# Petition for Writ of Certiorari — Electric Bond & Share Co. v. Securities & Exchange Commission

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Petition for Writ of Certiorari
- **Published:** January 1, 1951
- **Citation:** 341 U.S. 950

## Text

Cifice -Suprem

4 » We

IN THE

Supreme Court of the nite states —_
Octoser Term 1950. ——_ Z. oe

No. 7 () C

ELECTRIC BOND AND SHARE COMPANY,
Petitioner,
v.

SECURITIES AND EXCHANGE COMMISSION, WIL-
LIAM F. STUBERFIELD et al., ALFRED B. CORNELL
et al., and JOHN HANCOCK MUTUAL LIFE INSUR-
ANCE COMPANY.

PETITION FOR WRIT OF CERTIORARI TO THE
UNITED STATES COURT OF APPEALS FOR THE
SECOND CIRCUIT AND BRIEF IN SUPPORT
THEREOF.

Joun F. MacLane,
Counsel for Petitioner.

IMPSON THACHER & BARTLETT,,
120 Broadway,
New York 5, N. Y.,
Of Counsel

TABLE OF CONTENTS.

Oprrnton BELow ......

JURISDICTION

Sratute Invo.vep

QuEsTIONS PRESENTED

STATEMENT ........-..cececcceccoseeeee

Description of Amended Plan II-B and Proceed-
ings Relating Thereto

Description and Brief History of Bond and
Share .....

Bond and Share’s Position in July 1945................

Bond and Share’s Plans for Compliance with
the Act

REASONS FOR GRANTING THE Writ

ARGUMENT

Summary of Argument..

Pornr I. Since Bond and Share could have
effected a distribution of capital of $100 per
share, plus accumulated dividends, to its pre-
ferred stockholders apart from the Act, that
amount should mark the ceiling of the claims
of those stockholders

Pornt II. Under the circumstances existing in
the middle of 1945 Bond and Share would
probably have made a distribution of capital
of $100 per share in retirement of its pre-
ferred stocks even if Section 11 of the Act had
not compelled such retirement

le

. — " a OA te STERLING EEE OM NRL RRO OY NN SMe EON

Porxt III. Bond and Share could have effected
a distribution of capital of $100 per share,
plus accumulated dividends, to its preferred
stockholders apart from the Act

Pornt IV. The Commission, as affirmed by the
District Court, improperly and inconsistently
gave effect to the impact of the Act in making
its investment value appraisal of the pre-
ferred stocks

Pornt V. The Commission, as affirmed by the
District Court, erred as a matter of law in
basing its investment value appraisal on stock
yield levels prevailing between November
1945 and March 1947, a period of abnermally
high market values of a transient nature..........

Point VI. The Commission, as affirmed by the
District Court, erred as a matter of law in
directing that Bond and Share must pay inter-
est with respect to the $6 preferred stock at
the annual rate of 5.45% from March 6, 1947
to date of payment

APPENDIX

Section 11(e)

Excerpt from brief submitted on behalf of Se-
curities and Exchange Commission to United
States Court of Appeals for the Third Circuit
in Pennsylvania Edison Company case............

Cuart I. Electric Bond and Share Company,
system corporate organization chart, as of
December 31, 1937, and upon completion of
program for compliance.

PERE

PAGE

23

29

31

ili

Cuart II. Structures through which income of
American and Electric groups must flow be-
fore becoming available for payment of divi-
dends on Bond and Share preferred stocks,
actual as of date of retirement and as would
be ex the Act.

Cuart III. Structures through which income
of American and Electric groups must flow
before becoming available for payment of
dividends on Bond and Share preferred stocks,
as reorganized by Graham and accepted by
SEC.

Cuarr IV. Jackson Exhibit 8d, as supple-
mented.

iv

TABLE OF AUTHORITIES.

Court Decisions.

PAGE
Board of County Commissioners v. United States,

308 U. S. 343 (1939) 34
Colorado v. Great Western Sugar Co., 29 F. (2d)

810 (C. A. 8, 1928) 28
Continental Insurance Co. v. United States, 259 U. 8.

156 (1922) 28
Duplate Corp. v. Triplex Co., 298 U.S. 448 (1936)...... 34
Electric Bond and Share Co., 73 F. Supp. 426 (S. D.

N. Y., 1946) 10
Blectvie Bond and Share Co., 95 F. Supp. 492 (S. D.

N. Y., 1951) 2
Matter ‘a Erlanger, 237 N. Y. 159, 142 N. E. 571

- eenee 34
Federal Liquidating Corp.v.S.E.C., ¥F. (2d)

(C. A. 2, 1951), C. C. H. Fed. Sec. Serv. 790, 502,

Mar. 16, 1951 12, 13, 14, 17, 18, 19
Graham & Foster v. Goodcell, 282 U. S. 409 (1931)... 12
Johnson v. U. 8S. Shipping Board Fleet Corp., 280

U. S. 320 (1930) 12
Levin v. Pittsburgh United Corp., 330 Pa. 457, 199

Atl. 332 (1938)........... 24
Massachusetts Mutual Life Ins. Co. v. 8. E. C., 151

F. (2d) 424 (C. A. 8, 1945), cert. denied 327 U. S.

Tee (ERUBD cima 16
Mowry v. Whitney, 81 U. S. 620 (1871) 34

New York Trust Co. v. 8S. E. C., 181 F. (2d) 274
(C. A. 2, 1942), cert. denied 318 U. S. 786 (1943) 16

Otis é Co. v. S. E. C., 323 U.S. 624 (1945) 0... 2,14, 15, 17
Pennsylvania Edison Co., 176 F. (2d) 764 (C. A. 3,
UN escihtenvsbnaccotaduiahocen 27, 28

S. E. C. v. Central-Illinois Corp., 338 U. 8. 96 (1949)

2, 3, 14, 15, 16, 17, 18, 19, 20, 21, 30, 31
RA ce eo eh of al

Vv

PAGE
Stainback v. Mo Hock Ke Lok Po, 336 U. 8S. 368
ARR ek AR ce SR te ER 12

The Laclede Gas Light Co., 57 F. Supp. 997 (E. D.
Big: TIED svcccctninnicunsciarensessininsorniatetiiainaidaientaeiaiaitiasagiiniibe 16

Universal Camera Corp. v. National Labor Relations
Board, U. S. Sup. Ct., unreported, Case No. 40,
October Term 1950; February 26, 1951.................... ne

Vanston Bondholders Protective Committee v.
Circe, BED TT. Bh. TI CI ca ceticecsnsistcenasnsctenstttcirsnasiinns

White v. Mechanics Securities Corp., 269 U. S. 283
SITU: is tasieatr-tiheaupeh sheep edipiadadicienecan 12

SECURITIES AND EXCHANGE COMMISSION
DECISIONS.

(Hotpine Company Act Re.gasgs).

Electric Bond and Share Co., SEC ,H.C.A.R.

I Cs, BP sich ean cicescatincesinenentianencschttones 8, 24
Electric Bond and Share Co., SEC ,H.C.A.R

OU AI SU iki ties tec lishasastieeie teaptes 10
Electric Bond and Share Co., SEC ,H.C.A.R.

RST) iat, IE nase eecstsssenreicones 10
El Paso Electric Co., 17 SEC 659, H. C. A. R. 5499

(a aa 18, 19, 22
Engineers Public Service Co., SEC ,

H. C. A. R. 7041 (Dece., 1946).... 36
Federal Light & Traction Co., SEC oa @.

ie 11, 12
Pennsylvania Edison Co., SEC ,H.C. A. R.

Re IIE sciiscntarssicscciencnhacaineonn blecvaisiedaieioniabaecscisiae 27
The Laclede Gas Inght Co., 16 SEC 26, H. C. A. R.

I I PI ichicsctras Soeishscilisacescth canrhanionlogsipnhdinl acide 16
The United Light and Power Co., 10 SEC 1215,

ws, Bi, Bh. BG Cia, BO annette 16
United Gas Corp., 16 SEC 531, H. C. A. R. 5271

NT UININS edi eiciieichaetis ssa 7
Western Public Service Co., 12 SEC 804, H. C. A. R.

4114 (Feb., 1943) o4

vil

SraTures.
PAGE
New York Stock Corporation Law:
Sections 20, 22 26
Section 36 25
Section 37 25
Section 105 26
Public Utility Holding Company Act of 1935 (15
5 5.4) Renee 2
Section 11 ............ .3, 13, 14, 15, 18, 21, 22
TIE NT RIE ne SA A 6
UE I oeicssicisecctsensntsnenseseoo inne 6, 10
BNI BCD ircccccciscccsninccsennes 2, 4, 7,8, 10, 13, 14, 16, 24
RII STII -ciccasncehisiiinininentnénsecoectunte , 2
MISCELLANEOUS.
Securities & Exchange Commission, 15th Annual
Report, June 30, 1949.00.00. 5

IN THE

Supreme Court of the United States

Ocroszer Term 1950.

a

Ex.ectric Bonp anp Suare Company,
Petitioner,
v.

Securities anv Excnance Commission, WituiaM F.. Stuser-
riety, et al., ALrrep B. Corne i, ef al., anv Jonn Han-
cock Mutua Lire Insurance Company.

PETITION FOR WRIT OF CERTIORARI TO THE UNITED
STATES COURT OF APPEALS FOR THE SECOND
CIRCUIT AND BRIEF IN SUPPORT THEREOF.

Your petitioner respectfully prays that a writ of
certiorari be issued to the United States Court of Appeals
for the Second Circuit to bring up to this Court a case
pending in the Court of Appeals before judgment is given
in that Court and to review those portions of an order
of the United States District Court for the Southern
District of New York from which your petitioner appealed
to such Court of Appeals. The order of the District Court
approved and directed the enforcement of Amended Plan
II-B, filed by your petitioner with the Securities and
Exchange Commission (the Commission) pursuant to Sec-
tion 11(e) of the Public Utility Holding Company Act of
1935 with the reservation by your petitioner of the right
to contest the propriety of such plan and to object to the
approval and enforcement thereof.

Opinion Below.

There is no opinion of the Court of Appeals since this
petition is filed before judgment has been given by that
Court.

The opinion of the District Court (R. 4) is reported
in In re Electric Bond & Share Co., 95 F. Supp. 492 (S. D.
N. Y., 1951).

The findings and opinion of the Commission have not
been officially reported but are set forth in the Commission’s
Holding Company Act Release No. 9980, dated July 28,
1950 (R. 36).

Jurisdiction.

The order of the District Court, a part of which is
sought to be reviewed, was entered on March 2, 1951 (R.
16). The jurisdiction of this Court is invoked under
Section 1254 of the 1948 revised Judicial Code, Title 28 U.
S. Code, as amended, made applicable by Section 25 of the
Public Utility Holding Company Act of 1935, 49 Stat. 835,
15 U. S. C. §79y.

Statute Involved.

The statute involved is Section 11(e) of the Public
Utility Holding Company Act (the Act). This section is
reproduced in the Appendix hereto (p. A-1).

Questions Presented.

1. In the light of the opinions of this Court in the
Engineers* and Otis** cases, does the ‘‘fair and equit-
able’’ standard of Section 11(e) of the Act permit pre-

* 8. E. C. v. Central-Illinois Corp., 338 U. 8. 96 (1949).
** Otis & Co. v. 8. E. C., 323 U. 8. 624 (1945).

ferred stockholders of a company subject to Section 11
to obtain, in retirement of their stock as part of a liquida-
tion or capital distribution, an amount which exceeds the
voluntary ‘‘liquidation’’ preference of such stock under the
company’s charter, where the ‘‘liquidation’’ provisions of
the company’s charter could, and also probably would,
have been brought into play by the company apart from
Section 11 of the Act?

2. Did the Commission, in connection with its deter-
mination of the investment value of the $6 preferred stock
of your petitioner, rely on proper and consistent assump-
tions as to the presence or absence of the impact of Sec-
tion 11 of the Act on the pertinent transactions involved, in
accordance with the opinion of this Court in the Engineers
case?

3. Were the stock yield levels employed by the Com-
mission as standards in reaching its investment value
appraisals of the $6 preferred stock of your petitioner
abnormally low yield levels of a transient nature within
the prohibition of this Court’s opinion in the Engineers
case?

4. Did the Commission follow proper legal standards
in obliging your petitioner to pay on its $6 preferred stock,
with respect to which payment of $10 a share above charter
‘‘liquidation’’ preference has been directed, an additional
amount as interest on the $10 per share payment, and, if
so, is the rate of interest which your petitioner has been
directed to pay substantially excessive?

ee a ee

Statement.

Description of Amended Plan II-B and Proceed-
ings Relating Thereto.

This case involves the question of the fairness of
Amended Plan II-B filed pursuant to Section 11(e) of the
Act by your petitioner (Bond and Share) with the Commis-
sion. As originally filed, Plan II-B provided that Bond and
Share would make no further payments in retirement of its
$6 and $5 preferred stocks in addition to payments there-
tofore made of $30 and $70 per share—an aggregate of $100
in all and representing the ‘‘liquidation’’ value of the pre-
ferred stocks pursuant to the terms of the Bond and Share
charter—which had been made by Bond and Share pursu-
ant to previous Section 11(e) plans theretofore approved
by the Commission and District Court.

The Commission approved that portion of Plan II-B
which provided for no further payment with respect to the
$5 preferred stock, but directed that Bond and Share pay $10
per share with respect to the $6 preferred stock, together
with ‘‘compensation for delay in payment’’, or interest, at
the rate of 5.45% per annum on the $10 per share payment
from March 6, 1947, to the date of payment. Pursuant to a
commitment contained in one of its previously approved
plans, Bond and Share thereafter filed amendments to its
Plan II-B providing for such payment with respect to the
$6 preferred stock, but reserving its right to object to such
amendments before the District Court and to appeal from
any order of any court approving Amended Plan II-B.

Thereafter the District Court entered an order approv-
ing Amended Plan II-B, over the objections of Bond and
Share to that part of such Plan which directed a further
payment to be made with respect to the $6 preferred stock.

Bond and Share seeks review by this petition of that order
only in so far as it approved the part of the Plan just
mentioned.

The amount presently involved exceeds $10,250,000, of
which more than $1,850,000 is represented by interest alone.

Description and Brief History of Bond and Share.

Bond and Share, a registered holding company under
the Act, is a New York corporation (R. 39). It neither
owns nor operates physical properties, all of its assets
(other than current assets) being debt and stock securities
of other companies.

When Bond and Share registered under the Act in 1938,
it was the top holding company in the largest public utility
holding company system in the world. At that time Bond
and Share controlled about 120 domestic subsidiaries oper-
ating in 33 states and about 110 subsidiaries operating in
13 foreign countries with combined assets of nearly
$3,500,000,000.* These interests were owned primarily
through the following five major subsidiary holding com-
panies, all of which owned securities of public utility hold-
ing or operating companies :**

American & Foreign Power Company Ince. (For-
eign Power), the operating subsidiaries of which are
all located in foreign countries;

American Gas and Electric Company (American
Gas);

American Power & Light Company (American) ;

Electric Power & Light Corporation (Electric) ;

National Power & Light Company (National).

* 15th Annual Report of the Commission for the fiscal year ended
June 30, 1949, p. 99.

** Plan II-B, Appendix A (R. 186-91).

eaten:
6

In addition, Bond and Share owned a large direct inter-
est in United Gas Corporation (United Gas), a subsidiary
of Electric, and all the securities of Ebasco Services Incor-
porated (Ebasco), a wholly owned service company, to-
gether with miscellaneous investments.*

Each of the five subholding companies was capitalized
with debt or preferred stock, or with debt and preferred
stock, as well as common stock. The securities owned by
Bond and Share consisted mostly of junior securities of
the subholding companies.* The operating companies, in
addition to the subholding companies, also had debt and
preferred stocks outstanding in the hands of the public.
Thus Bond and Share’s position was primarily that of
the holder of equities junior to many layers of senior
securities.**

The depression of the early 1930’s struck with full force
Bond and Share’s attenuated equity in its subsidiary com-
panies and the effect of the depression on Bond and
Share’s earnings was magnified by other economic develop-
ments (R. 385-90). Further substantial reduction in earn-
ings resulted from the impact of the Act on the Bond and
Share system.

In 1940 the Commission initiated proceedings against
Bond and Share and certain of its subsidiary companies
under Sections 11(b)(1) and 11(b)(2) of the Act. As a
result of these proceedings the Commission directed the
dissolution of Electric, American and National. National
was substantially liquidated in 1946, Electric was dis-
solved in 1949 and the American compliance plan was
consummated in 1950, resulting in a substantial liquidation
of that company.

~ . — : i et oo " ” es oe
piped siti ite ott AG sa tg — : aS Te Re aR ag Ea eR Vt
Ante LT ang RRR Se Ss REE RE ead SB ale ae)

aA Se hash Leah Sih Paseo Dion 8 Bik ee gS!

* Plan II-B, Appendix A (R. 188).
** Ibid.

7

Under the Act, Bond and Share has been required
to dispose of the major portion of the securities which
it has received as a result of the consummation of the
compliance programs of these three subholding companies.
Many of such disposals have already been effected. Also,
Bond and Share has disposed of all of its holdings in
American Gas. Foreign Power, representing Bond and
Share’s largest investment, is still in Section 11(e) re-
organization proceedings before the Commission.

United Gas, formerly Bond and Share’s second largest
investment, was reorganized under Section 11(e) of the
Act pursuant to which Bond and Share in November 1944
received approximately $44,000,000 in cash for its entire
interest in United Gas, which cash could not be profitably
invested because of the restrictions of the Act.*-

As a result of the impact of the Act the Bond and Share
system had been severely contracted by July 1945 when it

filed with the Commission its Section 11(e) plans (herein-

after more fully described) for compliance with the Act.
Bond and Share’s net income had decreased from approxi-
mately $42,000,000 at the end of 1930 to approximately
$4,600,000 at the end of 1944. The earnings coverage for
its preferred stock dividend requirements had fallen from
5.8 times at the end of 1930 to .72 times at the end of 1944.
The substantial decline in earnings was continuing in the
year 1945.**

Bond and Share’s Position in July 1945.

By July 1945, due to the combined effect on the Bond
and Share system of the impact of the Act and the economic

* United Gas Corp., 16 SEC 531, H. C. A. R. 5271 (Sept., 1944).
** Plan II-B, Table A (R. 174).

8

developments above-mentioned, Bond and Share found
itself in the following position:

1. Its earnings had been reduced so that for
more than the past three years it had not earned its
preferred stock dividend requirements.

2. Its income from United Gas, its second largest
investment, had been wiped out in connection with
the reorganization of that company and Bond and
Share held $44,000,000 in cash which it received as
a result of such reorganization, with no profitable
place to invest such funds because of the restrictions
of the Act.

3. Its system had already been substantially
contracted under the Act and it was apparent that
further liquidation of the system would be necessary
to comply with the Act.

i. Mei eke Ne i> 2. Rey pS pea rete ee uetneds Da i tae iene
25 Sia eUS PREG he Rp ae ae Nee oe ee :

™
BROS

Bond and Share’s Plans for Compliance with
the Act.

On July 25, 1945, Bond and Share filed with the Com-
mission its three plans under Section 11(e) for compliance
with the Act. Plan I provided that, as the initial step in
the retirement of both its $6 and $5 preferred stocks, Bond
and Share would make a cash distribution of capital to all
its preferred stockholders in the amount of $30 per share
and that the rights of such stockholders would be appropri-
ately modified. After approval by the Commission and the
District Court for the Southern District of New York this
Plan was consummated in November 1945. In its Findings
and Opinion approving the Plan the Commission found
that the retirement of the preferred stocks was necessary
to effectuate Section 11(b) of the Act.*

Scere

PR iP IIIS eo unbideee k ONES Sipe

Pie

* Electric Bond and Share Co., SEC , H.C. A. R. 6121
(Oct., 1945).

,

11

tion is graphically shown by Chart I (Appendix hereto)
illustrating the nature and size of the Bond and Share
enterprise before and after proposed compliance with
the Act. The extent of the liquidation that had taken
place at the time of the completion of the preferred stock
retirement is shown by the fact that upon the consumma-
tion of its Plan II-A, Bond and Share had disposed of in-
vestments with a ledger value of over $200,000,000 (or
nearly 40% of the ledger value of investments held at
November 30, 1935 or subsequently acquired), in addition
to reducing its net current assets by $23,000,000 and its
capital stock liability from over $171,000,000 to about
$26,000,000 (R. 383).

Reasons for Granting the Writ.
I.

This case involves questions of substantial importance
in connection with the proper administration and inter-
pretation of the Public Utility Holding Company Act. It
is respectfully submitted that the public interest will be
promoted by prompt settlement in this Court of such ques-
tions. There are presently pending in different fora at least
three cases, including the present proceeding, in which
the primary legal issue is similar, if not identical. In two
of these cases petitions for writs of certiorari have been
filed in this Court, including the present case. The aggre-
gate amount in controversy in the three cases approxi-
mates $13,000,000.

In addition to the present proceeding the cases just men-
tioned are the Federal Light & Traction Company case,
which has recently been decided by the Court of Appeals

ER RG tee
Best Orca ne San or 6 ta

ie ae

cons
Ff

12

for the Second Circuit*, and the American Water Works
and Electric Company case,** which is pending undecided
before the Commission. A petition for a writ of certiorari
is being filed with this Court in the Federal case on or about
the same day that your petitioner files the present peti-
tion.*** The primary question of law in the Federal case
and the present case is substantially the same. Your
petitioner respectfully requests this Court, under its Rule
39, to grant Bond and Share’s petition before judgment is
given by the Court of Appeals for the Second Circuit, the
same Court that rendered the decision in the Federal case,
in order that the common question of law in the two cases
may be conclusively settled at one time.t This Court has
frequently so held.t

The common question of law involves the effect which
should be given to charter ‘‘liquidation’’ provisions upon
the retirement of preferred stocks of companies subject
to the Act in situations where, although such retirement
was effected as a part of a liquidation or distribution

* In the Matter of Federal Light & Traction Co.
SEC , H. C. A. R. 9981 (July, 1950) ; aff’d sub nom. Federal
Liquidating Corp. v. 8. E. C., F. (2d) (C. A. 2, 1951),
C. C. H. Fed. See. Serv. $90, 502, Mar. 16, 1951.

** In the Matter of West Penn Electric Co., et al.; American
Water Works and Electric Co., Inc., et al., Commission File Nos.
54-142 and 59-84.

*** (Sub nom. Federal Liquidating Corporation, Petitioner, v.
Securities and Exchange Commission, Respondent ).

+t The Commission recognized that a common question of law
existed in the Federal case and in the present case by issuing its
orders in the two cases on the same day (June 19, 1950) after
having had both cases under advisement for a period of over two
years.

t White v. Mechanics Securities Corp., 269 U. S. 283, 298-9
(1925) ; Johnson v. U. 8. Shipping Board Fleet Corp., 280 U. S.
320, 324-5 (1930); Graham & Foster v. Goodcell, 282 U. S. 409,
411-2, 415 n. 2 (1931) ; Cf. Stainback v. Mo Hock Ke Lok Po, 336
U. S. 368, 370-1 (1949).

13

of capital consummated by the company in question in con-
nection with plans filed with the Commission under Section
11(e) of the Act, the liquidation or distribution of capital
could have been, and indeed probably would have been,
carried out without the aid or compulsion of Section 11.

The Court of Appeals in the Federal case has decided
a federal question in a way probably in conflict with appli-
cable decisions of this Court or, at the very least, has
decided an important question of federal law which has
not been, but should be, settled by this Court.

Both Federal and Bond and Share were organized under
the laws of New York. In the Federal case the company
paid its preferred stockholders $100 per share and accu-
mulated dividends (being the amount payable pursuant to
the provisions of the charter upon any liquidation, whether
voluntary or involuntary) in connection with the liquida-
tion and dissolution of the company after requisite stock-
holders’ vote and pursuant to the provisions of the New
York corporation laws, as well as in accordance with a plan
filed and approved by the Commission under Section 11(e)
of the Act. In the present case, Bond and Share made pay-
ment in a like amount to its preferred stockholders as a
distribution of capital pursuant to a plan filed and approved
by the Commission under Section 11(e) of the Act. This
was the amount payable to such stockholders in accordance
with the Bond and Share charter upon any liquidation or
distribution of capital, whether voluntary or involuntary
(R. 399-400). In both cases the preferred stockholders were
given, in addition to the cash payment just mentioned, a
certificate evidencing any right they might have, as later
determined by the Commission or an appropriate court, to

14

obtain a further cash payment in connection with the retire-
ment of their stock.

In the Federal case the company not only could have
but in fact did liquidate under the provisions of its charter
and of the New York State corporation laws. In the present
case Bond and Share contends that it could have ( and, also,
probably would have), effected the distribution of capital,
which was carried out pursuant to its Section 11(e) plan,
under the provisions of its charter and of the New York
State corporation laws without the aid of Section 11 of the
Act. It is contended in both cases that the amount provided
in the companies’ respective charters to be paid to preferred
stockholders upon any liquidation or distribution of capital,
whether voluntary or involuntary (namely, $100 per share,
plus accumulated dividends), marks the upper limit of the
payment which such preferred stockholders are entitled to
receive.

This contention is entirely consistent with the decisions
of this Court in the Otis case* and in the Engineers case**
where the Court decided that involuntary charter liqui-
dation provisions were not applicable to preferred stock
retirements pursuant to Section 11(e) plans. The prin-
cipal legal question involved in the present case (and in the
Federal case) was not presented in either Otis or Engineers.
In the Otis case the assets of the company were insufficient
to pay the full liquidation claim of the preferred stock-
holders and leave anything over for the common stock-
holders who had been allocated about 5% of the assets by
the Commission. The preferred stockholders in that case
were secking to establish that the charter provision was
matured by the operation of the Act and thus deprive the

* Otis & Co. v. SEC, 323 U. S. 624 (1945).
** S.E.C. v. Central-Ilinois Corp., 338 U. 8. 96 (1949).

15

common stockholders of any participation in the enterprise
—a result which could not have been achieved by the pre-
ferred stockholders apart from Section 11 of the Act. In
holding that the charter liquidation provisions were not
applicable, this Court stated in the Otis case that:

‘

‘. . . Congress did not intend that its exercise
of power to simplify [under Section 11] should
mature rights, created without regard to the pos-
sibility of simplification of system structure, which
otherwise would only arise by voluntary action of
stockholders or, involuntarily, through action of
creditors. . .’’*

In the Engineers case** the charter provision required
the payment of an amount equal to the redemption pre-
mium upon voluntary liquidation. Only in case of involun-
tary liquidation would the preferred stockholders have been
limited to $100 per share, plus accumulated dividends. In
that case the common stockholders were seeking to mature
the provisions of the charter relating to involuntary liquida-
tion—again, as in the Otis case, a provision that could not
have been matured by action of the stockholders apart from
Section 11 of the Act. In this connection the Court said in
the Engineers case that its decision was based on

‘“*. . . the fact that Congress in its efforts to
achieve a particular economic goal, wished to avoid

* Otis & Co. v. SEC, 323 U. S. 624, 638, (1945).

** The Bond and Share preferred stocks were not in any way
comparable to the Engineers preferred stocks. The Commission has
made no finding that they were comparable, and, therefore, it is
unnecessary to develop the point. It should be added, however, that
in the Engineers case the courts and the Commission both empha-
sized that the evidence was undisputed, and the company even
admitted, that the investment values of the preferred stocks ex-
ceeded the redemption values of such stocks. On the contrary, in
the instant case Bond and Share has at all times vigorously asserted
and, we believe, proved that the investment values of the Bond and
Share preferred stocks do not exceed $100 per share.

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16

shifting investment values from one class of secu-
rities to another by maturing contract rights [i.e.,
liquidation rights] which would not otherwise have
matured. . .’’*

Indeed in the Engineers case this Court, while recogniz-
ing as firmly settled the fact that preferred stockholders
were not entitled to receive the amount provided in their
charter redemption provisions upon retirement of their
stock pursuant to a Section 11(e) plan, stated that the re-
demption provisions should mark the ceiling of the pre-
ferred stockholders’ recovery. In this respect the Court
said:

‘*., . the Commission did not apply the redemp-
tion provision, which, like the involuntary liquida-
tion provision, was inoperative, but held that fair-
ness required that the preferreds be paid no more
than the call price, since the company could have

called the stock at that price at any time absent the
Act.’?**

If fairness required that the charter redemption
value*** marked the ceiling of the preferred stockholders’

* SEC v. Central-Illinois Corp., 338 U. S. 96, 134 (1949).
** SEC v. Central-Illinois Corp., 338 U. S. 96, 153-4 (1949).

*** While charter redemption provisions properly form a ceiling
for preferred stockholders’ claims, an unbroken line of decisions
terminating with the decision of this Court in the Engineers ease
has defined the law to the effect that upon retirement of senior
securities pursuant to a Section 11(e) plan, the holders of such secu-
rities are not entitled to receive their charter redemption value as
a matter of contract right.

Cases to this effect include the following: The United Light and
Power Co., 10 SEC 1215, H. C. A. R. 3345 (Feb., 1942), aff’d sud.
nom. New York Trust (o. v. 8.E.C., 131 F. (2d) 274 (C. A. 2, 1942),
cert. denied 318 U. S. 786 (1943) ; The Laclede Gas Light Co., 16
SEC 26, H. C. A. R. 5062 (May, 1944), plan approved and enforced
57 F. Supp. 997 (E. D. Mo., 1944), afi’d sub. nom. Massachusetts
Mutual Life Insurance Co. v. SEC, 151 F. (2d) 424 (C. A. 8, 1945),
cert. denied 327 U. S. 795 (1946).

17

claims in the Engineers case, fairness equally requires that
the charter liquidation value in the Federal case and the
charter distribution of capital value in the present case con-
stitute the upper limit of the preferred stockholders’ claims,
since Federal could have liquidated (and in fact did liqui-
date) and Bond and Share could have (and probably would
have) made a distribution of capital without the benefit of
the Act.

If the rationale of the statement of this Court in the
Engineers case (last quoted above) is not to be applied to
situations where holding companies could have liquidated or
distributed capital pursuant to their charter provisions
apart from the Act, the result would be to permit the impact
of the Act to shift values from common stockholders to pre-
ferred stockholders which rightfully belong to the common
stockholders and would be capable of being realized by
them apart from the Act. Common stockholders would be
obliged to pay more as a result of the Act than they need
pay apart from the Act. Common stockholders who could, °
if the liquidation of their corporation were desirable in a
business context, liquidate and pay preferred stocks off at
$100 per share, plus accumulated dividends, would find that
under the Act they could be forced into an undesired liquida-
tion and be forced to pay a premium to preferred stock-
holders for the privilege of paying them off in liquidation,
just as if they could continue to use the money in a going
business. Such an interpretation of the Act is not only
essentially unjust but is wholly inconsistent with the funda-
mental premise of the Engineers and Otis cases which is
that the impact of the Act should not result in a shifting of
values from one class of securities to another.

The Court of Appeals in the Federal case, however,
affirmed the decision of the Commission awarding to the

ep reonensen AD a 0 i Eh LRAT IT enemas ’ me.

preferred stockholders $10 per share plus interest, in addi-
tion to the $100 per share plus accumulated dividends pro-
vided in the charter to be paid to such stockholders upon
liquidation of the company. The District Court in the
present case also affirmed a similar direction of the Com-
mission. These decisions of the Court of Appeals and
the District Court are in conflict with the above-quoted
statements of this Court; or, at the very least, those
Courts decided an important question which has not been,
but should be, definitely settled by this Court.

The Federal case and the present case also involved
another important question of federal law which has not
been, but should be, settled by this Court. There were
impelling business reasons for the liquidation of the com-
pany effected in the Federal case and the distribution of
capital made by Bond and Share in the present case, under
the circumstances in which those companies found them-
selves at the time that such liquidation and distribution of
capital, respectively, were carried out. It is conceded in
the present case that the business reasons for the distribu-
tions of capital in connection with the retirement of the pre-
ferred stocks arose out of a situation in which Bond and
Share was placed, in part at least, by reason of the pre-
vious impact of Section 11 of the Act on Bond and Share
and its subsidiary companies. A similar situation existed
in the El Paso case,* however, and it is our understanding

that the opinion of this Court in the Engineers case indi-

* El Paso Electric Co., 17 SEC 659, H. C. A. R. 5499 (Dee.,
1944).

7. .

cated that the Court did not intend that the doctrine of the
El Paso case should be overruled by this Court.*

In the El Paso case the Commission decided that the
preferred stockholders were limited, in the retirement of
their stock, to the $100 per share plus accumulated divi-
dends provided by their charter in the event of a liquida-
tion, voluntary or involuntary. In both the Federal case
and the present case the Commission overruled its deter-
mination in the El Paso case. It is respectfully submitted
that this Court should settle the important conflict of law
presented by these cases.

ARGUMENT.

Summary of Argument.

Since Bond and Share, under the provisions of its
charter and of the New York State corporation laws, could
have effected a distribution of capital of $100 per share,
plus accumulated dividends, to its preferred stockholders,
apart from the Act, the claims of the preferred stockholders
were limited to the amount of $100 per share, plus aceumu-
lated dividends.

Bond and Share not only could have made a distribution
of capital to its preferred stockholders apart from the Act,

*SEC v. Central Illinois Corp., 338 U. 8S. 96, 159 (1949),
footnote 10, reading as follows: ‘*Commissioner Caffrey thought
the liquidation preference applicable for a reason irrelevant here.
See El Paso Electric Co., Holding Company Act Release 5499’’,

We are not overlooking the fact that footnote 10 just quoted
appears in the Appendix to this Court’s opinion in the Engineers
ease and that the Court stated (p. 155) that ‘‘This Appendix is
merely a summary of Commission decisions and does not purport to
declare any rulings of law.’’ Nevertheless, the footnote merely
confirms our understanding gathered from the main portion of this
Court’s opinion.

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20

as set forth above, but under the circumstances existing in
the middle of 1945, when Bond and Share filed its plans
with the Commission for compliance with the Act, would
have been impelled by business considerations to make such
a distribution of capital in the amount of $100 per share,
plus accumulated dividends, even if it had not been com-
pelled to do so by the impact of the Act. This constitutes
an additional reason for limiting the claims of the pre-
ferred stockholders to the amount of the distribution of
capital charter preference.

The Commission and the District Court misapplied the
legal principles relating to the impact of the Act on Bond
and Share and its subsidiary companies in connection with
the Commission’s finding of investment value of the pre-
ferred stocks, with the result that the Commission did not
appraise the investment value of the preferred stocks of
Bond and Share as they actually existed at the time of their
retirement.

The Commission and the District Court violated the rule
of law announced by this Court in the Engineers case in
that the Commission, as affirmed by the District Court,
based its investment value appraisal of the Bond and Share
preferred stocks on a period of abnormally high market
values of a transient nature.

The Commission and the District Court erred as a mat-
ter of law in directing that Bond and Share must pay with
respect to its formerly outstanding $6 preferred stock ‘‘com-
pensation for delay in payment’’, or interest, at the annual
rate of 5.45% from March 6, 1947 to the date of payment.

: 21
:

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POINT I.

Since Bond and Share could have effected a distri-
bution of capital of $100 per share, plus accumulated
dividends, to its preferred stockholders apart from the
Act, that amount should mark the ceiling of the claims
of those stockholders.

We have fully stated hereinabove* our contention that,
under the express language of the opinion of this Court in
the Engineers case, fairness requires that payment to the
preferred stockholders should in no event exceed $100 per
share, plus accumulated dividends, and we need not repeat
such contention here.

POINT II.

Under the circumstances existing in the middle of
1945 Bond and Share would probably have made a
distribution of capital of $100 per share in retirement
of its preferred stocks even if Section 11 of the Act
had not compelled such retirement.

In July, 1945 when Bond and Share filed its compliance
plans, the company was impelled by economic pressure
under then existing conditions, concededly brought about
to a large extent by the impact of the Act during the earlier
years, to retire its preferred stocks by making a distribu-
tion of capital of $100 per share to the holders of such
stocks (R. 379-80), together with a related capital dis-
tribution to its common stockholders represented by the
offer to them at a discount in price of Bond and Share’s

* At pages 13-18.

22

holdings in American Gas and Pennsylvania Power & Light
Company (Pennsylvania) (R. 46, 299).

‘ The District Court did not deal with this point, having
a decided the charter question as a matter of interpretation
_ of the provisions of the charter as explained hereafter
a under Point III. The Commission, however, found that
4 Section 11 called for the elimination of the Bond and Share
_ preferred stocks, and that a substantial portion of the funds
: _ used in the retirement of such stocks emanated from a series
_ of events impelled by Section 11, and, consequently, that the
~ question of whether business judgment would have dictated
i: elimination of the preferred stocks ceased to be relevant
(R. 54).

We agree with the Commission that the evidence in
this case is clear that Bond and Share would not have taken
any steps to liquidate, either in whole or in part, and
would not have made any distribution of capital to its
preferred stockholders as a matter of business judgment
if the Act had never affected the affairs of Bond and Share
and its subsidiary companies in any way. We contend,
however, that since the impact of the Act, plus economic
developments, placed Bond and Share in such a situation
in the middle of 1945 that it would have been impelled as
a matter of business judgment to effect a distribution of
capital to its preferred stockholders of $100 per share,
as well as to carry out a capital distribution to its common
stockholders as stated above, and since Bond and Share
could have effected such distributions of capital without the
aid of Section 11 of the Act, the preferred stockholders’
~ claims cannot exceed $100 per share, plus accumulated
3 dividends, under the Bond and Share charter provisions.*

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* We need not repeat our discussion of the El Paso case herein-
» above at pages 18-19.

23

POINT III.

Bond and Share could have effected a distribution
of capital of $100 per share, plus accumulated divi-
dends, to its preferred stockholders apart from the Act.

The Bond and Share charter provides in Section 3(b)
that ‘‘in the event of any liquidation, dissolution or winding
up of the affairs of the Corporation or any distribution of
its capital, whether voluntary or involuntary,’’ each holder
of the $6 and $5 preferred stocks of Bond and Share ‘‘shall
be entitled pari passu to be paid on each share of such stock
held by him the sum of $100’’, plus the amount of accumu-
lated dividends, and no more (R. 399-400).

Bond and Share’s plans for compliance with the Act
involve a substantial liquidation of Bond and Share, as
shown by Chart I (Appendix hereto). It is not necessary
to determine whether the liquidation is complete or partial,
since it obviously involved distributions of capital by
Bond and Share. In connection with the retirement of
the preferred stocks, capital was distributed in the aggre-
gate of $100 per share. In order to obtain the major por.
tion of the funds with which to retire the preferred stocks,
Bond and Share offered substantially all of its holdings of
two subsidiary companies (American Gas and Pennsyl-
vania) to its stockholders at prices several dollars below
the market prices for the American Gas and Pennsylvania
securities (R. 200-1). This represented a distribution of
capital to the common stockholders to the extent of the
value of the rights to purchase the American Gas and Penn-
sylvania securities which were given to them (R. 299-300).

The phrase ‘‘any distribution of its capital’’ appearing
in Section 3(b) of the Bond and Share charter was patently

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24

meant to refer to a transaction other than ‘‘any liquida-
tion, dissolution or winding up of the affairs of the Cor-
poration’’. Otherwise the former phrase would be wholly
superfluous and repetitious. It is significant that the Com-
mission in its opinions relating to Plans I, II-A and II-B
referred repeatedly to Section 3(b) of Bond and Share’s
charter as providing for ‘‘liquidation or other distribution
of capital’’*.

Bond and Share could have retired its preferred stocks
by making a distribution of capital of $100 per share with-
out using the mechanism of Section 11(e) of the Act.**
Just prior to the retirement of the preferred stocks, the
common stockholders held over 83% of the total voting
power of the preferred and common stockholders. Mr.
George G. Walker, President of Bond and Share, testified
that in his opinion it would have been possible to obtain a
vote of more than 6624% of the stock of the Company in

favor of making a capital distribution aggregating $100

per share, in retirement of the preferred stocks (R. 380-2).

* Electric Bond and Share Co., SEC , H.C. A. R. 6121
(Oct., 1945) pp. 2, 9 and H. C. A. R. 6879-1 (Sept., 1946) pp. 6-9,
12; R. 42. Also in Western Public Service Co., 12 SEC 804, 818
H. C. A. R. 4114, (Feb., 1943), Commissioner Healy stated in his

- eoneurring opinion:

‘‘The charter provides that in the case of any liquidation
or dissolution or reduction of capital resulting in a distri-
bution of assets, the preferred stockholders are to receive
$100 plus acerued dividends * * *. Thus, it seems clear that
the intent was that if the enterprise, or any substantial
part of it, was abandoned, the capital involved and thereby
released, should be returned to those who contributed to it
or to those who had succeeded to their rights * * *. Cer-
tainly the reduction provision in the charter was pointed to
something less than total dissolution or liquidation.’’

See also Levin v. Pittsburgh United Corp., 330 Pa. 457, 470-1,
199 Atl. 332, (1938).

** In this discussion we are considering the distribution of eapi-
tal involved as being accomplished by one payment of $100 per share
since that was the substance of Bond and Share’s program of retire-
ment of the preferred stocks.

25

With such a stockholders’ vote a distribution of capital
of $100 per share in retirement of the preferred stocks
could have been effectuated under the corporation laws
of New York in the circumstances of the present case.*
Such distribution could have been consummated under
Section 36** (providing for the elimination of authorized

* The section numbers hereinafter referred to in respect of the
New York Stock Corporation Law are those in effect in 1945, the
time as of which it is appropriate to determine whether Bond and
Share could have retired its preferred stocks by a distribution of
capital under Section 3(b) of its Charter and the applicable pro-
visions of state law. The numbering and to some extent the form
of Sections 36-8 of the New York Stock Corporation Law were
changed by amendments effective as of September 1, 1949, the
provisions of former Sections 36-8 referred to herein now appearing
in Sections 35-8. Such amendments were not effective until more
than four years after the filing of Bond and Share’s Plans for the
retirement of its preferred stocks and in any event would not affect
the substance of the arguments made.

** The procedure under Section 36 would be to eliminate the
preferred stocks under Section 36(C) (which provides for the
elimination of any previously authorized shares) and at the same
time reduce Bond and Share’s capital under Section 36(G) (which
provides for the reduction of capital to a specified amount in con-
nection with any elimination of shares) by the amount of $100 for
each share of outstanding stock eliminated, returning the amount of
such reduction in capital to the preferred stockholders in accordance
with their rights under Section 3(b) of the charter. The required
authorization for such a procedure under subsections (C) and (G)
of Section 36 is a majority vote of the outstanding shares entitled
to vote (Section 37, 3(a)).

We do not believe that the proposed procedure would be a
‘classification or reclassification’’ of the preferred shares under
Section 36(E), thereby necessitating the approval under Section
37, 3(c), of two-thirds of the preferred stocks (voting as a class)
on the ground that such stocks were being ‘‘adversely affected’’ by
such classification or reclassification. It must be noted that Section
36(E) restricts a ‘‘classification or reclassification’’ to a transaction
to be effected ‘‘under this paragraph (E) or paragraph (D) or by a
reduction in the par value of such shares under paragraph (B)’’.
It has been seen that the proposed procedure would not be effected
under any of such subparagraphs of Section 36. Moreover, even
aside from the restrictive clause just quoted, we do not believe that
the proposed procedure would involve a ‘‘classification or reclassifi-
cation’’ which would cause the preferred stocks to be ‘‘adversely

, a

shares and the reduction of capital in connection therewith)
or Section 105* (providing for dissolution of corporations
without judicial proceedings) of the New York Stock Cor-
poration Law.

The District Court held that Bond and Share could not

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‘ Section 3(b) of its charter, since proper interpretation of

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ORS

~ Act was pursuant to the redemption provisions found in
~ Section 3(e) of the charter. The Court felt that Section
3(b) contemplated a situation in which there was at least
‘‘some payment or distribution to the common’’, and that
adoption of our interpretation of Section 3(b) would ren-
der Section 3(e) meaningless.

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PEERS Oc ip as

affected’’ by such procedure since the retirement of the preferred
stocks would here take place pursuant to a charter provision specifi-
eally providing therefor.

*The procedure here would be that Bond and Share would
file the requisite certificate of dissolution with the approval of the
holders of two-thirds of its outstanding shares of stock entitled to
vote, the directors then proceeding under subsection 9 of Section
105, after paying or providing for all corporate obligations, to sell
to another corporation formed for the purpose all the corporate
assets over and above a sum sufficient to provide each preferred
stockholder with $100 per share, plus accumulated dividends, in
exchange for all the captial stock of the new corporation. This sale
would require the approval of only a majority of the outstanding
shares entitled to vote. Thereafter Bond and Share would dis-
tribute the cash to its preferred stockholders and the eapital stock
of the new corporation to the common stockholders, both as dis-
tributions under Section 3(b) of the Bond and Share charter.
Similar procedure might be followed under Sections 20 and 22 of
the New York Stock Corporation Law.

It may be that if a distribution of capital were made to the
- preferred stockholders under Section 105 of the New York Stock
~ Corporation Law, any dissenting preferred stockholder would have
the right of appraisal under that section. In any event it is clear
~ from a review of the applicable authorities relative to appraisal
under New York State law that any dissenting stockholder could
_ not have expected his stock to be appraised at an amount greater
» than his charter ‘‘liquidation’’ claim ($100 per share, plus aceumu-
lated dividends).

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We believe that the Court misinterpreted Section 3(b)
of the charter. As we have stated, a distribution of capital
was made to the common stockholders in connection with
the retirement of the preferred stocks. This capital dis-
tribution was substantial in amount, aggregating in the
neighborhood of $9,000,000 (R. 201, 299-300; Transcript,
unprinted, p. 592). Moreover, Sections 3(b) and 3(e) of
the charter were not meant to be mutually destructive, but
to be complementary. The redemption provision, Section
3(e), was meant to apply primarily if Bond and Share de-
sired to refinance its preferred stocks at a lower cost to the
company but to continue the capital represented by such
stocks, i. e., where there was no shrinkage in capital em-
ployed in the business. The distribution of capital provi-
sion, Section 3(b), was meant to apply precisely to the type
of situation in which Bond and Share found itself in 1945,
i. e., Where its enterprise was being contracted in size and
substantially liquidated so that the company could no
longer use its entire invested capital and, therefore, pro-
posed to return to the preferred stockholders the capital
which they had originally invested in the enterprise.

Counsel for the Commission has specifically recognized
this very distinction in a brief to the Court of Appeals for
the Third Circuit in the Pennsylvania Edison case.* There
Commission counsel stated that a charter ‘‘distribution of
capital’’ provision contemplates ‘‘at least prima facie a
situation in which the invested interest of the common
stockholder would be substantially curtailed, if not termi-
nated’’, and that such a situation exists ‘‘when there is no
longer need to use the entire invested capital in the busi-
ness, and a distribution of capital can be made.’’ The brief

* Pennsylvania Edison Co., SEC > m GA. EE.
8550 (Oct., 1948), aff’d 176 F. (2d) 764 (C. A. 3, 1949).

28

also stated that the phrase ‘‘distribution of capital’’ did not
apply ‘‘where there is no shrinkage of capital employed in
the business and what is paid out to the preferred is merely
the proceeds of a new issue of securities sold for refunding
purposes’’ since ‘‘to so hold would make the provision for
a higher redemption price completely nugatory’’.* We
are wholly in accord with the statements just quoted and
submit that they are equally applicable here.

3 This Court held in the Continental case** that upon a
- distribution of capital the common law rule was that both
: common and preferred stockholders shared alike in the
a

: assets. If the Bond and Share preferred stockholders were
: in any danger of running afoul of the common law rule, they

“

would be the first to claim the benefit of Section 3(b) of the
charter upon a distribution of capital so that they would
rank ahead of the common stockholders to the extent of
- $100 per share, plus accumulated dividends.*** The pre-
ferred stockholders should hardly expect the terms of Sec-
tion 3(b) to work only in their favor.

* The relevant portion of the brief of Commission counsel in
the Pennsylvania Edison case is reproduced in detail in the Ap-
pendix hereto, pp. A-2, 3.

** Continental Insurance Co. v. United States, 259 U. S. 156
(1922).

*** Before the District Court our opponents cited Colorado v.
Great Western Sugar Co., 29 F. (2d) 810 (C. A. 8, 1928), in support
of their contention that the phrase ‘‘any distribution of its capital’’
in Bond and Share’s charter means no more and no less than total
liquidation. That case is clearly distinguishable. Not only is the
charter in that case different from the Bond and Share charter,
but also the Great Western case did not involve any substantial
contraction of assets as does the present case.

it Nt eh ASR 2 i RG RS ae ae a tte

29

POINT IV.
The Commission, as affirmed by the District Court,

improperly and inconsistently gave effect to the impact
of the Act in making its investment value appraisal of
the preferred stocks.

Bond and Share’s principal assets at the time of the
retirement of its preferred stocks consisted of its junior
equity holdings in its five subholding companies. Conse-
quently, the preferred stocks were junior not only to the
senior securities of the subholding companies but also to
all securities of the underlying operating companies. More-
over, all income from Bond and Share’s junior equity
holdings in the case of three of the subholding companies,
i.e., Foreign Power, American and Electric, was barred by
more than $200,000,000 of preferred stock dividend arrear-
ages (R. 84, 98, 125).

As long as the quantity and quality of the earnings
available to service the preferred stocks were affected by
that situation, not even the witnesses for the preferred
stockholders claimed that the investment value of the pre-
ferred stocks exceeded $100 a share. The problem was
avoided by the Commission’s assumption that reorgani-
zations of Foreign Power, Electric and American (one of
which has not yet been consummated and the other two of
which were consummated only in 1949 and 1950, respec-
tively) had been carried out by early 1947 pursuant to the
Act (R. 69-71). This assumption had the effect of both
eliminating Electric and American, as well as all their inter-
vening securities, and also of wiping out the tremendous
dividend arrearages on the preferred stocks of Foreign
Power, American and Electric. Ifthe Act had not been con-
sidered to apply, the evidence was clear that the three sub-

3

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30

holding companies would not have been reorganized so as to
dissolve these companies or to retire the substantial senior
securities ahead of Bond and Share’s junior holdings
(R. 368-9).*

This Court in the Engineers case held that the Com-
mission should determine the investment value of securi-
ties without reference to the ‘‘present liquidation or reor-
ganization required by the Act.’’** The ‘‘present liquida-
tion or reorganization’’ in the instant case is the substantial
liquidation of the whole Bond and Share system (including
the reorganizations of Foreign Power, American and Elec-

tric) pursuant to the Commission’s mandatory orders in
_ the consolidated proceedings involving the Bond and Share

system. To give effect to the reorganizations of the three
subholding companies, as the Commission did, was to violate

the Engineers case rule and thereby to improve the char-

acter of the Bond and Share preferred stocks to the point
where they no longer resembled the preferred stocks as
they actually existed at the time of their retirement.

But if the Commission were right in giving effect to the
impact of the Act in order to lay some basis for the as-
sumption that Foreign Power, American and Electric had

been reorganized as per the Commission’s hypothesis, it

could not then properly do an ‘‘about face’’ and incon-

* Charts II and III included in the Appendix hereto illustrate
the structures through which income from Bond and Share’s junior
equity holdings in American and Electric would have to flow
before becoming available to Bond and Share for payment of divi-
dends on its preferred stocks. Chart II shows such structures on
the assumption that American and Electrie (a) were not reorgan-
ized in any manner and (b) were reorganized without the aid of
the Act (Transcript, unprinted, 3019-20). Chart III shows that
such structures are substantially simplified and reduced in number
on the assumption that American and Electric were reorganized
pursuant to the Act on the hypothesis adopted by the Commission.

** SEC v. Central-Illinois Corp., 338 U. S., 96, 140 (1949).

31

sistently refuse to recognize that the impact of the Act re-
quired Bond and Share to divest itself of a substantial
portion of the securities (and, therefore, of the earnings
from such securities) it would receive as a result of the
three subholding company reorganizations. That, how-
ever, is what the Commission did and such action was
affirmed by the District Court.

POINT V.

The Commission, as affirmed by the District Court,
erred as a matter of law in basing its investment value
appraisal on stock yield levels prevailing between
November 1945 and March 1947, a period of abnor-
mally high market values of a transient nature.

The Commission stated that its finding to the effect that
the value of the $6 preferred stock equalled at least $110
per share was made ‘‘* * * in the light of the yield levels
current during the period [between November 1945 and
March 1947] that the preferred stocks were being severed
from the enterprise * * *’’ (R. 80). This Court in the
Engineers case stated that ‘‘the Commission would be wrong
in selecting, as a basis for valuation, abnormal or highly
speculative market values of a transient nature.’’*

The period between November 1945 and March 1947
represented just such a transient period of abnormally
high market values for preferred stocks. This fact cannot
be disputed and is clearly illustrated by one of the exhibits
offered in evidence on behalf of the preferred stockholders.

oor

* SEC v. Central-Illinois Corp., 338 U. S. 96, 146 (1949).

32

The exhibit, as brought down to date, appears in the Ap-
pendix attached hereto and is marked as Chart IV.*

Chart IV shows that in the twenty year period from
the end of 1929 to the end of 1949, the all-time high peak
of market prices of ‘‘all preferred stocks on the New York
Stock Exchange’’ was reached between November 1945 and
March 1947. During this period preferred stock prices
were 44% higher than the average price for the period
1939-1949 and substantially higher than in the periods imme-
diately preceding and following.

There were definite indications in the year 1946 and
early in 1947, before the completion of the preferred stock
retirement was effected (Bond and Share Ex. 146; R. 408),
that preferred stock yields were sharply rising and pre-
ferred stock market prices were correspondingly sharply
falling. The Commission wholly disregarded this evidence
of prospective events which would have reduced the value
of the Bond and Share preferred stocks, although, as we
have stated above, it gave full effect to assumed future
reorganizations of Bond and Share’s three subholding
companies, as prospective events which substantially in-
creased the value of the preferred stocks.

Without arguing the point we would like to state our
contention at this time, in order to reserve our right to

* Chart IV is a reproduction of Jackson Ex. 8d with the curves
representing the average price of all preferred stocks listed on the
New York Stock Exchange and representing Electric Bond and
Share common stock extended up to the end of 1949, the limit of the
chart. A box enclosing the period November 1945 to March 1947,
together with an accompanying statement, has been added to the
exhibit. In computing the 44% average figure shown on the chart,
average monthly prices were used for the period November 1945 to
March 1947. For the entire period 1929-1949 an average price of
the figures employed in plotting Jackson Ex. 8d was used.

ASPB NE

. SAE PAROLE 0 RNEE LO FFE

request this Court to hear argument on the point later if

the present petition is granted, that the findings of the
Commission respecting the investment value of the $6
preferred stock are not supported by substantial evidence
on consideration of the record as a whole in the light of

this Court’s recent opinion in Universal Camera Corp. v.
National Labor Relations Board, unreported, Case No. 40,
October 1950 Term, decided February 26, 1951.

POINT VI.

The Commission, as affirmed by the District Court,
erred as a matter of law in directing that Bond and
Share must pay interest with respect to the $6 preferred
stock at the annual rate of 5.45% from March 6, 1947
to date of payment.

A.

Assuming arguendo that all our contentions in the pre-
vious points are incorrect, we submit that the Commission
and the District Court erred in directing the payment of
interest.

Interest at 5.45% per annum on the $8,400,000 which
Bond and Share has been directed to pay with respect to
the $6 preferred stock amounts to over $450,000 per year
and has aggregated for the period from March 6, 1947 to
March 31, 1951 more than $1,850,000.

The retirement of the preferred stocks having been com-
pleted in March 1947, Bond and Share filed its Plan II-B
in April of that year and the case was presented to the
Commission for decision in April of 1948. The Commission
held the case under advisement until June 1950. During
this period of approximately 214 years Bond and Share was

ry
34

~ inno position to tender payment of any amount since there

% was no determination as to whether it owed anything to the

3 preferred stockholders and if so, how much. Moreover,

% Bond and Share, during this period, was obliged to keep

PI approximately $10,000,000 in liquid form so as to be in a

4 position to meet any necessary payment with respect to the

* preferred stocks. The Company, therefore, did not have

4 the use of the money during this period.

This Court has repeatedly announced that interest is
given or withheld by the Courts in response to considera-
tions of fairness.* It has also been established by this
_ Court that interest should not commence to run until the
- principal amount involved in litigation is liquidated.**

In the light of the foregoing it would be grossly in-
equitable to require Bond and Share to pay any interest and
we submit that the decisions of this Court just cited support
- such position.

If any interest is legally payable, the interest rate should
be substantially reduced below 5.45%. It may fairly be said
that no substantial portion of the delay since March 1947
has been attributable to the common stockholders of Bond
and Share. There is no equity, therefore, in obliging the
common stockholders to bear the whole brunt of the delay
- by reimbursing the preferred stockholders at the unusually
high rate of 5.45% for a period which already has extended
to almost four years.

We have shown that Bond and Share has not been in
a position, since its debt was not liquidated until entry of

* Board of County Commissioners v. United States, 308 U. S.
343, 352 (1939); Vanston Bondholders Protective Committee v.
Green, 329 U. S. 156, 165 (1946).

** Mowry v. Whitney, 81 U. S. 620, 653 (1871) ; Duplate Corp.
v. Triplex Co., 298 U. 8. 448, 459 (1936) ; Matter of Erlanger, 237
N. Y. 159, 166, 142 N. E. 571 (1923).

PE io eS A Ah aT ie a r ig Seg = -
: BREN esr BEE alg Cee nt PURee Gee Re oe SRN fn te eT STE SEE

iB ste

—_
35

the District Court order of March 2, 1951, to make tender
of payment. Nor, for the reasons above stated, has Bond
and Share had the use of the funds it has been obliged to
hold in liquid form for the past several years.

Finally, after the contingent certificates were issued
under Plan II-A to the preferred stockholders in March
1947, such holders no longer owned securities subject to
the risk factors appurtenant to the formerly outstanding
$6 preferred stock. Consequently, they were not entitled
to interest at a yield rate which reflected such risk fac-
tors. The contingent certificates are in effect evidences
of short-term contingent claims for cash against Bond and
Share. Such claims with respect to the $6 preferred stock
are subject to a maximum limit of approximately $8,400,000,
being $10 per share (the redemption price ceiling) on
840,268 shares.

The risk factor on these contingent certificates is
negligible. Indeed, if the asset value figures mentioned by
the Commission in its findings in the instant case be taken
as correct, the maximum claim of the certificates with
respect to the $6 preferred stock would be covered approxi-
mately 25 to 45 times by such assets (R. 66-7). There is
no argument of fairness that justifies paying to the holders
of these ‘‘gilt-edged’’ certificates, free from any risk factor,
interest computed upon yield rates applicable to preferred
stock of the speculative investment caliber of Bond and
Share’s $6 preferred stock.

No question was raised before this Court in the
Engineers case by the company or any common stockholder
with respect to the fairness to the common stockholders of
the payment of interest. This Court had before it for deci-
sion only the question of whether the interest allowed by the

36

~ Commission was sufficient in amount to be fair to the pre-
_ ferred stockholders, who attempted to claim substantial
- additional interest—even to the extent of seeking interest
on the amount which had already been paid to them.*

WHereroreE your petitioner respectfully prays that a
writ of certiorari be issued to the United States Court of
Appeals for the Second Circuit and that a hearing upon
and determination by this Court of the matters hereby pre-
~ sented be had.

ine Ge aes

re

=

: Dated, April 25, 1951.

Respectfully submitted,

; Joun F. MacLang,
a Counsel for Petitioner.

_ Stmpson TxHacuer & Bart ert,
‘: Of Counsel.

e

* It should be added that in the Engineers case the amount to be
placed in an escrow fund, which included a sum sufficient to cover
~ the payment of interest on the $6 preferred stock at a 5.45% annual
~ rate, had been determined early in the proceedings and that no
- objection was raised by anyone to such amount included for inter-
" est, as appears from the Commission’s opinion (Engineers Public
Service Co., SEC , H. C. A. R. 7041 (Dec., 1946), p. 36).

A-1

APPENDIX.
Section 11(e).

Section 11(e) of the Public Utility Holding Company
Act [15 U. S. C. 79k(e)] reads as follows:

‘*Sec. 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 investors or consumers, any reg-
istered holding company or any subsidiary company
of a registered holding company may, at any time af-
ter January 1, 1936, submit a plan to the Commission
for the divestment of control, securities, or other
assets, or for other action by such company or any
subsidiary company thereof for the purpose of en-
abling such company or any subsidiary company
thereof to comply with the provisions of subsection
(b). If, after notice and opportunity for hearing, the
Commission shall find such plan, as submitted 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 accordance 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 applica-
tion, the court, after notice and opportunity for
hearing, shall approve such plan as fair and equita-
ble and as appropriate to effectuate the provisions
of section 11, the court as a court of equity may, to
such extent as it deems necessary for the purpose of
carrying out the terms and provisions of such plan,
take exclusive jurisdiction and possession of the
company or companies and the assets thereof, wher-
ever located; and the court shall have jurisdiction
to appoint a trustee, and the court may so constitute
and appoint 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 pos-
sessed.’’

Pe TOE TE ee
EN tone at Seas =

ee Re,

oo aie

Coe SES MEI Qa og eee ee OER ee eset es faa rie See oe Seles
RS Rat E MENT a RAINS TAGISH tL GS A eae CARS 9s Soh AG ae Wa

A-2

Excerpt from brief submitted on behalf of Securities and
Exchange Commission to United States Court of Appeals
for the Third Circuit in Pennsylvania Edison Company ‘ase

(H. C. A. R. 8550, aff’d 176 F. (2d) 764, C. A. 3, 1949).

In the Pennsylvania Edison case counsel for the Com-
mission argued that the liquidation provision in the Penn-
sylvania Edison charter should not apply to a mergér be-
tween Pennsylvania Edison and one of its associated com-
panies and thus limit the amount of cash to be received by
holders of preferred stock of Pennsylvania Edison upon
the retirement of such stock in connection with the merger,
which was carried out as a part of a Section 11(e) plan.
In drawing a distinction between the redemption price and
the lower liquidation price provided in the Pennsylvania
Edison charter, Commission counsel stated in the Com-
mission brief (dated May 1949, in Case No. 9859 at pp. 31-3)
as follows:

“¢* * * Although the lower liquidation price was
intended to apply whether the ‘liquidation’ might be
voluntary or involuntary, it obviously was not in-
tended that voluntary liquidation, determinable by
vote of the common stockholder alone, should serve
as a cheaper alternative to redemption as a means of
terminating the preferred stockholders’ interest in
the company while the common stockholder retains
an undiminished interest. This is further illustrated
by the detailed specification, in Section 3 of the by-
laws, as to the kind of liquidation contemplated. The
specified contingencies are (1) ‘any liquidation or
dissolution or winding up of the corporation,’ (2) ‘a
sale of all or substantially all of the assets,’ (3) ‘any
distribution of its capital.’ Each of these contin-
gencies contemplates at least prima facie a situa-
tion in which the investment interest of the common
stockholder would be substantially curtailed, if not
terminated (footnote omitted). That is what occurs
when the business conducted by the company is
wound up; when there is a sale in the usual arms-
length sense to outside interests; or when there is

A-3

no longer need to use the entire invested capital in
the business, and a distribution of capital can be
made.*

e @ s ° e €

* ‘“When preferred stock is retired there is, of course, a distribu-
tion of capital to the preferred. But obviously that is not what is
meant by the by-law in question as applied to situations where there
is no shrinkage in capital employed in the business and what is paid
out to the preferred is merely the proceeds of a new issue of securi-
ties sold for refunding purposes. To so hold would make the pro-
vision for a higher redemption price completely nugatory.’’

STRUCTURES THROUGH WHICH INCOME OF AMERICAN AND ELECTRIC GROUPS
MUST FLOW BEFORE BECOMING AVAILABLE FOR PAYMENT
OF DIVIDENDS ON BOND AND SHARE PREFERRED STOCKS

ACTUAL AS OF DATE OF RETIREMENT AND
AS WOULD BE EX THE ACT

REVENUES DERIVED FROM SALES
OF ELECTRICITY, GAS, ETC

AMERICAN GROUP in ELFEQGTRIC GROUP
OPERATING COMPANIES OPERATING COMPANIES
ImCOME AVAILABLE INCOME Avail L ABLE
For SECURITIES For Securities

=

DEBT | | OEBT
| prereneeo STOCK | rrererneo STOCK
COMMON STOCK ¥ COMMON STOCK |

en moar

SS

—

HOLDING COMPANY HOLDING COMPANY

INCOME AVAILABLE INCOME AVAILABLE

For SECURITIES For SecumiTies
| reerenneo stock | | rrerenneo stock |

PREFERRED
*RREARS

PREFERPED
ARREARS
|
on a (ie
| I

Y bd

COMMON STOCK | |secono PFO stock|

qT

|

|

|

| SECOND PFD STOCK

|
a =

|

|

|

COWMON STOCK
|
!

P a amou

From OF INCOME BLOCKED UNTIL | BOND AND SHARE | NOTE: A RELATIVELY SMALL
PREFERRED AND SECOND PREFERRED OF INCOME FLOWS THROU
a
ARREARS ARE CLEARED + TO BOWO AND SHARE BY REAS

OF |\TSPREFERRED STOCK WOL

| PREFERRED stock | INS IN BOTH AMERICAN A

Evecrric.

PEED ALIVE ION BEL NE) CR PROLE™ EBB F OAS LATE SARE

STRUCTURES THROUGH WHICH INCOME OF AMERICAN AND ELECTRIC GROUPS
MUST FLOW BEFORE BECOMING AVAILABLE FOR PAYMENT
OF DIVIDENDS ON BOND AND SHARE PREFERRED STOCKS

AS REORGANIZED BY GRAHAM
AND ACCEPTED BY SEC

REVENUES DERIVED FROM SALES
OF ELECTRICITY, GAS, ETC

AMERICAN GROUP _ ELECTRIC GROUP
| 3 . |
OPERATING COMPANIES OPERATING COMPANIES
INCOME AVAILABLE InCOmEe AVAILABLE
For SECURITIES For SECURITIES

eee ee ee
I
!
nos Bers
ae saa

[ BOND AND SHARE |
| PREFERRED stock |

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386417_0680%3A1. Public record. Not legal advice.