Sec v. Central-Illinois Securities Corp., 338 U.S. 96 (1949)
Securities and Exchange Commission v.
Central-Illinois Securities Corp.
No. 226
Argued January 12-13, 1949
Decided June 27, 1949 *
338 U.S. 96
CERTIORARI TO THE UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
Syllabus
The Securities and Exchange Commission approved as fair and equitable an amended plan for dissolution submitted under § 11(e) of the Public Utility Holding Company Act of 1935 by a solvent holding company whose capital structure consisted of three classes of preferred and one class of common stock. The plan provided for payment to the preferred stockholders in cash; distribution of the remaining assets to the common stockholders, and dissolution of the company. The preferred stockholders were to be paid the voluntary liquidation values (or call prices) fixed by the charter ($105, $110, and $110, respectively), which the Commission found to be less than their going concern or investment values but which were more than their charter values on involuntary liquidation ($100 for each of the three classes). On application by the Commission for enforcement of the plan, the District Court concluded that it would not be fair and equitable to pay the preferred stockholders more than $100 per share, ordered the plan modified to provide for such payment, and approved the plan as thus modified.
Held: the Commission’s approval of the plan was not contrary to law; its findings were supported by adequate evidence, and its order should have been approved and enforced. Pp. 99-113, 155.
1. The Commission’s findings as to valuation, which are based upon expert judgment, discretion and prediction, as well as upon "facts," are not subject to reexamination on judicial review in a proceeding under § 11(e), unless they are not supported by substantial evidence or were not made in accordance with legal standard. Pp. 113-127.
(a) The scope of judicial review over findings of fact and over determinations in matters in which Congress has given the Commission authority to act upon its expert knowledge and experience is not different in a proceeding under § 11(e) from that in a proceeding under § 24(a). Pp. 113-127.
(b) The characterization of the reviewing court in § 11(e) as "a court of equity" was not intended to define the scope of review to be exercised over findings of fact or determinations in matters committed to the Commission’s expert judgment and discretion, or to set up a different and conflicting standard of review from the one to be applied in proceedings under § 24(a). P. 125.
2. The equitable equivalents of the securities’ investment values on a going concern basis, rather than charter liquidation provisions, provide the measure of stockholders’ rights in liquidations compelled by the Act. Otis & Co. v. Securities & Exchange Comm’n, 323 U.S. 624; Schwabacher v. United States, 334 U.S. 182. Pp. 129-135.
(a) The "fair and equitable" standard requires that each security holder be given the equitable equivalent of the rights surrendered; in liquidations under the Act, equitable equivalence is determined not by charter preferences, but by valuing the security surrendered "on the basis of a going business, and not as though a liquidation were taking place." Pp. 130-131.
(b) There is no significant difference between the charter provisions in this case and those in the Otis case. Pp. 131-132.
(c) The fact that, in this case, there is a dissolution of the holding company enterprise by the liquidation of the last holding company in the system, whereas, in the Otis case, the holding company system was to continue, does not require that the charter involuntary liquidation preference replace investment values as the measure of the preferred stockholders’ rights. Schwabacher v. United States, 334 U.S. 182. Pp. 132-135.
(d) A different result is not required by the fact that the plan provides for payment of the preferred stockholders in cash, rather than in securities of a new corporation. P. 135.
(e) The doctrine of impossibility or frustration does not provide a measure of the security holders’ claims. Pp. 136-139.
3. The Commission’s application of the investment value principle was free from errors of law, and the findings with respect to value were based upon substantial evidence. Pp. 139-152.
(a) The principle of compensating security holders by allowing them the equitable equivalent of the present going concern value of their securities as the measure of security satisfaction did not, and was not intended to, destroy the charter right to priority of satisfaction. P. 140.
(b) When the Commission values a security interest by determining the value that interest would have if it were not for the present liquidation required by the Act, it substantially complies with the statutory mandate. Pp. 140-143.
(c) When the claims of senior security holders are to be paid in cash, the Commission properly measures their claims in terms of the cost of reinvestment in a security of comparable risk and return. P. 144.
(d) When it became apparent that the going concern value would exceed the call prices of the stocks by a considerable amount, the exact going concern value became immaterial, because the call price (at which the corporation could always retire the preferred stock without reference to the Act) marked the limits of the preferred stocks’ claims. P. 145.
(e) The Commission’s determination that the investment values of the preferred stocks were in excess of their call prices has ample support in the record. Pp. 144-148.
(f) The Commission did not give the common stockholders less than the investment value of their stock. Pp. 148-151.
(g) Since the amended plan required the investment value of the preferred stock to be measured by cash in this case, there is no occasion for examination of the correlative rights of the preferred and common stockholders; the rights of the common stockholders are not entitled to recognition until the rights of the preferred stockholders have been fully satisfied. P. 151.
(h) In deciding the case on the assumption that the inquiry was one of "relative rights based on colloquial equity," the District Court erred insofar as, by "colloquial equities," it meant considerations which do not bear upon the investment or going concern value the preferred stocks would have absent the liquidation compelled by the Act. Pp. 151-152.
4. The escrow arrangement adopted by the District Court, whereby there would be deposited in escrow the difference between the involuntary liquidation price of $100 per share and the amount which the Commission approved, was fair to the preferred stockholders. Pp. 152-155.
168 F.2d 722 reversed.
A plan under § 11(e) of the Public Utility Holding Company Act of 1935 was approved by the Securities and Exchange Commission. Holding Company Act Releases Nos. 7041, 7119, and 7190. The District Court modified the plan and approved it as modified. 71 F.Supp. 797. The Court of Appeals vacated the decree of the District Court, with directions to remand to the Commission. 168 F.2d 722. This Court granted certiorari. 335 U.S. 851. Reversed and remanded, p. 155.