Securities and Exchange Commission v. Chenery Corporation (Chenery II)

The Federal Water Service Corporation (Federal) sought the approval of a complicated reorganization from the Securities and Exchange Commission (SEC) (defendant). The majority of Federal’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 Federal’s corporate management. The SEC determined that Federal’s reorganization was required to 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 the 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. Chenery challenged this decision, and the United States Supreme Court held that the SEC’s understanding of the judicial precedent was incorrect. The SEC then reconsidered the issue and again came to the same conclusion based on the purposes and standards of the Public Utility Holding Company Act of 1935. Chenery challenged the decision again, and the court of appeals reversed the SEC’s decision, finding that the SEC did not have the authority to make a determination that was not based on a promulgated rule. The SEC appealed to the United States Supreme Court.