The opinion of the court was delivered by: KENNEDY
This is a proceeding in which the petitioner prays for an order enforcing and carrying out the terms and provisions of an amended plan, subsequently modified, for the consolidation and recapitalization of three utility companies operating on Long Island. The companies are: (1) the Long Island Lighting Company (called Long Island), (2) its wholly owned subsidiary Queens Borough Gas and Electric Company (called Queens), and (3) the latter's wholly owned subsidiary Nassau and Suffolk Lighting Company (called Nassau). The plan was filed under Public Utility Holding Company Act of 1935, § 11(e), 15 U.S.C.A. § 79 et seq., called the Act.
Long Island was incorporated on December 31, 1910 under the Transportation Corporations Law to produce, purchase and sell electricity. It is engaged in the generation and purchase of electric energy, the manufacture and purchase of gas, and the sale and distribution thereof for light, heat and power to consumers in the counties of Nassau and Suffolk, on Long Island, in the State of New York. It is a public utility company as defined in sec. 2(a)(5) of the Act and is a holding company within the meaning of sec. 2(a)(7) of the same statute. As of March 31, 1949, its outstanding securities were as follows: first mortgage bonds, $ 42,035,000; sinking fund debentures, $ 5,974,000; notes payable to banks, $ 10,000,000; 7% cumulative preferred stock (74,750 shares) having a par value of $ 100; 6% cumulative preferred stock (179,050 shares) having a par value of $ 100; and common stock (3,000,000 shares) with no par value, but having a stated value of $ 1 per share. The two series of preferred stock having priority over the common stock as to cumulative dividends and upon dissolution, voluntary or involuntary, they are entitled to receive par value plus all accumulated dividends. These preferred shares are redeemable, in whole or in part, at 110% of their par value plus accumulated dividends. Long Island has not met its full preferred dividend requirements since 1936. As of March 31, 1949 (forgetting what I shall later call the '1944 plan') arrears were on the books at $ 77 per share on the 7% series ($ 17,573,050) and $ 66 per share on the 6% series. There have been no dividends on the common stock since 1933. Despite its arrearages the preferred stock does not vote in the election of directors.
Queens, a public utility corporation, was incorporated on December 31, 1910 under New York law. It generates and buys electric energy, manufactures gas, and sells and distributes it for light, heat and power to consumers in the Borough of Queens, City of New York, and in Nassau County, Long Island. On March 31, 1949, its outstanding securities were as follows: bonds, $ 10,858,000; debentures, $ 3,393,000; notes payable to banks, $ 1,500,000; 6% cumulative preferred stock (66,860 shares), having a par value of $ 100; and common stock (200,000 shares) having no par value, but a stated value of $ 10 per share. The preferred stock has priority over the common stock as to cumulative dividends and is entitled to receive, in the event of liquidation or dissolution, voluntary or involuntary, par value plus accumulated dividends. That same stock is redeemable in whole or in part at 110% of its value plus accumulated dividends. Full preferred dividend requirements have not been paid since 1936. No dividends have been paid on the common stock since 1933. The dividend arrears on the preferred stock as of March 31, 1949 amounted to $ 67.50 per share ($ 4,513,050). The preferred stock does not vote in the election of directors.
Nassau, a public utility corporation, was organized May 13, 1905, under the New York law. It manufactures and buys gas and sells and distributes it to consumers in Nassau County. It also engages in the purchase and sale of electricity to consumers in the same county. As of March 31, 1949, its outstanding securities were as follows: first mortgage bonds, $ 2,820,000; face value of notes payable to banks, $ 700,000; 7% cumulative preferred stock (27,262 shares) having a par value of $ 100; common stock (10,000 shares) having a par value of $ 100. The preferred stock has a priority over the common stock as to cumulative dividends, and, on dissolution, it is entitled to receive par value plus accumulated dividends. That preferred stock is redeemable at $ 112 per share plus accumulated dividends. Nassau has not met its full preferred dividend requirements since 1933, and no dividends have been declared on the common stock since the same year. The dividend arrearage on the preferred stock as of March 31, 1949 was $ 94.75 per share ($ 2,583,074.50).
The three companies, together with Long Beach Gas Company, Inc. (Long Beach) are and have been operated with respect both to gas and electric service as a single coordinated unit. The electric properties are interconnected by high voltage transmission lines. Long Island buys and sells electricity to Queens; Queens supplies Nassau with all its electric requirements. All the gas properties of the companies are interconnected by high pressure transmission mains. Long Beach gets its gas requirements from Queens and so does Nassau. Moreover, Nassau and Long Island sell gas to each other.
The foregoing facts have been taken from the petition in part, and in part from Holding Company Act Release No. 9473 dated November 2, 1949 (the findings and opinions of the commission on the amended plan submitted by the companies). To a very large extent I have merely set forth these facts in the very same words used in the documents mentioned. They do, however, reflect four very significant indisputable features of the present condition of the companies, namely: (1) that all three are hopelessly in arrears to the preferred stockholders, (2) that all three are dominated and controlled by the common stock alone, (3) that all three are so interconnected physically, as well as otherwise, that the feasibility of consolidation is apparent, and (4) that the necessity for recapitalization and reorganization is pressing.
History of Administrative Proceedings.
But before discussing the specific plan which I am asked to enforce it will, I think, be helpful if I mention, even briefly, the history of the efforts which have been made to evolve a remedy for this condition.
Prior to April 21, 1945, Long Island was not under the jurisdiction of the commission: it and each of its subsidiary companies had received an exemption. On December 16, 1944, Long Island filed in the office of the Secretary of the State of New York, with the approval of the Public Service Commission of the State of New York (the state commission) a certificate of reduction of capital to revise the rights and privileges of its stockholders. Certain journal entries were to be made in the books, as ordered by the state commission, and the par value of the outstanding 253,800 shares of preferred stock was to be reduced from $ 100 to $ 60 per share. The accumulated dividends as of June 30, 1944 were to remain unaffected. The outstanding 3,000,000 shares of common stock were to be cancelled and in lieu of outstanding stock the company was to issue 503,800 shares of new common stock to the preferred and common stockholders on the basis of one share of new common stock for each share of preferred stock and each 12 shares of common stock. No dividends on the common stock were to be paid until all preferred stock arrearage had been met, and the unearned surplus arising from the reduction in capital and the elimination of paid-in premiums together with existing unearned and earned surplus at June 30, 1940 was to be used to increase the depreciation reserve by $ 6,000,000 and to provide $ 4,979,320, as a 'special reserve for depreciation' and for loss in value of investments. Almost simultaneously with the filing of the plan petitioner, the Securities and Exchange Commission (the federal commission) brought a proceeding in the Eastern District of New York to enjoin any further action, pending an effort by the federal commission to cancel the exemption theretofor granted Long Island and its subsidiaries. This application I denied, Securities and Exchange Commission v. Long Island Lighting Co., D.C.E.D.N.Y. 1944, 59 F.Supp. 610, affirmed 2 Cir., 1945, 148 F.2d 252, judgment vacated and remanded to the district court with directions to dismiss the complaint on the ground that the cause had become moot, 1945, 325 U.S. 833, 65 S. Ct. 1085, 89 L. Ed. 1961. These proceedings to cancel the exemption became moot because on April 21, 1945, the federal commission then terminated the exemption with respect to certain sections of the Act including secs. 11(b)(2) and 11(e). On April 23, 1945, Long Island filed a notice of registration with the federal commission. In the meantime, the 1944 plan filed with the state commission had never become operative. None of the accounting entries were made; none of the certificates were issued.
On October 25, 1945, Long Island filed under sec. 11(e) of the Act a petition for consolidation and recapitalization involving Long Island, Queens, Nassau and Long Beach. On the following day (October 26, 1945) the same four companies filed with the state commission a joint petition for permission and approval to consolidate, to exercise the franchise through the consolidated company, and to issue 101,520 shares of preferred stock 4% series, and 1,059,036- 3/10 ths shares of common stock without par value. On November 9, 1945, the federal commission instituted proceedings under sec. 11(b)(2) of the Act, directed against all four companies, in order to determine whether voting power was unfairly and inequitably distributed among the security holders. There was a consolidation of the proceeding before the federal commission; that is, the proceeding under sec. 11(e) to consolidate and recapitalize, and the proceeding under sec. 11(b)(2) to determine the question of inequitable distribution of voting power.
On September 24, 1947 the state commission issued a memorandum suggesting that Long Beach be eliminated from the consolidation and that the consolidated corporation have outstanding only one class of stock, namely, common stock. On February 7, 1948, an amended petition was filed with the state commission, and on March 10, 1948, the present plan for consolidation and recapitalization was filed with the federal commission. One principal object of the amended plan was to meet the criticism of the state commission with reference to the elimination of Long Beach, and to make provision for common stock only. On June 16, 1948 the state commission issued a memorandum saying that the proposed consolidation was in the public interest, except that there should be no participation whatsoever by the common stockholders of Long Island. On August 25, 1948, the federal commission concluded in the proceeding under sec. 11(b) (2) that voting power was inequitably distributed and ordered that the companies be recapitalized in such wise as to provide for only one class of (common) stock, that stock to be distributed among the shareholders of each company in a fair and equitable manner. To meet, or at least to attempt to meet, the criticism of the state commission (June 16, 1948) the companies filed (November 18, 1949) with that body a further amended petition, which also conformed to the modification suggested by the federal commission in its release No. 9473 dated November 2, 1949.
In the midst of these proceedings Consolidated Edison Company of New York, Inc. (Edison) applied to the federal commission on September 15, 1948 under secs. 9(a) and 10 of the Act asking approval of a purchase offer to all the holders of the common stock of the new consolidated corporation under which Edison was to pay over $ 28,000,000 of its 3% 15-year convertible debentures provided that there should be deposited certificates of stock entitling Edison to become the holder of not less than 90% of the total amount of the outstanding shares of the common stock of the consolidated corporation, or such lesser percentage in excess of 66- 2/3 % as Edison might determine. The commission refused to consolidate Edison's application with the proceedings then pending under sec. 11(e). A hearing on the application of Edison has been concluded but no post-hearing procedure taken. Nor has any step been taken to enforce the order of the commission under sec. 11(b)(2) of the Act, which, as has been said, is really a definite direction to the companies to correct unfair and inequitable distribution of voting power, to recapitalize on the basis of a single class of stock, and to distribute that stock in a fair and equitable manner.
To recapitulate, and to single out certain significant features of the history of the proceedings there was, prior to the assumption of jurisdiction by the federal commission, an effort under state law to compel the Long Island preferred stockholders to surrender approximately 40% of the value of their holdings in a scheme of consolidation and recapitalization. Before that plan could be consummated, federal jurisdiction attached, and there then followed more or less parallel proceedings in the two commissions, federal and state, looking toward consolidation, and toward recapitalization which would eliminate former abuses with respect to voting power and which, above all, would bring about a fair and equitable redistribution among the various classes of shareholders of their respective interest in the company.
It may be well to say at this point, and then to dismiss them from any further consideration, that Long Beach need not be mentioned from this point on, nor Liland Corporation, a company which holds land not used in the system's utility operations. There is no controversy now on the point that any plan should envisage the use of these two companies as subsidiaries of the consolidated corporation, if consolidation is to come about.
The problem which confronted both commissions, federal and state, were therefore primarily two: (1) Consolidation was feasible, but was it fair and equitable, not to say necessary, and, if so, (2) Under a plan of consolidation based on a single class of stock (common) what would be a fair method of distribution of the new common stock to the former shareholders? And so after prolonged hearings the federal commission (which by now was the administrative body solely charged with answering these questions) filed on November 2, 1949, after prolonged hearings, its findings and conclusions. The state commission, charged with different duties in the premises, at that time had before it practically the same proposals which the companies had made to the ...