Order under the Public Utility Holding Company Act for holding company to divest companies other than a single integrated public utility system did not violate the Commerce Clause and Fifth Amendment.
structures were very difficult for individual states to regulate. PUHCA required electric company holding companies to register with the SEC, and authorized the SEC to limit a holding company to a single integrated electric system through the divestiture of its other public utility and unrelated companies.
The
Detroit Edison Company
. In addition, North American also owned an investment trust company and West Kentucky Coal Company. Together the various electric systems served more than 3,000,000 customers in a service territory of 165,000 square miles.
North American initially challenged the constitutionality of PUHCA and requested an injunction against its enforcement, but the Supreme Court in Landis v. North American Co.,[3] held that the case was premature and that North American should register and then litigate the constitutionality of PUHCA after the SEC conducted its proceeding. North American then registered in 1937 as a holding company with the SEC, reserving its right to challenge the validity of the remaining portions of PUHCA. After initiating an administrative proceeding, the SEC issued an order requiring divestiture of North American's securities in companies other than the Union Electric Company. North American appealed, but in 1943 the Court of Appeals for the Second Circuit upheld the order.[4] Arguing that ownership of securities was not interstate commerce within the meaning of the Commerce Clause and that the divestiture ordered by the SEC was a taking in violation of the Fifth Amendment, North American appealed to the Supreme Court, which granted certiorari.
Opinion
The opinion by Justice Murphy first concluded that North American was engaged in interstate commerce and through its substantial stock ownership dominated its subsidiaries. The opinion then noted that North American's argument that PUHCA's divestiture provision was invalid because ownership of securities was not commerce had been previously rejected by the Court in the anti-trust case of Northern Securities Co. v. United States.[5] Under its authority under the Commerce Clause, Congress could regulate to protect the freedom of interstate commerce using any means that were lawful and not prohibited by the Constitution. Under Northern Securities, Congress could deal with and affect the ownership of securities to protect the freedom of commerce, which it did in fashioning the divestiture remedy in PUHCA.
Lastly, the Court dismissed the takings argument, noting that Congress had weighed the benefit to shareholders of efficient, common management of diversified companies against the actual and potential harm to the public, investors, and consumers from the use of pooled investments, and determined that the economic advantages of a holding company atop an unintegrated, sprawling electric system were not commensurate with the resulting economic disadvantages. In addition, it was not clear that there would be a loss necessary for a takings claim under the Fifth Amendment. PUHCA does not require the dumping or forced liquidation of the securities on the market for cash, so the stock of the companies ordered divested could be distributed to the shareholders or sold under a plan that protects shareholder rights. The Court determined that it could not conclude that North American shareholders were disadvantaged by the operation of the divestiture provision of PUHCA.
Justices Reed, Douglas and Jackson did not participate in the consideration of the case. Although Chief Justice Stone had initially recused himself for a disclosed reason, but when he discovered that his disqualification plus those of the other justices would result in the lack of a quorum, he reversed his position.[6]
