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

Facts

During the reorganization of Federal Water Service Corporation (a holding company) under the Public Utility Holding Company Act of 1935, the company’s officers, directors, and controlling stockholders purchased a substantial amount of the company’s preferred stock on the open market. Under the proposed reorganization plan, this preferred stock would be converted into common stock of a new corporation, giving management more than 10% ownership. The management admitted their purpose was to protect their interests in the new company. The SEC refused to approve the plan unless the preferred stock purchased by management was treated differently from other preferred stock, requiring it to be surrendered at cost plus interest rather than converted to new common stock. The management challenged this decision, arguing that no law, regulation, or precedent prohibited their stock purchases. After the Supreme Court’s initial decision (Chenery I) rejecting the SEC’s reliance on judicial precedents, the SEC reexamined the case and reached the same conclusion but based its decision on its interpretation of the Public Utility Holding Company Act’s requirements that reorganization plans be “fair and equitable” and not “detrimental to the public interest or the interest of investors.”