# Opposition Brief — Public Service Commission v. Securities & Exchange Commission > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386416_1665%3A2 ## Record - **Collection:** Supreme Court brief - **Document type:** Opposition Brief - **Published:** January 1, 1948 - **Citation:** 334 U.S. 838 ## Text i Beer erat errrert Teeter teeters oe teas ton kk arash seine teense Ses ewes ase eee ree EE Sgn kup Bin bse A 4 ae 3 h04 45 aa dheenaboks anes ae ag REE ia a oe ee ere ee Sowwnmnmnme 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.: SL Ladin s kWaigh aa kK GMa AS ANNO NN ll ME See aN ek CAA crak REAR AW CORR NICKS ll a Like can ak nck Sues OAAw en chuh ene es eke 11,14 ERE ERES ARERR Rae ere weet 13 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 SS Wiad D8 ud nha Gal Cx wana Glow bene SMR SCA hie Nees NCA SAA AN Kutt KONRA SHC BHC ll I a is's Kiana gn as hee bak ah Ghee sa 4 eae 12, 20 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 ee OCG CLICK sich Gn be a CRM CAST 1l 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 --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386416_1665%3A2. Public record. Not legal advice.