going interest in the enterprise—as is the

ease in this merger, 411 F. Supp. at 155-56.

The estate and gift tax valuation eases cited by the Court of

Appeals have no applicability. Those cases involve a tax based on

‘fair market value’’ of stock as of a particular date. The Tax

Regulations define that value as the amount which would be paid

in eash by a willing buyer to a willing seller, (Treasury Regulation

See. 20.2031-1(b)). This revenue collecting concept has no place in

the determination of fairness in mergers where the medium of

exchange, on both sides of the transaction, is not cash but Du Pont

stock, the receipt of which ‘s not a taxable event,

32

Commission concluded that it would be unfair and un-

reasonable for Du Pont to appropriate from the Chris-

tiana stockholders, as the price of its agreement to

merge, any significant portion of the inerease in values

that might flow to such stockholders as the result of tax

savings—real and potential—and the stock market’s

appraisal of the value of stock held directly as com-

pared with stock held indirectly through an investment

eompany. Such appropriation on the part of Du Pont

would have been, in the Commission’s view, precisely

the overreaching that Section 17 expressly forbids.

In rejecting the Commission’s informed application

of the “fair and reasonable ard no overreaching”

standard of Section 17(b), in favor of an ‘‘earmarks

of an arm’s length bargain’’ standard, the decision of

the Court of Appeals would encourage—indeed demand

—the very kind of ‘‘advantage-taking”’ that the Invest-

ment Company Act was intended to supplant.

Impact on Market Price of Du Pont Stock. Finally,

the Commission considered at length the principal

claim advanced by respondent Murtaugh that the mer-

ger would lead to such a volume of selling by former

Christiana stockholders that the market price of Du

Pont stock would be adversely affected over an ex-

tended period of time. The Commission viewed this as

the ‘‘erux’’ of the case and carefully examined the ex-

tensive evidence that was adduced at the hearing ( Pet.

App. 25a). It determined that there was no evidence

of long term adverse market impact and the Court of

Appeals agreed (Pet. App. 90a fn. 39).

The Commission made specific findings that large

Christiana stockholders lacked any present intention

Oo

or incentive to sell and that substantial post-merger

sales were unlikely (Pet. App. 14a-15a, 25a fn.46).

Such stockholders had for years been indirect investors

in Du Pont and the merger would not change the essen-

tial nature of their investment—it would rest upon Du

Pont’s earnings and prospects. Moreover, there was no

evidence that such stockholders had lost confidence in

Du Pont and were desirous of bailing out. Indeed, the

record shows that the directors of Christiana, who

hold in the aggregate approximately 16 percent of the

Christiana common stock, have no intention to sell

Du Pont stock to be received in the merger and that

Wilmington Trust Company, which holds in its trust

department over 50 percent of Christiana common

stock, likewise has no intention to sell, other than

sales which might be required in connection with

settlement of estates and similar administrative mat-

ters (A, A564-A566; A. AS00-807).

As to the specifie factors which would make selling

unlikely, the Commission noted that the merger is con-

ditioned upon the receipt of an Internal Revenue Serv-

ice ruling that it will be tax free; thus former Chris-

tiana stockholders will be under no compulsion to sell

to raise money to pay taxes (Pet. App. 7a, 34a fn.59).

It also noted that there was no requirement of any

kind—court order or otherwise—that forced any sell-

ing by Christiana stockholders so that each stockholder

in deciding to sell or hold would be guided solely by his

own investment judgment and self-interest (Pet. App.

33a-34a £n.59).” This circumstance the Commission saw

21'The Commission found wholly unpersuasive the principal pre-

cedent advanced by respondent Murtaugh—the position taken by

Du Pont in opposing a court order requiring the divestiture of its

(ieneral Motors stock (Pet. App. 33a fn. 59). That divestiture, as

proposed by the Government, did threaten to cause substantial

J+ ;

as a disincentive to selling. Tlie Commission also found

that ‘*[m]ost of Christiana’s stock has a very low basis

in the hands of those who now hold it’’ because of the

long-term nature of those holdings, and because of the

reduction in tax basis resulting from distributions of

General Motors stock pursuant to the divestiture by

Du Pont of its interest in that company (Pet. App.

l4a).

Based on all the evidence, the Commission speci-

fieally rejected respondent Murtaugh’s claims of mas-

sive sales of Du Pont stock following the merger (Pet.

App. 25a fn.46, 26a). The Commission went on to deal

with the matter of what effect, if any, the occasional

sales which it was agreed could take place might have

on the market price of Du Pont stock, accepting as an

assumption that there might be selling which ‘‘at cer-

tain points in time [would] be substantial.’’ (Pet. App.

26a). The Commission’s reasoning was based on its own

expertise and knowledge of how securities markets

operate.

“{T lhe merger might possibly engender selling

of a volume that could on occasion cause Du

Pount’s market price to dip below the level at

which it would otherwise stand. ... We... con-

clude that such depressing effects on the price of

Du Pont common as may occasionally manifest

themselves by reason of the proposed transaction

will be of relatively brief duration.’’ (Pet. App.

28a-29a ).

selling, but because of two factors not present here: the distribution

wonld have been taxable as a dividend at rates up to 90 percent;

and substantial sales of General Motors stock would have been

required by court order. Thus the Commission found *‘the General

Motors situation had nothing in common with this one.’’ (Pet. App.

d3a-d4a fn. 59),

~~ eal,

35

The basis for the conclusion reached by the Commission

was that Du Pont’s earning power and the trend of

those earnings will be the basie determinant of the

market price of its stock. The Commission stated :

‘In no way will the Christiana merger detract

from either the assets or the earning power of

[Du Pont.] The fundamentals of the situation

will remain as they are.”’ (Pet. App. 28a).

In finding that the merger would cause no detriment

to Du Pont as a result of the claimed adverse market

impact, the Commission declined to attempt to measure

that impact on the basis of any specifie number of

shares to be sold at any specific time. It first pointed

out how little weight could be accorded any such at-

tempt because of the highly speculative nature of such

an effort (Pet. App. 30a-31a). It noted the impossibil-

ity of determining how much Du Pont stock was likely

to come on the market by reason of the merger in any

given period of time. Even if an amount were assumed

or speculated, the Commission questioned whether its

impact on market price could be reasonably estimated.

It finally observed in this respect that even an attempt

to look at ma ket impact after the merger, with all of

the facts available, would be of little help because stock

prices are so

‘‘volatile and the factors that influence them multi-

farious”’

that there is no known way of isolating the actual, let

alone the probable, effect of a single factor such as in-

creased stock sales resulting from the merger (Pet.

App. 31a).

The Court of Appeals agreed with the Commission’s

principal conclusion that the merger would not ad-

36

versely impact the market price of Du Pont stock for

any extended period of time, It criticized the Commis-

sion, however, for not taking into account the possible

short-term market impact of occasional large sales

(Pet, App, 90a), The court thus set for the Commission

an impossible task, Ilaving determined that future

short-term market behavior was too elusive to measure,

the Commission would nonetheless be required to ap-

praise it in passing on the fairness of merger terms,

The Commission's refusal to speculate on short-term

market behavior is further supported by the cireum-

stance that in this merger the parties are exchanging

equivalents, Du Pont is exchanging and receiving in

return shares of Du Pont common stock, The inherent

investment value of what is being surrendered is thus

the same as the value of what is being received, So long

as these values are in line the Commission was satisfied

that the merger would result in no detriment to Du

Pont or its stockholders, As the Commission concluded,

‘the simple, readily usable tool of net asset value does

the job much better than an aceurate gauge of market

impact (were there one) ecould,’’ (Pet, App, 82a),

ll, THE COURT OF APPEALS DID NOT ACCORD THE JUDG.

MENT OF THE COMMISSION THE DEFERENCE REQUIRED

BY THE INVESTMENT COMPANY ACT AND DECISIONS OF

THIS COURT.

As has been shown, the Court of Appeals accorded

no deference to the Commission's informed judgment

on fairness and investment values, In so acting it vio-

lated the basie principle of judicial review established

by decisions of this Court, particularly Securities and

Evchange Commission v, Chenery Corp, supra,

“The facts being undisputed, we are free to dis-

turb the Commission's conclusion only if it lacks

37

any rational and statutory foundation, In that con-

nection, the Commission has made a thorough ex-

amination of the problem, utilizing statutory

standards and its own accumulated experience with

reorganization matters, In essence, it has made...

an informed, expert judgment on the problem,

** * The ‘fair and equitable’ rule of § 11(e) and

the standard of what is ‘detrimental to the publie

interest or the interests of investors or consumers’

.» Were inserted by the framers of the Aet in

order that the Commission might have broad pow-

ers to protect the various interests at stake, The

application of those eriteria . . . necessarily re-

quires the use of informed diseretion by the Com-

mission, The very breadth of the statutory lan-

guage precludes a reversal of the Commission's

judgment save where it has plainly abused its dis-

cretion in these matters,’ 332 0, at 207-08 (cita-

tions omitted),

Tn addition, the procedure followed by the Court of

Appeals in reviewing the Commission’s order under-

scores the extent to which it went bevond proper ju-

dicial review in this matter, After receiving briefs

and hearing argument, the Court of Appeals, over

the objection of the Commission, Christiana and Du

Pont, emploved Professor Roger B, Upson, Associate

Dean of the University of Minnesota College of Busi-

ness Administration, ‘*to assist the Court in under-

standing the record in this ease and to prepare reports

and memoranda for this Court in connection with that

funetion,”? (Pet, App. 91a fn, 40; A, AD81-A982), The

report submitted by Professor Upson ineludes no-

merous data and observations that are not a matter of

record, are not a proper subject of judicial notice and

were, of course, at no time considered by the Commis-

sion which is charged by Congress with passing initial-

38

ly on all relevant evidence, For example, Professor

Upson gave the greatest prominence in his report to an

analysis performed by a Professor Halpern of some

seventy-seven industrial mergers oecurring in’ the

period 1950-1965 (A, 985). That analysis, which does

not deal with investment company mergers or recog-

nize the difference between such mergers and those of

industrial companies, drew the conelusion that any

post-merger aceretion in market value is divided, on

the average, evenly between the two merger parties,”

Applying this conelusion Professor Upson prepared

and presented to the Court merger terms, quite differ-

ent from those agreed to by the parties and approved

by the Commission, which would have resulted in an

approximately equal inerease in the aggregate market

value of Du Pont and Christiana (A, A985-A990), The

mere consideration, de novo, of merger terms based on

the Hlalpern study reflects the extent to which the

Court departed from the Chenery principle of judicial

review,

The Court of Appeals’ jurisdiction to review orders

of the Commission is specifically limited, The court

may only;

‘affirm, modify, or set aside such order, in whole

or in part... . The findings of the Commission

as to the facts, if supported by substantial evi-

denee, shall be conelusive.”’ 15 ULS.C, § 80ad4d2 (a),

"Tn their comment on the Upson report filed with the Court of

Appeals on December 22, 1975, Christiana and Du Pont ineluded

the data base for Professor Halpern's study, Analysis of this base

shows that the average derived by the Professor is purely arith.

metical and obseures such wide variations as to be useless as an

analytical tool,

39 |

If additional evidence is deemed necessary, the matter

must be remanded for additional proceedings by the

Commission,

** .. 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 reason-

able 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... 2”? 15 U.S.C, §80-42(0) Cemphasis

added),

Thus Professor Upson’s participation in the rev ow of

the Commission's decision was in conflict with the

explicit directions of Congress,

This Court has eautioned in other contexts that ‘the

focal point for judicial review should be the adminis-

trative record already in existence, not some new record

made initially in the reviewing court.”’ Camp vy, Pitts,

411 U.S, 138, 142 (1973), And only recently a Court

of Appeals has been criticized for going outside the

record in reviewing the action of an administrative

ageney, Federal Power Commission V, Transcontinental

Gas Pipe Line Corp, 428 U.S, 826 (1976), Seetion

43(n) provides for review of the Commission's deei-

sion and the evidence on which it is based, and not

review based on a record made in the reviewing court,

The procedure followed by the Court of Appeals

‘clearly runs the risk of ‘propel[ling] the court into

the domain which Congress has set aside exclusively

for the administrative agency.’ ’’ Federal Power Com-

40)

mission Vv. Transcontinental Gas Pipe Line Corp.

supra, 423 U.S, at 333, quoting from Securities and

Exchange Commission Vv, Chenery Corp,, supra, 332

U.S, at 196,

CONCLUSION

The decision of the Court of Appeals should be

reversed and the action of the Commission, whieh

constitutes a reasoned exercise of informed judgment

on a matter clearly within its administrative experi-

ence, affirmed.

Respectfully submitted,

Danie M, Gainnon

Of Counsel Cyn V. Sarria, Jr,

James M. Mellanry, Jr,

Covington & Burling

SAS Sixtoenth Street, NW,

Washington, D.C, 20006

Croartes 6. Ween

Roark W. Annineton

7038 Du Pont Building

Wilmington, Delaware 19898

Iftorneus for Petitioner

Ki 1. du Pont de Nemours

and Company

Marriew J, Broprerick

Riciarp 8, Serzer

Eowarn J, MeInryver

Dechert Price & Rhoads

3400 Centre Square West

Philadelphia, Pa, 19102

Attorneys for Petitioner

Christiana Securities Company

APPENDIX

A-1

APPENDIX A

Section 17 of the Investment Company Act, 15 U.S.C.

§ 80a-17, provides in pertinent part:

**$17(a) It shall be unlawful for any affiliated person

or promoter of or principal underwriter for a _ reg-

istered investment company (other than a company of

the character described in section 80a-12(d)(3)(A) and

(B) of this title), or any affiliated person of such a

person, promoter, or principal underwriter, acting as

principal—

(1) knowingly to sell any security or other prop-

erty to such registered company or to any com-

pany controlled by such registered company .. .

(2) knowingly to purchase from such registered

company, or from any company controlled by such

registered company, any security or other prop-

erty ...

(b) Notwithstanding subsection (a) of this section,

any person may file with the Commission an applica-

tion for an order exempting a proposed transaction of

the applicant from one or more provisions of said sub-

section. The Commission shall grant such application

and issue such order of exemption if evidence estab-

lishes that—

(1) the terms of the proposed transaction, in-

cluding the consideration to be paid or received,

are reasonable and fair and do not involve over-

reaching on the part of any person concerned;

(2) the proposed transaction is consistent with

the policy of each registered investment company

concerned, as recited in its registration statement

and reports filed under this subchapter; and

(3) the proposed transaction is consistent with

the general purposes of this subchapter.”’

A-2

Section 43 of the Investment Company Act, 15 U.S.C.

§ 80a-42, provides in pertinent part:

**<43(a) Any person or party aggrieved by an order

issued by the Commission under this subchapter may

obtain a review of such order in the United States

court of appeals within any cireuit 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 pray-

ing that the order of the Commission be modified or

set aside in whole or in part. * * * Upon the filing of

such petition such court shall have jurisdiction, which

upon the filing of the reeord shall be exclusive, 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 find-

ings of the Commission as to the facts, if supported

by substantial evidence, shall be conclusive. If appli-

eation is made to the court for leave to adduce addi-

tional 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 ad-

duce such evidence in the proceeding before the Com-

mission, 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

modifieation or setting aside of the original order.

*® 2 # 99

B-1

APPENDIX B

Computation of Adjusted Net Asset Value of Christiana for

Merger Purposes

The value of Christiana’s security holdings for pur-

poses of the merger was determined as set forth in the

following table:

Value

No of

Security Shares Per Share Total

Du Pont, Common Stock 13,417,120 $163.875 $2,198,730,540

Du Pont, $4.50 Preferred

Stock 16,256 69.15 1,124,102

The News-Journal Co.,

Common Stock 7,460 — 24,260,000

Wilmington Trust Co.,

Common Stock 69,216 39.00 2,699,424

$2,226,814,066

Values for Christiana’s holdings of Du Pont Common

Stock and Du Pont $4.50 Preferred Stock were computed

by multiplying the respective number of sha. s held by

Christiana by the respective average closing prices on the

New York Stock Exchange on July 10 through 14, 1972,

inclusive. Value for The News-Journal Co. Common Stock

is its estimated fair value based upon an appraisal by Vin-

cent J. Manno, an expert in the field. The valne per share

for Wilmington Trust Co. Common Stock is based on its

average closing bid price in the over-the-counter market

on July 10 through 14, 1972, inclusive.

Because Du Pont intends to hold the stock of Wilmington

Trust Co. and The News-Journal Co. for only the period

required for orderly disposition thereof, the net asset value

of Christiana was adjusted for expenses and anticipated

tax effect of the disposition of those securities. The ad-

justment for this purpose reflects the expense (estimated

at 3% of market value) to dispose of the Wilmington Trust

Co. stock, and federal income taxes at the rate of 30%

on the long term capital gains which would result from

sale of the two investments at the values thereof used for

purposes of the merger.

B-2

Christiana and Du Pont will incur certain expenses in

connection with the merger, estimated to total $1,500,000,

which are to be shared equally by Christiana and Du Pont.

Christiana’s net asset value was adjusted to reflect its por-

tion of the estimated merger expenses.

The assets of Christiana include a claim pending in the

United States District Court for the District of Delaware

for refund of federal income taxes and interest, carried on

Christiana’s books as of June 30, 1972 as a deferred charge

in the amount of $11,723,013. As Christiana and Du Pont

were unable to determine the fair value of the tax claim,

it was treated as having no value, subject to a contingent

distribution of Du Pont Common Stock upon settlement

of the claim, and #1,000,000 of Christiana’s cash was re-

served to cover the expense of litigating the claim.

The adjustments described above result in adjusted net

asset value as follows:

Security holdings of Christiana ........ $2,226,814,066

Other assets (at June 30, 1972):

Cash and cash equivalents, less current

ae, Weireae Semen nee = 5,981,367

Deferred charge—claim for tax refund = 11,723,013

Total net asset value of Christiana .... $2,244,518,446

Adjustments for purposes of the merger:

Less: deferred charge for the tax claim,

together with $1,000,000 for expenses

thereof (no present value for merger

NS nin késccsiaddnesdeeeekanae (12,723,013)

Less: estimated expenses and taxes

upon disposal of stock of Wilmington

Trust Co. and The News-Journal Co. (7,619,606)

Less: Christiana’s share of expenses

Oe I ons es ckonesescesseeisenes (750,000)

Adjusted net asset value of Christiana

for merger purposes ................ $2,223,425,827

A. AT14-A715, A720, A731-A726; A. AG66-A676