The opinion of the court was delivered by: TAMM
This is an action to enjoin, set aside, annual and suspend in part two orders of the Interstate Commerce Commission (hereafter called the Commission). This Court has jurisdiction under Section 1336 of Title 28 United States Code. The first order challenged in this action was published April 1, 1947, and was entered in a proceeding before the Commission designated Finance Docket No. 15228. That order approved a merger of Pere Marquette Railway Company (hereafter called Pere Marquette) into The Chesapeake and Ohio Railway Company (hereafter referred to as Chesapeake and Ohio) under Section 5(2) of the Interstate Commerce Act as amended, Section 5(2), Title 49 U.S.C.A. After review of this order by the Supreme Court and remand to the Commission, a Supplemental Order was entered under the same docket number on May 9, 1949. This second order, except for a modification described below, affirmed the provisions of the earlier order.
The plaintiffs in this action own, in the aggregate, 2,100 shares of $ 100 par value 5% cumulative preferred stock of Pere Marquette. Their combined interests represented 2% of the outstanding stock of that class. The defendants are the United States of America and the Interstate Commerce Commission. tHe Chesapeake and Ohio has intervened as a defendant under the provisions of Section 2323 of Title 28 United States Code.
In March, 1946, The Chesapeake and Ohio, Pere Marquette and the Alleg/eny Corporation (which controlled the Chesapeake and Ohio) filed a joint application with the Commission under Section 5 of the Interstate Commerce Act, Section 5, Title 49 U.S.C.A., for approval of a merger agreement. Under the agreement, the Pere Marquette was to be merged into the Chesapeake and Ohio, and its stock was to be exchanged for stock of the Chesapeake and Ohio. Shortly after the application was filed with the Commission, the agreement was approved by the requisite number of stockholders of each railroad, as required by law.
The Commission's hearings on the proposed merger were held in April, 1946, at which representatives of some of each of the three classes of stockholders of Pere Marquette participated as protestants. Following the closing of the record and the filing of briefs, a proposed report recommending approval of the merger was served upon the parties. Several weeks later, in November, 1946, the plaintiffs here asked leave to intervene to file exceptions to the proposed report. Their request was granted.
On January 10, 1947, the parties, including plaintiffs, were heard on oral argument by Division 4 of the Commission. On April 1, 1947, Division 4 issued its report and order approving the proposed merger and the issuance of securities in accordance with its terms, but declined to determine whether dissenting stockholders as members of a class created by the merger were entitled to any better treatment by virtue of their charter contract. Petitions for reconsideration were denied by the entire Commission on May 20, 1947.
On May 29, 1947, plaintiffs filed an action in the United States District Court for the Eastern District of Virginia to set aside the Commission's order on the grounds that 'failure to include protection for plaintiffs as dissenting shareholders, as a distinct class created by the merger is contrary to law and a direct violation of the Commission's statutory duty to impose just and reasonable conditions for the protection of all interests involved.' Schwabacher v. United States, D.C., 72 F.Supp. 560, 561. On June 4, 1947, that Court heard argument on plaintiff's request for a temporary stay of the Commission's order. The temporary stay was denied, and on June 6, 1947, the merger was consummated. The Court subsequently dismissed the complaint, and the plaintiffs then appealed to the Supreme Court.
The question which plaintiffs presented to the Supreme Court was whether the Commission, in view of its authority over mergers, could decline to determine just what the dissenting stockholders' legal rights were under the State law and the Pere Marquette charter and to recognize them in full by the terms of the merger. Schwabacher v. United States, 334 U.S. 182, 189, 68 S. Ct. 958, 968, 92 L. Ed. 1305. The Court held that neither party's position was correct; that the Commission should have considered the liquidation rights under the charter 'to the extent that they may affect intrinsic or market values', and since it was not clear from the report that the Commission had done this, the judgment of the lower court was reversed and the case remanded to the Commission for reconsideration upon the principles expressed. With respect to the asserted claim under state law, the Court said:
'* * * In appraising a stockholder's position in a merger as to justice and reasonableness, it is not the promise that a charter made to him but the current worth of that promise that governs, it is not what he once put into a constituent company but what value he is contributing to the merger that is to be made good. * * * Consequently the liquidation preferences were only one factor in valuation rather than determinative of amounts payable. * * * Since the federal law clearly contemplates merger as a step in continuing the enterprise, it follows that what Michigan law might give these dissenters on a winding-up or liquidation is irrelevant, except insofar as it may be reflected in current values for which they are entitled to an equivalent.' 334 U.S. at pages 199, 200, 68 S. Ct. at page 967.
The case was remanded to the Commission because it was not clear under the language of the First Report whether the Commission had given consideration to the 'current worth', if any, of plaintiffs' liquidation rights. Thus, the Court said:
Briefs were submitted to the Commission in connection with its reconsideration under the terms of the Supreme Court's opinion. On May 9, 1949, the Commission issued its second report (hereafter referred to as the Report on Reconsideration) and entered an order as of that date approving the merger agreement for the second time. This latter report recounted the proceedings on appeal, analyzed the decision of the Supreme Court, and stated that the Commission's only function on reconsideration was to make sure that the liquidation rights of the Pere Marquette cumulative preferred stock were considered to the extent that they might affect the intrinsic or market value of the stock. The Commission noted the likelihood of liquidation of Pere Marquette, as one of the essential transportation facilities of the country, was extremely remote. It then held that the preferred stock's prior right to dividends rather than its liquidation preferences were significant in evaluating the stock. After this analysis, the Commission held that Division 4 had adequately considered these matters.
Plaintiffs, in substance, seek from this Court an order directing the Commission to revise the merger terms and to award to plaintiffs more Chesapeake and Ohio stock in exchange for their holdings of Pere Marquette cumulative preferred stock than is provided for in the present merger terms. They attack both the first and supplemental orders on three principal grounds. As stated by the plaintiffs', these grounds are: (1) The findings in the Report on Reconsideration are materially inconsistent with the findings in the First Report relating to the justness and the reasonableness of the terms for exchange of stock and demonstrate the errors in those earlier findings; (2) The findings in both reports when considered together do not support the ultimate finding of justness and reasonableness; (3) The findings of the Commission in its Report on Reconsideration do not support its conclusion that the liquidation preferences have no value and were given adequate consideration in its First Report. All parties before the Court have filed motions for summary judgment. The Court has before it only the orders and reports of the Commission. The plaintiffs have not attacked the sufficiency of the evidence on which the Commission relied in making its findings; consequently, the record of the proceedings before the Commission has not been brought to this court. This court's task, then is to determine whether the Commission has acted in conformity with the opinion of the Supreme Court and the requirements of the statute.
Plaintiff's Allegation of Inconsistence.
The first contention of the plaintiffs to be considered is that the findings of the Commission in the Report on Reconsideration are materially inconsistent with and demonstrate the errors in the findings of the First Report.
The inconsistency alleged lies, according to the plaintiffs, in the Commission's findings on the prospect of eventual payment of arrearages on the preferred and resumption of dividend payments on the common. The language in the Report on the Reconsideration which the plaintiffs maintain is inconsistent with the earlier language and deeds of the Commission of the following:
'Had the Pere Marquette continued as a separate company, there was reason to believe that, in view of the facts of record, all arrearages on the prior preference and preferred stocks would be paid and that dividends would eventually be resumed on the common. It was the prospect of ultimate payment of these arrearages and the resumption of payment of dividends on the common, rather than any possibility of actual liquidation that weighed heavily in giving intrinsic or market value to the several classes of Pere Marquette stock, whether that company was to continue its separate existence or merge with some other company.'
A reading of the First Report does not reveal that the Commission made any specific finding on the subject of the prospect of dividends on the Pere Marquette Common stock. It did refer to the fact that holders of Pere Marquette common stock had received no dividends since 1931, and in a footnote mentioned the witnesses for the applicant carriers had agreed that the common stockholders could not expect to receive dividends for many years to come. It noted that Chesapeake and Ohio dividends were being paid regularly, and after determining dividend prospects on the Chesapeake and Ohio common stock and on the preferred stock, it said: 'On the whole, it would seem that the prospects of Pere Marquette stockholders for returns on their investments would be enhanced by merger of their company with the Chesapeake and Ohio.' Later, the Commission noted that a holder of Pere Marquette common stock would fare much better as a holder of Chesapeake and Ohio common stock 'if, as testified, the prospect of any dividend on the (Pere Marquette) common is indeed many years away.' These are the only references to future dividend payment in the First Report. These statements are not inconsistent with the Commission's findings of this subject in the Report on Reconsideration. Counsel for the plaintiffs have not pointed to any other language in the First Report on which they rely to establish the inconsistency. It does not appear to the Court that the findings of the Commission in its Report on Reconsideration on the prospect of eventual payment of arrearages and resumption of payment of dividends is at all inconsistent with the language of the First Report.
The plaintiffs seek also to establish an inconsistency on the basis of the security exchange terms which the Commission approved. A discussion of this question requires a brief exposition of the ratios of stock exchange approved by the Commission. At the time of the merger application, Pere Marquette had outstanding a total of 686,735 shares with a par value of $ 6b,673,612. This was comprised of 134,288 shares of $ 100 par value 5% cumulative preferred stock; 111,999 shares of $ 100 par value 5% cumulative ...