An important although narrow legal point in the interpretation of the Public Utility Holding Company Act of 1935 is involved in this case. This is whether a plan under section 11(e) of that act may be 'fair and equitable' to preferred stockholders within the meaning of those words as used in that section, which allows a participation by junior common stockholders in the distribution of the assets of a registered holding company, which is liquidated in compliance with section 11(b)(2), before the senior preferred stockholders receive securities whose present value equals the preferred's full liquidation preferences.
The Securities and Exchange Commission approved the Plan, Holding Company Act Release No. 4215, April 5, 1943. The United States District Court of Delaware approved the Plan, D.C., 51 F.Supp. 217, and the Circuit Court of Appeals affirmed this action. This Court has jurisdiction under Judicial Code, Section 240, 28 U.S.C.A. § 347, and Section 25 of the Holding Company Act. Certiorari was granted because of the importance of the question raised in administration of the act. 322 U.S. 724, 64 S.Ct. 1289.
The United Light and Power Company, a Maryland corporation, is a registered holding company under the Act. Section 5. It is the top holding company of a large system with twenty-four other corporate associates. Section 2(a)(10). Its place in the system violates the prohibition of the Act against a registered holding company being a 'holding company with respect to (any) of its subsidiary companies (Sec. 2(a)(8)) which itself has a subsidiary company which is a holding company.' Section 11(b)(2). This prohibition is known as the 'great-grandfather clause.'
In proceedings for the simplification of the system, after finding that Power violated the great-grandfather clause, an order was entered on March 20, 1941, directing that Power be liquidated and dissolved. The order authorized Power to submit to the Commission a plan for compliance with the order 'on a basis which is fair and equitable to its security holders.' Power with its registered holding company subsidiary, The United Light and Railways Company, a Delaware corporation, all of whose common stock was owned by Power, submitted such a plan and after examination by the Commission and modification it was approved by order of April 5, 1943. The Plan was held specifically to be fair and equitable to all security holders. By the application and order Railways' participation in the Plan was accepted. Holding Company Act Release No. 4215. This is the order which is before us.
It approved the Plan for the liquidation and dissolution of Power as 'necessary to effectuate the provisions of Section 11(b) of the' Act. It directed counsel for the Commission to apply to an appropriate federal court for an order enforcing the Plan. The central feature of the Plan and the one here in issue was Power's proposed distribution of its assets to its preferred and common stockholders. Power's chief asset was its holdings of common stock in its subsidiary, Railways. It represented over $72,000,000 of its total gross assets of a little more than $81,000,000. All other property of Power which remained after the satisfaction of its obligations was to be distributed by Power to Railways. Thus this residual property of Power would inure to the benefit of Railways' new common stockholders, the former stockholders of Power.
Distribution of Power's common stock holdings in Railways was to be effected on the basis of 5 shares of Railways' common stock for one share of Power's preferred and one share of Railways' common for 20 shares of Power's common, an allocation of 94.52% To Power's preferred stockholders and 5.48% To Power's common stockholders. As Railways was the only company in the tier below Power of the holding company system, it would become by the dissolution of Power the top holding company and Power's preferred and common stockholders, by the distribution to them of all of Railways' common, would have in the aggregate the same rights in Railways and in the holding company system that Power had. The rights and preferences of Power's stockholders would of course disappear with the distribution of Railways' common and the dissolution of Power. As holders of Railways' single class of common, a new relationship of equality would arise between Power's preferred and common stockholders.