Before MCLAUGHLIN and KALODNER, Circuit Judges, and MADDEN, District Judge .
KALODNER, Circuit Judge .
The question involved is whether the Securities and Exchange Commission, "Commission", and the District Court, erred in approving as fair and equitable, pursuant to the Public Utility Holding Company Act of 1935, as amended, 15 U.S.C.A. § 79k (e), a plan submitted by the North American Company, "North American", for the liquidation of its subsidiary North American Light & Power Company, "Light & Power", without making a specific determination of the merits of complex and controverted claims pressed by the appellants, a group of common stockholders in Light & Power.
We are here concerned with that part of what has been designated in the proceedings as "Plan I" which provides for the distribution of the assets of Light & Power among its security holders and for the settlement of all claims against North American. North American submitted this Plan in response to an order of the Commission dated December 30, 1941, directing the liquidation and dissolution of Light & Power pursuant to Section 11 (b) (2) of the Act, 15 U.S.C.A. § 79k (b) (2). 10 S.E.C. 924 (1941). Under the Plan, North American offered the sum of $7.50 per share to Light & Power stockholders for their stock interest and in settlement of all claims, and North American was to receive the remaining assets of Light & Power.
The facts are as follows:
Between 1932 and 1940 North American had acquired in the open market, at substantially less than par, $9,608,000 of Light & Power debentures. As a result of redemptions in 1940 and 1941 its holdings were reduced to the $5,623,500 principal amount presently outstanding. All the publicly-held debentures were retired in 1942 at principal plus accrued interest in partial compliance with the liquidation and dissolution order previously mentioned. 11 S.E.C. 820 (1942), aff'd sub nom. City National Bank & Trust Co. v. S.E.C., 7 Cir., 1943, 134 F.2d 65. North American's holdings, however, were not retired, since the Commission had questioned whether the debentures and other senior securities of Light & Power acquired by North American should be treated on a parity with those held by the public or should be limited to cost or subordinated in view of the relationship between the two companies and the circumstances under which North American had acquired them. 10 S.E.C. 924, 932 (1941). Light & Power paid no interest on those debentures, since July 1, 1942, and pursuant to orders of the Commission the accruing interest was segregated pending a final determination of the issues involved. 12 S.E.C. 621 (1942); 13 S.E.C. 518 (1943). As of January 1, 1947, the interest thus segregated amounted to $1,391,816, but upon application of Light & Power, joined by North American, the Commission permitted Light & Power to apply that fund towards the payments it was obligated to make to Illinois Power Company, "Illinois Power", a registered holding company subsidiary of Light & Power, under the terms of a negotiated settlement*fn1 incorporated into the first part of Plan I. Holding Company Act Release No. 7446 (1947).
North American owns 44% (84,925 shares) of Light & Power's $6 cumulative preferred stock, having acquired it in the open market between 1932 and 1940, either directly or through its subsidiaries, at an average price of $48.64 per share. The original sale of preferred to the public was completed prior to December 31, 1932, at an average price of $92 per share. The preferred stock is entitled to $100 per share on dissolution, whether voluntary or involuntary, plus all unpaid and accrued dividends. Light & Power has not paid preferred stock dividends since 1932, and as of January 1, 1947, accumulated dividends in arrears amounted to $87 per share.
North American, finally, owns 85% (5,327,067 shares) of Light & Power's common stock.Acquisition of this stock began in 1926. In 1927, it held 42.5% of the stock then outstanding, an equal amount being held by the Insull interests, and 15% being held by the Studebaker interests. By 1931, North American had increased its holdings to 43.94%. In that year, North American and The Middle West Corporation, "Middle West", an Insull company, entered into an agreement with Light & Power pursuant to which the latter borrowed $10,000,000 from certain banks for which it issued five notes maturing annually over the next succeeding five years. The agreement further provided that Light & Power was to retire the loan as it matured by offering to its common stockholders, other than North American, additional common stock at approximately 75% of the market price.North American and Middle West agreed to take up the unsubscribed stock. In 1932, Middle West became bankrupt and performance of the agreement fell to North American. When the first three notes matured in 1932, 1933 and 1934, some sales were made to the public common stockholders of Light & Power, but the bulk of the stock, amounting to 1,939,332 shares, was purchased by North American*fn2 In 1935 and 1936, North American refused to make further purchases, contending it was not obligated to do so. It did, however, advance $4,000,000 to Light & Power to meet the last two maturing notes and compelled it to give new notes for that amount. A derivative action brought by the preferred stockholders resulted in a court order directing North American to return the notes and the interest received thereon and to purchase additional common stock. Murphy v. North American, D.C., 1938, 24 F. Supp. 471, modified and affirmed, 2 Cir., 1939, 106 F.2d 74.In compliance, North American acquired 2,000,000 shares at $1 per share and 666,667 shares at $3 per share, in accordance with the 1931 agreement. The Light & Power common stock acquired by North American and its wholly-owned subsidiary under this agreement totaled 4,620,370 shares at an aggregate cost of $9,971,924.
Light & Power's principal assets consist of common stock of four utility companies*fn3 As of December 31, 1946, the total assets of Light & Power were found by the Commission to be worth from a low of $74,425,399 to a high of $81,789,285. After deducting the amount of Light & Power's senior securities, including those held by North American, and accrued interest and preferred stock arrearages, the value of the common stock equity was determined to range between $31,098,423 and $38,462,309, or $5 to $6 per share. On the basis of the foregoing findings, the Commission concluded that $5.50 represented the reasonable break-up value per share of Light & Power's common stock, if the debt and equity securities of Light & Power held by North American were accorded their apparent rank and priority without regard to any claims for subordination or other equitable limitations.
Having made its preliminary determination of the break-up value of the common stock of Light & Power, the Commission next turned its attention to the claims asserted and developed by two groups of security owners. These claims are summarized by the Commission as follows: (26 S.E.C. 169 (1947) ).
I.A claim on behalf of Light & Power against North American for any sums Light & Power might have to pay in connection with the Illinois Power settlement, on the theory that any action by Light & Power was taken under North American's direction. Under this theory, the Dana Group is seeking to have North American, rather than Light & Power, bear any cost of the Illinois Power settlement. In the course of these proceedings this claim has become known as and is hereinafter referred to as the claim-over.
II. A claim that North American's holdings in Light & Power should be subordinated to the public security holders of Light & Power or limited to cost. This is based on:
(a) a charge of general mismanagement, which it is contended falls within the pattern of the Deep Rock case, and the fact that North American's original acquisition of an interest in Light & Power was allegedly in violation of the anti-trust laws under the doctrine of the Columbia Gas case;
(b) the contention that certain North American purchases of Light & Power senior securities, made during the period 1935-1937 when North American was not registered as a holding company under the Act and made after registration in 1937 without Commission authorization, were in violation of Sections 4 (a) (4) and 9 (a) (2) and void under Section 26 [15 U.S.C.A. §§ 79d (a) (4), 79i (a) (2), 79z];
(c) a contention that senior securities, other than those involved in the claim in subparagraph b, purchased by North American in the market between 1932 and 1940 at depressed prices cannot now be permitted to participate to the extent of their face amount;
(d) the contention by the Dana Group that the funds that North American expended in purchasing the securities referred to in subparagraph c should have been invested in 1931 in Light & Power stock "by the control interests in the form of venture capital" instead of requiring Light & Power to borrow from banks. It is argued that North American's common stock holdings should be reduced by the difference between the number of shares it actually acquired since 1931 and the number of shares it ...