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Phillips v. Securities and Exchange Commission

decided: January 16, 1968.

RANDOLPH PHILLIPS, PETITIONER,
v.
SECURITIES AND EXCHANGE COMMISSION, RESPONDENT



Waterman, Friendly and Smith, Circuit Judges.

Author: Friendly

FRIENDLY, Circuit Judge:

This petition to review an order of the Securities and Exchange Commission brings us a "chapter of Alleghany" immediately succeeding the one we studied in Willheim v. Murchison, 342 F.2d 33, 35 (2 Cir.), cert. denied, 382 U.S. 840, 86 S. Ct. 36, 15 L. Ed. 2d 82 (1965). The Willheim chapter took us through the proxy contest resulting in the victory of the Murchison brothers over Allan P. Kirby at the annual meeting of the stockholders of Alleghany Corporation in May 1961. This one begins with a transaction between the Murchisons and Gamble-Skogmo, Inc. negotiated in August 1962, and put in definite terms in October. The issue, stated at this point in incomplete fashion, is whether Gamble-Skogmo thereby acquired control of Alleghany. The practical importance of this is that if it did, there was arguably a transfer "of a controlling block" of the stock of Alleghany's controlled subsidiary, Investors Diversified Services, Inc. (IDS) under § 2(a) (4) and consequent automatic termination of the investment advisory and principal underwriting contracts between IDS and various mutual funds under §§ 15(a) and (b). This, in turn, would mean that the funds would be entitled to recover the excess of the fees paid between the acquisition of control and the dates in April and May 1963 when new contracts were approved by their shareholders over the cost of performing the services -- unless the Commission were to exempt the transactions from the Act's ban in whole or in part, see § 6(c), as it has sometimes done in the past. Investors Diversified Services, 30 S.E.C. 273 (1949); T.I.S. Management Corp., 10 SEC 695 (1941); Management Associates, 9 SEC 645 (1941).

The agreements between the Murchisons, for themselves and as agents for others, and Gamble-Skogmo, Inc. and its subsidiary General Outdoor Advertising Co., here collectively referred to as the Gamble companies, contained the following principal provisions:

(1) The Murchisons would sell and the Gamble companies would buy 1,500,000 shares of Alleghany common stock at $10 per share;

(2) The Gamble companies were granted a nonassignable call on the Murchisons, exercisable until May 31, 1963, for an additional 2,000,000 shares (which the Murchisons could reduce to 1,500,000 shares) at $10 per share. For this the Gamble companies were to pay a fee equivalent to 5% per annum from September 20, 1962, to the date of purchase on the aggregate price of stock purchased up to 1,500,000 shares or, if neither the call nor the put referred to below should be exercised, then to May 31, 1963, on the same amount.

(3) If the call was not exercised, the Murchisons could put the shares to the Gamble companies at $10 per share between June 1 and June 30, 1963.

(4) Stock purchased under the call or the put was to be paid for in 5% notes payable one-half on January 31, 1964, and one-half on January 31, 1965, collateralized by a pledge of the stock.

(5) If either the call or the put were exercised, the Gamble companies would have the right during a 20-day period beginning on the 200th day after the transfer, to put to the Murchisons any additional Alleghany stock otherwise acquired prior to September 20, 1963, up to 1,000,000 shares, at cost but not in excess of $10 per share, provided the Gamble companies then owned shares in excess of the number acquired from the Murchisons by virtue of the provisions of the agreement that have been outlined.*fn1

The agreements contained no provision for resignation of any of the directors.

The sale of the 1,500,000 Alleghany shares was consumated October 5, 1962. At an Alleghany directors' meeting on October 9, two of the ten directors who had been on the management slate at the uncontested 1962 stockholders' meeting resigned and were replaced by Bertin C. Gamble and one of his attorneys, James W. Deer; also a director resigned from the five-man Executive Committee and Gamble was chosen to fill the vacancy. On December 13, 1962, John D. Murchison resigned as president of Alleghany and Gamble succeeded him.

Section 2(a) (9) of the Investment Company Act provides:

Sec. 2(a) When used in this title, unless the context otherwise requires --

(9) "Control" means the power to exercise a controlling influence over the management or policies of a company, unless such power is solely the result of ...


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