Taylor v. Axton-Fisher Tobacco Co.

• Decision Date: 15 July 1943
• Parties: TAYLOR v. AXTON-FISHER TOBACCO CO.
• Court: Kentucky Court of Appeals

173 S.W.2d 377

295 Ky. 226

TAYLOR v. AXTON-FISHER TOBACCO CO.

Court of Appeals of Kentucky

July 15, 1943

Appeal from Circuit Court, Jefferson County, Chancery Branch, First Division; Churchill Humphrey, Judge.

Declaratory judgment action by Charlotte Taylor against the Axton-Fisher Tobacco Company to determine the power of defendant's board of directors to modify its action in calling defendant's Class A Common stock for retirement. From an adverse judgment, plaintiff appeals.

Reversed.

S. J Stallings, of Louisville, for appellant.

Woodward Dawson & Hobson, of Louisville, for appellee.

Ogden Galphin, Tarrant & Street, of Louisville, Phillip S. Ehrlich of San Francisco, Cal., and John E. Tarrant and Squire R. Ogden, both of Louisville, for Transamerica Corporation, amicus curiae.

STANLEY Commissioner.

The case presents a novel question of power of the board of directors of a corporation to rescind or modify its action in calling certain stock for redemption or retirement.

The Axton-Fisher Tobacco Company, a Kentucky corporation, has or had three classes of stock, which are designated as Preferred, Class A Common and Class B Common. The preferred stock (13,698 shares outstanding) bears cumulative dividends at the rate of 6 per cent per annum. Class A Common stock (15,397 shares outstanding) bears cumulative dividends at the rate of $3.20 per share per annum and has other substantial rights. Class B Common stock (142,080 shares outstanding) has the sole voting power in the management of the corporation except in the event of default in the payment of as many as four quarterly dividends on either of the other two classes. The Preferred stock has first right to dividends. It is not involved in the case. Class A Common stock has few of the attributes of ordinary common stock, it being of the nature of secondary preferred stock. The character and general rights of these respective classes of stock are described in Franke v. Axton-Fisher Tobacco Co., 289 Ky. 687, 160 S.W.2d 23, and, in the particular respect involved, in the further course of this opinion.

The articles of incorporation contain a provision that all or any part of the Class A Common stock, at the option of the directors, upon sixty days notice, may be redeemed on any quarterly dividend-payment date by the company paying $60 a share therefor, and all accrued unpaid dividends. If less than all the stock be retired, all stockholders of the class must be treated alike. On April 30, 1943, the board of directors adopted a resolution reciting that pursuant to the above provision of the charter the entire outstanding Class A Common stock was called for redemption on July 1, 1943 at $60 per share plus the accrued unpaid dividends thereon, including one payable July 1st, amounting to $20.80 per share, an aggregate of $80.80. A trust company was named as redemption agent and the officers of the corporation were authorized and directed to deposit $1,244,077.60 with the trust company as a special fund with which to effectuate the redemption.

On June 16, 1943, the directors adopted a resolution modifying their previous action and changing the call for the retirement of Class A Common stock from a mandatory to an optional one, leaving it to the option of the holders thereof whether they would surrender the stock for redemption on July 1st upon the same terms or would retain it without impairment of the rights appertaining thereto.

A holder of a small amount of Class B Common stock instituted this suit for a declaratory judgment respecting the power and right of the directors to modify the action of April 30th. She denied such power. The circuit court declared it was a proper exercise of power. On the appeal the Transamerica Corporation, claiming to be the owner of about 85 per cent of the Class B Common stock and none of Class A (having previously exchanged what it owned, a very large amount, for Class B) has joined the plaintiff on the appeal by filing a brief as amicus curiae challenging the validity of the action of the board and the correctness of the judgment.

On first impression it would seem clear that the directors had a perfect right to change their minds, and that their action in modifying the first call for redemption was but a decision made in the course of management, well within the common law and statutory powers of a board of directors of a corporation in their discretion to manage its affairs intra vires. It is fundamental and elemental that the action of directors when exercised in good faith and not in fraud of the rights of the stockholders is not subject to their control and will not be interfered with by the courts. KRS 271.230; Manufacturers' Land & Improvement Co. v. Cleary, 121 Ky. 403, 89 S.W. 248; Reid Drug Co. v. Salyer, 268 Ky. 522, 105 S.W.2d 625; Fletcher, Cyclopedia of Law of Private Corporations, §§ 505, 2104. It would also appear that the power to recall or modify the original action existed until July 1st, as of which date the redemption would be consummated; and, further, that Class A stockholders alone might have complained of the modification but for the fact they were not prejudiced thereby. These are the essential arguments of the appellee.

The general and necessary conception of power and right of exclusive management in the directors, obviously, is subject to the elementary principle that if in a particular instance their action created rights in another they cannot alter or affect those rights to his prejudice. The first resolution of this board of directors materially changed the entire corporate structure. It changed the status of both holders of Class A and Class B common stock very definitely and directly. The question is whether the new status could be altered. The subsequent resolution of June 16th did not effectually disturb that changed status of Class A stockholders for they had the right to continue it; but it could not and did not give any choice to the Class B stockholders.

The rights of the holders of Class A stock and of the corporation as to its redemption rested on an express contract, namely, the provision of the articles of incorporation which made them junior preferred stockholders and subject at all times to have their stock retired. Thompson on Corporations, §§ 189, 210; 13 Am.Jur. Corporations, § 318; Fletcher, § 5443; Westerfield-Bonte Co. v. Burnett, 176 Ky. 188, 195 S.W. 477; F. T. Gunther Grocery Co. v. Hazel, 179 Ky. 775, 201 S.W. 336; Fayette Realty & Finance Co. v. Commonwealth, 229 Ky. 556, 17 S.W.2d 722; Crimmins & Pierce Co. v. Kidder Peabody Acceptance Corporation, 282 Mass. 367, 185 N.E. 883, 88 A.L.R. 1122.

We have a declaration of principle in Fox v. Johnson &amp Wimsatt, 75...