The opinion of the court was delivered by: KENNEDY
The Application, generally considered.
The Securities and Exchange Commission applies for an order approving and enforcing an Amended Plan of Reorganization submitted by Kings County Lighting Company (herein called Kings) under the terms of the Public Utility Holding Company Act, Act of August 26, 1935, c. 687, title 1, sec. 1 et seq., 49 Stat. 838, 15 U.S.C.A. § 79 et seq.; herein sometimes called the 'act' and sometimes 'the statute.' The precise statutory basis for the application is section 11(e) of the act.
The Long Island Lighting Company (herein called Long Island) is a holding company as defined by section 2(a)(7) of the act. Kings is a subsidiary of Long Island under section 2(a)(8)(A) of the act. Under the statute, section 11(b)(2), it was the duty of the Securities and Exchange Commission to require Kings to take whatever steps that commission found necessary to insure that the corporate structure did not unfairly or unequitably distribute the voting power among security holders
The statute also authorizes any subsidiary company of a registered holding company (like Kings) voluntarily to submit a plan to the Securities and exchange Commission, section 11(e), in order to accomplish the purpose of section 11(b)(2) of the act, among which are, as I have mentioned, the correction of corporate structure to eliminate unfair or inequitable distribution of voting power. It is an amended plan, submitted by Kings under section 11(e) that is the subject of the application before me. Ordinarily, of course, the only question before me would be whether the proposed plan is fair and equitable, and calculated to accomplish the statutory purpose, section 11(e). However, as will appear, more than that is here for decision: the application itself has produced a jurisdictional controversy between the Public Service Commission of the State of New York and the federal Securities and Exchange Commission.
It should be unnecessary at this point to dwell at very great length on that amended plan to revise the capitalization of Kings, although some brief reference ought now to be made to it. I say this because the area of controversy over the plan itself seems to me to be very narrow.
At present, the outstanding shares of common and preferred stock of Kings are as follows:
17,871 shares 7% Series B,
par value $ 100 $ 1,787,100.
1,129 shares 6% Series C,
par value $ 100 112,900.
25,000 shares 5% Series D,
par value $ 100 2,500,000.
50,000 shares without par
value, having a value
for capital purpose of $ 2,000,000.
Total capital represented by
outstanding stock $ 6,400,000.
If the plan is approved and carried out, the capitalization of Kings will be as follows:
44,000 shares new 4% preferred
stock, par value
$ 50 $ 2,200,000.
New Common stock:
440,000 shares without par
value, having a value
for capital purposes
of $ 2,200,000.
Total capital represented by
outstanding stock $ 4,400,000.
It will be observed that the net effect of these changes is to reduce the capital of the company in the amount of $ 2,000,000. Out of this amount it is planned to return in cash to preferred stockholders $ 191,484, and with the remainder to create a capital surplus of $ 1,808,516, to be used solely for the purpose of making such adjustments in the company's books of account as may be directed by the Public Service Commission of the State of New York with respect to depreciation and other reserves. The plan is based upon the belief that this change, and others incidental to it, will bring the dividend requirements of the company into proper relation to earning power, and will effect a fair and equitable distribution of the voting power between the two classes of stock, a salient feature of the plan being that the present preferred stockholders will receive 396,000 shares (90%) of the new common stock, leaving only 44,000 shares (10%) in the hands of the present owners of the common stock of the company.
So far as the amended plan itself is concerned, it is clear that the controversy between the Securities and Exchange Commission, on the one hand, and the Public Service Commission of the State of New York, on the other, springs perhaps not exclusively, but largely from this proposed redistribution of the common stock
The Chronology of the Application.
I believe I can clarify the controversy to some extent by reviewing briefly here the history of the proceeding.
In 1936 the Securities and Exchange Commission granted the application of Long Island that it and its subsidiaries be exempt from the provisions of the statute (Long Island Light Company, 1 S.E.C. 345). In 1944 Long Island filed with the New York Public Service Commission a petition for reduction (and other changes) in its capital structure. The plan was opposed as unfair and inequitable by a Protective Committee for preferred stockholders. Under date of July 27, 1944, the Public Service Commission, after severely criticizing the proposal of Long Island, pointed out that it (the Commission) had power only to approve or disapprove, and none to compel the company to readjust its stock, or its voting rights, in accord with sound finance and equitable considerations. In November, 1944 the Stockholders' Protective Committee petitioned the Securities and Exchange Commission to revoke or modify the 1936 exemption order, and on November 10, 1944, a hearing was ordered by the Securities and Exchange Commission. Meanwhile, and on December 14, 1944, the Public Service Commission approved an amended proposal of Long Island by a vote of 3 to 2. The majority pointed out that the plan was deficient in some respects, but again said that the authority of the Public Service Commission was limited to approval or disapproval: the commission could not formulate a new plan nor require the petitioning company (Long Island) to make changes which might be thought desirable. Thereupon the Securities and Exchange Commission attempted to restrain Long Island against carrying out the plan. I denied the application for a temporary injunction. Securities and Exchange Commission v. Long Island Lighting Co., D.C., 1944, 59 F.Supp. 610. And this determination was upheld by the Circuit Court of Appeals for the Second Circuit, Judge Clark dissenting. Securities and Exchange Commission v. Long Island Lighting Co., 2 Cir., 1945, 148 F.2d 252. The Supreme Court granted certiorari, but later dismissed the proceeding as moot, Securities and Exchange Commission v. Long Island Lighting Co., 1945, 325 U.S. 833, 65 S. Ct. 1085, 89 L. Ed. 1961, because, in the meantime, the Securities and Exchange Commission had modified the exemption order theretofore granted Long Island, Long Island Lighting Company et al., Holding Company Act Release No. 5746; order of April 21, 1945. The modification order was predicated on findings, among others, that the preferred and common stocks of Long Island were distributed among holders in some 49 states and foreign countries. The Securities and Exchange Commission also found that in a period of 12 months the common and preferred shares of Long Island had been extensively traded on the New York Curb Exchange. Kings, the subsidiary of Long Island here involved, at that time had listed on the New York Stock Exchange two series of bonds, and the preferred stock of Kings was traded through the New York Curb Exchange. Holders of the capital stock of Kings, as of January 15, 1947, are located in 28 states and in 3 foreign countries.
Kings filed its original plan for recapitalization on August 25, 1945. On February 5, 1946, the Public Service Commission of the State of New York adopted a memorandum setting forth 10 specific criticisms of the plan as filed. Kings thereupon amended its plan as of April 16, 1946, and filed that amended plan with the Public Service Commission of the State of New York on April 23, 1946, in an effort to comply with the criticisms theretofore made by the state commission. This amended plan (April 16, 1946) spoke throughout of balance sheets and other financial statements reflecting the condition of the company on April 30, 1946, the significance of which fact will be made clear at a later point.
On December 13, 1946, the Securities and Exchange Commission handed down findings and an opinion, indicating that it would approve Kings' amended plan only if it was further modified in four respects, namely: (a) by reduction of the proportion of new common stock to be issued to the present holders of common shares, (b) by amendment of the proposed certificate of incorporation to provide for cumulative voting in the election of directors by the holders of the new common stock, (c) by the elimination of the requirement for a vote of existing stockholders with respect to the plan, and (d) by a provision for the payment of fees and expenses in connection with the plan and the proceedings to carry it out.
On January 8, 1947, Kings filed a modification of its amended plan embodying the suggestions made by the Securities and Exchange Commission, and on January 9, 1947, the amended plan, as modified, was approved by the Securities and Exchange Commission. A district court hearing was noticed for February 24, 1947, for the purpose of determining whether the plan is fair and equitable, and, if so, whether an enforcement order should be granted.
In the meantime, the Public Service Commission of the State of New York had under consideration the amended plan. The return day of the district court hearings was, therefore, adjourned to March 24, 1947. Prior to that adjourned date, and on March 6, 1947, the Public Service Commission of the State of New York handed down a long memorandum and reached the conclusion (1) that none of the plans then before it should be approved, (2) that the pending application as a unit should be denied as inequitable, (3) that it supplied no basis on which it (the Commission) could make the findings required by the Public Service Law of the State of New York, and (4) that it is not in the public interest.
It is certain, as I have suggested, that one of the strongest objections on the part of the Public Service Commission of the State of New York to the proposal before it related to the allocation of new common stock to the holders of the old common stock. The amended plan had provided for a distribution of 10% of the new common stock to the old holders. (Long Island actually owns 97.736% of the common stock of Kings. However, from time to time hereafter I speak of Long Island as if it were the sole owner of the old common stock). The Securities and Exchange Commission on December 13, 1946, thought this proportion should be reduced to 7 1/2%. But the Public Service Commission of the State of New York is of the opinion that none of the new common stock should go to the old holder, even though it (Long Island) was required, within the space of a year, to divest itself of its holdings of the new common stock. It will be readily appreciated that, in a case of this kind, it is always easy to over-simplify the issues, a result which I strongly wish to avoid. However, it is clear, to me at least, that the Securities and Exchange Commission believes that a redistribution of the common stock, under which Long Island receives 7 1/2% of the total to be outstanding and retains that percentage for no more than a year, is fair and equitable; this the Public Service Commission of the State of New York vigorously denies. And the difference of opinion between the two commissions is very largely explained by the fact that the Securities and Exchange Commission has attempted to appraise the present Kings common stock holdings of Long Island on a potential earning basis, whereas the Public Service Commission of the State of New York believes any such basis unreliable, and any plan based upon that sort of distribution neither fair nor feasible, because, on an asset basis, the present common stock holdings (in Kings) of Long Island have no value at all. I may say in passing that certain groups of the preferred stockholders of Kings, who would be directly and adversely affected by an unfair allocation of the new common stock, take the position in briefs filed in this proceeding that an enforcement order should be granted, despite the objections of the Public Service Commission of the State of New York. But this fact is not controlling and, perhaps, not of any great significance. Primarily, the conflict is between two public agencies, each anxious, within the scope of its authority, to protect the public, and, in a controversy of that kind, the wishes of those immediately affected (i.e., the stockholders and the company) must necessarily be subordinated to other more important considerations.
Should the Plan be Remanded?
I have tried to outline the factual setting out of which the application at bar, and the opposition to it, arose. The command of the particular portion of the act invoked by this proceeding, sec. 11(e), is that the court, if it approves the plan as 'fair and equitable and as appropriate to effectuate the provisions' of the statute, may make an order for the purpose of carrying out the terms and provisions 'of such plan'.
The New York Public Service Commission, in its brief, emphasizes that my power is very limited: I can only approve or disapprove the ('such') plan before me (citing In re Laclede Gas Light Co., D.C.E.D. Mo., E.D., 1944, 57 F.Supp. 997, 1002). The Public Service Commission places this strong emphasis upon the limited scope of the power of the District Court, because the plan in its original (August 25, 1945), as well as in its amended (April 16, 1946) form, sets forth the fact that among the steps to be taken in effectuating it is the securing of the consent and approval of the Public Service Commission. In its findings and opinion (December 13, 1946) the Securities and Exchange Commission did not suggest that the plan be modified by elimination of this requirement for approval by the state commission. Therefore, says the latter, the plan which I am asked to pass upon still contains this important feature, and it would be an idle gesture on the part of any court to approve it as it now exists, since it is obvious that the Public Service Commission will not give its approval: it has specifically withheld such approval (March 6, 1947). What I have said fairly summarizes, I think, the first two points of the brief submitted to me by the state commission. On the other hand, it is urged on behalf of the Securities and Exchange Commission that, even though the plan, both in its original and amended form, contemplates that the approval of the state commission is to be sought and secured, still this is not a vital feature of the plan, because, if it is, then the recapitalization of Kings is subject to the veto of the New York Public Service Commission. And the argument runs that this cannot be so, because the basic federal act is a specific overriding federal law (citing Phillips v. Securities and Exchange Commission, 2 ...