Argenbright v. Phoenix Finance Co. of Iowa

• Citation: 187 A. 124,21 Del.Ch. 288
• Court: Court of Chancery of Delaware
• Decision Date: 14 July 1936
• Parties: GLENNON F. ARGENBRIGHT, FRANCES M. ARGENBRIGHT, GLENNON F. ARGENBRIGHT, Guardian of Harriet Argenbright, Mary Argenbright, Zelda Argenbright and Leland Argenbright; EMMA ARGENBRIGHT, Guardian of Myron Argenbright, and ANN HUSTON, v. PHOENIX FINANCE COMPANY OF IOWA, a corporation of the of the State of Delaware; PHOENIX FINANCE COMPANY OF OHIO, a corporation of the State of Delaware; PHOENIX FINANCE COMPANY OF DAVENPORT, a corporation of the State of Delaware; PHOENIX FINANCE COMPANY OF MILWAUKEE, a corporation of the State of Delaware; PHOENIX FINANCE COMPANY OF ST. LOUIS, a corporation of the State of Delaware; PHOENIX FINANCE COMPANY OF AMERICA, a corporation of the State of Delaware; PHOENIX FINANCE SYSTEM, a corporation of the State of Delaware; and PHOENIX FINANCE CORPORATION, a corporation of the State of Delaware

187 A. 124

21 Del.Ch. 288

GLENNON F. ARGENBRIGHT, FRANCES M. ARGENBRIGHT, GLENNON F. ARGENBRIGHT, Guardian of Harriet Argenbright, Mary Argenbright, Zelda Argenbright and Leland Argenbright; EMMA ARGENBRIGHT, Guardian of Myron Argenbright, and ANN HUSTON, v. PHOENIX FINANCE COMPANY OF IOWA, a corporation of the of the State of Delaware; PHOENIX FINANCE COMPANY OF OHIO, a corporation of the State of Delaware; PHOENIX FINANCE COMPANY OF DAVENPORT, a corporation of the State of Delaware; PHOENIX FINANCE COMPANY OF MILWAUKEE, a corporation of the State of Delaware; PHOENIX FINANCE COMPANY OF ST. LOUIS, a corporation of the State of Delaware; PHOENIX FINANCE COMPANY OF AMERICA, a corporation of the State of Delaware; PHOENIX FINANCE SYSTEM, a corporation of the State of Delaware; and PHOENIX FINANCE CORPORATION, a corporation of the State of Delaware

Court of Chancery of Delaware, New Castle

July 14, 1936

The bill in this case names eight Delaware corporations as defendants. The complainants sue as stockholders of the first five defendant corporations named in the caption.

The defendants have demurred.

Demurrer to the extent indicated sustained.

Aaron Finger, of the firm of Richards, Layton & Finger, of Wilmington, and Allen Whitfield, of Allen & Whitfield, of Des Moines, Iowa, for complainants.

Christopher L. Ward, Jr., of the firm of Marvel, Morford, Ward & Logan of Wilmington, for defendants.

OPINION

THE CHANCELLOR:

The complainants are stockholders in the first five corporations named in the caption as defendants. They hold preferred and participating stock issued by those corporations, none having voting rights. All voting rights were conferred by the respective charters upon the common stock which was owned or controlled by one John A. Thompson and wife.

In January 1932 the five corporations in which the complainants held stock and the sixth and seventh defendant corporations named in the caption, by separate corporate proceedings entered into separate transactions with the eighth defendant corporation named in the caption, viz., Phoenix Finance Corporation, whereby each of the seven corporations transferred all of its assets to Phoenix Finance Corporation in consideration for its eight per cent. gold bonds, preferred stock, participating stock and cash, the several amounts and quantities of each being based on the net asset value of the outstanding preferred stock of each of the transferring corporations. These several proceedings were taken in contemplation of each other and were designed for the purpose of bringing all the business, assets and affairs of the several Phoenix companies, which were engaged in the small loan business, under the ownership and management of one company. The complainants have never consented to the proceedings which their corporations took. They never expressed dissent, however, until this bill was filed on May 20, 1935, over three years after the event.

The complainants denominate the proceedings which the corporations took in January 1932 as a common law merger or consolidation, meaning thereby that they were neither a merger nor consolidation under the statute. The defendants do not contend that there was any pretense at a statutory merger or consolidation. If what took place was a common law merger or consolidation, as argued by the complainants, then the complainants contend that nothing short of the unanimous consent of all stockholders could validate the proceedings, and, as the complainants never consented, the proceedings may be regarded by them as void and the complainants accordingly entitled to appropriate relief in equity.

The defendants on the other hand contend that the transactions which the seven corporations severally engaged in with Phoenix Finance Corporation were transactions of sales of assets under Section 64 A of the General Corporation Act (Rev. Code Del. 1915, § 1978 A. as amended by 36 Del. Laws, c. 135, § 19) under which all eight of the corporations were incorporated Each transaction, so the defendants insist, was consummated independently of the others and, though contemplated by, was not contingent for its accomplishment upon the consummation of the others. The proceedings, the defendants say, in all respects complied with the requirements of Section 64 A and the result therefore is not assailable on the theory of law applicable to mergers or consolidations of any sort.

Answer to the question of whether or not the transactions referred to were transactions of sale, will determine the pertinency of a great part of the argument which the complainants' brief presents. The form which the several transactions took was that of a sale of assets under the section referred to. No contention is made to the contrary. Nor is anything alleged by the bill to show that the procedure required by the section was deviated from in any particular. The only possible circumstance that I can glean from the lengthy recitals of the bill which can be laid hold of as indicating a scheme of consolidation of the existing companies, is the circumstance that Thompson and his wife, by reason of their voting control in the several companies, had it in their power to cause each to sell its assets to the same purchaser and thus effect the result of bringing all their assets into the ownership of one concern. This result was an incident however to the peculiar personal position of Thompson and wife. It was not a result which the seven corporations in their corporate capacities concerted together to accomplish.

When a consolidation or merger has taken place under the statute, the old corporations have their identity absorbed into that of the new corporation or the one into which they were merged. Section 60 of the Act (Rev. Code 1915, § 1974, as amended by 35 Del. Laws, c. 85, § 19). There was nothing like that in this case. The consideration for the assets in each case was to be paid to the selling corporation. Its stockholders adopted resolutions directing the distribution of the assets, and in each case proceedings were authorized to effect the dissolution of the corporation as a distinct corporate entity. Dissolutions of all seven of the corporations were respectively completed under the statute by May 23, 1932.

While in every merger a sale of assets is involved (Cole, et al., v. National Cash Credit Ass'n., 18 Del.Ch. 47, 57, 156 A. 183, 188), yet the converse is not true, viz., that in every sale of assets a merger or consolidation is involved. If it were otherwise, every proceeding under Section 64 A would spell a merger or consolidation. In its last analysis the argument of the complainants at many of its stages seems to require for its acceptance that if a sale of all the assets is made in consideration of stock or securities of the purchasing corporation, as the statute allows, a merger or consolidation, if not statutory yet at common law, results. That view is at variance with the Act. Whether it would be sound in the absence of the Act as a common law proposition, it is unnecessary to say. It cannot be accepted, however, in light of the Act's provisions.

It seems quite clear from the bill which goes into elaborate details in its recital of the history of the transactions involved, that what was done by each of the five corporations in which the complainants hold stock as well as by the other two, was to sell all the corporate assets to the Phoenix Finance Corporation, the eighth defendant, for the lawful consideration before mentioned. It was in each case a sale under Section 64 A. The Supreme Court of Iowa, in reviewing the identical state of facts which this bill presents, reached the same conclusion. Graeser v. Phoenix Finance Co. of Des Moines, et al., 218 Iowa 1112, 254 N.W. 859.

But, say the complainants, even if the transactions be deemed to be sales under Section 64 A, they were induced by the fraud of the purchaser, and hence are voidable. If so, it is contended, rescission and restoration to the status quo ante ought to be awarded as relief at the suit of non-consenting stockholders, or, if that relief be impractical, the purchasing corporation ought at least to be decreed to pay the non-consentors the value of their stock as of the date of sale and be decreed to hold the purchased assets subject to the lien of the amount decreed to be paid.

This contention raises the question of whether fraud induced the sales. One element of fraud is charged to have been this that the purchaser did not assume all the obligations of the seller which by the terms of sale it agreed to assume. The variation between what the purchaser was to assume and what it actually did assume by the executed contract of sale, is evidenced only by variations in the language which defines the liabilities actually...