Appeal from the Order of the Federal Trade Commission.
Before MANTON, SWAN, and AUGUSTUS N. HAND, Circuit Judges.
Respondent entered an order on a complaint filed under section 7 of the Clayton Act (15 USCA § 18) directing the Arrow-Hart & Hegeman Electric Company to divest itself of the common stock of Hark & Hegeman Manufacturing Company and Arrow Electric Company, two corporations engaged in the manufacture of electrical devices in competition in interstate commerce. Both manufacturing corporations had issues of preferred stocks which were not transferred and which were part of the corporations' obligations as hereinafter stated.
The Hart & Hegeman Manufacturing Company was incorporated in 1891, under the laws of Connecticut, having common and preferred stock. The Arrow Electric Company was organized under the Connecticut laws in 1903 and it had both common and preferred stock. Its preferred stock was nonvoting except on six consecutive defaults of quarterly dividends. The common stocks of both corporations were closely held. Both corporations were engaged in the manufacture and sale of electrical wiring devices and were in direct and substantial competition. The respondent found that 59 per cent. of the Hart & Hegeman Manufacturing Company's sales were in competition with the Arrow Electric Company sales in 1927. The combined total sales of the two companies in 1927 was 24 per cent. of the total sales of the entire electrical wiring device industry.
Pursuant to an agreement of August 6, 1927, of the common stockowners of both manufacturing companies, and as a part of the plan to join the companies, the Hart & Hegeman Manufacturing Company's old preferred stock and also a preferred issue of the H. T. Paiste Company, its subsidiary, were retired and a preferred nonvoting stock and additional common stock were issued. Thereafter both Hart & Hegeman Manufacturing Company and the Arrow Electric Company had outstanding preferred stock. On October 6, 1927, Arrow-Hart & Hegeman, Inc. (the holding company), was organized under the Connecticut laws with an authorized capital stock of $2,000,000 of $10 par common stock. On October 10, 1927, Arrow-Hart & Hegeman, Inc., acquired the 20,000 shares of Hart & Hegeman Manufacturing Company common voting stock in exchange for 80,000 shares of its stock, and acquired the 30,000 shares of the Arrow Electric Company common voting stock in exchange for 120,000 shares of its common stock. It did not, however, acquire any of the two companies' preferred stock.
On March 3, 1928, the respondent issued its original complaint against Arrow-Hart & Hegeman, Inc., charging violations of section 7 of the Clayton Act (15 USCA § 18). On September 7, 1928, this holding company filed an answer, and on November 10, 1928, its directors recommended dissolution and distribution of its assets, consisting of the Arrow Electric Company and the Hart & Hegeman Manufacturing Company common stock to the shareholders. A notice to the stockholders recommending such dissolution inclosed a form of proxy and consent to the plan of dissolution and expressed the view that efficiency and economy would be promoted by "actual merger and consolidation of the two companies." The stockholders' meeting was called for December 10, 1928. To avoid federal tax on liquidation, all the shares of common stock of the Arrow Electric Company then held by Arrow-Hart & Hegeman, Inc., were transferred to Arrow Manufacturing Company, a holding company for tax purposes, and in consideration therefor the tax company issued all its capital stock to the stockholders of Arrow-Hart & Hegeman, Inc. All the shares of the common stock of the Hart & Hegeman Manufacturing Company then held by Arrow-Hart & Hegeman, Inc., were transferred to H. & H. Electric Company, another tax company, and in consideration of this transfer the tax company issued all its capital stock directly to the stockholders of Arrow-Hart & Hegeman, Inc. These stockholders thus received the stock of the two tax companies. Arrow-Hart & Hegeman, Inc., then had no assets and was dissolved. The four corporations, the two manufacturing and the two tax companies, agreed to merge or consolidate, and did so on December 31, 1928, under the Connecticut laws, into the Arrow-Hart & Hegeman Electric Company, petitioner. The preferred stock of Arrow Electric Company and Hart & Hegeman Manufacturing Company constituted nearly 73 per cent. of their total par value capitalization, and was in no way concerned with the organization or dissolution of Arrow-Hart & Hegeman, Inc., or with the formation of the tax companies. The capitalization of the petitioner was $2,000,000 $10 par value common stock and $3,228,300 of $100 par value preferred stock; 18,950 shares of preferred stock were issued for the Arrow Electric Company preferred and 13,333 shares for Hart & Hegeman Manufacturing Company preferred; and 100,000 shares of common stock were issued for H. & H. Electric Company common stock and 100,000 shares for Arrow Manufacturing Company common stock (then held by Arrow-Hart & Hegeman, Inc., stockholders' representatives).
On January 1, 1929, the board of directors of the petitioner held its first meeting, and on January 28 the stockholders held their first meeting. On June 29, 1929, the respondent issued a supplemental complaint naming the petitioner as a new respondent and alleging that the original respondent Arrow-Hart & Hegeman, Inc., had formed petitioner by the consolidation of the manufacturing and tax companies. The respondent found that the acquisition of the stock by Arrow-Hart & Hegeman, Inc., and the petitioner's acquisition of the assets of the manufacturing companies may have the effect of lessening competition between them and may restrain commerce in the electrical wiring device industry and has the tendency to create a monopoly.
The respondent concluded that the acquisition of stock by Arrow-Hart & Hegeman, Inc., and the voting of said stock which culminated in the organization of the petitioner constituted a violation of section 7 of the Clayton Act (15 USCA § 18). The second paragraph of section 7 reads:
"No corporation shall acquire, directly or indirectly, the whole or any part of the stock or other share capital of two or more corporations engaged in commerce where the effect of such acquisition, or the use of such stock by the voting or granting of proxies or otherwise, may be to substantially lessen competition between such corporations, or any of them, whose stock or other share capital is so acquired, or to restrain such commerce in any section or community, or tend to create a monopoly of any line of commerce."
The order entered herein directs the petitioner to divest itself of stocks and assets of both manufacturing companies. Section 7 of the Clayton Act, upon which the prosecution is based, addresses itself to the stock acquisition only, and section 11 of the act (15 USCA § 21) gives the respondent power over a corporation violating the act to issue an order requiring it to cease and desist from the violation by divesting itself of the common stock held.
Congress intended to prevent, by section 7, a corporate control which could be concentrated by prohibited acquisition of stock. Wrongful acquisition of the stock facilitates a merger or consolidation of assets. When ordered to divest itself of stock, the utmost good faith should be used by a corporation in order to remove as far as possible the corporate concentration of ownership caused by the wrongful acquisition of stock. One method of divestiture would be to restore the exact status existing before the wrongful acquisition by distributing the stock acquired to its owners before acquisition. It should be recognized that, where shares of corporations which pass from one owner to another are being considered it would be difficult, if not impossible, to transfer the stock to the identical group of shareholders who held the stock prior to the formation of the holding corporation. The stock wrongfully acquired might be sold to third parties. The holding company might have distributed its assets, consisting of stock of the competing companies, to its own stockholders in such a manner that each stockholder would have shares of both competing companies. For example, Arrow-Hart & Hegeman, Inc, in exchange for the surrender in dissolution of its 200,000 shares, might have distributed the 30,000 common shares of Arrow Electric Company and the 20,000 common shares of Hart & Hegeman Manufacturing Company in a ratio of 3 Arrow and 2 Hart & Hegeman for 10 Arrow-Hart & Hegeman, Inc. Corporate control would be removed, but some measure of common ownership and common interest of a group of individuals in both competing companies would remain. That common ownership would be a result of the unlawful acquisition by the holding company and would facilitate a later merger or consolidation of the competing companies brought about by the individuals without any further intervention of the holding company.
But if the merger by transfer of assets is completed before the Federal Trade Commission filed its complaint, it cannot be attacked under the Clayton Act (38 Stat. 730). Thatcher Mfg. Co. v. Fed. Trade Comm., 272 U.S. 554, 47 S. Ct. 175, 71 L. Ed. 405.
Whether, under the rule of Fed. Trade Comm. v. Western Meat Co., 272 U.S. 554, 47 S. Ct. 175, 71 L. Ed. 405, common ownership in individuals would be sufficient or, in addition, continued corporate control would be required to render the merger or consolidation objectionable and subject to action by the respondent, we need not decide, because in the instant case both factors of common ownership and corporate control of even the details of the complete consolidation ...