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Public Service Corp. v. Securities and Exchange Commission

August 12, 1942

PUBLIC SERVICE CORPORATION OF NEW JERSEY
v.
SECURITIES AND EXCHANGE COMMISSION



Author: Maris

Before BIGGS, MARIS, and JONES, Circuit Judges .

MARIS, Circuit Judge .

The Public Utility Holding Company Act of 1935, 15 U.S.C.A. § 79 et seq., provides for the imposition of duties and liabilities upon holding companies and subsidiaries of holding companies. Section 2 (a) (8) of the Act, 15 U.S.C.A. § 79b (a) (8), defines "subsidiary company" and authorizes a company to file with the Securities and Exchange Commission an application for an order declaring that it is not a subsidiary company of a specified holding company*fn1 Pursuant to this statutory authority, Public Service Corp. of New Jersey applied to the Commission for an order declaring that it is not a subsidiary of The United Gas Improvement Co. (hereinafter referred to as UGI) or of The United Corp. (hereinafter referred to as United). The Commission denied the application. Public Service has petitioned this court to set aside the order of the Commission. In support of its petition Public Service urges that the findings of the Commission were not supported by substantial evidence, that the Commission misconstrued the Act in reaching its conclusions, and that the proceedings were so conducted by the Commission as to deny to Public Service due process of law in violation of the fifth amendment.

We have examined the record in the light of Public Service's argument that the Commission's fact findings are not supported by substantial evidence and we find no merit in Public Service's contentions in this regard. Indeed some of these contentions are so wholly lacking in merit as to border on the frivolous. It is sufficient to say that the evidence fully supports the findings of the Commission which we summarize as follows:

Public Service was organized in 1903 under the laws of the State of New Jersey. Plans for its organization were submitted to the board of directors of UGI and approved by it. UGI transferred its interest in an electric company and leases in several operating gas companies to Public Service and received in return interest bearing certificates of Public Service. UGI subscribed to 25 percent of the original stock issue of Public Service and underwrote part of the total stock issue of $10,000,000 par value. Under a contract for 5 years UGI supplied Public Service with engineering, purchasing and advisory service. UGI men served on the board of Public Service, on its finance, salary, works and budget committees and on the boards of several Public Service subsidiaries. United has had representation on the board of Public Service since 1930.

From 1927 to 1930 UGI directors and executives took an active and perhaps leading role in attempting to procure a contract for Public Service with the Pennsylvania Railroad to supply electricity to its newly electrified lines, even though a UGI subsidiary, Philadelphia Electric Co., was a logical competitor for the business. Not until it became apparent that Public Service could not get the contract and that an independent utility might, did Philadelphia Electric enter the field. The resultant contract between Pennsylvania Railroad and Philadelphia Electric made some provision for Public Service. Throughout the negotiations for the contract both UGI and United officials advised the president of Public Service as to the procedure he was to follow.

In 1928 Public Service and UGI pooled their interests in corporations devoted to construction work and organized United Engineers and Constructors, Inc. Although Public Service owned one-half of its stock United Engineers was managed by UGI almost exclusively. After United Engineers proved to be a financial failure all its problems were still dealt with by UGI until 1938, when Public Service and UGI simultaneously rid themselves of their stock ownership.

UGI participated in financing Public Service and in acquiring utility properties for Public Service. United and UGI helped to reorganize Public Service transportation subsidiaries. UGI negotiated with Columbia Gas and Electric Corp., a subsidiary of United, to induce Columbia Gas to refrain from supplying natural gas in territory supplied by Public Service.

Following the passage of the Public Utility Holding Company Act of 1935 and the decision by the Supreme Court in Electric Bond & Share Co. v. Securities and Exchange Commission , 303 U.S. 419, 58 S. Ct. 678, 82 L. Ed. 936, 115 A.L.R. 105, in 1938 UGI and United representatives resigned from the board of Public Service so that at the time of the Commission's present order there were no individuals serving as officers or directors of Public Service who were serving in similar capacities for UGI or United. However, Public Service and UGI continued until 1939 to utilize joint purchasing agencies, Public Service still continues to send UGI detailed monthly reports, a practice which it does not follow with other stockholders, and UGI offers suggestions and criticisms from time to time.

United and UGI are registered holding companies. UGI is a subsidiary of United.UGI owns 28.4 percent and United 13.9 percent of all outstanding securities of Public Service, a total of 42.3 percent. From 1929 through 1940 United and UGI cast a majority of the total number of votes which were cast at each annual meeting of Public Service stockholders. At the 1941 annual meeting when United refrained from voting, UGI stock accounted for 49.2 percent of the total stock voted. Except for the stock held by United and UGI the securities of Public Service are widely scattered. The combined holdings of the next 30 largest stockholders aggregate but 8.85 percent of the outstanding stock of Public Service. In 1936, despite an extraordinary effort made by Public Service to procure proxies, only 79.1 percent of the outstanding stock was voted and of this the holdings of UGI and United represented 53.5 percent.

From the foregoing facts as to stock ownership the Commission concluded that as a practical matter if United and UGI so willed they could defeat any resolution or action recommended by Public Service management, could pass their own resolutions as to any matter which did not require a special vote, could "break quorum" at any stockholders' meeting, and could veto any corporate action which required a two-thirds vote of each class of stockholder, such as merger or consolidation. In the light of the close relationship between United, UGI and Public Service disclosed by the history of Public Service the Commission concluded that the continuing corporate intimacy was especially significant on the issue of controlling influence.

The Commission accordingly reached the conclusion that Public Service had not sustained the burden of proving that it was not controlled by UGI and United, or subject to their controlling influence.

In support of its contention that the Commission misconstrued and misapplied section 2 (a) (28) of the Act Public Service alleges that the Commission treated the prima facie status of subsidiary, created by the Act whenever 10 percent of the outstanding voting securities are owned by a holding company, as evidence of a fact to be overcome by proof sufficient to satisfy the Commission beyond any possible doubt that there was an absence of present or possible future "control" of or a "controlling influence" over Public Service by UGI and United; that the Commission imposed upon Public Service the burden of demonstrating to the satisfaction of the Commission that it is not now controlled, or subject to a controlling influence by UGI and United and that there is no possibility of any such control or controlling influence in the future; that the Commission construed "controlling influence" as any influence; that the Commission construed the Act as giving it absolute discretion to determine what constitutes "control" and "controlling influence" and to determine whether or not it is necessary or appropriate in the public interest or for the protection of investors or consumers that Public Service be subject to the obligations, duties and liabilities imposed by the Act upon subsidiary companies of holding companies; and that the Commission failed to give effect to the direction in the Act that when it is shown that a controlling influence does not presently exist the application for an order declaring the applicant not to be a subsidiary must be granted.

Most of these contentions are wholly beside the point for the reason that they are without factual bassi in the record. Thus, upon examination of the Commission's fact findings and opinion we discover that in arriving at its conclusion the Commission did not rest its decision upon any presumption arising from the ownership of 10 percent of voting stock of a utility company by a holding company but relied entirely upon evidence presented at the hearing before its trial examiner as to the effect of the stock ownership upon the relations of the three corporations. Again, although the Commission used the word "demonstrated" when referring to the burden which the Act places upon the applicant, there is no basis for concluding that the word was intended to connote "absolute certainty" as Public Service would have us find. Indeed, the only conclusion which can fairly be drawn from the Commission's opinion as a whole is that it proceeded upon the theory that the burden of proof which is imposed by the Act upon an applicant is to establish by a preponderance of the evidence that it is not controlled or subject to a controlling influence by a holding company. Such a conception of the burden of proof is entirely correct in the light of the express ...


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