Anderson v. Cleveland-Cliffs Iron Co., 579838.

• Decision Date: 09 June 1948
• Docket Number: No. 579838.,579838.
• Parties: ANDERSON et al. v. CLEVELAND-CLIFFS IRON CO. et al.
• Court: Ohio Court of Common Pleas

87 N.E.2d 384

ANDERSON et al.
v.
CLEVELAND-CLIFFS IRON CO. et al.

No. 579838.

Court of Common Pleas of Ohio, Cuyahoga County.

June 9, 1948.

Action by Leander Anderson and another against the Cleveland-Cliffs Iron Company and others to enjoin the consolidation of certain corporations.

Judgment for defendants in conformity with opinion.

[87 N.E.2d 385]

Wilbert J. O'Neill, Silas J. Blair, and Earl J. Krock, Cleveland, Robert J. Newton, Cleveland, of counsel, for plaintiffs.

Jones, Day, Cockley & Reavis, Cleveland, William B. Cockley, Frank C. Heath and John G. Sarber, Cleveland, of counsel for defendants.

McNAMEE, Judge.

Plaintiffs are the owners of 4,327 shares of the preferred stock of the old Cleveland-Cliffs Iron Company, defendant herein. The intervening petitioners seeking the same relief as plaintiffs, and upon identical grounds, are the owners of 1,270 shares of the preferred stock of defendant corporation. The individual defendants are directors of said corporation. On April 24, 1947, the directors of The Cleveland-Cliffs Iron Company approved an ‘Agreement of Consolidation’ by the terms of which it was proposed to consolidate the assets and liabilities of the defendant corporation with the assets and liabilities of the Cliffs corporation in a new corporation also to be known as The Cleveland-Cliffs Iron Company.

The ‘Agreement of Consolidation’ was submitted to and voted upon by the stockholders at a special meeting called for that purpose, on June 16, 1947. More than two-thirds of the voting power of the corporation approved the Agreement. The proposal also was approved by more than two-thirds of the voting power of the Cliffs Corporation. On June 9, 1947, the Agreement of Consolidation was declared effective by the respective Boards of Directors of the constituent corporations and filed in the office of the Secretary of State.

In their petition filed on July 7, 1947, plaintiffs seek an order restraining defendants from consummating the consolidation agreement and other equitable relief, but no application for a temporary restraining order was made prior to the filing of the Agreement of Consolidation with the Secretary of State.

Plaintiffs attack the Consolidation Agreement on two principal grounds:

1. That it is illegal as constituting a perversion of the purposes of the consolidation statute (G.C. § 8623–67).

2. That the Consolidation Agreement was unfairly presented to the stockholders by the Board of Directors and officers of the corporation. It is claimed also that in the event the Court finds the Consolidation Agreement to be valid plaintiffs are entitled to receive the liquidation value of their stock including the dividend arrearages thereon in accordance with the provisions of their preferred share contracts.

In their petition the plaintiffs allege that the Cliffs Corporation as sole owner of the common stock of Cleveland-Cliffs Iron Company, and the officers and directors and other owners of preferred shares were debarred from voting said shares in favor of the Consolidation Agreement—but no argument, either oral or in the briefs, has been made in support of these claims. Therefore they are considered as having been waived.

Plaintiffs' claims and the fact, essential to an understanding of the decision reached on each point will be considered in the order stated above.

1. For many years The Cleveland-Cliffs Iron Company has been one of the leading producers of iron ore in this country. Prior to 1929 its capitalization consisted entirely of common stock. In the latter year the corporation was recapitalized by the issuance of shares of $5 cumulative preferred stock in addition to the common stock. In June 1947, the company had outstanding 487,238 shares of preferred and 408,296 shares of common stock. All the common shares are owned by Cliffs Corporation. The Cliffs Corporation was organized in 1929 in conjunction with the recapitalization of Cleveland-Cliffs Iron Company and as a part of a plan to create a new large steel corporation in the Middle West. This plan failed of realization but Cliffs Corporation continued to function as a holding company. At the time of consolidation and in addition to its ownership

[87 N.E.2d 386]

of all the common shares of Cleveland-Cliffs Iron Company, Cliffs Corporation possessed additional assets consisting of cash and common stock of various steel companies all of the approximate value of $25,000,000. In June, 1947, Cliffs Corporation had 805,000 shares of common stock outstanding. The management of Cleveland-Cliffs Iron owned and controlled about 35% of the preferred stock of that company and 33 1/2% of the common stock of the Cliffs Corporation.

At the time of consolidation there were arrearages on the preferred stock of Cleveland-Cliffs Iron amounting to $26.16 per share or total arrearages in the sum of $12,746,148.08. There was also a deficit in the preferred stock sinking fund of $14,500,000. The company had a funded debt of approximately $7,000,000, but its working capital was in excess of $18,000,000 and it had an earned surplus of more than $17,000,000. Because of financial difficulties not necessary to be recounted, the company defaulted in its payment of dividends on the preferred stock in the year 1931 but in 1940 it resumed payment of the current preferred dividends and since the latter year it has made payments of $3 per share on the existing arrearages. No dividends have been paid on the common stock since 1930. Cleveland-Cliffs Iron and Cliffs Corporation are managed by the same officers, but excepting E. B. Greene, who is a director in both companies, there is no common membership on the respective boards of directors.

Beginning about 1937, the executive and fiscal officers of the corporation sought to devise acceptable plans of recapitalization and merger with a view of combining the resources of the two corporations and the elimination of the preferred dividend arrearages of Cleveland-Cliffs Iron. About 40 plans of recapitalization and 20 plans of merger were formulated. From time to time many of these plans were discussed informally with large stock-holding interests of both companies but prior to 1947 none of these plans were considered formally or officially by the directors or stockholders or either company. In the latter part of 1946, for reasons unnecessary to be stated, the management of Cliffs Corporation, proposed plans for the dissolution of that company and the distribution of its assets among its stockholders. This proposal included, of course, the distribution of 408,296 shares of the common stock of Cleveland-Cliffs Iron Company. Following a suit to enjoin the dissolution proceedings the plan was abandoned. Immediately thereafter the directors of both corporations agreed upon the plan of consolidation which, as above noted, was consummated on July, 9, 1947. Under the adopted plan a new corporation, known also as Cleveland-Cliffs Iron Company, was formed with an authorized capitalization of 500,000 shares of $4.50 cumulative preferred stock of $100 par value and 3,000,000 shares of common stock of the par value of $1. Subject to adjustments, made necessary by the claims of dissenting shareholders the Agreement contemplates the issuance of 487,238 shares of $4.50 cumulative preferred and 2,300,140 shares of common. Preferred shareholders of the old Cleveland-Cliffs Iron Company will receive one share of $4.50 cumulative preferred and one share of common stock in the new company for each share of $5 cumulative preferred stock held by them in the old company. Shareholders of Cliffs Corporation will receive 2 1/4 shares of common in the new company for each share of common stock of Cliffs Corporation.

8623–67 G.C., 112 Ohio Laws, 35, effective 1927, provided, in part, as follows:

‘Any two or more corporations organized under the laws of this state may consolidate into a single corporation as follows:

‘(a) The board of directors of each corporation shall approve an agreement which shall set forth the terms and conditions of consolidation, the mode of carrying the same into effect and such other facts as are required to be set out in articles as hereinbefore provided, as well as the manner and basis of converting the shares of each of the constituent corporations into shares of the consolidated corporation (whether into the same or a different number of shares) with such other details and provisions as are deemed necessary or desirable.’

[87 N.E.2d 387]

Section 67 also provided for a special meeting of the shareholders of the consolidating companies for the purpose of voting upon the question of adoption or rejection of the Consolidation Agreement, and ‘if approved by the affirmative vote of the holders of shares of each corporation entitled to exercise two-thirds of the voting power or such other proportion, not less than a majority, or vote by classes, as the articles may require, said agreement shall be adopted, and shall be the agreement of such corporations.’

Section 67 also provided: ‘Dissenting shareholders shall be entitled to relief in the manner and under the conditions hereinafter provided.’

Under the 1927 Code corporations were permitted to amend their articles of incorporation in many respects, but it was not until 1939 that the legislature made express and specific provision for the elimination of preferred dividend arrearages by amendment to the articles of incorporation.

In Wheately, Trustee, et al. v. A. I. Root Co. et al., 147 Ohio St. 127, 69 N.E.2d 187, the Supreme Court declared: ‘The provision of Section 8623–14(3)(i), General Code, authorizing a corporation to ‘change any or all of the express terms and provisions or designations of issued or unissued shares of any class or series; which change, if desired, may include the discharge, adjustment or elimination of rights to accrued undeclared cumulative dividends on any such class,’ may not be applied retroactively to permit an alteration of the terms of a contract...