# Opposition Brief — Electric Bond & Share Co. v. Securities & Exchange Commission > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386417_0680%3A2 ## Record - **Collection:** Supreme Court brief - **Document type:** Opposition Brief - **Published:** January 1, 1951 - **Citation:** 341 U.S. 950 ## Text ; Page MME ic Sn ee ddl SV Accs wg ded LAAT Oi Oo IE 1 WETMRUINGIIESE oy oss Woks Pete ee a ocuh n wian So con aes 2 EUSA oC rR ae lean 2 RTE RTE TOU EEE Ree wea e ee ene 2 I Po nn Fat a alowhs pp aalis obra eon Una 3 PRR PERREME h eti p 2 Bier eau PE rie G aoe Sree RAC NON Sn NR a 8 NPE MEL 80 hn Gene Bate Oe Aten ON Gite dee ee I 16 Pee eres re fee ae PP eres Serr? ore 17 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.: TES ORR (7 ORES a a AR OA a Hone 17 RMN oo onsoesedss ve kee voces 17 TIRES. coho och ci cegecccpeeeaseoe 2, 3, 5, 10, 18 (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 --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386417_0680%3A2. Public record. Not legal advice.