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In re Federal Water Service Corp.

18 S.E.C. 231 (1945)

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In re Federal Water Service Corp.

Securities and Exchange Commission

18 S.E.C. 231 (1945)

Facts

The Federal Water Service Corporation (Water Service) sought approval by the Securities and Exchange Commission (SEC) for a complex corporate reorganization. Chenery Corporation owned a controlling block of stock that included voting rights, which allowed Chenery to select Water Service’s corporate management. In order to maintain a controlling interest in Water Service’s voting rights, Chenery obtained additional stock during Water Service’s reorganization. The SEC determined that Chenery had to divest this recently obtained stock. The SEC justified this determination through an understanding of judicial precedent that corporate management could not trade in a corporation’s stock during a reorganization, due to the management’s fiduciary obligation to all shareholders. The SEC stated that it was acting as it believed a court of equity would in the same situation. Chenery brought suit challenging the SEC’s order. On appeal, the SEC argued that regardless of its application of judicial precedent, its order should be upheld on other grounds, including the SEC’s experience and expertise in overseeing similar corporate reorganizations. The Supreme Court rejected the SEC’s argument and remanded the issue. On remand, Chenery proposed the same plan that the SEC previously rejected.

Rule of Law

Issue

Holding and Reasoning (Per curiam)

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