Exchange Commission 329 U.S. 90 (1946) ]
Mr. Roger S. Foster, of Philadelphia, Pa., for respondent.
Mr. Justice MURPHY delivered the opinion of the Court.
We are concerned here with the constitutionality of 11(b)(2) of the Public Utility Holding Company Act of 19351 and its application to the petitioners, the American Power & Light Company and the Electric Power & Light Corporation.
American and Electric are two of the subholding companies in the Electric Bond and Share Company holding company system, certain aspects of which were considered by this Court in Electric Bond & Share Co. v. S.E.C., 303 U.S. 419 , 58 S.Ct. 678, 115 A.L.R. 105. This system is a pyramid-like structure of which Bond and Share itself constitutes the apex, five subholding companies (including American and Electric) create an intermediate tier,2 and approximately 237 direct [329 U.S. 90, 96] and indirect subsidiaries of the latter form the base. From the standpoint of book capitalization and assets, number of customers and areas served by the operating companies, and quantity of electricity generated and gas sold, the Bond nd Share system constitutes the largest single public utility holding company system registered under the Act.
The proceeding now under review was instituted by the Securities and Exchange Commission under 11(b)(2) of the Act. After appropriate notice and hearing, the Commission found that the corporate structure and continued existence of American and Electric unduly and unnecessarily complicated the Bond and Share system and unfairly and inequitably distributed voting power among the security holders of that system, in violation of the standards of 11(b)(2). 11 S.E.C. 1146. Orders were accordingly entered requiring the dissolution of both American and Electric and requiring them to submit plans for the effectuation of these orders. The First Circuit Court of Appeals sustained the Commission's action in all respects and affirmed its orders, while refusing to consider certain contentions of American and Electric which had not been raised before the Commission. 141 F.2d 606. We granted certiorari because of the obvious public importance of the issues presented. 325 U.S. 846 , 65 S.Ct. 1400
At the outset, we reject the claim that 11(b)(2), viewed from the standpoint of the commerce clause, is unconstitutional. [329 U.S. 90, 97] So far as here pertinent,3 11(b)(2) directs the Securities and Exchange Commission, as soon as practicable after January 1, 1938, 'To require by order, after notice and opportunity 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 inequitably distribute voting power among security holders, of such holding-company system. ... Except for the purpose of fairly and equitably distributing voting power among the security holders of such company, nothing in this paragraph shall authorize the Commission to require any change in the corporate structure or existence of any company which is not a holding company, or of any company whose principal business is that of a public utility company.'
Like 11(b)(1) its statutory companion, 11(b)(2) applies only to registered holding companies and their subsidiaries. We noted in North American Co. v. S.E.C., 327 U.S. 686 , 66 S.Ct. 785, that by making certain interstate transactions unlawful unless a holding company registers with the Commission 4(a), and by extending 11(b)(1) to registered holding companies, Congress has effectively applied 11(b)(1) to those holding companies that are [329 U.S. 90, 98] in fact in the stream of interstate activity or that affect commerce in more states than one. The identical observations can be made as to 11(b)( 2). Its impact is likewise limited by reference to the registration requirements, to those holding companies which depend for their very existence upon the constan and systematic use of the mails and the instrumentalities of interstate commerce. Effect is thereby given to the legislative policy set forth in 1(c) of interpreting all provisions of the Act to meet the problems and to eliminate the evils 'connected with public-utility holding companies which are engaged in interstate commerce or in activities which directly affect or burden interstate commerce.' 15 U.S.C.A. 79a(c).
The Bond and Share system including American and Electric, possesses an undeniable interstate character which makes it properly subject from the statutory standpoint, to the provisions of 11(b)(2). This vast system embraces utility properties in no fewer than 32 states from New Jersey to Oregon and from Minnesota to Florida, as well as in 12 foreign countries. Bond and Share dominates and controls this system from its headquarters in New York City. 4 As was the situation in the North American case, the proper control and functioning of such an exten- [329 U.S. 90, 99] sive multi-state network of corporations necessitates continuous and substantial use of the mails and the instrumentalities of interstate commerce. Only in that way can Bond and Share, or its subholding companies or service subsidiary, market and distribute securities, control and influence the various operating companies, negotiate inter-system loans, acquire or exchange property, perform service contracts, or reap the benefits of stock ownership. See 1(a). See also International Textbook Co. v. Pigg, 217 U.S. 91 , 30 S.Ct. 481, 27 L.R.A.,N.S., 493, 18 Ann.Cas. 1103. Moreover, many of the operating companies on the lower echelon sell and transmit electric energy or gas in interstate commerce to an extent that cannot be described as spasmodic or insignificant. Electric Bond & Share Co. v. S.E.C., supra, 303 U.S. 432, 433 , 58 S.Ct. 681, 682, 115 A.L.R. 105.5 Such activities serve to augment the interstate nature of the Bond and Share system. And they make even plainer the fact that this system falls within the intended scope of 11(b)(2).
Congress, of course, has undoubted power under the commerce clause to impose relevant conditions and requirements on those who use the channels of interstate commerce so that those channels will not be conduits for promoting or perpetuating economic evils. North American Co. v. S.E.C., supra; United States v. Darby, 312 U.S. 100, 657 , 61 S.Ct. 451, 132 A.L.R. 1430; Brooks v. United States, 267 U.S. 432 , 45 S.Ct. 345, 37 A.L.R. 1407. Thus to the extent that corporate business transacted through such channels, affecting commerce in more states than one, Congress may act directly with respect to that business to protect what it conceives to be the national welfare. It [329 U.S. 90, 100] may prescribe appropriate regulations and determine the conditions under which that business may be pursued. 6 It may compel changes in the voting rights and other privileges of stockholders. 7 It may order the divestment or rearrangement of properties. 8 It may order the reorganization or dissolution of corporations. 9 In short, Congress is completely uninhibited by the commerce clause in selecting the means considered necessary for bringing about the desired conditions in the channels of interstate commerce. Any limitations are to be found in other sections of the Constitution. Gibbons v. Ogden, 9 Wheat. 1, 196.
Since the mandates of 11(b)(2) are directed solely to public utility holding company systems that use the channels of interstate commerce, the validity of that section under the commerce clause becomes apparent. It is designed to prevent the use of those channels to propagate and disseminate the evils which had been found to flow from unduly complicated systems and from inequitable distributions of voting power among security holders of the systems. Such evils are so inextricably entwined around the interstate business of the holding company systems as to present no serious question as to the power of Congress under the commerce clause to eradicate them.
In the extensive studies which preceded the passage of the Public Utility Holding Company Act, 15 U.S.C.A. 79 et seq., it had been [329 U.S. 90, 101] found that 'The most distinctive characteristic, and perhaps the most serious defect of the present holding-company organization is the pyramided structure which is found in all of the important holding-company groups examined.' 10 The pyramiding device in its most common form consisted of interposing one or more subholding companies between the holding company and the operating companies and issuing, at each level of the structure, different classes of stock with unequal voting rights. Most of the financing of the various companies in the structure occurred through the sale to the public of bonds and preferred stock having low fixed returns and generally carrying no voice in the managements. Under such circumstances, a relatively small but strategic investment in common stock (with voting privileges) in the higher levels of a pyramided structure often resulted in absolute control of underlying operating companies with assets of hundreds of millions of dollars. 11 A tremendous 'leverage' in rela- [329 U.S. 90, 102] tion to that stock was thus produced; the earnings of the top holding company were greatly magnified by comparatively small changes in the earnings of the operating companies. The common stock of the top holding company might quickly rise in value and just as quickly fall, making it a natural object for specul tion and gambling. In many instances this created financially irresponsible managements and unsound capital structures. 12 Public investors in such stock found themselves the innocent victims, while those who supplied most of the capital through the purchase of bonds and preferred stock likewise suffered in addition to being largely disfranchised. Prudent management of the operating companies became a minor consideration, with pressure being placed on them to sustain the excessive capitalization to the detriment of their service to consumers. Reduction of rates was firmly resisted. The conclusion was accordingly reached by those making the studies that the highly pyramided system 'is dangerous and has no justification for existence'13 [329 U.S. 90, 103] and 'represents the holding-company system at its worst.'