## Facts

- Federal Water Service Corporation (Water Service) was a registered public-utility holding company subject to the Public Utility Holding Company Act of 1935 (PUHCA) and sought SEC approval of a reorganization plan under § 11(e).
- Chenery Corporation and related insiders (the Chenery group) owned a controlling block of Water Service securities that carried voting rights, giving them effective control over the selection of Water Service’s management.
- While Water Service’s SEC-supervised reorganization was pending, the Chenery group purchased additional shares of Water Service preferred stock in market transactions.
- The Chenery group’s purpose in acquiring the preferred stock was to strengthen or preserve voting control and to obtain a larger ownership position in the reorganized company through the plan’s allocation to the preferred class.
- In the earlier phase of the proceeding, the SEC rejected giving the Chenery group full participation based on the recently acquired preferred shares, explaining its action largely by reference to equitable fiduciary concepts drawn from judicial reorganization practice (i.e., that management should not trade in the company’s securities during a reorganization).
- In *SEC v. Chenery Corp.* (Chenery I, 1943), the Supreme Court held that an agency order must stand or fall on the grounds the agency stated; it remanded because the Commission’s stated rationale did not adequately support the result.
- On remand, the Chenery group again proposed a plan that would have allowed their after-acquired preferred shares to share in the plan’s equity distributions on the same basis as other preferred holders.
- The SEC reconsidered the matter and issued the 1945 decision at 18 S.E.C. 231, addressing whether the plan was “fair and equitable” under PUHCA in light of management’s reorganization-period purchases.

## Issues

1. Under PUHCA § 11(e), may the SEC find a reorganization plan not “fair and equitable” if controlling insiders seek full equity participation based on preferred stock acquired while the reorganization is pending?
2. In applying “fair and equitable,” may the SEC evaluate allocations using “investment value” (earning prospects and risk) rather than applying only liquidation priorities and formal contract rights?
3. May the SEC articulate and apply, through adjudication in a § 11(e) proceeding, a policy limiting the benefits insiders may obtain from trading during a Commission-supervised reorganization?

## Decision

- The SEC approved the reorganization plan under § 11(e) subject to conditions designed to satisfy PUHCA’s “fair and equitable” requirement and the Act’s investor-protection and public-interest aims.
- The SEC refused to allow the Chenery group to obtain the same plan participation on their after-acquired preferred shares that other preferred holders received.
- As a remedy, the SEC required the Chenery group to divest, or otherwise accept limited treatment of, the preferred shares acquired during the reorganization period rather than receive full equity treatment under the plan.
- The SEC explained its action as an application of PUHCA’s “fair and equitable” standard informed by the realities of the reorganization, including the control position and informational advantages of management during the proceeding.
- In assessing fairness among security holders, the SEC relied on an “investment value” approach that considered expected earnings and risk, not solely a liquidation-based ranking.

## Legal Principles

- Under PUHCA § 11(e), the SEC must independently determine whether a proposed holding-company reorganization is “fair and equitable” and may condition approval to prevent unfair allocations among security holders.
- The “fair and equitable” standard under PUHCA allows consideration of investment value—earning capacity, risk, and the practical consequences of the capital structure—rather than requiring a mechanical application of liquidation priorities alone.
- Where controlling insiders purchase a company’s securities during a pending, Commission-supervised reorganization and then seek plan treatment that would increase their position, the SEC may limit or deny the resulting plan benefits to prevent unfair advantage tied to control or informational access.
- The SEC may develop and apply reorganization policies through adjudication in individual proceedings, so long as it ties the rule it applies to the statute and explains its reasoning in the administrative record.
- An agency’s action must be judged on the grounds the agency itself states; a reviewing court cannot uphold the action on alternative rationales the agency did not give (the principle emphasized in Chenery I that led to this remand decision).

## Conclusion

In *In re Federal Water Service Corp.*, the SEC, acting on remand after Chenery I, reapproved a PUHCA § 11(e) reorganization while limiting the Chenery insiders’ ability to profit from preferred stock they purchased during the proceeding, treating those after-acquired shares differently from other preferred holdings to satisfy PUHCA’s “fair and equitable” requirement using an investment-value approach and a stated Commission policy against insider advantage in reorganization trading.


In re Federal Water Service Corp., 18 S.E.C. 231 (1945)