[ Sec. and Exchange Commission v. Central-Illinois Securities Corp. 338 U.S. 96 (1949) ]
[338 U.S. 96 , 99] Mr. Roger S. Foster, for Securities & Exchange Commission, washington, D.C.
Mr. Lawrence R. Condon, New York City, for Thomas W. Streeter and others.
Mr. Francis H. Scheetz, Philadelphia, Pa., for Home Ins. Co. and others.
Mr. Louis Boehm, New York City, for Lucille White and others.
Mr. Alfred Berman, New York City, for Central-Illinois Securities Corp. and others.
Mr. Justice RUTLEDGE delivered the opinion of the Court.
The case involves an amended plan filed under 11(e) of the Public Utility Holding Company Act of 19351 by Engineers Public Service Company. The plan provided, inter alia, for satisfying the claims of Engineers' preferred stockholders in cash as a preliminary to distributing the [338 U.S. 96 , 100] remaining assets to common stockholders and dissolving the company. Broadly, the question is whether the Securities and Exchange Commission, in reviewing the plan, correctly applied the 'fair and equitable' standard of 11(e) in determining the amounts to be paid the preferred stockholders in satisfaction of their claims.
As will appear, the ultimate effect of the Commission's determination was to allow the holders of the three series of Engineers' outstanding cumulative preferred stock to receive the call (or voluntary liquidation and redemption) prices for their shares, namely, $105 per share, $110 per share and $110 per share, rather than the involuntary liquidation preference which, for each of the three series, was $100 per share. Common shareholders oppose the allowance to the preferred of the call price value, insisting that the maximum to which the preferred are entitled is the involuntary liquidation preference of $100.
In this view the District Court and, generally speaking, the Court of Appeals have concurred, declining to give effect to the plan as approved in this respect by the Commission. Consequently we are confronted not only with issues concerning the propriety of the Commission's action in applying the 'fair and equitable' standard of 11(e), but with the further question whether its judgment in these matters is to be given effect or that of the District Court, either as exercised by it or as modified in certain respects by the Court of Appeals.
The facts and the subsidiary issues involved in the various determinations are of some complexity and must be set forth in considerable detail for their appropriate understanding and disposition.
At the time the Public Utility Holding Company Act was enacted, the holding company system dominated by Engineers consisted of 17 utility and nonutility compa- [338 U.S. 96 , 101] nies. Of these, nine were direct subsidiaries of Engineers and eight were indirect subsidiaries. Integration proceedings under 11(b)(1) of the Act were instituted with respect to Engineers and its subsidiaries in 1940. In a series of orders issued in 1941 and 1942 the Securities and Exchange Commission directed Engineers to dispose of its interests in all companies except either Virginia Electric and Power Company or Gulf States Utilities Company, and designated Virginia as the principal system if Engineers failed to elect between it and Gulf States. 2 At the time the plan now under review was filed Engineers had complied with the divestment orders to the extent of disposing of all its properties except its interest in Virginia, consisting of 99.8 per cent of that company's common stock, and its interest in Gulf States and El Paso Electric Company, consisting of all their common stock. Engineers' principal assets were the securities representing its interest in these companies and $14,650,000 in cash and United States Treasury securities.
Engineers had no debts. It had outstanding three series of cumulative preferred stock of equal rank: 143,951 shares of $5 annual dividend series, 183,406 shares of $5.50 series, and 65,098 shares of $6 series. As has been said, [338 U.S. 96 , 102] all three series had involuntary liquidation preferences of $100 per share, call prices of $105 for the $5 series and $110 for the $5.50 and $6 series, and voluntary liquidation preferences equal to the call prices.
Proceedings before the Commission. The Plan as Originally Filed. The plan as originally filed by Engineers provided for the retirement of all three series of preferred stock by payment of the involuntary liquidation preference of $100 per share, plus accrued dividends to the date of payment. 3 The remaining properties of Engineers were then to be distributed among the common stockholders, and Engineers was to dissolve. 4
In order to insure adequate presentation of the views of the preferred stockholders, Engineers' board of directors authorized one of its members, Thomas W. Streeter, who was primarily interested in the preferred stock, to retain counsel partly at the company's expense. Streeter and members of his family are petitioners in No. 227. These preferred stockholders and representatives of a group of institutional investors who held preferred stock, [338 U.S. 96 , 103] the Home Insurance Company and Tradesmens National Bank and Trust Company, petitioners in No. 243, appeared before the Commi sion in opposition to the plan. They contended that they should receive amounts equal to the voluntary liquidation preference of the preferred.
After summarizing the issuing prices,5 the dividend history,6 and the market history7 of the three series of preferreds, the Commission analyzed the assets coverage and earnings coverage of the stock. The preferred stock of Engineers represented 17.5 per cent of the consolidated capitalization and surplus of the system. That stock was junior to the 66. 2 per cent of the consolidated capitalization and surplus which consisted of securities of Engineers' subsidiaries held by the public, and senior to 16.3 per cent, [338 U.S. 96 , 104] consisting of Engineers' total common stock and surplus.
The system's average earnings coverage of fixed charges and preferred dividends for the last five years prior to the submission of the plan was 1.4 times. For these five years Engineers' average earnings coverage of preferred dividends was 1.5 times.
Certain expert testimony concerning the going-concern or investment value of the preferred stock was adduced before the Commission. Dr. Ralph E. Badger was an expert witness on behalf of certain preferred stockholders. He made a detailed analysis of the earnings and assets of Engineers and of the three series of preferred stock. He then compared Engineers and the preferred stock with relevant information concerning other comparable companies and securities. 8 He concluded that, apart from [338 U.S. 96 , 105] their call provisions and on the basis of quality and yield, the three series of preferred stock should be valued at $108.70, $119.57, and $130. 33 respectively, but that because of the redemption privilege, 'the present investment values are represented by their call price, plus a slight premium to account for the time required to effect a call.' The fair investment values of the preferred, in view of the redemption privilege, were: $5 series-$106.25; $5.50 series-$111.38; $6 series-$111. 50. No rebuttal testimony was introduced, and there was no serious challenge to Badger's conclusions that the fair investment value of each series of the preferred exceeded the call prices.
Donald C. Barnes, Engineers' president, testified that apart from the impact of 11 of the Act and taking into account the call prices, the fair value of the preferreds, i.e., 'what a willing buyer would pay and what a willing seller would take in today's market for such securities,' was somewhat above the redemption prices. Barnes spoke of several factors, viz., possibilities of continued inflation, of depression, government competition, adverse changes in regulatory policy, or developments in atomic [338 U.S. 96 , 106] energy, all 'common to the utilities industry generally,' which might have a future adverse effect on the value of Engineers preferred. Both witnesses agreed, however, as Engineers stated in its brief before the Commission, that 'the present value or investment worth of these three series of stock, on a going concern basis and apart from the Act, under prevailing yields applied to comparable securities' was in excess of the call prices. Barnes also testified that the preferred stock would have been called if it had not been for the impact of 11.
The Commission first held that 'the dissolution of Engineers (was) 'necessary' under the standards of the Act.' However, since such a liquidation, under Otis & Co. v. Securities and Exchange Commission, 323 U.S. 624 , 'does not mature preferred stockholders' claims' the so-called involuntary liquidation provision of Engineers' charter was not operative. The Otis case ruled 'that Congress did not intend that its exercise of power to simplify should mature rights, created without regard to the possibility of simplification of system structure, which otherwise would only arise by voluntary action of stockholders or, involuntari y, through action of creditors.' 323 U.S. at page 638, 65 S.Ct. at page 490.
After announcing that in a 11 reorganization 'a security holder must receive, in the order of his priority, from that which is available for the satisfaction of his claim, the equitable equivalent of the rights surrendered,' the Commission considered all the charter provisions which affected the preferred, 'such as the dividend rate and the call price as well as the liquidation preferences,' and analyzed the financial condition of the company 'with particular regard to the asset and earnings coverage of the preferred.' On the basis of the undisputed testimony the Commission found that the going concern or investment value of the preferred was at least equal to the respective call prices. Since the call prices operated as ceilings on the value of the security by providing with respect to each [338 U.S. 96 , 107] series, 'a means, apart from the Act, whereby the security can be retired at a maximum price,'9 no attempt was made to determine whether the investment value of any series of preferred would exceed the call price if there were no call provision.
The Commission concluded that the payment of only $100 per share, plus accrued dividends, would not be fair and equitable to the preferred stockholders. It therefore refused to approve that provision of the plan which provided for retirement of the preferred at involuntary liquidation preferences.
Turning its attention to whether the plan was fair to the common stock, the Commission stated that, because of the accumulation of large amounts of idle cash,10 elimination of preferred stock having fixed dividend requirements was 'highly beneficial to the common.' Moreover, by implementing adjustment of the system to compliance with the Act, retirement of the preferred brought the common closer to the time when it would begin receiving dividends.
Engineers' contended that payment to the preferred of any amount in excess of $100 per share was unfair, because certain divestments required by the Act resulted in losses to the common stock and also eliminated the advantages of a 'diversified portfolio of securities.' In reply to this the Commission noted that it did not accept [338 U.S. 96 , 108] the hypothesis that losses were incurred by divestments caused by the Act, 11 and stated that the preferred claims, measured by their going-concern value, were entitled to absolute priority, and that what remained to junior security holders after satisfying this priority was necessarily their fair share.
Certain mechanical features of the plan were also disapproved by the Commission. 12
The Amended Plan. Engineers then acquiesced in the Commission's determination and submitted an amended plan. In addition to meeting the Commission's mechanical objections to the original plan, the amended plan pro- [338 U.S. 96 , 109] vided for payment of the preferred stocks at their voluntary liquidation or call prices.
Over the objections of certain common stockholders, the Commission approved the plan as amended. It stated that, in the event the common stockholders continued to litigate the fairness of the plan after approval by the district court, it would be appropriate 'to achieve expeditious compliance with the Act and fairness to the persons affected * * * for Engineers to make prompt payment of $100 per share and accrued dividends in order to stop the accrual of further dividends, and set up an escrow arrangement.' The escrow would secure the payment of the amount in issue and also 'an additional amount to provide the preferred 'for the period of the escrow a return on the amount in escrow which is measured by the return which would have been received by it if the stock had remained outstanding." Such an escrow could be established under court supervision without returning the plan to the Commission. Holding Co. Release No. 7119, p. 6. By later order the Commission provided for the establishment of such an escrow at the option of Engineers if it appeared likely that common stockholders would litigate beyond the district court. Holding Co. Release No. 7190.13
Proceedings in the District Court. The Commission applied to the District Court for the District of Delaware for approval of the plan as amended. 11(e). Cer- [338 U.S. 96 , 110] tain common stockholders, respondents in Nos. 226, 227, and 243, and petitioners in No. 266, filed objections to the plan, contending that the Commission had erred in awarding to the preferred stockholders the equivalent of the voluntary liquidation preferences of their shares. The Streeter group of preferred stockholders o jected to the Commission's finding of the appropriateness of an escrow arrangement to stop the accrual of further dividends in the event of continued litigation.
The District Court considered the case on the record made before the Commission. It preferred not to determine whether the involuntary liquidation preferences controlled, but stated that (71 F.Supp. 797, 802) 'in each case the inquiry is one of relative rights based on colloquial equity.' That standard, thought the court, necessitated consideration of various factors to which it was thought the Commission had attached little or no importance. Thus it was important to consider not only the charter provisions but the issuing price in terms of what the company received for the securities, and the market history of the preferred. These factors might more than offset the factor of investment value, the testimony as to which the court accepted. In any event, thought the court, several other considerations have this effect. The Act, in addition to compelling the preferred stockholders to surrender 'this present enhanced value,' [338 U.S. 96 , 111] worked hardships on the common. All classes of securities, the court said, suffered losses as a result of the divestment orders issued by the Commission under the Act. Earnings retained in the system at a sacrifice to the common contributed to the enhancement of the value of the preferred. These standards of 'colloquial equity,' which the District Court conceived to be controlling in our decision in Otis & Co. v. Securities and Exchange Commission, supra, compelled the conclusion that it would not be fair and equitable to give the preferred more than $100 per share. Arguments concerning the worth of the preferred in the absence of a Public Utility Holding Company Act were thought not profitable to consider 'for there is a Public Utility Holding Company Act.' In effect amending the plan to provide for payment of the preferred at $100 per share, the District Court approved the plan as thus amended. The escrow agreement prescribed by the Commission was approved, the court concluding that there was no merit in the preferred stockholders' objections to this feature. 71 F.Supp. 797.
Proceedings in the Court of Appeals. The Court of Appeals for the Third Circuit regarded as a central issue in the case the question whether the District Court had exceeded the scope of review properly exercised by a district court reviewing a plan under 11(e) of the Public Utility Holding Company Act. It concluded that the District Court was charged with the duty of exercising a full and independent judgment as to the fairness and equity of a plan, 'to function as an equity reorganization tribunal within the limitations prescribed by the Act.' 168 F.2d 722, 736.
Turning to the various factors which should have been taken into consideration in arriving at the equitable equivalent to the rights surrendered by the preferred [338 U.S. 96 , 112] shareholders, the Court of Appeals criticized the Commission for finding the investment value of the preferred as if there were no Holding Company Act while omitting to evaluate the common by the same standard, and for failing to consider factors other than the investment value. It was thought that the Commission should have estimated the future earning power of Engineers, absent a Holding Company Act, and apportioned that power between preferred and common stockholders in accordance with their respective claims. It was also thought that, in the process of valuing the preferred and the common by the same approach, the Commission should have considered 'the substantial losses which occurred to Engineers by virtue of divestitures compelled by the Act.'14 Losses of this nature 'should be returned to the credit side of the enterprise's balance sheet as a matter of bookkeeping.' Id. at pages 737-738.
The District Court, however, was held to have erred in one particular: it had amended the plan by substituting its own valuation of $100 per share for the preferred stock for that of the Commission. The court had no power to do this. It could only reject the Commission's valuation, and return the case to the Commission for further action in the light of the court's views.
At the time the opinion of the Court of Appeals was rendered, the plan had been consummated, with the exception of the payment of the disputed amounts in [338 U.S. 96 , 113] excess of the involuntary liquidation preferences of the preferred. The escrow arrangement, which had been employed to preserve the issue of the amount to which the preferred was entitled after having been approved by the Commission and the District Court, was held to be proper.
We granted certiorari because of the importance of the questions presented in the administration of the Public Utility Holding Company Act. 335 U.S. 851 .
The Court of Appeals was of the view that the question of the extent of 'the power conferred on the district courts * * * by the Act' was one which went 'to the heart of the instant controversy.' 168 F.2d at page 729. The Commission apparently took the position before that court that the District Court had erred in setting aside the agency's conclusions unless those conclusions lacked 'any rational and statutory foundation.'15 This view was rejected by the Court of Appeals. Distinguishing judicial review under 24(a) as being limited to the inquiry whether the Commission 'has plainly abused its discretion in these matters,' Securities and Exchange Commission v. Chenery Corp., 332 U.S. 194 , 1583, 1760,16 the [338 U.S. 96 , 114] Court of Appeals held that a 11(e) court was charged with the duty of exercising a full and independent judgment as to the fairness and equity of a plan, 'to function as an equity reorganization tribunal within the limitations prescribed by the Act.' 168 F.2d at page 736.
This position is maintained before this Court by the representatives of the common stockholders. The preferred stockholders' representatives urge that the Court of Appeals erred in this regard, and that the conclusion of the Commission should not have been disturbed by the District Court, because that conclusion was supported by substantial evidence and was within the agency's statutory authority. The District Court, in their view, exceeded the proper scope of review.
The Commission apparently no longer takes so restrictive a view of the District Court's function as it formerly held. It now concedes that that court had power to eview 'independently' the method of valuation employed. But it urges that in this case the question, whether a proper method of valuation was employed, is one of law, since Congress has itself prescribed the standard for compensating the various classes of security holders instead of delegating to the Commission the task of fixing that standard.
In the alternative the Commission argues that 'If, as the court below seemed to assume, the question is not one of law, * * * the scope of review under Section 11(e) is limited in the same manner as that applicable to determinations of the Interstate Commerce Commission under Section 77 of the Bankruptcy Act (11 U.S.C.A. 205),' which is said to embody a similar statutory scheme and under which administrative determinations of valuation are sustained if supported by substantial evidence and not contrary to law. Ecker v. Western Pacific R.R. Corp., 318 U.S. 448, 473 , 707; R.F.C. v. Denver & Rio Grande W.R. Co., 328 U.S. 495 , 505-509, 1288-1290, 1384. [338 U.S. 96 , 115] The problem of the scope of review which Congress intended the district court to exercise under 11(e) arises from and is complicated by the fact that Congress provided not one, but two procedures for reviewing Commission orders of the type now in question.
The first is afforded by 11(e) itself. It relates to orders approving voluntary plans submitted by any registered holding company or subsidiary for compliance with subsection (b). The Commission is authorized to approve such a plan if, after notice and opportunity for hearing, it '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.' Then follows the provision that 'the Commission, at the request of the company, may apply to a court * * * to enforce and carry out the terms and provisions of such plan. If * * * 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 is authorized 'as a court of equity' to take exclusive jurisdiction and possession of the company or companies and their assets, and to appoint a trustee, which may be the Commission, for purposes of carrying out the plan. 17 [338 U.S. 96 , 116] The alternative mode of review is provided by 24(a). It applies to all orders issued by the Commission under the Act and in abbreviated form is as follows:
The District Court thought it was authorized to substitute its own judgment for that of the Commission as to whether the plan was 'fair and equitable,' after considering independently the various matters it denominated as 'colloquial equities.' Accordingly, after reaching numerous conclusions on those matters contrary to the Commission's or not given final effect in its determinations, the court arrived at an over-all judgment opposite to that of the Commission and held the plan not 'fair and equitable' to the common stockholders in awarding the preferred more than $100 per share. Modifying the plan to allow the latter only that amount, the court ordered it enforced as modified.
The Court of Appeals was in general agreement with the District Court concerning its power to exercise a full and independent judgment in giving or withholding approval of the plan as 'fair and equitable' and, on the whole, was in accord with the District Court's dispositions of the matters of 'colloquial equity.' Stressing statements appearing in the legislative history of 11, the court thought they gave basis for a strong analogy between the functions of district courts under 11(e) and those of such courts 'when called upon under the Sherman and Hepburn Acts (15 U.S.C.A. 1-7, 15 note, 49 U.S.C.A. 1 et seq.) to effect compulsory corporate readjustments required by the public policy expressed in those acts.'19 The court's opinion then added: 'We think that it will not be contended that a district court * * * adjudging a controversy arising under the Sherman Act would function [338 U.S. 96 , 119] other than as in an original equity proceeding, exercising all the powers and duties inherent in a court of equity under such circumstances.' 168 F. 2d at page 729. Accordingly, the court upheld the District Court's view that it had power, as a court of equity, to withhold approval and enforcement of the plan upon its own independent judgment of the 'colloquial equities,' notwithstanding the Commission's contrary judgment and, apparently even though the Commission's judgment involved no clear error of law or abuse of discretion.
The Court of Appeals, however, viewed somewhat differently the limitations placed by the Act upon the power of review. 'The proceedings before the equity reorganization court are not strictly de novo since the district court can only approve a plan when it has been approved by the Commission. See Application of Securities and Exchange Commission, D.C.Del ., 50 F.Supp. 965, 966.' 168 F.2d at page 732. The district court, it was said, could receive evidence aliunde the Commission's record, could decide on that evidence and the Commission's record that the plan is unfair and inequitable, and remand the cause to the Commission for further consideration, or could remand without taking new evidence. The District Court therefore was wrong in ordering enforcement of the plan as modified by itself. It could only approve and enforce or refuse approval and remand. Only a plan approved by the Commission and by the court could be enforced.
These views were thought supported by the history of the law of reorganization, including equity receiverships, reorganization of insolvent companies under former 77B of the Bankruptcy Act, 11 U.S.C. 207, 11 U.S.C.A. 207, and Chapter X reorganizations (id. at 501 et seq .), although the court did not 'mean to imply that Congress intended to grant a Section 11(e) court the same full and untrammeled scope that a court of bankruptcy would have in a Chapter X proceeding.' 168 F.2d at pages 735-736. [338 U.S. 96 , 120] Nevertheless, 'Any question which goes to the issue of what is fair and equitable may be raised and must be passed upon.' 168 F.2d at page 735. Moreover, since 'the critical phra e employed alike by courts of equity and by Congress in framing the test under which a plan shall be approved or disapproved, has always embraced the phrase 'fair and equitable' or its substantial equivalent,' the court thought that the power and functions of the district courts in review of plans submitted did not 'vary much from statute to statute and from case to case,' 168 F.2d at page 734, i.e., whether the plan was to be consummated by way of equity receivership, by action under former 77B, by suit under Chapter X, by a proceeding under 77, 11 U.S.C. 205, 11 U.S.C.A. 205, or by petition to a district court under 11(e).
The variant views held respectively by the Commission, the District Court, the Court of Appeals, and the parties to the proceeding demonstrate the complexity of the problem. Each view has a rational basis of support but none is without its difficulties, either in statutory terms, history and intent or in practical consequences.
The legislative history of 11(e) throws little light on the problem. There was, surprisingly, only casual, indeed tangental, discussion of it. The analogy to proceedings under 77 of the Bankruptcy Act, drawn by the Commission and referred to by the Court of Appeals, rests chiefly upon the statement of Senator Wheeler, cosponsor of the bill, made during a colloquy in debate on the Senate floor and set forth in the margin. 20 But that state- [338 U.S. 96 , 121] ment did not occur in any detailed consideration of the scope and incidence of judicial review. It arose only as it were incidentally in the course of extended discussion which centered about the receivership provisions of 11(e) as it stood at the time of the debate.
Moreover, the discussion did not and could not take account of the fact that, under our subsequent decisions in the Western Pacific and Denver & Rio Grande cases, supra, matters of valuation in 77 reorganizations have been held to be exclusively for the Interstate Commerce Commission, not for the district courts, except as stated above. Ecker v. Western Pacific R.R. Corp., supra; R.F.C. v. Denver & Rio Grande W.R. Co., supra. Significantly, this fact seems not to have been taken into account when the Court of Appeals included the 77 proceedings among its general grouping of reorganization procedures for analogical purposes. And in this respect the Commission makes clear its difference from the Court of [338 U.S. 96 , 122] Appeals, pointing out that under the Western Pacific and Rio Grande decisions the Commission decides questions of valuation, subject only to the narrow scope of review there allowed.
But, as if to complicate the matter further, the Commission's analogy is somewhat weakened by the fact that the Western Pacific and Rio Grande rulings concerning review of valuation matters rested upon language in 77 not repeated in 11(e) of the Act presently in question. That language, appearing in subsection (e) of 77, provided: 'If it shall be necessary to determine the value of any property for any purpose under this section, the Commission shall determine such value and certify the same to the court in its report on the plan.' This, the Court held, left to the Interstate Commerce Commission the determination of value 'without the necessity of a reexamination by the court, when that determination is reached with material evidence to support the conclusion and in accordance with legal standards.' 318 U.S. at pages 472-473, 63 S.Ct. at page 707.
On the other hand, the opposing analogy drawn by the Court of Appeals from the history of the law of reorganization in general is highly indiscriminate. Insofar as it includes equity receiverships, e.g., pursuant to Sherman and Hepburn Act readjustments, it ignores the important fact that in such proceedings there is no effort to brigade the administrative and judicial processes. Nor does it take account of the substantial differences 'from statute to statute,' e.g., between proceedings under 77 of the Bankruptcy Act as construed in the Western Pacific and Rio Grande cases, on the one hand, and Chapter X reorganizations, on the othr. Moreover, and perhaps most important, it substitutes analogy drawn from other statutes and judicial proceedings, together with a reading of 11(e) in comparative isolation from the other provisions of the Act, for a consideration of that section in the context of the Act, as a whole and particularly with [338 U.S. 96 , 123] reference to any effort toward harmonizing the section with 24(a) and bringing the two as close together as possible in practical operation.
Of course Congress could provide two entirely dissimilar procedures for review, depending on whether appeal were taken by an aggrieved person to a Court of Appeals or the plan were submitted by the Commission at the Company's request to a district court. But it is hard to imagine any good reason that would move Congress to do this deliberately. The practical effect of assuming that Congress intended the review under 11(e) to be conducted wholly without reference to or consideration of the limitations expressly provided for the review under 24(a) certainly would produce incongruous results which would be very difficult to impute to Congress in the absence of unmistakably explicit command.
For one thing the consequence would be, in effect, to create to a very large possible extent differing standards for administration and application of the act, depending upon which mode of review were invoked. In the one instance, apart from reviewable legal questions, the Commission's expert judgment on the very technical and complicated matters to deal with which the Commission was established, would be controlling. In the other instance, it would have to give way to the contrary view of whatever district court the plan might be submitted to.
Conceivably the same plan might be brought under review by both routes. Indeed, in one instance the District Court for Delaware, to which the plan here was submitted, held that its determination of the issues in a 11(e) proceeding was precluded by a prior affirmation of the same order by a Court of Appeals in a 24(a) review proceeding. See L. J. Marquis & Co. v. Securities & Exchange Commission, 3 Cir., 134 F.2d 822, and Application of Securities and Exchange Commission, D.C., 50 F.Supp. 965. Presumably, under the views now taken by the District Court and the Court of Appeals, if district court review [338 U.S. 96 , 124] under 11(e) could be had first, that determination likewise would be conclusive as against contrary views held by the Commission and a Court of Appeals in a later 24(a) proceeding.
Moreover, apart from legal questions, the controlling standard would be fixed by the discretion of the district court to which the plan might be submitted. And since such a court might be any of the many district courts available for that purpose, there hardly could be the uniform application of the 'fair and equitable' standard which Congress undoubtedly had in mind when it entrusted its primary administration to the Commission's expert judgment and experience, and when it drafted the detailed provisions of 24(a) for review. To the extent at least that the standard contemplated an area of expert discretion, its content under the view taken by the District Court and the Court of Appeals could not be uniform, but would vary from court to court as the judicial discretion might differ from that of the Commission or other courts.
In contrast with the specific limitations of 24(a), the very brevity and lack of specificity of 11(e), together with the paucity and tentative character of the legislative history, concerning the scope of review under the latter section, give caution against reading its terms as importing a breadth of review highly inconsistent with the limitations expressly provided by 24(a). Both sections are parts of the same statute, designed to give effect to the same ligislative policies and to secure uniform application of the statutory standards. That statutory context and those objects should outweigh any general considerations or analogies drawn indiscriminately from differing statutes or from the history of reorganizations in general, leading as these do to incongruities and diversities in practical application of the Act's terms and policies. [338 U.S. 96 , 125] Indeed we think it is fair to conclude that the primary object of 11(e) was not to provide a highly different scope of judicial review from that afforded by 24(a), but was to enable the Commission, by giving it the authority to invoke the court's power, to mobilize the judicial authority in carrying out the policies of the Act. To do this the court 'as a court of equity' was authorized to 'take exclusive jurisdiction and possession of' the company or companies and their assets and to appoint a trustee to hold and administer the assets under the court's direction.
True, the court was to approve the plan as fair and equitable but nothing was said expressly as to the scope of review or the resolution of differences in discretionary matters between the Commission and the court. The court's characterization as 'a court of equity' was appropriate in relation to the powers of enforcement conferred. We do not think it was intended to define with accuracy the scope of review to be exercised over matters committed to the Commission's discretion and expert judgment, not involving questions of law, or to set up a different and conflicting standard in those matters from the one to be applied in proceedings under 24(a). This view is not inconsistent with Senator Wheeler's comparison with 77 proceedings under the Bankruptcy Act, which perhaps, despite its rather casual interjection, most nearly approaches disclosure of the legislative intent as to the present problem.
It may be added that in general the courts which have dealt with the problem appear to have taken the view we take,21 as against the one prevailing in the District [338 U.S. 96 , 126] Court and the Court of Appeals which reviewed this case,22 although in no case has the question been so sharply focused as here. While 11(e), as we have noted, does not contain language the equivalent of subsection (e) of 77 of the Bankruptcy Act upon which this Court rested its ruling concerning review of valuations in the Western Pacific case, that lack may be supplied in this case by the correlation we think is required between the terms of 11(e) and those of 24(a). Accordingly we are unable to accept the c nclusion of the Court of Appeals and the District Court that the latter was free in passing upon the Commission's valuations to disregard its judgment in the large areas of discretion committed by the Act to that judgment.
Administrative finality is not, of course, applicable only to agency findings of 'fact' in the narrow, literal sense. The Commission's findings as to valuation, which are based upon judgment and prediction, as well as upon 'facts,' like the valuation findings of the Interstate Commerce Commission in reorganizations under 77 of the Bankruptcy Act, Ecker v. Western Pacific R.R. Corp., supra, are not subject to reexamination by the court unless they are not supported by substantial evidence or were not arrived at 'in accordance with legal standards.' [338 U.S. 96 , 127] Administrative determinations of policy, often based upon undisputed basic facts, in an area in which Congress has given the agency authority to develop rules based upon its expert knowledge and experience, are exemplified by Securities and Exchange Commission v. Chenery Corp., supra, in which the Commission determined that preferred stock purchased by management in the over-the-counter market during the formulation of a holding company reorganization plan could not be exchanged for common stock participation in the reorganized company, as could other preferred stock; instead management was to be paid cost plus interest for the preferred stock so purchased.
The Commission's determination was made in the exercise of its duty to determine that a plan is 'fair and equitable' within the meaning of 11(e) and that it is not 'detrimental to the public interest or the interest of investors or consumers' within the meaning of 7(d)(6) and 7(e), 15 U.S.C.A. 79g(d) (6), (e). On certiorari to the Court of Appeals which had reviewed the Commission's order under 24(a) of the Act, we held that the Commission's action was 'an allowable judgment which we cannot disturb.' ( 332 U.S. 194 ) This holding was not based upon the fact that the Commission's order was reviewed under 24(a) of the Act rather than under 11(e), but upon the ground that the Commission's determination was made in an area in which Congress had delegated policy decisions of this sort to the Commission, and therefore that the agency determination was 'consistent with the authority granted by Congress.' We think this view is applicable when review is had under 11(e) as much as when it arises under 24(a).
Even with the latitude allowed by our present ruling for play of the Commission's judgment, it remains to consider whether in this case the Commission has com- [338 U.S. 96 , 128] plied with the statutory standards in its determination that the plan as amended by it is fair and equitable. The common shareholders deny this. And, contrary to the preferred shareholders' position, the Commission has argued, alternatively to its contentions concerning the scop of review, that application of the 'fair and equitable' standard of 11(e) in this case presents questions of law which have been decided erroneously by the District Court and the Court of Appeals.
Taken most broadly, this argument of the Commission seems to be that the entire matter of applying the 'fair and equitable' standard involves only legal issues, with the result that each subsidiary question raised and determined in that process becomes independently reviewable and judicially determinable. If so, of course, the question of the proper scope of review would become irrelevant, at any rate for the purposes of this case, since it was determined solely on the record made before the Commission.
But the Commission does not stop with this broad argument. It goes on to consider particular questions which arose in the valuation process and to urge that they presented questions of law which the reviewing courts erroneously determined. Among these are whether the cour's dispositions violated the 'absolute priority' standard attributed to the Otis case; whether their requirement that the Commission value the common stock in the same manner as it did the preferred, rather than simply awarding to the common shareholders all of Engineers' assets remaining after giving the preferred the equitable equivalent of their shares as determined, violated the statutory standard; whether the courts rightly required the Commission to take into account alleged losses incurred by Engineers in earlier dispositions of company properties made to comply with the Act; and whether the Commission improperly failed to take into [338 U.S. 96 , 129] account other matters of 'colloquial equity' the courts considered not only proper but essential to a fair and equitable determination.
We think at least some of these matters do raise legal issues, particularly in the light of the Otis decision, which should now be considered and resolved. Accordingly we turn to them for that purpose.
Challenges to the Investment Value Theory of Valuation. The principal effect of the Otis decision was to rule that in simplification proceedings pursuant to 11(b)(2) and (e) of the Act the involuntary charter liquidation preference does not of itself determine the amounts shareholders are to receive, but instead the amounts allocated should be the equitable equivalent of the securities' investment value on a going- concern basis.
The common shareholders seek to avoid the effect of this ruling by various arguments presently to be stated, which should be considered and determined in the light of the Otis decision and the Commission's practice consistent with that decision, a summary of which practice is set forth in the Appendix to this opinion.
In the Otis case the plan called for the dissolution of the United Light and Power Company, the top holding company in the system, in obedience to a Commission order requiring the elimination of that company, whose existence violated the 'great-grandfather clause' of 11(b)(2). Since both common and preferred stockholders were to receive, in exchange for their stock in United Power, stock in its subsidiary, the United Light and Railways Company, which was itself a holding company, the effect of the dissolution was to eliminate the top holding company in a multi-tiered holding company system, leaving both classes of security holders with an investment in a continuing holding company enterprise. [338 U.S. 96 , 130] The assets of United Power were insufficient to satisfy the claims of the company's preferred stockholders, if the charter liquidation preference of the preferred was applicable. The Commission found however that 'if all the assumed earnings materialized and were applied to liquidating the preferred current and deferred dividends, in approximately fifteen years the arrearages would be paid and the common would be in a position to receive dividends,' 323 U.S. at page 632, 65 S.Ct. at page 487, and that only by forced liquidation could the common be d prived of all right to future earnings and the preferred be given the right to prospective earnings in excess of the dividends guaranteed by charter. The Commission concluded that 'in its 'overall judgment' Power's common had a legitimate investment value of a proportion of 5.48 per cent of Power's assets to the preferred's value of 94.52 per cent.' Ibid. Relying on the legislative history of the Act, 323 U.S. at pages 636-637, 65 S.Ct. at pages 489-490, and upon the fact that the charter provision was not drafted in contemplation of the legislative policy embodied in the Act, 323 U.S. at pages 637-638, 65 S.Ct. at page 490, we held that the Commission had not erred in its method of valuation. By this ruling we rejected the easier solution of permitting liquidations or reorganizations compelled by the Act to mature charter rights and thus to shift investment values from one class of security holders to another.
In so ruling this Court did not abandon the 'absolute priority' standard insofar as embodied in the requirement that the plan be 'fair and equitable.' 23 That standard requires that each security holder be given the equitable equivalent of the rights surrendered, but the equitable equivalent is not invariably the charter liquida- [338 U.S. 96 , 131] tion preference, as it is in the case of liquidations or reorganizations brought about through the action of creditors or stockholders. The principle of the Otis case is that the measure of equitable equivalence for purposes of simplification proceedings compelled by the Holding Company Act is the value of the securities 'on the basis of a going business and not as though a liquidation were taking place.' 323 U.S. at page 633, 65 S.Ct. at page 488.
The decisions of the Commission, from the commencement of its enforcemen of the Public Utility Holding Company Act to the present time, show a consistent and developing application of the investment value rule approved in the Otis case. 24 At least since its decision in that case charter provisions have been held invariably not to be determinative. Federal courts which have had occasion to speak in this connection have recognized that charter liquidation provisions are not the measures of stockholders' rights in liquidations and reorganizations compelled by the Act. 25
Seeking to distinguish the Otis case, the representatives of the common stockholers contend that here the charter liquidation provisions are applicable, from which of course it would follow that those provisions are the measure of equitable equivalence.
It is urged first that Engineers' charter liquidation provision is phrased in more comprehensive terms than was the one in Otis, and that the framers of Engineers' charter [338 U.S. 96 , 132] contemplated the possibility of governmental act on of the kind required by the Holding Company Act. A comparison of the two charter provisions reveals no significant difference between them. 26 Engineers' charter was drafted some four years earlier than the Otis charter. Each contract was made at a time when the legislative policy embodied in the Holding Company Act 'was not foreseeable.' 323 U.S. at page 638, 65 S.Ct. at page 490.27
A further asserted distinction is that there is here a 'genuine liquidation,' i.e., a termination of the holding company enterprise by the liquidation of the last holding company in the system; while in the Otis case 'the holding company enterprise continued essentially unchanged, even though the particular corporation there involved was being dissolved pursuant to the mandate of the Act, as an incident to the simplification of the continuing system.'
It would probably suffice to observe that the word 'liquidation,' as used in Engineers' charter liquidation provision, quite obviously means liquidation of Engineers, not liquidation of other corporations or of the holding company enterprise of which Engineers is a part. But there are nore fundamental reasons which require the rejection of this argument. The legislative history relied [338 U.S. 96 , 133] upon in the Otis case, 323 U.S. at pages 636-637, 65 S.Ct. at pages 489- 490, contains no hint that Congress intended to preserve investment values only when the policy of the Act required a reduction in the number of holding companies in a system rather than the elimination of the system's last holding company. 28 And the Otis opinion rejected the Commission's argument in that case that the result there was justified by the fact that the holding company enterprise was to continue. We said that the reason for the inapplicability of charter provisions '* * * does not lie in the fact that the business of Power continues in another form. That is true of bankruptcy and equity reorganization. It lies in the fact that Congress did not intent that its exercise of power to simplify should mature rights, created without regard to the possibility of simplification of system structure, which otherwise would only arise by voluntary action of stockholders or, involuntarily, through action of creditors.' 323 U.S. at page 638, 65 S.Ct. at page 490. [338 U.S. 96 , 134] Far from aiding the distinction urged by the common stockholders, Schwabacher v. United States, 334 U.S. 182 , supports the conclusion that investment values rather than charter provisions provide the measure of the preferred stockholders' rights. In that case the Court held that the charter liquidation provision of a railroad corporation merging with another railroad under 5 of the Interstate Commerce Act was not determinative of the amount to which holders of cumulatie preferred stock were entitled, and that 'In appraising a stockholder's position in a merger as to justice and reasonableness, it is not the promise that a charter made to him but the current worth of that promise that governs, it is not what he once put into a constitutent company but what value he is contributing to the merger that is to be made good.' 334 U.S. at page 199, 68 S.Ct. at page 967.
Again this result depended, not upon the fact that the merger left a continuing enterprise, but upon the fact that Congress, in its efforts to achieve a particular economic goal, wished to avoid shifting investment values from one class of securities to another by maturing contract rights which would not otherwise have matured. As did the Otis opinion, which was said to construe 'a federal statute of very similar purposes,'29 the Schwabacher opinion [338 U.S. 96 , 135] assumed 'that Congress intended to exercise its power with the least possible harm to citizens.' Otis & Co. v. Securities and Exchange Commission, supra, 323 U.S. at page 638, 65 S.Ct. at page 490.
The final reason for rejecting the asserted distinction between liquidation of the particular corpoation and liquidation of the holding company enterprise serves also to answer a further, related argument made by the representatives of the commom stockholders. It is said that payment of the preferred stockholders in cash rather than in securities of a new corporation and the consequent termination of these stockholders' investment 'matures' the preferred claims and makes this a 'genuine liquidation.' These arguments, which necessarily imply that the Commission may not choose the elimination of one company in a system rather than another or payment in cash rather than securities as means of conforming the enterprise to the requirements of the Act, without varying the standard by which stockholders are to be compensated, are answered in the Otis opinion. We held there that security values should not 'be made to depend on whether the Commission, in enforcing compliance with the Act, resorts to dissolution of a particular company in the holdi g company system, or resorts instead to the devices of merger or consolidation, which would not run afoul of a charter provision formulated years before adoption of the Act in question. The Commission in its enforcement of the policies of the Act should not be hampered in its determination of the proper type of holding company structure by consideratons of avoidance of harsh effects on various stock interests which might result from enforcement of charter provisions of doubtful applicability to the procedures undertaken.' 323 U.S. at pages 637-638, 65 S.Ct. at page 490. [338 U.S. 96 , 136] The common stockholders argue also that even if the charter liquidation provision by deemed inapplicable, the 'fair and equitable' standard requires the application of the 'doctrine of frustration.' It is said that frustration of a contract by governmental edict or any other supervening event not contemplated by the parties requires that 'the loss * * * lie where it falls. Neither party can be compelled to pay for the other's disappointed expectations.'30 In such a case, it is said, 'the face amount of the security-which theoretically mirrors the senior security holder's contribution to the enterprise-is all that he is entitled to recover.' Again the Otis case is said to be distinguishable in that there the preferred stockholders were to receive a participation in the continuing enterprise, which here their investment is terminated by payment in cash. But, as we observed above, the Commission is not to be hampered in its enforcement of the policies of the Act 'by considerations of avoidance of harsh effects on various stock interests.'
The authorities relied upon in support of the frustration argument would not compel the result for which the common stockholders contend, even in the absence of the Otis decision. Considerable reliance is placed upon The United Light & Power Co., 10 S.E.C. 1215, and the affirmance of that decision by the Court of Appeals for the Second Circuit in New York Trust Co. v. Securities and Exchange Commission, 131 F.2d 274. In that case the plan, a different feature of which was reviewed in the Otis case, provided for payment to the company's debenture holders in cash. The Commission, after deciding that voluntary liquidation preferences were not payable, and that the bondholders had no right to receive the premium 'by virtue of any other recognized legal or [338 U.S. 96 , 137] equitable principle,' held that there was no right to compensation for the termination of the investment, which, like the termination of the stockholders' investments, had been 'brought about by the act of a sovereign power-in this case a congressional mandate.' 10 S.E.C. at 1223, 1228. In affirming the Commission's determination, the Court of Appeals held that 'the contract is no longer binding and further performance is excused. * * * where, as here, the essential existence of one of the parties to a contract has become illegal and impossible because contrary to a new concept of public policy which was unforeseeable when the contract was made.' 131 F.2d at page 276. Since the corporation was undewr no obligation to call the bonds, 'it might well let the rights of those in interest be determined as though there had been no call option. The order under review was, accordingly, fair and reasonable to all parties in interest since it provided for the payment of the bonds in a way which discharged in full the contract obligations of the dissolved corporation.' Ibid.
Even if it is assumed that no distinction is to be made between bonds and preferred stock,31 neither the decision of the Court of Appeals nor that of the Commission in the New York Trust case is inconsistent with the later Otis decision or with the position of the Commission in [338 U.S. 96 , 138] this case, insofar as each holds that performance of the charter contract is excused. 32 Engineers is no longer required by its contract either to continue the payment of preferred dividends beyond the dissolution date provided in the plan or to redeem the preferred at either voluntary or involuntary charter liquidation prices.
Moreover the New York Trust case need not be construed to fix the measure of the senior security holder's claim at the face amount of his security. In Massachusetts Mutual Life Insurance Co. v. Securities and Exchange Commisson, 151 F.2d 424,33 the Court of Appeals for the Eighth Circuit recognized that the doctrine of impossibility or frustration applied in the New York Trust case excused the corporation from its contractual obligations and agreed with the Commission that it would not be fair and equitable to pay redemption premiums in the circumstances of that case. But the Court observed that 'whether, upon retirement of outstanding bonds * * * payment of principal, accrued interest and redemption premiums is the equitable equivalent of the bondholders' rights depends upon the facts of each particular case.' 151 F.2d at page 430.34 [338 U.S. 96 , 139] The doctrine of impossibility or frustration explains the conclusion that the corporation is excused from performing its contract, but it does not provide a measure of the security holders' claims. For that measure, we must look to the intention of Congress, as we did in the Otis case.
Application of the Investment Value Theory: The Commission's Alleged Failure to Take Account of Prior Divestment Losses Sustained by Engineers; Its Alleged Failure to Value the Common Stock by the Same Method as Was Used in Valuing the Preferred; 'Colloquial Equities.' It was the Commission's duty in passing upon the fairness and equity of the plan to accord each security holder, in the order of his priority, the investment or going-concern value of his security. Here, as in the Otis case, the manifest solvency of Engineers 'simplifies the problem of stockholers' rights * * *. The creditors are satisfied.' 323 U.S. at pages 633-634, 65 S.Ct. at page 488. Valuation on the basis of a going con ern necessarily has primary relationship to value as of the time the shareholders' surrender becomes effective, not as of some earlier, remote period or one long afterward. Moreover,
These are the governing principles to be applied in consideration of the differences between the Commission and the reviewing courts concerning the matters listed in the heading of this paragraph. It is important to note that the doctrine of allowing equitable equivalents on present going- concern value to replace stated charter liquidation value as the measure of security satisfaction did not and was not intended to destroy charter or contract right to priority of satisfaction.
A. The investment value or going-concern value theory rests upon the premise that Congress intended to exercise its power to simplify holding company systems and to remove uneconomic companies without destroying legitimate investment value. It is consistent with this premise that the investment value determined by the Commission by the investment value the securities would have if it were not for the liquidation required by the Act. This does not mean, however, that the agency must value the stock as if the Act had never affected the holding company system of which the particular company dealt with in the plan is a part. 36 When the Commission values a security interest by determining the value that interest would have if it were not for the present liquidation or reorganization required by the Act, it substantially complies with the statutory mandate. [338 U.S. 96 , 141] There are at least two sufficient reasons, both of which are illustrated by the present case. It would be administratively impossible, in determining the investment value of securities in a corporation being liquidated, to revaluate every transaction in the gradual simplification of the system of which the company is a part, as if the Act had never been passed. 37 If the Commission were required to reconstitute Engineers' balance sheet as if the Act had never been passed, it would be necessary, for example, retroactively to evaluate the economic consequences of the compelled divestment of Engineers' interest in Puget Sound Power and Light Corporation in 1943 and to determine whether and to what extent Engineers would have gained or lost by retaining its interest in Puget Sound to the present time. 38 The difficulties of [338 U.S. 96 , 142] going through such a procedure, multiplied by the number of divestments compelled by the Act over many years,39 would be insuperable. [338 U.S. 96 , 143] The second reason lies in the basis for the Otis rule itself. Since Congress intended that investment values should be preserved in each liquidation or divestiture required by the Act, we may assume that it intended the Commission to value securities in a particular liquidation as if that liquidation were not taking place, but not as if the Act had never been passed; for if investment values have been preserved in th early divestitures, it is useless to reconstitute the balance sheet as if the divestitures had not taken place. The Commission's determinations upon which the various divestiture orders were based may not be collaterally attacked.
B. We have observed that the standard of compensation to be accorded security holders does not depend upon whether their security interests are to be retired by exchanging them for new securities in a continuing enterprise or by payment in cash. However, these different methods of compensating the security holder determine which of varying methods of arriving at investment value will be employed by the Commission. Where the security holder is to receive new securities, the Commission is faced with a dual valuation problem. It must evaluate the securit to be surrendered and the securities to be received in exchange. Recognizing the inherent complexity of this problem this Court has held that a security holder may be accorded the equitable equivalent of the rights surrendered without placing a dollar valuation upon either the rights surrendered or the securities given in compensation therefor. 40 In the Otis case, in which the plan contemplated compensating both preferred and common stockholders of United Power in common stock of Power's sole subsidiary, the Commission [338 U.S. 96 , 144] was required to apportion the Power common between the two classes by evaluating the expectation of income from the new stock and the risk factor of that stock in relation to the rights being surrendered. In effect the Commission's task was to apportion to the new stock earning power substantially equivalent to that surrendered.
But when the claims of the senior security holders are to be satisfied by payment in cash, the Commission appropriately varies its approach. In such a case it holds that 'the most workable hypothesis for finding a fair equivalent between cash received and the security surrendered under the compulsion of the plan, is that of reinvestment in a security of comparable risk.' The question to which the Commission seeks the answer is, 'How much money would it cost the preferred stockholders to replace their securities with comparable ones?'
Badger sought to provide an answer to this question by deriving from his analysis and comparison a proper yield basis for Engineers' preferred, 41 which, taking into account the effect of the risk factor, he found to be 4.6%. Capitalization of this rate gave the preferreds values ranging from $108.70 per share to $130.33 per share, amounts well in excess of the call prices. The testimony of Engineers' president, Barnes, as to 'what a willing buyer would pay and what a willing seller would take in today's market for such securities,' absent a Public Utility Holding Company Act, coincided with that of Badger, as to the estimated going-concern value in cash of the preferred.