Opposition Brief — Electric Bond & Share Co. v. Securities & Exchange Commission

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CITATIONS

Cases:

American Power ¢ Light Company v. S.E.C., 329 U. S.

ge EERO REECE ANG Gayl Dd Cre Ly tn Mra, Spee 4

Edelstein, et al. v. S.E.C., No. 687, October Term, 1950... 8

Electric Bond and Share Co., In re, Civ. Action No.

0-508 (0.0. A... Mev. G, 3005) ..... .. 5. c nae. 6

Electric Bond and Share Co., In re, 73 F. Supp. 426.... 6,11

Federal Liquidating Corp. v. S.E.C., No. 686, October

MROTIOCE OUD or Pe ear ee tae . 8,10, 15

Niagara Hudson Corp. v. Levintritt, 340 U.S. 336. LW ae, 13

nO CO: 8 SOC. Geek Uc Gad? en helene. 9

Pennsylvania Edison Company, In re, 176 F. 2d 764.... 12

S.E.C. v. Central-Illinois Securities Corp., 338 U. S.

LE gS ae ore res A rg OMe Fea st career we et 6, 7, 9, 12, 14, 15

Statutes :

Publie Utility Holding Company Act, 49 Stat. 803, 15

U.S.C. 79 et seq.:

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(1)

—

Guthe Supreme Gourt of the Wnited States

OcTOBER TERM, 1950

No. 700

Euectric Bonp AND SHARE COMPANY, PETITIONER

Vv.

SECURITIES AND ExCHANGE CoMMISSION, WILLIAM

F. STuBERFIELD, et al., ALFRED B. CoRNELL, et al.,

AND JoHN Hancock Mutua LIFE INSURANCE

COMPANY

ON PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR THE SECOND

CIRCUIT

BRIEF FOR THE SECURITIES AND EXCHANGE

COMMISSION IN OPPOSITION

OPINION BELOW

Since the petition for a writ of certiorari was

filed immediately after the record was brought

from the District Court to the Court of Appeals

and before the Court of Appeals had an opportun-

(1)

2

ity to consider the issues or to render judgment,

there is no opinion of the Court of Appeals. The

opinion of the District Court is reported at 95 F.

Supp. 492 (R. 4). The findings and opinion of the

Commission dated July 28, 1950, have not been

officially reported but are set forth in Holding

Company Act Release No. 9980 (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). Petitioner invokes the jurisdiction

of this Court under 28 U. 8. C. 1254, made ap-

plicable by Section 25 of the Public Utility Hold-

ing Company Act of 1935, 49 Stat. 835, 15 U.S. C.

Section 79y.

STATUTE INVOLVED

The pertinent sections. of the statute involved,

11(b) (2), and 11(e) of the Publie Utility Holding

Company Act, are set forth in an Appendix,

infra, pp. 17-19.

QUESTIONS PRESENTED

1. Whether, in measuring the rights of the $6

preferred stockholders pursuant to plans ealling

for the retirement of their stock under Section

11(e) of the Public Utility Holding Company Act,

the Commission erred in holding that such stock-

holders were entitled to receive sums equivalent

to their investment value on a going concern basis

rather than a sum specified in the corporate char-

ter to be payable upon ‘‘liquidation, dissolution or

a

3

winding up of the affairs of the corporation or any

distribution of its capital, whether voluntary or

involuntary.”’

2. Whether the District Court erred in holding

that there was substantial evidence to support the

Commission’s appraisal of the investment value of

the $6 preferred stock.

3. Whether it was in accordance with the ‘‘fair

and equitable’’ standard of Section 11(e) of the

Public Utility Holding Company Act to award

preferred stockholders, deprived of $10 during the

pendency of the litigation, compensation computed

at a rate measured by the yield they had been re-

ceiving upon the investment value of their stock.

STATEMENT

Petitioner seeks a writ of certiorari to review

a portion of an order of the United States District

Court for the Southern District of New York en-

forcing a plan filed with the Securities and Ex-

change Commission pursuant to Section 11(e) of

the Public Utility Holding Company Act. The

plan, designated as Plan II-B, was the third in a

series of plans concerned with retiring the two

series of preferred stock of Electric Bond and

Share Company (Bond and Share), and satisfying

the rights and claims of the holders thereof.

Bond and Share, a registered holding company,

is a New York corporation. It was the apex of a

pyramid of holding companies and operating com-

panies forming, at one time, the largest public

4

utility holding company system in the world.

Bond and Share owned debt or stock securities,

or both, of five subsidiary holding companies:

American & Foreign Power Company (Foreign

Power), American Gas and Electric Company

(American Gas), American Power & Light Com-

pany (American), Electric Power & Light Cor-

poration (Electric), and National Power & Light

Company (National). In addition, it owned di-

rectly interests in various operating companies in-

the system."

Early in 1940 the Commission instituted the first

of a number of Section 11 proceedings directed to

Bond and Share and its subsidiaries in the course

of which it soon became apparent that the Bond

and Share System would have to be sharply con-

tracted if it was to meet the requirements of that

section. The Commission, inter alia, entered or-

ders directing the liquidation of Bond and Share’s

intermediate holding companies, American and

Electric, which were upheld by this Court in

American Power & Light Company v. Securities

and Exchange Commission, 329 U.S. 90. The

process of divestment, undertaken by Bond and

Share in order to comply with the act, resulted

in accumulating large amounts of cash, part of

which was used, pursuant to Commission approval,

1See Table II (R. 65) in the Commission’s opinion for a

list of these companies and the book value of the Bond and

Share holdings as of December 31, 1946.

7

wep

5

to purchase on the open market and retire some of

the preferred stock of Bond and Share (R. 40-41).

On July 25, 1945, Bond and Share filed three

plans, designated as Plans 1, II, and III, under

Section 11(e) of the Public Utility Holding Com-

pany Act in an effort to bring the capital structure

of the company into compliance with the Act. At

that time Bond and Share had no debt outstanding

but had 840,268 shares of preferred stock entitled

to $6 per share cumulative dividends annually,

203,012 shares of preferred stock entitled to $5 per

share cumulative dividends annually, and 5,250,-

357.66 shares of $5 par value common stock (R.

42). Except for a $1 difference in dividend pref-

erence the $6 and $5 Preferred Stocks have identi-

eal rights. Each had a preference of $100 a share

upon liquidation or other distribution of capital

and was callable at the option of the company at

any time at the redemption price of $110 per share

plus accrued dividends (R. 399, 400).

Plan I provided that, as an initial step in the

retirement of these issues, Bond and Share would

make a pro rata payment of $30 per share to all

preferred stockholders and that their rights to

dividends and capital would be modified to reflect

this payment. In approving this plan the Commis-

sion found the elimination of the preferred stocks

from the Bond and Share capital structure neces-

sary to effectuate the provisions of Sections 11 (b),

and the United States District Court for the South-

6

ern District of New York approved and enforced

this determination.” No appeal was taken.

Plan 11-A (which replaced the earlier Plan II)

provided for the payment to both the $5 and $6

preferred stocks of $70 per share plus accumu-

lated dividends, in cash, and the issuance of a

certificate entitling the holder to such additional

amount, if any, as might be ultimately awarded

by the Commission or the courts. This plan was

approved by the Commission and enforced by order

of the United States District Court for the South-

ern District of New York on December 20, 1946

(R. 258).°

Plan III, which provides for certain other dis-

positions by Bond and Share, is not relevant to

these proceedings.

On April 7, 1947, Bond and Share filed its Plan

II-B. Initially, this plan provided that no fur-

ther payments be made to the preferred stock-

holders. While the proceedings were pending be-

fore the Commission the case of S. E. C. v. Central-

Illinois Securities Corp., 338 U. S. 96 was argued

before this Court. Since that case appeared to in-

volve comparable issues no determination was

made by the Commission pending its decision. The

Central-Illinois opinion was issued on June 27,

1949, and Bond and Share immediately requested

2 In re Electric Bond and Share Co., Civil Action No. 33-343

(S. D. N. Y. Nov. 5, 1945).

3 In re Electric Bond and Share Co., 73 F. Supp. 426 (S. D.

N. Y. 1946).

Bec Wisel aa

7

leave to file with the Commission supplemental

briefs and present another oral argument in the

light of that opinion. Leave was granted, briefs

were filed and another argument was heard.

~ On July 19, 1950 the Commission issued its order

approving that portion of Plan II-B which pro-

vided for no further payment to the $5 preferred

a

i stock but disapproving that portion of the plan

limiting the $6 preferred stock to the $100 payment

already received. The Commission determined

3 that each $6 preferred share should be paid an

additional $10, together with compensation for the

delay in payment at the rate of 5.49 per cent per

annum. The rate (5.45% ) was computed, in ac-

cordance with the Central-Illinois formula, by the

relationship between $6, the annual dividend, and

$110, the investment value.

In its opinion the Commission reviewed the volu-

minous evidence of the investment value of the

preferred stock presented by the interested parties,

and on the basis of the whole record decided that

the $6 preferred stock had an investment value of

at least $110. The Commission found it unneces-

sary to determine more precisely what the invest-

ment value was in view of the provision in the

charter which would have permitted Bond and

Share to redeem these shares for that sum. Bond

and Share thereupon filed amendments to its Plan

II-B to conform it to the directions of the Com-

8

mission but reserved the right to object to these

amendments before the courts.

The Commission then applied to the District

Court for an order approving the amended plan

and enforcing its provisions. Over the objections

of Bond and Share, representatives of certain $5

preferred shareholders, and a common stockholder,

the District Court granted the Commission’s

request.

Cross-appeals have been filed by Bond and Share

and the $5 preferred stockholders.

ARGUMENT

1. Petitioner urges that this Court consider,

prior to decision by the Court of Appeals, the is-

sues raised by its appeal from the order of the dis-

trict court, arguing that the primary issue is sub-

stantially the same as the primary issue presented

in Federal Liquidating Corp. v. S. E. C. and Edel-

stein, ct al. v. S. FE. C., Nos. 686 and 687, this Term.

We agree that there is a close relationship between

the primary legal issues in the two cases. We are

filing a separate brief in opposition to the petitions

in Nos. 686 and 687, in which we state our reasons

for believing that there is no novelty in the issues

and that the court below correctly determined that

investment value, rather than the charter liquida-

tion preference, is the proper measure of the pre-

ferred stockholders’ rights in a plan of liquida-

tion in compliance with Section 11 of the Holding

9

Company Act. This Court is respectfully referred

to that brief for a more complete analysis of the

issue involved.

The Commission’s order in this case is based on

the same principle as that upheld in the Central-

Illinois case, as well as in the earlier decision in

Otis & Co. v. S. E. C., 323 U.S. 624, namely, that the

proper measure of preferred stockholders’ rights

in a solvent company, when compelled to surrender

their investment under a Section 11 (e) plan, is

the investment value of their stock on a going con-

cern basis rather than its charter liquidation

preference.

The charter provision relied upon by petitioner

in this case is Section 3 (b) which provides:

In the event of any liquidation, dissolution

or winding up of the affairs of the corporation

or any distribution of its capital, whether yol-

untary or involuntary * * * each holder of the

$6 preferred stock * * * shall be entitled * * *

to be paid on each share of such stock held by

him the sum of $100 * * *. After such pay-

ment * * * the remaining assets and funds of

the corporation * * * shall be divided and dis-

tributed among the holders of the Common

Stoek. [R. 399-400. ]

Bond and Share does not dispute that Section

11 (b) of the Holding Company Act compelled the

retirement of its preferred stock, and indeed it

specifically invoked the powers of the Commission

and the district court under Section 11 (e) to effect

10

piecemeal retirement of its preferred stock in a

manner not authorized by the charter. It urges,

however, that apart from the compulsions of the

Act it would have been prompted by business rea-

sons to retire its preferred stock and could have

done so under its charter by a payment of only

$100 per share. In the Commission’s view, even

assuming the facts, this would be immaterial to the

question of whether ‘‘investment value’’ or the

charter provisions are controlling under Section

11 (e) of the Act. However, the alleged proba-

bility of the retirement of the preferred stock, not

under compulsion of the Act and for independent

business reasons, was considered by the Commis-

sion as one factor affecting the investment value

of the preferred stock. The Commission therefore

considered the evidence offered and rejected the

factual basis for the contention that business rea-

sons unrelated to the compulsions of Section 11

would have led Bond and Share to retire, without

refunding, its preferred stocks (R. 54). The Dis-

trict Court held that this finding was based on sub-

stantial evidence (R. 15). As to this point the de-

cision rests upon considerations generally similar

to those involved in the Federal case, although of

course upon different evidence.

The district court rejected Bond and Share’s

interpretation of what the charter provision in

question would require if the petitioner had sought

to retire its preferred stock pursuant to its charter.

The District Judge held that ‘‘even if Bond and

11

Share had, as a matter of business judgment apart

from the Act, sought to retire the preferred, it

could not have done so under §3 (b) but would

have had to do so under §3 (e)’’ (R. 9), the

provision of the charter permitting retirement of

the preferred by redemption at $110 per share (R.

400-402).

Thus, the question involved in the Federal case,

whether the charter liquidation provision is con-

trolling, is not reached unless this Court disagrees

with the decision of the District Judge as to what

the charter would have permitted in the absence of

the Holding Company Act.‘

2. A further difficulty is presented by the sugges-

tion that this Court grant certiorari at this stage in

the case, since petitioner here is only one of the ap-

pellants in the court below and the other appellant

has raised issues which would not necessarily be i

determined by a decision on the issues here in-

volved.

An appeal is pending in the Court of Appeals

for the Second Circuit on behalf of Bond and

Share’s $5 preferred stock, which was found by the

Commission and the district court to have an in-

~ 4In addition, the decision of Judge Leibell in approving

Plan II-A seems to foreclose any such argument as Bond and

Share makes with respect to the controlling weight which

should be assigned to its charter liquidation provision. Judge

Leibell expressly held, and it must be taken as the law of the

case, that the preferred stock was being retired: “* * * not

in any of the ways specified in the charter, but in accordance

with the plans which cut across the charter provisions.”

Electric Bond and Share Co., 73 F. Supp. 426, 446. (R. 293)

12

vestment value of only $100 per share. That ap-

pellant apparently will urge that the evidence re-

quired a higher valuation for the $5 preferred.

A grant of the instant petition would thus require

this Court to pass upon questions of fact with re-

spect to one class of preferred stock while similar

issues not concluded by the determination of this

Court with respect to the other class might remain

pending in the Court of Appeals.

3. Petitioner’s objection to the Commission’s or-

der awarding compensation for delay presents a

minor and insubstantial issue. Having found the

fair investment value of the $6 preferred stock to

be $110 per share, the Commission was required,

under all the cases thus far decided, to award these

stockholders compensation for delay in payment

at a rate ‘‘which approximates the favorable rate

of return they received on their preferred stock.’ *

In accordance with the formula adopted in the

Central-Illinots.case, which was approved by this

Court (338 U. S. 96, 152-155), the Commission

held that the rate of compensation should be $6 per

annum divided by the investment value of $110 per

share, or 5.45 per cent. Any lower rate would

deprive the $6 preferred stockholders of the full

5S. EB. C. et al. v. Central-Illinois Securities Corporation et

al., 338 U.S. at 145, 155. See also In re Pennsylvania Edison

Company, 176 F. 2d 764, 769 (C. A. 3, 1949). Similar com-

pensation for delay in payment was also awarded in the Fed-

eral case, and no objection was raised although the dissenting

judge in the Court of Appeals in that case construed the escrow

agreement there involved to require no payments in excess of

the money set aside by that agreement.

T

return upon their investment and thus be incon-

sistent with the finding of fair investment value.

4. Petitioner criticizes the financial analysis

from which the Commission derives its conclusions

as to the investment value of the $6 preferred

stock.® This raises merely a question of judgment

as to which this Court has indicated that great

weight should be given to the Commission’s con-

clusion. See Niagara Hudson Corp. v. Levintritt,

340 U.S. 336, 346-347.

Petitioner argues that the Commission erred in

taking into account prospective earnings from sub-

sidiaries where there were dividend arrears on the

preferred stocks and consequent blocks to payment

on Bond and Share’s holdings of common stock

pending consummation of reorganizations. The

Commission considered the whole record in its

analysis and made detailed findings with regard

to both the assets and earnings coverages of the

preferred stocks. With respect to both cover-

ages, it analyzed them on both a system and a cor-

porate basis. With respect to system earnings,

the Commission analyzed past, current, and pros-

pective earnings coverages for the preferred stocks

as of the time they were retired. The Commission

did not assume that Bond and Share’s subsidiaries,

then in process of reorganization, had actually

13

® Petitioner’s suggestion that the Commission’s findings re-

specting the investment value of the $6 preferred stock “are

not supported by substantial evidence on consideration of the

record as a whole” is not developed at this time and accordingly

we are not in a position to discuss it. (Pet. 32-33).

been reorganized, but did include the prospect of

such reorganizations as factors to be considered

in estimating prospective earnings. Consideration

of such factors was necessary to reach an intelli-

gent conclusion as to the prospective earnings that

would have been available for the preferred stocks

of Bond and Share if they had remained outstand-

ing. Bond and Share’s own expert testified that

the use of the plans on file at the time of his testi-

mony was ‘‘as good a way of appraising what kind

of a reorganization there might have been in its

overall effect, although it might have been apart

from the impact of the Act, as any other way that I

ean think of”’ (R. 392-393). Accordingly, the Com-

mission assumed, in its analysis of system earnings,

that the three plans on file would be consummated

in substantially the form in which they had been

submitted.’

This analytic technique did not, as Bond and

Share contends, violate any rule of the Central-

Illinois case. The ‘‘ present liquidation or reorgan-

ization required by the Act’’ which must be omit-

ted from the valuation process is the elimination

of Bond and Share’s own corporate securities. It

does not, as this Court made clear, require the re-

constitution of the system as it would have existed

if the Act had not been passed (338 U. S. 96, 140-

143). Nor does it, we believe, require the Commis-

* This assumption was borne out by the two reorganizations

which have been consummated thus far.

15

sion to ignore pending plans which may assist it in

its valuation process.

Bond and Share further contends that the Com-

mission was required to ignore these earnings be-

cause the Act compels Bond and Share to divest

itself of the stock in the subsidiary holding com-

panies. Obviously, divestment of the holdings of

Bond and Share in American, Electric, and For-

eign Power involves not a forfeiture of the values

inherent in such holdings, but the realization of

equitable equivalents. The Commission properly

evaluated the holdings; Bond and Share would, in

effect, almost disregard them.

Finally, Bond and Share contends that the Com-

mission erroneously used as a basis for determin-

ing investment value ‘‘a period of abnormally high

market values of a transient nature.’’ (Pet. p. 31)

A similar contention was advanced and rejected in

the Central-Illinois case.

16

CONCLUSION

The decision of the District Court is correct an

no question is presented which would warrant r¢

view by this court. Accordingly the petition feo

certiorari should be denied.

Respectfully submitted,

Puiipe B. PERLMAN,

Solicitor General

JOHN F. Davis,

Special Assistant to th

Attorney General

Rocer 8S. Foster,

General Counsel,

Myron 8. Isaacs,

Chief Counsel,

Division of Public Utilities.

MYER FELDMAN,

Attorney,

Securities and Exchange Commission

May, 1951

; and

it re-

1 for

0 the

1

17

APPENDIX

Pusiic Utiity Hotpinag Company Act oF 1935,

49 Stat. 820, 15 U. S. C. 79k

See. 11.

* * * * *

(b) It shall be the duty of the Commission, as

soon as practicable after January 1, 1938:

* * * * *

(2) To require by order, after notice and oppor-

tunity for hearing, that each registered holding

company, and each subsidiary company thereof,

shall take such steps as the Commission 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 inequit-

ably distribute voting power among security hold-

ers, of such holding-company system. In earry-

ing out the provisions of this paragraph the Com-

mission shall require each registered holding com-

pany (and any company in the same holding-com-

pany system with such holding company) to take

such action as the Commission shall find necessary

in order that such holding company shall cease to

be a holding company with respect to each of its

subsidiary companies which itself has a subsidiary

company which is a holding company. Except for

the purpose of fairly and equitably distributing

voting power among the security holders of such

18

company, nothing in this paragraph shall authorize

the Commission to require any change in the corp-

orate structure or existence of any company which

is not a holding company, or of any company whose

principal business is that of a public-utility com-

pany.

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 un-

der this subsection shall be subject to judicial re-

view as provided in section 24.

* * * * *

(e) In accordance with such rules and regula-

tions or order as the Commission may deem neces-

sary or appropriate in the public interest or for the

protection of investors or consumers, any regis-

tered holding company or any subsidiary company

of a registered holding company may, at any time

after January 1, 1936, submit a plan to the Com-

mission for the divestment of control, securities,

or other assets, or for other action by such company

or any subsidiary company thereof for the pur-

pose of enabling 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 equit-

19

able to the persons affected by such plan, the Com-

mission 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 provi-

sions 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 approve

such plan as fair and equitable 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 juris-

diction and possession of the company or com-

panies and the assets thereof, wherever located;

and the court shall have jurisdiction to appoint a

trustee, and the court may constitute and appoint

the Commission as sole trustee, to hold or admin-

ister, under the direction of the court and in ac-

cordance with the plan theretofore approved by the

court and the Commission, the assets so possessed.

* * * * *

w U. S. GOVERNMENT PRINTING OFFICE: 1981 946190 e36