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NORTH AMERICAN COMPANY v. SECURITIES & EXCHANGE COMMISSION

decided: April 1, 1946.

NORTH AMERICAN COMPANY
v.
SECURITIES & EXCHANGE COMMISSION



CERTIORARI TO THE CIRCUIT COURT OF APPEALS FOR THE SECOND CIRCUIT.

Stone, Black, Frankfurter, Murphy, Rutledge, Burton; Reed, Douglas and Jackson took no part in the consideration or decision of these cases.

Author: Murphy

[ 327 U.S. Page 689]

 MR. JUSTICE MURPHY delivered the opinion of the Court.

Congress enacted the Public Utility Holding Company Act of 1935, 49 Stat. 803, in order to correct grave abuses which it had found in the use of the holding company device in the nation's electric and gas utility industries. This Court in Electric Bond & Share Co. v. Securities & Exchange Commission, 303 U.S. 419, held constitutional the various provisions of the Act relating to the registration of holding companies as therein defined. In this case we are called upon to determine the constitutionality of § 11 (b) (1) of the Act, authorizing the Securities and Exchange Commission to act to bring about the geographic and economic integration of holding company systems. Specifically, we must decide whether this requirement falls within the power of Congress to regulate commerce among

[ 327 U.S. Page 690]

     the several states and whether it violates the due process clause of the Fifth Amendment.

The North American Company, the petitioner, is a holding company within the meaning of the Act, § 2 (a) (7), and is registered as such with the Securities and Exchange Commission.*fn1 The Commission instituted appropriate administrative proceedings against North American under § 11 (b) (1), the provisions of which apply to registered holding companies. As a result, the Commission entered orders limiting North American's properties to those which, in the Commission's judgment, complied with the standards of § 11 (b) (1) and compelling it to sever relationships with all its other properties.*fn2 The court below, after affirming the orders of the Commission on a statutory level, rejected North American's constitutional objections. 133 F.2d 148. Only these constitutional issues are now before us.

As was the situation in the Electric Bond & Share Co. case, North American is clearly engaged in activities which bring it within the ambit of congressional authority. North American is a typical utility holding company. It is the pinnacle of a great pyramid of corporations, the majority of which operate electric and gas utility properties. These properties are scattered throughout the United States, many of them serving large cities and contiguous territories.*fn3 Electric energy is transmitted across state lines by numerous companies in the pyramid or

[ 327 U.S. Page 691]

     system.*fn4 As of December 31, 1940, there were some eighty corporations in the system, with an aggregate capitalized value in excess of $2,300,000,000. Organized in New Jersey in 1890 and maintaining business headquarters in New York City, North American maintains direct or indirect interests in these corporations through the medium of stock ownership. It is that medium that binds the system together.

North American owns stock directly in ten of the corporations, holding 79% or more of the common stock of eight of them and 17.71% and 19.2%, respectively, of the voting securities of the other two. Three of these direct subsidiaries are registered holding companies: (1) Union Electric Company of Missouri, operating in and around St. Louis, Mo., and with subsidiaries operating in Illinois and Iowa as well; (2) Washington Railway and Electric Company, with subsidiaries operating in the District of Columbia and adjacent territory in Virginia and Maryland; and (3) North American Light & Power Company, operating extensive systems in Kansas, Missouri, Illinois and Iowa in addition to being the parent of several registered holding companies.

Four of the direct subsidiaries of North American are operating companies: (1) Cleveland Electric Illuminating Company, serving Cleveland, Ohio, and surrounding territory; (2) Pacific Gas & Electric Company, serving large areas in California; (3) The Detroit Edison Company, serving Detroit and vicinity; and (4) Wisconsin Electric Power Company, a holding company with subsidiaries operating an integrated electric utility system in Wisconsin and Michigan.

[ 327 U.S. Page 692]

     The other three direct subsidiaries are (1) North American Utilities Securities Corporation, an investment trust; (2) West Kentucky Coal Company, which owns and operates a coal mine in Kentucky and sells coal in interstate commerce; and (3) 60 Broadway Building Corporation, which owns the office building in New York City where petitioner has its offices.

The various companies in the North American system perform a variety of functions from electric and gas service to railroad transportation, warehousing and amusement park operations. All told, they conduct business in seventeen states and the District of Columbia. Electric service alone is provided for more than 3,000,000 customers in an area of roughly 165,000 square miles.

North American claims that its sole and continuous business has been that of acquiring and holding for investment purposes stocks and other securities of the subsidiaries, its relationship being essentially that of "a large investor seeking to promote the sound development of his investment." Active intervention on North American's part in the activities of these companies, it is true, has been of a limited character. Operations and operational policies, the Commission found, have been left entirely to the local managements. Nor has North American sold these subsidiaries any supplies or engineering service. This lack of active intervention, however, is indecisive. It appears to have resulted in large part from North American's satisfaction with the local managements of the subsidiaries and from the fact that the local managements have often included men selected by or historically related to North American. See Detroit Edison Co. v. Securities & Exchange Commission, 119 F.2d 730, 734-735; Pacific Gas & Electric Co. v. Securities & Exchange Commission, 127 F.2d 378, 383-384. The Commission was thus warranted in considering the harmonization of local policies with those of North American as a fact, the

[ 327 U.S. Page 693]

     absence of conflicts making affirmative action by North American unnecessary. But it does not follow that North American's domination of its system was any less real or effective. Historical ties and associations, combined with strategic holdings of stock, can on occasion serve as a potent substitute for the more obvious modes of control. See Southern Pacific Co. v. Bogert, 250 U.S. 483, 491-492; Natural Gas Co. v. Slattery, 302 U.S. 300, 307-308. Domination may spring as readily from subtle or unexercised power as from arbitrary imposition of command. To conclude otherwise is to ignore the realities of intercorporate relationships. Rochester Telephone Corp. v. United States, 307 U.S. 125, 145-146. In light of the extensiveness of North American's holdings of the securities of its subsidiaries and the penetration of local managements with men of North American background, the Commission was justified in treating North American as possessing domination over its subsidiaries or the power to dominate them when and if necessary.*fn5

But North American in some respects has actually intervened in the activities of its subsidiaries. It has affirmatively participated in and dominated their financing operations.*fn6 So completely has it taken over the planning and handling of the various flotations of securities that North American urged before the Commission, though in vain, that the subsidiaries were incompetent to handle

[ 327 U.S. Page 694]

     such matters and that it would be highly uneconomical for them to attempt to do so. As the Commission noted, the ability to dominate this financing and to control the flow, through underwriting channels, of millions of dollars of securities has been of great value and benefit to North American, in addition to being of aid to the subsidiaries. North American has also provided the subsidiaries with advisory and consultative facilities in relation to management problems; and intercompany committees have been created to serve as clearing houses for technical and accounting information.

The interstate character of North American and its subsidiaries is readily apparent from the Commission's survey of their activities. North American is more than a mere investor in its subsidiaries. See Northern Securities Co. v. United States, 193 U.S. 197, 353-354. It is the nucleus of a far-flung empire of corporations extending from New York to California and covering seventeen states and the District of Columbia. Its influence and domination permeate the entire system and frequently evidence themselves in affirmative ways. The mails and the instrumentalities of interstate commerce are vital to the functioning of this system. They have more than a casual or incidental relationship. Cf. Ware & Leland v. Mobile County, 209 U.S. 405; Blumenstock Bros. v. Curtis Pub. Co., 252 U.S. 436; Federal Baseball Club v. National League, 259 U.S. 200. Without them, North American would be unable to float the various security issues of its own or of its subsidiaries, thereby selling securities to residents of every state in the nation. Without them, North American would be unable to exercise and maintain the influence arising from its large stock holdings, receiving notices and reports, sending proxies to stockholders' meetings, collecting dividends and interest, and transmitting whatever instructions and advice may be necessary. Nor could North American maintain its

[ 327 U.S. Page 695]

     other relationships and contacts with its own subsidiaries without the use of the mails and facilities of interstate commerce. Such interstate commercial transactions involve the very essence of North American's business. See International Textbook Co. v. Pigg, 217 U.S. 91. They enable it "to promote the sound development" of its investments from its headquarters in New York City. In short, they are commerce which concerns more states than one. Gibbons v. Ogden, 9 Wheat. 1, 194; Second Employers' Liability Cases, 223 U.S. 1, 46; Minnesota Rate Cases, 230 U.S. 352, 398. As stated by this Court in Associated Press v. Labor Board, 301 U.S. ...


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