some type of uniform approach between the companies and the three regulatory bodies and I hope you will supply to us your position. We will ask the same of the SEC. Mr. Chairman, is someone from the Department of Justice going to testify also on this? M. FRIEDEL. Yes, on Thursday. Mr. ADAMS. Thank you. Mr. FRIEDEL. The meeting stands adjourned until Thursday at 10 a.m. (The following letter was received for the record:) CIVIL AERONAUTICS BOARD, Washington, D.C., April 21, 1969. Hon. SAMUEL N. FRIEDEL, DEAR MR. CHAIRMAN: During the course of my testimony before your Subcommittee on March 25, 1969, on bills relating to stock control of airlines, I was requested to provide the following information for the record: 1. An analysis of the present multiple or single control factors involved in the trunk carriers and the local service carriers; 2. An evaluation of the actual and legal control principle, contained in section 1(3) (b) of the Interstate Commerce Act, as against control of 3, 5 or 10 percent of stock; 3. The percentages (both for reporting and control purposes) which the Board believes should be incorporated by the Subcommittee in the legislation; 4. The time limit which the Board believes should be prescribed for it to act on an application for acquisition of stock in excess of the percentage that may be specified in the bills for control purposes; and 5. Whether the hypothecation of stock, with the power to vote for a temporary period, should be brought within the scope of the bills. 1. ANALYSIS OF MULTIPLE OR SINGLE CONTROL FACTORS As we understand it, the Subcommittee wishes by this request to be informed concerning the percentage-size holdings of large blocks of stock in the trunkline and local service carriers and whether the holders of such blocks of stock may be said to control the carriers involved. Section 407 (b) of the Federal Aviation Act requires an annual submission by each air carrier of the names of each of its stockholders holding more than 5 percent of its entire capital stock. Additionally, section 407 (c) requires an annual submission by each officer and director of an air carrier of a report describing any shares of stock held by him in any air carrier, and the Board from time to time also receives other information in the course of evidentiary proceedings concerning the identity of persons holding airline stock. On the basis of these reports and data, the Board's staff has compiled the enclosed listing which reflects all persons known to the Board to hold more than 3 percent of the stock of a trunkline or local service carrier. The reports filed by the carriers pursuant to section 407(b) are as of December 31, 1967 (the most recent on file with the Board). while those of the officers and directors submitted under 407 (c) are as of March 1, 1969. The Board proceedings from which data were obtained are subsequent to December 31, 1967. Except in the instances of Braniff, Northeast and Frontier, where more than 50 percent of the carrier's stock is held by one stockholder, the Board is unable to state that any person holding the percentages of stock listed actually controls the particular carrier. However, it is generally accepted that Trans-Texas Airways is controlled by Minnesota Enterprises, and that Ozark, Piedmont and Southern are controlled by the individuals shown in the report who also are officers and directors of the carriers. Somewhat similarly, it is generally assumed that National Airlines is controlled by Messrs. Swim and Maytag who are either officers or directors. 2. EVALUATION OF ACTUAL AND LEGAL CONTROL As we understand it, this request asks for a comparison of the "actual" and "legal" control concept, as defined in section 1(3) (b) of the Interstate Commerce Act, and the meaning of "control" as defined in sections 408 and 413 of the Federal Aviation Act. In addition, we are requested to compare the actual and legal control test with the proposed legislation's use of a stated percentage, such as 3, 5 or 10 percent. The Federal Aviation Act of 1958 carried forward without change the control provisions of the Civil Aeronautics Act of 1938. These provisions in turn were derived from section 213 of the 1935 Motor Carrier Act. Neither section 213 nor section 408 contained any definition of control. Rather, both sections made it unlawful for any person within their purview to acquire control of a motor or air carrier by "any manner whatsoever." Moreover, section 213 and section 413 of the Civil Aeronautics Act provided that "whenever reference is made to control, it is immaterial whether such control is direct or indirect." In 1940, the Congress incorporated section 1(3) (b) in the Interstate Commerce Act, containing a broad definition of control which is designed to encompass "actual as well as legal control" whether exercised in named ways or by "any other direct or indirect means ***." The Board's staff has always considered that the provisions of the Federal Aviation Act relating to control are as broad as those of the Interstate Commerce Act, and the Board relies upon the overall body of case law, including decisions under the Interstate Commerce Act, in applying and interpreting the provisions of section 408. The Board has never interpreted the application of section 408 as being dependent upon the acquisition of any specified percentage of stock but rather upon whether in all the facts and circumstances there is power to control or actual control. Thus, as the Board stated in Railroad Control of Northeast Airlines, 4 C.A.B. 379, 381 (1943): * '[C]ontrol' as used in section 408 does not necessarily depend upon the ownership of any specific minimum percentage of stock or other ownership rights but rather depends, in the light of all the facts and circumstances in a particular case, upon whether there exists as a matter of fact a power to dominate or an actual domination of one legal personality by another." Without going into detail, the case law shows that the Board and the Commission have followed virtually identical principles in interpreting the term "control" as used in the Federal Aviation and Interstate Commerce Acts. Both have held that "control" is a factually oriented determination, and that ownership of substantial blocks of stock may signal the presence of other factors, which in their totality constitute the power to substantially influence or dominate a company's operations or policies and, hence, to control it. Furthermore, the Board has recognized that control may exist by reason of a debtor-creditor relationship (see e.g., National Airlines v. CAB, 306 F.2d 753 (C.A.D.C. 1962)). Insofar as percentages of stock ownership are concerned, it may be stated that the regulatory agencies and the courts have recognized that, coupled with other factors, percentages of stockholdings as low as 6.2 percent may constitute control. Thus, one Board proceeding involved 11.4 percent of stock ownership (see Atlas Corp.-Control of Consolidated Vultee, 9 C.A.B. 921 (1948)), an ICC proceeding involved 6.2 percent (see Chesapeake & Ohio Railway Company Purchase, Etc., 271 I.C.C. 5 (1948)), and an SEC proceeding involved 18 percent (see American Gas & Electric Co. v. SEC, 134 F.2d 633, 642 (C.A.D.C. 1962)). The Board regards its historic concepts of control under the Act as compatible with the proposed use of stated percentages in the legislation. The bills before the Committee do not make ownership of the stated percentage of stock proof of control, but rather create a presumption of control solely for the purpose of insuring scrutiny by the Board. A lesser percentage well might constitute control and, in such a situation, the Board would continue to be obligated under the bills before the Committee to determine whether an acquisition of control had in fact occurred. 3. THE PERCENTAGES TO BE EMPLOYED Concerning the percentage to be specified for reporting purposes, the Board did not suggest any change in the 5 percent figure contained in section 407(b) of the Act when it offered certain amendments to the bills, and it sees no need at the present time for a change in such figure. The Board did, however, express the view that the reporting requirement should be broadened to apply to ownership of 5 percent of any class of capital stock-rather than of 5 percent of the total capital stock, as section 407(b) now provides. As I also indicated at the hearings, the precise percentage of stock acquisition which should be precluded without Board approval is a matter of judgment and one on which there is room for difference of opinion. Nevertheless, the Board still is inclined to the view that reasonable figures might be 10 percent for initial acquisitions and 5 percent for additional increases in holdings. Although our review of court and agency decisions involving control does not point to any precise percentage as being better adapted for this purpose, it does, as previously stated, indicate that the presence of a block of stock, although small from a percentage standpoint, may indicate other circumstances pointing to the existence of an acquisition of control situation. The Congress used the 10 percent ownership criterion in the Public Utility Holding Company Act. Further more, the ATA and the SEC witnesses testifying before your Subcommittee suggested that the 10 percent figure might be a reasonable figure for this purpose. 4. STATUTORY PERIOD FOR BOARD ACTION ON APPLICATIONS The Board adheres to the belief that any legislation should not prescribe a mandatory time limit within which the Board must act on an application for approval of a stock transaction. In this connection, a distinction should be drawn between the various proposals pending before the Committee. The bills on which hearings were held would subject all acquisitions of control of air carriers to the Board's approval, and H.R. 8261 would specify a percentage of stock which would be deemed to constitute control unless the Board found otherwise. Under these provisions, the Board, unless the proposed purchase plainly did not constitute an acquisition of control, would be required to proceed by way of an evidentiary hearing. The ATA proposal advanced during the course of the hearings would have permitted the Board to issue an order of approval without hearing pursuant to the third proviso of section 408, in circumstances in which no request was made for hearing by any interested person. In contrast, the Board suggested that (1) the acquisition of stated percentages of stock be made subject to its approval, irrespective of whether such acquisition resulted in control of the carrier, and (2) it be empowered either to exempt from the requirement for its approval, or to approve without hearing, those acquisitions of the stated percentage which otherwise would not fall within the coverage of section 408. This would mean, in effect, that an acquisition of control of an air carrier by another air carrier, a common carrier, or a person engaged in a phase of aeronautics would continue to be governed by existing provisions of the statute, irrespective of the stock percentage involved in the new legislation. The Board believes that it would be impractical to prescribe a particular period of time within which evidentiary hearings must be completed. This is so not only because the proceedings themselves will vary as to complexity and duration, but because of the crowded status of the Board's docket, which does not always permit an immediate setting down of a matter for hearing. (We do not believe that the Congress should enact legislation giving preference over all other proceedings to the new provisions relating to stock purchases.) If the suggestion advanced by the Board were to be adopted, it might be possible to prescribe a period within which the Board would be required to approve the transaction without hearing, or to set the matter for hearing. However, the Board's suggestion was that it be empowered to enter orders of approval pursuant to regulations to be prescribed by it, and the Board believes that time limitations would be more appropriately provided by regulation rather than by statute. Under its proposal, the Board would be in a position to establish and adjust procedural schedules in the light of actual experience, rather than being bound by inflexible statutory provisions. In any event, the Board does not believe that the Congress should require either an order of approval or exemption, or a setting of the matter down for evidentiary hearing, in any less than 60 days. 5. EXTENSION OF LEGISLATION TO INCLUDE HYPOTHECATED STOCK Following the hearings, the Board considered whether the legislation should be expanded to cover a security transaction involving a hypothecation or pledge of stock, accompanied by a transfer of the power to vote the stock. In cases where the airlines themselves borrow money, they customarily arrange their financing without any hypothecation or pledge of stock. The banks and insurance companies who lend money to the major airlines for new aircraft purchases make the aircraft collateral for the loan; they do not look to the stock for security. Nevertheless, airline shareholders can offer their stockholdings as collateral for a loan although none have (so far as we know) transferred voting rights to a lender. As the Committee knows, however, there was one case in which creditors insisted upon a transfer of the airline stock and voting rights to a voting trust in connection with airline financing. Trans World Air., Control by Hughes, 32 C.A.B. 1363 (1960). It is thus possible for a shareholder or an air carrier to pledge airline stock and to transfer the voting rights to that stock to a person not within the reach of the existing Act. Without legislation, the transaction would not be subject to the Board's review although the control of the stock would be vested in the pledgee, not the title holder of record. Indeed, the identity of a pledgee controlling more than 5 percent of the stock would not be reported to the Board under the current Act. Consequently, the Board believes that the objectives of the legislation would be enhanced if both the reporting and scrutiny requirements covered such transactions. In addition to your Subcommittee's formal requests for information, I understand that your Subcommittee also desires the Board's views as to what should be the relationship between it, the Securities and Exchange Commission, and the Department of Justice with respect to the handling of monopoly or control situations. In response to a similar inquiry at the hearings, the Securities and Exchange Commission stated that it believed that the Board and the Interstate Commerce Commission should have the authority to determine whether takeovers should or should not occur with respect to carriers subject to their respective jurisdictions, rather than having the SEC assume general responsibility for the approval or disapproval of takeovers involving such carriers. The Board agrees with the SEC's views insofar as they relate to air carriers. If you desire further information, please do not hesitate to let us know. JOHN H. CROOKER, Jr., Chairman. PERSONS KNOWN TO BOARD HOLDING MORE THAN 3 PERCENT OF ISSUED AND OUTSTANDING STOCK OF Note: Reports submitted to the Domestic Finance Subcommittee of the House Banking and Currency Committee, for periods different from reports filed with the Board, also disclose additional airline stock holding information. See staff report dated July 8, 1968. Source: Except as noted, schedule G-41, persons holding more than 5 percent of respondent's capital stock or capital, of CAB form 41: Data as of Dec. 31, 1967. |