Before EDGERTON, WILBUR K. MILLER and WASHINGTON, Circuit Judges.
UNITED STATES COURT OF APPEALS, DISTRICT OF COLUMBIA CIRCUIT. 1950.CDC.34
J. Donald Halsted et al., as a Protective Committee for the
Holders of the Common Stock of Long Island Lighting
DECISION OF THE COURT DELIVERED BY THE HONORABLE JUDGE WASHINGTON
This case presents the question whether the Securities & Exchange Commission has power to prohibit a stockholders' protective committee from soliciting financial contributions from the stockholders whom it represents in a reorganization proceeding under the Public Utility Holding Company Act of 1935 (15 U.S.C. § 79), where such contributions were to be used for the purpose of bearing the expenses of the committee and paying fees to its legal and other representatives.
The Long Island Lighting Company is a utility holding company, incorporated under the laws of New York. In 1939 the Securities & Exchange Commission granted the company an exemption from the provisions of the Public Utility Holding Company Act, pursuant to section 3 (a) (1) of that Act. On April 21, 1945, after appropriate proceedings, Long Island's exemption was revoked by the Securities & Exchange Commission, and Long Island thereupon registered as a holding company. In November 1945 proceedings under section 11 (b) (2) and 11 (e) of the Act were commenced and consolidated. Hearings were held from time to time in these proceedings. Early in 1948, petitioners J. Donald Halsted, E. M. Nichols and B. F. Grizzle formed a protective committee for common stockholders of Long Island. From that point on the committee was represented before the Commission, and from time to time offered objections to various actions taken or proposed by the Commission in the 11 (e) and 11 (b) (2) proceedings. On November 2, 1949, the Securities & Exchange Commission concluded that a plan submitted under 11 (e), if modified in certain aspects, would be fair and equitable, and upon that modification the plan was approved on November 17, 1949. The common stockholders' committee offered certain objections to this plan, none of which are here relevant.The plan has lately (February 10, 1950) been approved by the District Court for the Eastern District of New York as being proper, fair and equitable.
The protective committee, petitioners here, filed a declaration of solicitation with the Securities & Exchange Commission on April 21, 1948, requesting permission to circularize the common stockholders and secure authorization to represent them in certain aspects of the reorganization. This was approved by the Securities & Exchange Commission on June 10, 1948.On October 28, 1948, the committee requested the Commission to approve the circularization of the stockholders for a voluntary contribution of 5 cents a share. After a hearing on the proposed solicitation, the Securities & Exchange Commission, on March 31, 1949, issued an order denying the permission requested, and the protective committee brings this appeal.
The committee contends, in its petition to this court: First, that the Securities & Exchange Commission has no jurisdiction to regulate or prohibit the circularization of stockholders for the purpose of acquiring funds to finance the committee; second, that the action taken by the Commission violates the committee's right of free speech under the First Amendment; and, third, that in any event the Commission's action was arbitrary and capricious. A further contention was made for petitioners, in their brief and oral argument, that the Long Island Lighting Company neither operates in, affects, nor burdens interstate commerce, and that hence the Securities & Exchange Commission has no jurisdiction over the company and consequently no power to regulate the activities of the committee.
The first question is thus whether the Securities & Exchange Commission had authority under the Public Utility Holding Company Act of 1935 to deny the committee the permission which it requested to circularize the stockholders of the company. The principal statutory provision which must be examined is section 12 (e) of the Holding Company Act, reading as follows:
"It shall be unlawful for any person to solicit, or to permit the use of his or its name to solicit, by use of the mails or any means or instrumentality of interstate commerce, or otherwise, any proxy, power of attorney, consent, or authorization regarding any security of a registered holding company or a subsidiary company thereof in contravention of such rules and regulations or orders as the Commission deems necessary or appropriate in the public interest or for the protection of investors or consumers or to prevent the circumvention of the provisions of this chapter or the rules, regulations, or orders thereunder." (15 U.S.C. § 791 (e). )
The provision just quoted is an important part of a comprehensive congressional plan for the regulation of public utility holding companies. Prior events had shown the necessity for supervision of these companies, and in particular the need for reorganization of their capital structure. See American Power Co. v. Securities & Exchange Commission, 329 U.S. 90, 96-104; In re Standard Power & Light Corp., 48 F. Supp. 716, 719-20. Under the Holding Company Act an expert administrative body, the Securities & Exchange Commission, was given broad regulatory powers over registered companies, to compel reorganization when necessary, and then to control the reorganization process. And solicitation of authorizations, especially of the right to act for security holders, was among the practices which for the protection of investors Congress considered it necessary to control, both during the ordinary operations of a registered company and during the reorganization process. The Securities & Exchange Commission had previously, in the Securities Exchange Act of 1934, been given power to supervise communications addressed to holders of securities registered under that Act, where proxies and similar authorizations were being solicited. Section 14, 1934 Act; 15 U.S.C. § 78n (a). In the Public Holding Company Act of 1935, passed a year later, the Congress gave the Commission broader powers over proxy solicitations than it had given in the 1934 Act. Section 12 (e), 1935 Act; 15 U.S.C. § 791 (e). In this, as in other instances, Congress showed that it deemed the public utility holding company field to be one requiring a stricter measure of regulation and control than was the case with corporations generally.Both the 1934 and 1935 Acts applied to solicitations of "any proxy, power of attorney, consent, or authorization." But the 1935 Act in section 12 (e) not only permits the Commission to make rules and regulations for the control of such solicitations, but also to regulate by order solicitations not falling within the ambit of any particular rule. Further, in section 12 (e) the Commission was specifically empowered to prevent circumvention of the provisions of the Act and of the Commission's implementation of those provisions. The 1935 Act thus authorized not only prohibition by the Commission of solicitations obviously contrary to the Act, but also regulation of those fashioned in a more ambiguous design, aimed at avoiding the Act by circuitous means. The employment of legal expertise in sleight-of-hand was not unknown in the utility holding company field. The Congress recognized that it was necessary to give the Commission broad powers in order that the adroit manipulation which had resulted in the abuses of the holding company system could be prevented. Securities & Exchange Commission v. Chenery Corp., 332 U.S. 194, 201-03; Detroit Edison Co. v. S.E.C., 119 F.2d 730, 738-739 (C.C.A. 6, 1942), cert. denied 314 U.S. 618.
Prior to the passage of the 1935 Act, protective committees frequently required their constituent security holders to sign agreements, under which their securities were physically deposited with the committee. These agreements commonly gave authority to the committee not only to act for the security holders, but also to obtain for the committee, through hypothecation and otherwise, such measure of reimbursement and compensation as the committee might see fit to require. Assessments were also utilized from time to time by protective committees to raise from their constituents funds for the conduct of the committee's business and, in some instances at least, for payment of compensation. It has been pointed out that under deposit agreements assessments were on occasion used as a device for retention of control, and that under such agreements "Assessments have been levied apparently more with reference to their deterrent effect upon withdrawal than with reference to the actual expenses which the committee has incurred. ... Committees have levied assessments which have amounted to a substantial percentage of the market price of the securities, and, in fact, as much as the entire amount of the market price, thus making withdrawal impractical if not completely useless." *fn1 And one of the notorious abuses of the past consisted in excessive fees obtained by committees when left to their own discretion, as well as costs incommensurate with services rendered either to the security holders or the corporation being reorganized *fn2
In contrast, the Commission's regulations now provide, in substance, that any person represented by a protective committee may sever his connection with the committee at any time prior to the close of the proceeding, without expense to him. Rule U-62 (h). Further, the Holding Company Act, in section 11 (f), expressly gives the Commission control over all fees and expenses in connection with reorganization proceedings under the Act, in the following broad language:
"The Commission may, by such rules and regulations or order as it may deem necessary or appropriate in the public interest or for the protection of investors or consumers, require that any or all fees, expenses, and remuneration, to whomsoever paid, in connection with any reorganization, dissolution, liquidation, bankruptcy, or receivership of a registered holding company or subsidiary company ...