it will agree, in connection with its sales, to eliminate any reference to such memorandum account, and will further agree, in referring to its fixed capital account, to use only the figures reported to the Public Service Commission of New York. This renders unnecessary, for the purposes of this proceeding, any further discussion of the appraisal and its status in applicant's accounts, and obviates the necessity of further inquiry into the relationship between Cheney and persons controlling the Associated Gas and Electric Company holding company system.

Our order, therefore, will be conditioned upon applicant delivering to each person solicited to purchase such notes, prior to or contemporaneously with the first solicitation of such person, a prospectus containing a balance sheet as of a date not earlier than May 31, 1938, of the same form and content as would be filed with the Public Service Commission of New York and containing no reference of any kind to any appraised value of fixed capital. Such a balance sheet, as of February 28, 1938, appears as Exhibit E to the amendment to the application included in File 32-85, which is part of the record in this case. Our order will be further conditioned upon applicant not making, in its advertising, selling literature, and verbal solicitations, any representations as to its fixed capital account at variance with such prospectus.

An order will accordingly issue granting the exemption applied for. The Commission finds it appropriate in the public interest and for the protection of investors and consumers that such order shall be subject to the conditions incorporated therein.

By the Commission: Commissioner Mathews was absent at the time of the Commission's consideration of this case and did not participate therein.

3 S. E. C.

[No. 535]

IN THE MATTER OF

Louis R. Gates, R. W. Samuelson, Ira C. Snyder, Donald L. Pettis, and A. Z. Patterson, as Reorganization Managers of

THE UNITED TELEPHONE AND ELECTRIC COMPANY

File No. 52-6. Promulgated July 28, 1938

SIMPLIFICATION OF HOLDING COMPANY SYSTEMS.

Reorganization Plan Under Section 77B of Bankruptcy Act.

An application filed under Section 11 (f) of Public Utility Holding Company Act of 1935 and Commission's Rule U-11F-1 for approval of a plan of reorganization for a registered holding company, applicant company having instituted proceedings for reorganization under Section 77B of Bankruptcy Act and where the plan was supported by committees representing holders of more than 51 percent of each class of stock of applicant and of representatives of creditors holding substantially more than 66% percent in amount of claims affected by plan, approved having met the standards of Sections 11 (a), 11 (b) (2), and 11 (e), and other pertinent sections of Act, in that, the proposed corporate structure is not unduly or unnecessarily complex; the voting power in new company will be fairly and equitably distributed; and the plan is fair and equitable to persons affected.

SIMPLIFICATION OF HOLDING COMPANY SYSTEMS.

Reorganization Plan Approved Subject to Certain Conditions.

Commission approved reorganization plan, that incorporated therein a voting trust which provides for stock to be held in trust for 5 years, subject to condition that plan be amended so that by January 1, 1942, every holder of a voting trust certificate be given a reasonable time within which to withdraw his portion of the common stock.

Reorganization Plan, Standards Applicable.

The Commission in approving or disapproving a reorganization plan under Section 11 (f) of Public Utility Holding Company Act of 1935 is guided and directed by standards prescribed by the Act.

Rights of Creditors Under Reorganization Plan.

The Commission found that the reorganization plan was fair and equitable to creditors where they will receive new securities equal in principal amount to whole of their claims, except a portion of interest to date and modified with respect to date of maturity, security, and interest rate, and where principal creditors have indicated approval of the plan.

Rights of Stockholders Under Reorganization Plan.

Where the reorganization plan provides that new stock will all be of one class of common. where stock capitalization is reduced from $11.952.350 to

$6,016,335.50, where the reorganization plan gives the present preferred stockholders 97.18 percent of voting power, of the earnings after interest, and of equity value of new company and where the plan requires common stock to surrender voting control and right to participate in any substantial way in prosperity of new company and to receive 2.82 percent of voting power, of the earnings after interest, and of the equity values as presently submitted, the Commission found the plan to be fair and equitable and further that the relatively insignificant portion of equity allocated to common stockholders does not infringe unfairly upon the contract rights and priorities of any class of stockholders or creditors.

Jurisdiction Retained.

Where the Commission approved a plan of reorganization filed pursuant to Section 11 (f) of Public Utility Holding Company Act of 1935, the Commission emphasized the fact that nothing in its findings is intended or should be construed to prejudice or restrict the powers which the Commission may or may not be called upon to exercise in the future under Section 11 (b) of Act whether or not presented to or considered by Commission in these proceedings.

Voting Trust Agreement Made a Part of Reorganization Plan.

In considering the inclusion of voting trust in the reorganization plan, the Commission found it to be an appropriate expedient in this case, where it is the judgment of representatives of committees of security holders that there is no one within the organization qualified to perform functions as chief executive of company, where it would be difficult to find men to take the position without any assurance of continuity of service because of danger that some one might acquire control of stock and change the management and moreover, while the voting trust proposal was initiated by a stockholders' committee, the principal creditors have also insisted upon it in the absence of a practical alternative and where the voting trust agreement contains provisions less susceptive of abuse than more conventional agreements.

ISSUE AND SALE OF SECURITIES BY REGISTERED HOLDING COMPANY OR SUBSIDIARY.

Reorganization.

Commission found that all of securities to be issued or sold under plan are to be issued and sold for purpose of effecting a reorganization and therefore qualify under Section 7 of Public Utility Holding Company Act of 1935.

FINDINGS AND OPINION OF THE COMMISSION

This case arises upon an application under Section 11 (f) of the Public Utility Holding Company Act of 19351 and the Commission's Rule U-11F-1 for approval of a plan of reorganization for The United Telephone and Electric Company, a public utility holding company. The application was filed on October 29, 1937, by Louis

1 Section 11 (f) provides that

a reorganization plan for a registered holding company or any subsidiary company thereof shall not become effective unless such plan shall have been approved by the Commission after opportunity for hearing prior to its submission to the

court.

2 The Company owns no operating properties but owns or controls, directly or through three intermediate holding companies, the voting stock of one gas utility company. The Central Gas Utilities Company, which operates in Kansas and in a small adjacent territory in Colorado; two electric utility companies, the Southern Nebraska Power Company and The Central Kansas Power Company, which operate in Nebraska and Kansas, respectively; three nonutility companies; and 14 telephone companies which operate in New Jersey, Pennsylvania, Ohio, Indiana, Arkansas, Missouri, and Kansas.

R. Gates, R. W. Samuelson, Ira C. Snyder, Donald L. Pettis, and A. Z. Patterson, as reorganization managers. On January 7, 1936, the company had instituted proceedings for reorganization under Section 77B of the Bankruptcy Act, as amended, before the United States District Court for the District of Delaware, and on October 27, 1937, had registered with the Commission under the Public Utility Holding Company Act of 1935.8

After appropriate notice, a public hearing was held on November 29 and 30, and December 1, 1937. At this hearing no member of the public or state commission requested to be heard. Thereafter, following numerous conferences with members of the Commission's staff, supplementary applications were filed, the last on June 7, 1938.* Proposed findings submitted by counsel for the Commission were served upon the applicants on June 23, 1938. Exceptions thereto were limited to the proposed finding that the plan be modified to eliminate provisions for a voting trust, and at the oral argument before the Commission, on July 14, 1938, applicants agreed to file amendments embodying all other changes or modifications requested by counsel to the Commission. It was further agreed that the amendment would include certain additional changes which were suggested by the Commission at the oral argument. Such an amendment was filed on July 25, 1938, and at a reconvened hearing on July 28, 1938, was made a part of the record. Other objections raised by the trustee in bankruptcy will be considered below.

Our judgment, in determining whether to approve or disapprove a plan of reorganization under Section 11 (f) of the Act, is appropriately guided and directed by standards which the Act prescribes in these situations. Indeed, Section 1 (c) permits no other course." Thus, in accordance with the standards prescribed in Sections 11 (a), 11 (b) (2) and 11 (e) of the Act, we must find, as a condition to approval of a plan, that the proposed corporate structure is not "unduly or unnecessarily" complex; that the voting power in the reorganized company is "fairly and equitably distributed"; and that the plan is "fair and equitable to the persons affected by such plan."

The reorganization managers are hereinafter referred to as the "applicants," The United Telephone and Electric Company as the "Company"; and the Public Utility Holding Company Act of 1935 as the "Act."

It may not be amiss to point out that at the argument before the Commission on July 14, 1938, Mr. A. Z. Patterson, counsel for the applicants, stated, "the staff of this Commission caused us to make changes in this plan, and in other matters, which we think now are decidedly beneficial and advantageous to the stockholders and creditors .. have certainly had an improvement in the plan because of the very thorough and complete investigation which this Commission has made."

Section 1 (c) provides in part:

we

and it is hereby declared to be the policy of this title, in accordance with which policy all the provisions of this title shall be interpreted, to meet the problems and eliminate the evils as enumerated in this section, connected with public utility holding companies which are engaged in interstate commerce or in activities which directly affect or burden interstate commerce . . .

In the matter of Genesee Valley Gas Company, Inc., 3 S. E. C. 104 (1938). Moreover where, as here, the reorganization contemplates the issuance of securities and the acquisition of assets or securities, we must also find that there is compliance with the specific standards prescribed by Sections 7 and 10 of the Act. Commissioner Healy, concurring in In the matter of Peoples Light and Power Company et al., 2 S. E. C. 829 (1937).o

The securities and claims of the company (including interest to May 15, 1936) to be dealt with under the plan, as of December 31, 1937, are as follows:

Notes and accounts payable---

Thrift certificates and preferred stock installments_

$1,297, 003. 51 51, 084. 86 4, 115, 600.00 4,737, 400.00 3,099, 350. 00

7% cumulative preferred stock par value $100 41,156 shares6% cumulative preferred stock par value $100-47,374 shares---Common stock without par value-36,178 shares-stated value___ $988,830.61 of the notes and accounts payable are held by Southwestern Bell Telephone Company and Indiana Bell Telephone Company. These notes bear interest at 6% per annum and are partially secured by the pledge of securities of certain telephone company subsidiaries. The balance of the notes and accounts payable is held by subsidiaries of the Company, and, with the exception of $67,310.03 held by the United Trust Company (Abilene, Kans.), is unsecured. As of December 31, 1937, arrearages of dividends on the 7% preferred stock amounted to $31.50 per share, and on the 6% preferred amounted to $28 per share. 13,577 shares of the common stock, issued as a stock dividend in 1931, will not participate in the reorganization.

The

• The opinion states in part: "We must give consideration to Sections 7 and 10 and their applicability in a situation to which Section 11 (f) applies. In imposing upon this Commission the duty under Section 11 (f) of passing upon reorganizations of registered holding companies and their subsidiaries, Congress recognized that the efforts of the Commission should be coordinated with the work of the courts in reorganization cases. objectives of the Act could not be achieved if, while the Commission was applying the standards of the Act in some cases, reorganizations could be effected through the courts without application of such standards. By Section 1 (c) of the Act all the provisions are to be interpreted in accordance with the policy expressed in the Act. The policy and standards to be applied in a proceeding under Section 11 (f) are to be found in those sections of the Act which relate to the matters being presented under Section 11 (f). For example, if the plan includes the issue of securities, the section fixing standards for the issuance of securities is Section 7. If the plan includes the acquisition of securities or utility assets or any other interest in any business, the section fixing standards for such acquisition is Section 10. The proper interpretation would appear to be that in acting under Section 11 (f) the Commission is to apply the standards supplied by other sections of the Act, such as Sections 7 and 10."

Paragraph (d) of Rule U-11F-1 includes the following provisions: "If the plan proposed includes acquisition of assets or securities or issuance of securities, the application, in addition to other appropriate matters, shall include the information required by Section 6 (b), or 7, or 10 and the rules, regulations, and forms thereunder, or any rules or order pursuant to Section 12. The Commission, at the time when it issues its order approving or withholding approval of the plan, will determine whether or not the requirements of said sections are satisfied, subject, however, to retention of jurisdiction as provided in paragraph (e) hereof."