Opposition Brief — Public Service Commission v. Securities & Exchange Commission

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CITATIONS

Cases:

American Power & Light Company v. Securities and

Exchange Commission, 329 U. S. 90............... 13

Consolidated Rock Products Co. v. Du Bois, 312 U. 8. 510. 17

Eastern Minnesota Power Corporation and Wisconsin

Hydro-Electric Company, D. Minn., Fifth Div. No.

SE SN, 6c akc Wash s Ponce Sv keen tesa aelnetees 10

Ecker v. Western Pacific R. Co., 318 U. S. 448.......... 17

First Iowa Hydro-Electric Cooperative v. Federal Power

Comeanicston, S38 U. GB. UGB... . 2... cee ncncess 12

Georgia Power ¢ Light Company, M.D. Ga. No. 133

rrr rrrrr Teter rrre rte yet vet cy 10

Group of Institutional Investors v. Ch., M., St. P. & P.

— ee GR re er er a 17

Hopkins Federal Savings Association v. Cleary, 296

DG. Jcatidis hase wana iaenéme ea eek hie Ais 18

Indiana Service Corporation, N.D. Ind. No. 313 (1947) 10

Jacksonville Gas Company, In re, 46 F. Supp. 852... ... 16

Laclede Gas Light Company, In re, 57 F. Supp. 997, af-

firmed sub nom. Massachusetts Mutual Life Ins. Co. v.

Securities and Exchange Commission, 151 F. 2d 424,

certiorari denied, 327 U. S. 795... ..... 2... 6... eee 10, 15

Minnesota Power & Light Company, D. Minn. No. 817

rE rey ere ery Serer: ee 10

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

ge Oy ee erry eee io ee ee 9,17, 18

People v. New York C. R. Co., 233 N. Y. 679, 135 N.E.

967, affirming, 199 App. Div. 949, 191 N. Y. Supp. 944. 19

Puget Sound Power and Light Co., Holding Company Act

Release No. 4255, plan enforced without opinion, D.

Mass. No. 2308 (1943)... PO 10, 16

Reconstruction Finance Corporation v. Denver & R. G.

YS Fe rrr eee 17

Schwabacher v. United States, No. 258, October Term,

BE 8 Weh Kele AWA WWE ee ae ee RAEN OR hie TEC 16, 17

Southern Colorado Power Co., Holding Company Act

Release No. 4501, plan enforced without opinion, D.C.

Colo. No. 670, affirmed sub nom. Disman v. Securities

and Exchange Commission, 147 F. 2d 679, certiorari

EE Hi I ks x 98 4 ake wh A vaaen Keka cx ka 10, 16

Spokane Gas ¢& Fuel Company, E.D. Wash., No. 494

SE ic wat wa haa sin < tetany A ekeeees nae Ceh 10

United Gas Corp., In re, 58 F. Supp. 501, affirmed, 162

RED au ol sau bb dana Camda ee owen Oka SA 15

Utah Power ¢ Light Company, D. Utah (1946)........ 10

Western Union Telegraph Co., In re, 51 P.U.R. (N.S.

CORE Wha adh ooo conn aehSACANERNE aaa RG: 19

York County Gas Company, M.D. Pa. No. 1652 (1945) .. 10

Statutes:

Public Utility Holding Company Act of 1935, 49 Stat.

803, 15 U.S.C. 79a, et seq.:

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ES con inden ik ate SURARS SAG NAS RNAS 13

EE .covvirenknhorahinhah sats dsateepoal 13

EE oa Obt wide pukd cance inact 13, 14, 20

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EE. Aka ce ukcahee Rau hhea snes 6, 13, 15, 20

EE, Sac Cin sda ee tha Neen’ DEEN ates 21

ER oN Ral SSN RRA ORE RICA 3, 8, 16, 17, 22

a CNSR le eral ARG CA aes Cg ps Pele 11

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RG ahr e is sia a cca RGARS ees Ae 7

ES ow Ca cat k's cuss huh ah RAS ORR A RRA ea 11,19

TEE S95 aR ACRE SEES SP erasers Coen war net 12

New York Public Service Law, Section 69............. 5

New York Stock Corporation Law:

ER ie ot eb S i wk EAN RAW CO 5

I I, CNS Or ae oy WRK AE As eaten 5,19

Miscellaneous :

H. Rep. No. 1318, 74th Cong., Ist Sess., p.7............ 13

Record of the proceedings of the National Association of

Railroad and Utilities Commissioners for 1945, p. 74. . 14

Se eer 12

—

Guthe Supreme Court of the Wnited States

OcroBER TERM, 1947

No. 769

Puswic SERVICE COMMISSION OF THE STATE OF NEW

YORK, PETITIONER

v.

SECURITIES AND EXCHANGE COMMISSION

ON PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES CIRCUIT COURT OF APPEALS FOR

THE SECOND CIRCUIT

BRIEF FOR THE SECURITIES AND EXCHANGE

COMMISSION IN OPPOSITION

OPINIONS BELOW

The opinion of the Circuit Court of Appeals for

the Second Circuit (R. 393-399) is reported at

166 F. 2d 784. The opinion of the District Court

(R. 288-318) is reported at 72 F. Supp. 767. The

findings and opinion of the Securities and Ex-

change Commission (R. 60-98) have not yet been

officially reported but are set forth in the Com-

mission’s Holding Company Act Release No. 7060.

(1)

2

JURISDICTION

The judgment of the Circuit Court of Appeals

for the Second Circuit was entered on March 5,

1948 (R.399). The petition for a writ of certi-

orari was filed on April 28, 1948. The jurisdiction

of this Court is invoked under Section 240 of the

Judicial Code, as amended by the Act of February

13, 1925 (28 U. S. C. 347), made applicable by Sec-

tion 25 of the Public Utility Holding Company Act

of 1935 (15 U.S. C. 79 y).

QUESTIONS PRESENTED

1. Whether, in the case of a plan under Section

11(e) of the Public Utility Holding Company Act

of 1935, found necessary to correct inequitable dis-

tribution of voting power among security holders

of an operating subsidiary of a registered holding

company, the Act vests in the Securities and. Ex-

change Commission and the Federal courts exclu-

sive power to determine whether the allocation of

new securities is ‘‘fair and equitable’’, or empowers

a State commission having regulatory jurisdiction

over the operating company to veto the plan be-

cause of disagreement as to that issue.

2. Whether the Holding Company Act is uncon-

stitutional if construed as not conferring such a

veto power upon State commissions.

3. Whether the Court below erred in upholding

the conclusions of the Securities and Exchange

Ww

A AO COE TE

3

Commission and the District Court that the instant

plan is ‘‘fair and equitable.”

STATUTES INVOLVED

The pertinent provisions of the Public Utility

Holding Company Act of 1935, 49 Stat. 803, 15

U. S. C. 79a, et seq. (hereinafter referred to as the

Act) are set out in the Appendix, infra, pp. 20-23.

The New York statutes upon which petitioner relies

are described in note 5, infra, pp. 5-6.

STATEMENT

Petitioner seeks review by this Court of a judg-

ment of the Circuit Court of Appeals for the Second

Circuit which affirmed an order of the United

States District Court for the Eastern District of

New York approving a plan of reorganization

previously approved by the SEC under Section

11(e) of the Act. The sole objectors to the Plan

in the courts below were the Public Service Com-

mission of the State of New York (hereinafter

referred to as ‘‘the PSC’’) and the Secretary of

State of the State of New York.’

The Plan was filed with the SEC by Kings

County Lighting Company (hereinafter referred

to as ‘‘Kings’’), an operating subsidiary of Long

Island Lighting Company, which in turn is a regis-

1 Representatives of the several classes of stockholders, including

representatives of a substantial group of the preferred stockholders

(R. 161) in whose interest the PSC seeks a larger participation,

recommended approval of the Plan in the District Court (R. 183).

The Secretary of State simply endorsed the position taken by the

PSC.

a

tered public utility holding company.’ Kings is a

corporation organized under the laws of New York

and is engaged in the manufacture, distribution and

sale of gas in Kings County in the State of New

York (R. 63). Its securities are held by persons

residing in twenty-eight States and three foreign

countries (R. 373-74) and are traded through the

channels of interstate commerce (R. 193).

Kings has outstanding 44,000 shares of $100 par

value cumulative preferred stock, and 50,000 shares

of no par value common stock with a stated value

of $40 per share (R. 66). As of April 30, 1946,

dividend arrearages on the preferred stock of

Kings represented an accumulation of almost three

4

2In 1936, the SEC accorded the Long Island Lighting Company

system an administrative exemption from the Holding Company

Act because of its predominantly intrastate character. In 1944, the

PSC condemned a management-proposed recapitalization plan of

the Long Island Lighting Company and noted that, unlike the SEC,

it could not compel appropriate reorganizations but could only ap-

prove or disapprove plans submitted to it by the management. There

ensued litigation by which the SEC attempted to stay consummation

of the recapitalization pending a determination, after hearing,

whether the 1936 exemption should be revoked. The litigation

reached this Court with the granting of the SEC’s petition for

a writ of certiorari, 324 U. S. 837, but the cause was later dismissed

as moot, 325 U. S. 833, the SEC having revoked the 1936 exeniption

because of changed conditions which established a basis for Federal

intervention to protect the interests of the Long Island system’s

scattered security holders. The exemption was revoked only to

the extent necessary to bring the registration and reorganization

provisions of the Act into play. These proceedings are discussed

in the opinion of the District Judge (R. 291-293), and in greater

detail at R. 184-221, 376-383.

It is not disputed that the SEC has jurisdiction to consider a plan

of reorganization of Kings under Section 11(e).

3 The financial statements considered by the SEC in its adminis-

trative proceeding, and in turn by the District Court, are carried

to April 30, 1946.

——

5

years of full dividends. No dividends have been

declared on the common stock since 1936 (R. 64-66).

On the basis of book value or liquidating value,

after giving effect to concededly necessary account-

ing adjustments, the common stock is without any

equity in the enterprise, being, in fact, ‘‘under

water’’ to the extent of at least 2.1% of the adjusted

capitalization and surplus (R. 66).* Nevertheless,

the common stock, some 98% of which is owned by

Long Island Lighting Company, has the exclusive

voting power for the election of directors (R.

66-67).

On or about August 20, 1945, Kings filed a re-

organization Plan with both the SEC and PSC, its

submission to the latter Commission being for ap-

proval ‘‘to the extent required by the laws of the

State of New York for the changes and issuance

of stock necessary to effectuate and carry out said

Plan’ (R. 25).° The Plan was designed to effectu-

4On the basis of somewhat different computations, the PSC

found the common stock to be “under water” to a larger extent (R.

243).

5 Section 38(1) of the New York Stock Corporation Law pro-

vides that a corporation shall not file an amended certificate of

incorporation with the Secretary of State, and the Secretary of

State shall not accept or file such a certificate, “unless it shall have

endorsed thereon the consent and approval of the commission hav-

ing jurisdiction of such corporation.” Section 69 of the New York

Publie Service Law provides, in general, that a public utility company

organized under the laws of New York may not issue securities with-

out first securing from the Public Service Commission an order author-

izing such issue. Section 26-a of the New York Corporation Law

provides that a New York corporation which is the subject of a court-

approved reorganization plan under the Holding Company Act may

0 ORAERRERCRneRT NEE eee RE IY NRT

a,

6

ate an equitable distribution of voting power among

the security holders of Kings in conformity with the

requirements of Section 11(b) (2) of the Holding

Company Act.

After hearings, and on February 5, 1946, the

PSC issued a memorandum in which it criticized

the Plan and concluded, among other things, (1)

that certain accounting adjustments should be car-

ried out in accordance with previous suggestions

of the PSC; (2) that certain changes should be

made in the proposed new capital structure; and

(3) that the allocation of new securities to the old

common stockholders should be limited to a ‘‘nom-

inal amount”’ at most (R. 223-224).

On or about April 16, 1946, Kings amended its

application before the PSC and its Plan before the

SEC so as to incorporate therein the suggestions of

the PSC with respect to capital structure and re-

lated accounting adjustments. The Amended Plan

provided for a new capital structure consisting of

$2,200,000 of preferred stock and $2,200,000 of

common stock. Ten percent of the new common

stock was to go to the existing common stock-

do any of the things required by the court order or contemplated by

the plan, but that

any such plan, decrees or orders, relating to or affecting any

corporation subject to the jurisdiction of the public service

commission of the state of New York, shall neither be carried

out nor given any effect unless and until said public service com-

mission (i) shall have found such plan to be in the public

interest and (ii) shall have approved by written order any

changes in the capital structure, transfer of assets, or issuance

of securities for which provision is made in such plan, decrees

or order.

_

7

holders. The rest of the common stock, all of the

preferred stock, and $191,484 in cash were to go to

the existing preferred stockholders (R. 25-51).

Hearings upon the Amended Plan were held

before the SEC, and various groups of interested

security holders participated (R. 61). The PSC

was given notice of the proceedings (R. 373), but

did not avail itself of its right to become a party

under Section 19 of the Act. On December 13,

1946, the SEC issued its findings and opinion (R.

60-98). It interposed no objections to the proposed

new capitalization and accounting adjustments.

With respect to the allocation provisions of the

Amended Plan, it found that the common stock-

holders were entitled to some participation reflect-

ing their interest in prospective earnings under the

existing capital structure, but that it could not find

the plan ‘‘fair and equitable’’ unless the allocation

of new common stock to the existing common stock-

holders were reduced from 10% to 744% (R. 72-

87)." On January 8, 1947, Kings filed with the

SEC an amendment conforming to these sugges-

tions (R. 99-117), and on January 9, 1947, the SEC

6 Section 19 provides in part:

* ©* * In any proceeding before the Commission, the Com-

mission * * * shall admit as a party any interested State,

State commission, State securities commission. * * *

TThe allocation of 744% of the new common stock to the exist-

ing common stockholders represents a participation of 3.77% in

the consolidated net assets of the company. This interest is also,

of course, in a junior position as to earnings and distribution in

event of liquidation. :

8

entered its order approving the Amended Plan as

thus further amended (R. 118-123).

At the request of the company, and pursuant to

the provisions of Section 11(e), the SEC, on the

same day, filed an application with the United

States District Court for the Eastern District of

New York for an order approving and enforcing

the Plan (R. 4).

During the pendency of the District Court pro-

ceedings, the PSC rendered an opinion disapprov-

ing the Amended Plan; as is expressly stated in the

present petition (Pet. 6, 23), the sole point of dif-

ference between the two agencies is over the ques-

tion of the participation of the existing common

stockholders, the PSC contending that they should

receive no recognition at all in the reorganization.

Subsequently, counsel for the PSC urged the

District Court to remand the Plan to the SEC upon

various grounds, of which the following have not

been abandoned in the present petition: (1) The

Holding Company Act requires that approval of

the local regulatory commission be obtained with

respect to a Section 11(e) reorganization affecting

an intrastate operating company; (2) the Holding

Company Act is unconstitutional if construed as

permitting the consummation of reorganization

plans affecting intrastate operating companies

without the approval of local regulatory commis-

sions; and (3) the Plan is neither fair and equita-

ble, nor feasible.

9

The Secretary of State of the State of New York

endorsed the position of the PSC. All other par-

ties, including representatives of the preferred

stockholders (R. 183), recommended approval of

the Plan. The District Court overruled the objec-

tions of the PSC i-: a carefully considered opinion

(R. 288-318), and entered an order approving and

enforcing the Plan (R. 319-322). The order of

the Cireuit Court of Appeals affirmed in all re-

spects the order of the District Court (R. 399).

Consummation of the Plan has been held in abey-

ance during the pendency of appellate proceedings

(R. 367-368).

ARGUMENT

Insofar as the petitioner merely challenges the

application by the Commission and both courts

below of the ‘‘fair and equitable’’ standard to the

instant plan, its contentions are either limited in

their application to the facts of the present case or,

as more fulky revealed in the record, are in direct

conflict with the uniform course of decisions by the

SEC and the courts, including this Court’s decision

in Otis & Co. v. Securities and Exchange Commis-

sion, 323 U. 8. 624. Indeed, petitioner concedes

that this question ‘‘standing alone, is not of control-

ling importance. . . .’’ (Pet. 8).

Insofar as the petition assumes that the SEC

and the courts below properly interpreted and ap-

plied the fair and equitable standard of Section

11(e), but nevertheless contends that the Federal

site RER ROMER PNERN yasorn

—

10

standard of what is fair and equitable treatment

of the security holders may be overridden by a State

authority, the issue raised is concededly of impor-

tance but is adequately dealt with by the court

below, and does not require further review by this

Court. There is no claim of conflict among the cir-

cuits, and indeed this is the first instance in more

than ten years of administration of the Holding

Company Act where there has been presented at

even the administrative level the assertion by a

State commission of power to veto a Section 11(e)

plan.* It should be noted that even in this case the

8 Numerous section 11(e) plans, many of which have involved re-

organizations of public utility operating companies, have been en-

forced in Federal district courts in some ten different States. Some

of such proceedings are: Puget Sound Power & Light Company, et

al., D. Mass. No. 2308 (1943) (an operating company incorporated

in Massachusetts and doing business in Washington); Southern

Colorado Power Company, D. Colo. No. 670 (1944), affirmed sub

nom. Disman v. Securities and Exchange Commission, 147 F. 2d

679 (C.C.A. 10), certiorari denied, 325 U. S. 863; In re Laclede

Gas Light Company, 57 F. Supp. 997 (E. D. Mo.), affirmed sub

nom. Massachusetts Mutual Life Ins. Co. v. Securities and Exchange

Commission, 151 F. 2d 424 (C.C.A. 8), certiorari denied, 327 U. S.

795; York County Gas Company, M. D. Pa. No. 1652 (1945);

Georgia Power & Light Company, M. D. Ga. No. 133 (1945);

Minnesota Power & Light Company, D. Minn. No. 817 (1945);

Spokane Gas ¢ Fuel Company, E. D. Wash. No. 494 (1945); Utah

Power &¢ Light Company, D. Utah (1946); Indiana Service Cor-

poration, N. D. Ind. No. 313 (1947); Eastern Minnesota Power

Corporation and Wisconsin Hydro-Electric Company, D. Minn.,

Fifth Div., No. 844 (1947) (plan for reorganization of Wisconsin

Hydro-Electric Company, incorporated and operating in Wiscon-

sin).

11

SEC was able to approve a plan in which the capital

structure for the new company fully conformed to

the views of the PSC.

1. Petitioner’s principal reliance is upon the

Holding Company Act itself, which, as the SEC

has always recognized, was intended to strengthen

State regulation of operating companies and, ac-

cordingly, contemplates the exercise of concurrent

jurisdiction by State regulatory authorities over

various transactions which the Act subjects to the

scrutiny of the SEC. Examples of the provisions

of the Act which contemplate such concurrent

jurisdiction are those concerning new securities

issues (Sec. 6,7), acquisitions of securities or other

assets (Sec. 9, 10), regulation of service company

relationships (Sec. 13), and regulation of account-

ing practices (Sec. 15, 20). In these sections, gen-

erally, the Holding Company Act imposes re-

straints upon the holding company managements

to prevent the recurrence of the financial mal-

practices which had been revealed in the investi-

gations antedating the Act and which are referred

to in Section 1. The Congress, in imposing these

purely negative restraints, has made it clear that it

was generally consistent with this objective to per-

mit in addition such restraints as might be imposed

in furtherance of State policies. As the court

below noted with reference to Section 7, ‘‘no pur-

pose of the Act will be thwarted, if a ‘declaration’

fails’’ (R. 397).

12

Section 11, in contrast to the foregoing sections

of the Act, evidences an affirmative Federal policy,

stated in subsection (b), that it ‘‘shall be the duty

of the Commission, as soon as practicable . . . to

require by order . . .’’ action on the part of

registered holding companies and their subsidiaries

to conform to standards for the simplification of

their properties and structures and to bring about

a fair and equitable distribution of voting power

among their security holders. Appendix, infra,

pp. 20-21. This affirmative mandate is subject to no

qualification as to conformity to State law. As

the court below noted, ‘‘it becomes to the highest

degree unlikely that Congress should have set up a

system of dual control over the fulfillment of this

purpose’”’ (R. 396). Cf. First Iowa Hydro-Electric

Cooperative v. Federal Power Commission, 328

U.S. 152. The intention of Congress in this respect

need not be left to inference, since Section 21 ex-

pressly provides for saving the existing jurisdic-

tion of State regulatory authorities only ‘‘insofar

as such jurisdiction does not conflict with any pro-

vision of this title or any rule, regulation, or order

thereunder,’’ and the legislative history shows that

this qualification was adopted with specific refer-

ence to Section 11.°

®In the bill adopted initially by the Senate (S. 2796, 74th Cong.,

1st Sess.), Section 21, in addition to its present language, had ap-

pended to it the following additional sentence: “Nothing in this

title shall exempt any public-utility company from obedience to the

law of any State in which it operates.” This sentence was omitted

from the draft of the bill reported to the House of Representatives

13

2. Petitioner relies largely upon prior SEC de-

cisions to support its argument that plans of reor-

ganization to effectuate compliance with Section

11 are subject to the limitation contained in Section

7(g) (Appendix, infra, p. 20) insofar as new

securities are to be issued under a plan (Pet. 20).

The precedents relied on contain no suggestion,

however, that the SEC considers its duty to bring

about compliance with Section 11 to be subject to

the veto power of State authorities. The precedents

do show that the SEC has considered, in the light

of the standards for financial soundness prescribed

in subsections (c), (d) and (e) of Section 7, the

appropriateness of the financial structure to

emerge from a reorganization. Cf. American

Power & Light Company v. Securities and Ex-

change Commission, 329 U.S. 90, 104-05, indicating

that the standards of Section 11(b)(2) derive

‘‘meaningful content,’’ inter alia, from ‘‘the stand-

ards for new security issues set forth in §7.’’ In

the case of operating companies, it has also been the

practice of the SEC, as was done in this case, to

insist that the accounts and financial structure of

on June 24, 1935. The report of the House Committee on Inter-

state and Foreign Commerce explained the omission as follows

(H. Rep. No. 1318, 74th Cong., 1st Sess., p. 7) :

Section 21 is changed by omitting the sentence providing

that “Nothing in this title shall exempt any public-utility com-

pany from obedience to the law of any State in which it op-

erates,” on the theory that it imposed a limitation which might

interfere with the carrying out of the provisions of section 11

or other sections, under which it might be necessary to do

things not permitted under State law.

——

14

the reorganized company conform to any ascertain-

able views of State regulatory authorities, no situa-

tion having arisen where such conformity appeared

to conflict with carrying out the objectives of the

Federal statute.”

Reconciling these precedents with the decision

below involves holding, as the court below did,

merely that the standards of Section 7 are not

‘‘absolute limitations upon the powers of the Com-

mission, when dealing with a plan submitted under

Section 11(e)’’, but are merely ‘‘admonitory”’ (R.

398). If, however, Section 7 be deemed fully ap-

plicable to the securities issued under the Plan, we

believe the mandate of Section 7(g) for compliance

with ‘‘State laws applicable to the act in question”’

has reference only to valid requirements under

State law concerning matters as to which the Hold-

ing Company Act has not prescribed a Federal

standard which by its nature completely occupies

the field. As we note in the next section, the present

case presents an irreconcilable conflict between the

views of the PSC and the Federal standard of what

is ‘‘fair and equitable.”’

10 See the published record of the proceedings of the National

Association of Railroad and Utilities Commissioners for 1945, at

p. 74 et seq. stating, among other things:

It is the established policy of the Securities and Exchange Com-

mission to foster effective cooperation with the state commis-

sions in all matters where their respective jurisdictions comple-

ment each other, and in all additional matters where such coop-

eration is desirable and appropriate in the case under considera-

tion.

—

_

15

3. Petitioner urges that ‘‘there is no irreconcil-

able conflict between the Federal and State statu-

tory schemes which would warrant the conclusion

that the State requirements had been superseded

by paramount Federal law” (Pet. 22). In making

this argument, petitioner points to the fact that

there has been agreement between the SEC and

PSC as to the new capitalization and agreement

also that the present distribution of voting power

is not fair and equitable. It notes that the sole dif-

ference between the two commissions is whether

existing common stockholders are to receive 714%

of the new common stock or none at all. It is then

suggested that the objective of Section 11(b) (2),

the correction of inequitable distribution of voting

power, could be achieved by letting the PSC have

the ‘‘final say’’ concerning the allocation of new

common stock (Pet. 23). But the petitioner does not

deny that the present reorganization is ‘‘for the

purpose of fairly and equitably distributing voting

power among the security holders’’, nor has it chal-

lenged the unbroken line of authorities holding

that the appropriate approach to such a problem

is not a mere paper reshuffling of voting rights

under the existing structure, but the bringing about

of a sound recapitalization vesting voting control

in securities which will represent a real equity in a

properly balanced capital structure.” Once it is

11 In re Laclede Gas Light Company, 57 F. Supp. 997 (E.D. Mo.)

affirmed sub nom. Massachusetts Mutual Life Ins. Co. v. SEC, 151

F. 2d 424 (C.C.A. 8), certiorari denied, 327 U. S. 795; In re

4

Ao ONL AO OL Pe Bn SB: ne

16

recognized that the plan falls within the scope of

Section 11 (e), there is no room for doubt that the

Holding Company Act requires a federal deter-

mination, by the SEC and the enforcement court,

of whether the proposed allocation is ‘‘fair and

equitable.’’ This Court has recently found that

Federal control over the terms of a railroad merger

leaves no room—even where the Interstate Com-

merce Commission finds no conflict with basic Fed-

eral policy—for the resolution, by reference to State

law, of issues relating to the rights of security hold-

ers. See Schwabacher v. United States, No. 258,

October Term, 1947.

4. In urging that the plan is ‘“‘neither fair and

equitable, nor feasible’ (Pet. 25) the petition

scarcely goes beyond mere assertion. As to feasi-

bility, there appears to be merely a reassertion of

the alleged veto power of the PSC.” If we look to

United Gas Corp., 58 F. Supp. 501, 509 (D. Del.), affirmed, 162

F. 2d 409 (C.C.A. 3); In re Jacksonville Gas Company, 46 F.

Supp. 852 (S. D. Fla.); Southern Colorado Power Co., Holding

Company Act Release No. 4501 (1944), plan enforced without opin-

ion, D. C. Colo., affirmed sub. nom. Disman v. SEC, 147 F. 2d 679

(C.C.A. 10), certiorari denied, 325 U. S. 863; Puget Sound Power

and Light Co., Holding Company Act Release No. 4255 (1943),

plan enforced without opinion (D. Mass.).

12Tn answer to the petitioner’s contention that the district court

did not have the power to disregard the “condition” that the plan

should be submitted to the PSC for its approval, the court below

said that “a submission to that commission was not part of the

plan at all; but, as it [the plan] itself declared, only one of the

‘steps to be taken to make the amended plan effective’” (R. 396).

Since, as the court below held, and as we have shown, the consent

of the PSC is not essential to the effectiveness of the plan, the plan

could be approved without submission to that body.

_

17

the opinion of the PSC for elaboration of the argu-

ment concerning what is ‘‘fair and equitable’’, it

appears that apart from disagreement with the

SEC’s forecast of future earnings, the views of

the PSC rest upon a rejection of reorganization

criteria which have been definitely settled by this

Court. Thus the PSC has attributed primary

significance to adjusted book values rather than

earning power, and has measured the claims of the

preferred stockholders by reference to their liqui-

dation preference (R. 279-280). By contrast, the

decisions of this Court emphasize the primary im-

portance of prospective earnings, rather than book

assets, in determining whether treatment accorded

in a plan is the equitable equivalent of the rights

surrendered.** This Court has further held that

a Section 11(e) reorganization of a solvent com-

pany does not mature liquidation rights of pre-

ferred stockholders.* The SEC did not oppose the

petition for a writ of certiorari in the Otis case be-

cause of the then novelty of the issue. But it sees no

need for now reexamining the merits of that deci-

sion, especially in the present context of a mere

recapitalization in which there is not even in form

a liquidation of the corporation. Thus there is not

13 Group of Institutional Investors v. Ch., M., St. P. & P. RR.

Co., 318 U. S. 523, 539-541; Consolidated Rock Products Co. v.

DuBois, 312 U. S. 510, 525-526; Ecker v. Western Pacific R. Corp.,

318 U. S. 448; Reconstruction Finance Corporation v. Denver &

R. G. W. R. Co., 328 U. S. 495.

14 Otis & Co. v. Securities and Exchange Commission, 323 U. S.

624; ef. Schwabacher v. United States, No. 258, October Term,

1947,

LRA IE LIE TEN RD:

ee

18

here present what appears to have been the most

troublesome question presented in the Otis case:

whether the charter liquidation preference should

be deemed the sole measure of the rights surren-

dered in a reorganization which takes the form of

a liquidation.

5. Petitioner’s constitutional point is a chal-

lenge, albeit not a vigorous one (Pet. 24), to the

Federal power to impose uniform standards of

fairness with respect to the impact of what is

done in furtherance of the commerce power to

security holders residing in twenty-eight States

and three foreign countries (R. 374). Judge

Learned Hand, writing for the Circuit Court of

Appeals, found this issue ‘‘too trivial to justify

discussion’’ (R. 399).

It is said that the Federal Government cannot,

through enforced recapitalizations, require ‘‘fun-

damental changes in the corporate charters granted

by the State’’ (Pet. 24) ; the only case cited to this

effect ** contained an express statement that

nothing was being decided therein respecting the

powers of Congress to regulate interstate com-

merce.”® It may be noted that the Court of Ap-

peals of the State of New York and the petitioner

in a prior case have taken the opposite view.”

15 Hopkins Federal Savings & Loan Association v. Cleary, 296

U. S. 315.

16 296 U. S. at 343.

17 The New York Court of Appeals has squarely held that, when

the issuance of securities by a New York corporation has been ap-

———

19

CONCLUSION

For the reasons stated, the petition for a writ of

certiorari should be denied.

Respectfully submitted,

Pup B. PERLMAN,

v Solicitor General.

Y Roar 8. Foster,

Solicitor.

J Swwyey H. Wier,

Associate Solicitor.

Harry SLATER,

Chief Counsel, Division

of Public Utilities.

¥ Soromon FREEDMAN,

ALFRED HILL,

Attorneys

Securities and Exchange Commission.

May, 1948.

proved by the Interstate Commerce Commission under Section 20a

of the Interstate Commerce Act, the approval of the PSC as re-

quired by the New York statute is to be dispensed with. People v.

New York C. R. Co., 233 N. Y. 679, 135 N. E. 967, affirming, 199

App. Div. 949, 191 N. Y. Supp. 944. The holding of the New

York Court of Appeals in the above-cited case was followed by

the PSC in 1943 when it stated that it had no alternative but to

indorse its approval on the certificate of incorporation purswant to

Section 38 of the New York Stock Corporation Law in connection

with the merger of Postal Telegraph, Inc., and Western Union Tele-

graph Company, where the issuance of securities involved in the

merger had already been approved by the Federal Communications

Commission. In re Western Union Telegraph Co., 51 P. U. R.

(N. S. 1944) 404, 410-412.

20

APPENDIX

The pertinent provisions of the Public Utility

Holding Company Act of 1935, 49 Stat. 803, 15

U.S.C. 79a, et seq. are as follows:

See. 7(g). If a State commission or State

securities commission, having jurisdiction

over any of the acts enumerated in sub-

section (a) of section 6, shall inform the

Commission, upon request by the Commis-

sion for an opinion or otherwise, that State

laws applicable to the act in question have not

been complied with, the Commission shall not

permit a declaration regarding the act in ques-

tion to become effective until and unless the

Commission is satisfied that such compliance

has been effected.

See. 11(b). It shall be the duty of the Com-

mission, as soon as practicable after January

1, 1938:

* * *

(2) To require by order, after notice and

opportunity for hearing, that each registered

holding company, and each subsidiary com-

pany thereof, shall take such steps as the Com-

mission shall find necessary to ensure that the

corporate structure or continued existence of

any company in the holding-company system

does not unduly or unnecessarily complicate

the structure, or unfairly or inequitably dis-

tribute voting power among security holders,

of such holding-company system. In carrying

out the provisions of this paragraph the Com-

a

21

mission shall require each registered holding

company (and any company in the same hold-

ing-company system with such holding com-

pany) 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. Except for the purpose

of fairly and equitably distributing voting

power among the security holders of such

company, nothing in this paragraph shall

authorize the Commission to require any

change in the corporate structure or existence

of any company which is not a holding com-

pany, or of any company whose principal busi-

ness is that of a public-utility company.

The Commission may by order revoke or

modify any order previously made under this

subsection, if, after notice and opportunity for

hearing, it finds that the conditions upon which

the order was predicated do not exist. Any

order made under this subsection shall be sub-

ject to judicial review as provided in section

24.

Sec. 11(d) The Commission may apply to

a court, in accordance with the provisions of

subsection (f) of section 18, to enforce com-

pliance with any order issued under subsection

(b). In any such proceeding, the court as a

court of equity may, to such extent as it deems

necessary for purposes of enforcement of such

order, take exclusive jurisdiction and posses-

sion of the company or companies and the as-

22

sets thereof, wherever located; and the court

shall have jurisdiction, in any such proceeding,

to appoint a trustee, and the court may con-

stitute and appoint the Commission as sole

trustee, to hold or administer under the direc-

tion of the court the assets so possessed. In

any proceeding for the enforcement of an or-

der of the Commission issued under subsection

(b), the trustee with the approval of the court

shall have power to dispose of any or all of

such assets and, subject to such terms and con-

ditions as the court may prescribe, may make

such disposition in accordance with a fair and

equitable reorganization plan which shall have

been approved by the Commission after op-

portunity for hearing. Such reorganization

plan may be proposed in the first instance by

the Commission, or, subject to such rules and

regulations as the Commission may deem neces-

sary or appropriate in the public interest or for

the protection of investors, by any person

having a bona fide interest (as defined by the

rules and regulations of the Commission) in

the reorganization.

See. 11(e) In accordance with such rules

and regulations or order as the Commission

may deem necessary or appropriate in the

public interest or for the protection of inves-

tors or consumers, any registered holding

company or any subsidiary company of a

registered holding company may, at any time

after January 1, 1936, submit a plan to the

Commission for the divestment of control,

securities, or other assets, or for other action

ie —

al

23

by such company or any subsidiary company

thereof for the purpose of enabling such com-

pany or any subsidiary company thereof to

comply with the provision of subsection (b).

If, after notice and opportunity for hearing,

the Commission shall find such plan, as sub-

mitted or as modified, necessary to effectuate

the provisions of subsection (b) and fair and

equitable to the persons affected by such plan,

the Commission shall make an order approving

such plan; and the Commission, at the request

of the company, may apply to a court, in ac-

cordance with the provisions of subsection

(f) of section 18, to enforce and carry out

the terms and provisions of such plan. If,

upon any such application, the court, after

notice and opportunity for hearing, shall ap-

prove such plan as fair and equitable and as

appropriate to effectuate the provisions of sec-

tion 11, the court as a court of equity may, to

such extent as it deems necessary for the pur-

pose of carrying out the terms and provisions

of such plan, take exclusive jurisdiction and

possession of the company or companies and

the assets thereof, wherever located; and the

court shall have jurisdiction to appoint a

trustee, and the court may constitute and ap-

point the Commission as sole trustee, to hold

or administer, under the direction of the court

and in accordance with the plan theretofore

approved by the court and the Commission,

the assets so possessed.

U. S. GOVERNMENT PRINTING OFFICE: 1948