Before BIGGS, ALBERT LEE STEPHENS and MARIS, Circuit Judges .
The pertinent facts relating to these three appeals are clearly and succinctly set out in the opinion and findings of fact of the court below. See 71 F. Supp. 797. In addition thereto more complete descriptions of Engineers Public Service Company and its holding company system will be found in In the Matter of Engineers Public Service Co., 9 S.E.C. 764, 10 S.E.C. 904, and 12 S.E.C. 41 and 268. In view of these reports, no extended recapitulation of facts will be necessary.
The questions presented may be put as follows: (a) Did the Commission properly approve as "fair and equitable" within the meaning of Section 11 (e) of the Public Utility Holding Company Act of 1935, 15 U.S.C.A. § 79k (e), cash payments in certain amounts to be made to the preferred stockholders of Engineers Public Service Company; and (b) did the court below err in refusing to approve the plan proposed by the Commission as "fair and equitable", deciding that the cash payments should be in lesser amounts than those set up by the Commission? These questions, albeit put as two, are in fact one and one answer will suffice for both.
Preliminarily it may be stated that after extended hearings the Commission issued a series of orders designed to effect the integration of the Engineers system pursuant to Section 11 (b) (1) of the Act. It is unnecessary to deal with these orders and with their disposition in detail*fn1 It is enough to state here that Engineers has no funded debt; that its capital structure consists of preferred and common stock. The preferred stock is divided into three series. There are presently outstanding 143,951 shares of $5 cumulative dividend convertible preferred stock; 183,406 shares of $5.50 cumulative dividend preferred stock, and 65,098 shares of $6 cumulative dividend preferred stock. Each share of the three series has a stated value of $100 and under the applicable charter provisions each share is entitled to receive $100 plus accrued dividends in the event of involuntary liquidation; but on redemption or voluntary liquidation each share of the $5 series is entitled to receive $105 and each share of the $5.50 and each share of the $6 stock is entitled to receive $110 per share, plus accrued dividends*fn2 The $5 series was sold with a convertible feature which need not be described here since it expired some time ago. The $5.50 series was sold with warrants, presently inoperative, entitling the holder thereof to purchase common stock. Engineers was given the right, to be exercised at its option, to redeem or call the whole or any part of the preferred stock at $100 per share, plus the fixed redemption premium therefor, together with the amount of any dividends accrued, or to repurchase its preferred stock from time to time at a price not exceeding that at which the stock might be redeemed*fn3
Reduced to its simplest terms the plan approved by the Commission provides that Engineers shall dissolve*fn4 and that its preferred stockholders shall receive for each share of preferred stock an amount equivalent to its stated value, plus the redemption premium as if on voluntary liquidation, with accrued dividends to the date of the deposit of each share with a designated depository*fn5 In other words, the three series of preferreds would be paid off at $105, $110 and $110 a share plus dividends. The court below took a different view, concluding that the plan approved by the Commission was not fair and equitable to the common stockholders of Engineers. Exercising its independent judgment it held that the plan would be fair and equitable if each share of preferred stock of Engineers received as payment only its stated value, viz. $100, plus an amount equal to the accrued dividends to the date of deposit. These payments would be the equivalents of those received by the preferred stockholders if Engineers had been subjected to involuntary liquidation, the common stockholders profiting, of course, to the extent of the difference. The common stockholders also give up their stock in Engineers and receive in lieu thereof stocks of subsidiary operating companies and other considerations. What has been stated represents the difference in money between the views of the Commission and that of the District Court, but the methods whereby the respective monetary results of the Commission and the court were arrived at represent the substantial question in the appeal at bar.
The Commission asserts that it arrived at the amount to be paid in cash for the preferred stocks by the application of the doctrine of equitable equivalents as enunciated by the Supreme Court in Otis & Co. v. Securities and Exchange Commission (The United Light and Power Co.), 323 U.S. 624, 65 S. Ct. 483, 89 L. Ed. 511. It takes the position that it has obeyed the clear mandate of the Act in that it has measured the rights to be surrendered by the preferred stockholders in terms of investment value; that is to say ex the Act which itself necessitated the dissolution of Engineers. Relying on its interpretation of the Otis & Co. case the Commission has disregarded the liquidation provisions of the charter. The Commission in arriving at a value for the preferred stocks relied in large part on the testimony of two experts, Dr. R. A. Badger and Mr. D.C. Barnes, president of Engineers. Dr. Badger prepared a report in which he analyzed the value of the three series of preferred stock comparing them as to fair investment, going concern and intrinsic value with stock of five other public utility holding companies like Engineers. He testified that he made his studies without regard to the plan of divestiture of Engineers required by Section 11 of the Public Utility Holding Company Act. He concluded that the three series of preferreds were worth respectively $107.49, $118.31 and $129.07 per share. He also compared the preferred stocks of Engineers with those of ten operating and holding companies selected on the basis of similarity of earnings' history with Engineers and found that these stocks had sold during the period examined at an average yield of 4.5%. Applying this yield to the three Engineers' preferreds he arrived at values for the three series of $111.11, $122.22 and $133.33. He reached the conclusion nonetheless that the "investment characteristics of the Company" and the conditions of the money market placed a proper yield for the three series of Engineers preferreds, absent a call price, of 4.6%. In view of the foregoing he expressed the opinion that the investment values of the three series were respectively $108.70, $119.57 and $130.33. Dr. Badger's evidence as to values also included a number of other elements, the principal items of which are referred to in the opinion of the court below. See 71 F. Supp. at pages 801, 802. These included the charges and preferred dividends earned, the proportion of obligations to total capitalization, the book value of equity per share of preferred, the percent of quick net assets to prior obligations and the times the parent company dividends were earned. Dr. Badger also commented on the "possible permanency of the [general] interest rate" and based his opinion, to a considerable extent, on this factor. These estimates of value were based as will have been observed on the continued existence of Engineers as a "going concern". Dr. Badger really was testifying as we have indicated as to the investment value of the preferreds; in short what they were worth to the present stockholders without the impact of the Act. Next, employing the call or voluntary redemption prices of the preferred as "stoppers", he cut the values down to the respective amounts, as we have stated, of $105, $110 and $110 a share. Mr. Barnes testified that the United States was in a "boom period". While conceding that the investment value of the preferreds might be as high as indicated by Dr. Badger his attitude was a more cautious one. We think that it is apparent on a careful examination of the testimony of the two men that each was testifying to values as of May, 1946, ex the Act.
The District Court expressly stated that it accepted Dr. Badger's values and that in the absence of a showing of changed circumstances it would deem them to be applicable at the time of the hearing. The District Judge went on to say, however, that "It must be conceded * * * that these values are not controlling because the plan itself does not propose to give these amounts to the preferreds." The court considered a number of other elements which it designated as "colloquial" equities. It pointed out that "A significant reason why the present preferreds are able to be evaluated at more than their redemption prices is because of retained earnings over a period of years not paid as dividends to the common stockholders", and that "The past sacrifices and contributions of the common contributed significantly to the present value of the preferreds. * * *" The court also concluded that the issuing prices and market histories of the preferreds looked toward non-payment of any premium, that none of the series of preferreds was initially sold to the public at prices in excess of $100 per share and that in order to sell the preferreds even at these prices it was deemed necessary to attach a convertible feature to the $5 series and warrants to the $5.50 series; that there was "no showing" that Engineers in fact received the amounts which the public paid for the various issues; that underwriting fees and "underwriting spreads in vogue at the time" were large. "The important consideration", said the court, "is not what the preferred security holders paid, but how much the company received for their stock." The court concluded that Engineers did not receive as much at $98 a share and states that as a matter of "colloquial equity" the preferred stocks should not be paid a premium. The trial court stated that market history ex the conversion and warrant privileges showed an average price "much below $100 per share" and that the importance of the conversion and warrant features is demonstrated by the lower average price of the $6 preferred in comparison with the other two series. The District Judge laid emphasis on the fact that dividends were not paid on the preferreds from July 1, 1933, to July 31, 1936, the accumulated arrearages being paid off in 1936 and 1937. He said: "The market history accordingly not only fails to support the preferred's claim to a premium, but affords affirmative support to the non-payment of the premium." The court pointed also to the charter provisions of Engineers, concluding that the liquidation of the company was an involuntary liquidation brought about by the operation of the Holding Company Act, and, while not holding this fact to be determinative in respect to values, nonetheless referred to decisions where, the provisions of the Act having worked a dissolution, courts had treated the charter provisions of the holding companies involved as dispositive of the issue of whether premiums should be paid*fn6*fn7 In this finding of fact the court below laid particular emphasis on the losses sustained by Engineers in making the divestitures required by the Commission*fn8 The trial judge also made a cogent finding respecting Dr. Badger's use of interest rates as an aid in fixing values for the preferreds deeming the interest rate used by the latter to be too low. This finding also is set out in the margin*fn9 The court below, as has been said, reached the conclusion that the amounts which should be paid to the preferreds should not exceed the cash payments which would have been received by them under a strict construction of Engineers' charter in an involuntary liquidation.
The court also said, and this represents the greatest difference between the respective approaches of court and Commission to the problem of valuation [71 F. Supp. 802],
I do not consider the argument advanced [by the Commission] as to what these series of preferreds would be worth if there were no Public Utility Holding Company Act. I do not think it profitable to consider an argument based on unreality for there is a Public Utility Holding Company Act . Unless one subscribes completely to the doctrine of foreordination, things might always be different from what they are.
While recognizing that there might be more than one road to a fair and equitable plan of reorganization under the Act the court concluded that because the Commission had failed to weigh the factors of divestiture and dissolution as well as the other elements referred to in the court's opinion the plan did not meet the test of the Act since it was not fair and equitable.
At this point arises a question of law which, we think, goes to the heart of the instant controversy. What is the power conferred on the district courts of the United States by the Act? Section 11 (e) provides that if the Commission finds a proposed plan of divestiture and integration necessary to effectuate the provisions of Section 11 (b) and to be fair and equitable to the persons affected by it, the Commission shall make an order approving the plan and may then apply to a district court of the United States to carry out its terms.Subsection (e) states also that, "If, upon any such application, the court, after notice and opportunity for hearing, shall approve such plan as fair and equitable and as appropriate to effectuate the provisions of section 11, the court as a court of equity may, to such extent as it deems necessary for the purpose of carrying out the terms and provisions of such plan, take exclusive jurisdiction and possession of the company or companies and the assets thereof, wherever located. * * *"
The Commission takes the position before us that "Unless the conclusions of the Commission lack 'any rational and statutory foundation' they should not have been disturbed by the court below for the 'fair and equitable' rule of Section 11 (e) * * * [was] inserted by the framers of the act in order to protect the various interests at stake. * * * The very breadth of the statutory language precludes a reversal of the Commission's judgment save where it has plainly abused its discretion in these matters"*fn10, citing, among other authorities, Securities Comm'n v. Chenery Corp. (the second Chenery case), 332 U.S. 194, 195, at pages 207, 208, 67 S. Ct. 1575, at pages 1582, 1583. The court below takes a very different view, asserting that a " § 11 (e) court has the affirmative and independent duty to consider and find whether a proposed plan, which has been approved by the Securities and Exchange Commission, is fair and equitable.", citing its decision In the Matter of Interstate Power Co., D.C. Del., 71 F. Supp. 164.
The legislative history of the Public Utility Holding Company Act of 1935 throws some light on this vital question. The report of the Senate Committee which reported out the original bill states, "Section 11 provides that plans for the voluntary readjustment of the affairs of holding companies to conform with the section may be presented to the federal courts at any time and that in such cases those courts may exercise in the furtherance of such voluntary plans all the extraordinary powers such courts have been accustomed to exercise when called upon under the Sherman and Hepburn [Acts] [15 U.S.C.A. §§ 1-7, 15 note, 49 U.S.C.A. § 1 et seq.] to effect compulsory corporate readjustments required by the public policy expressed in those acts . * * *. The title provides that during all court processes the SEC will act as the impartial expert economic adviser and administrative assistant to the courts*fn11 That expert assistance will enable the courts to save time and expense in the solution of essentially economic and administrative problems for which in the Sherman Act cases it had no assistance except that of opposing counsel." See Senate Report No. 621, accompanying S. 2796, 74th Cong. 1st ...