Securities and Exchange Commission v. Chenery Corp. (Chenery I)

The Federal Water Service Corporation (Water Service) sought approval by the Securities and Exchange Commission (SEC) (defendant) for a complex corporate reorganization. The majority of Water Service’s shareholders owned preferred stock that did not include voting rights. Chenery Corporation (plaintiff) owned a controlling block of common stock that did include voting rights, which allowed Chenery to select Water Service’s corporate management. The SEC determined that Water Service’s reorganization must include a conversion of preferred stock to common stock, such that the majority of shareholders would have voting rights. Chenery obtained preferred stock at market price in anticipation of this conversion, in order to maintain a controlling interest in the voting rights. The SEC determined that Chenery had to divest this recently obtained preferred stock in order to adequately distribute shareholder voting power. 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 court of appeals set the SEC’s order aside, and the United States Supreme Court granted certiorari.