Wiley Blount Rutledge

“ Even if we could find that investment value had been destroyed by the liquidation of Engineers, or if we could find that the operation of the Act prior to the formulation of Engineers' plan had inflicted losses on the Engineers system and could take such losses into account, these facts would be irrelevant, except to the extent that such losses had impaired the investment value of Engineers' preferred by lowering its assets coverage or otherwise adversely affecting the economic prospects of the company apart from the Act. ”

“ 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. ”

“ 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. ”

“ 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. ”

“ For example, if the claims of bondholdes rather than preferred stockholders had been in issue in the Otis case, United Power would have been an insolvent rather than a solvent corporation and so subject to bankruptcy. At least with reference to the issue of whether amounts in excess of the face value of a security are payable, we need not distinguish between treatment to be accorded bonds and preferred stock. The Commission's tendency has been to treat both the same. ”

“ 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. ”

“ We may concede that even though the preferred is to be paid in cash and thus should receive cash sufficient to purchase a comparable investment with a comparable yield, the Commission would be wrong in selecting, as a basis for valuation, abnormal or highly speculative market values of a transient nature. ”

“ The Commission first applied the investment value standard in a series of cases holding common stock entitled to participate with preferred in the new securities given to satisfy claims in the dissolving corporation, although in each case the book value of the corporation's assets was exceeded by the charter claims of the preferred. ”

“ This right to priority in assets which exists between creditors and stockholders, exists also between various classes of stockholders. When by contract as evidenced by charter provisions one class of stockholders is superior to another in its claim against earnings or assets that superior position must be recognized by courts or agencies which deal with the earnings or assets of such a company. ”

“ 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. ”

“ 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. ”

“ 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. ”

“ 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. ”

“ These companies were compared with Engineers for the years 1940 to 1945 with reference to 'times all charges and preferred dividends earned,' 'proportion of prior obligations to total capitalization,' 'book value of equity per share of preferred,' 'percent of net quick assets to prior obligations' and 'times parent company dividends were earned.' It appeared that in general the position of Engineers' preferred was somewhat below the average of the five other companies until the disposition of Puget Sound in 1943. ”

“ 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. ”

“ 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. ”

“ In other cases holding that, in the circumstances of the particular case, retirement of preferred stock having a call or voluntary liquidation price in excess of the involuntary liquidation price by payment in cash at the latter price is fair and equitable, the Commission has considered a number of factors other than charter provisions. ”

“ 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, 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. ”

“ After summarizing the issuing prices, [5] the dividend history, [6] and the market history [7] 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, consisting of Engineers' total common stock and surplus. ”

“ 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,
'Like the bankruptcy and reorganization statutes, the Public Utility Holding Company Act, in providing that plans for simplification be 'fair and equitable,' incorporates the principle of full priority in the treatment to be accorded various classes of security interests. ”

“ These funds had accumulated from property dispositions and retained earnings, the management having pursued a policy of withholding dividends on the common until it was satisfied that the system had made the adjustments required by the Act.↑ The Commission observed: 'In all of its divestments, Engineers has been free in its choice of methods, and, within in limits, to choose the time for divestment. All sales have been negotiated by Engineers at arm's-length. ”

“ The record does not clearly indicate what it will cost to maintain Engineers after Gulf States and El Paso have been divested. Estimates range from $172,000 to $365,000 a year. The company freely admits that Engineers could in no way justify any such continuing expenditure. Virginia is able to undertake its own financing and service and is large enough to stand independently. Any functions Engineers might perform should more properly be carried out by Virginia's own management.' Holding Company Act Release No. ”

“ On the $5 or $10 per share held in escrow the preferred stockholders will receive, for the period between the date of consummation and the date of payment, a return which approximates the favorable rate of return they received on their preferred stock in Engineers. ”

“ 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. ”

“ The old common was estimated to be 18 to 34 years away from dividends in the absence of a reorganization. 13 S.E.C. 226. As in the Otis case, the controversy was over the question of whether Engineers was entitled to any participation in the new company, in view of the remote and contingent character of its earnings expectations. Engineers subsequently sold the interest it received in the reorganization for $764,765.↑ Engineers' system consisted of 17 companies before the Commission began its integration proceedings. ”

“ 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. ”

“ 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. ”

“ Additional Views by Representative Eicher, H.R.Rep. No. 1318, 74th Cong., 1st Sess. 46-47; Statement of House Managers, H.R.Rep. No. 1903, 74th Cong., 1st Sess. 70-71; Committee of Public Utility Executives, Summary of S. 2796, 74th Cong., 1st Sess., with Annotations, June, 1935, 5, 7.↑ See note 7, supra.↑ Cf. ”