Bodell v. General Gas & Electric Corp.

• Decision Date: 22 February 1927
• Parties: JOSEPH J. BODELL, FREDERICK BODELL, LOUIS C. BERRY, FREDERICK B. WILCOX, HAROLD C. FIELD and ANTONIO LAZO, co-partners trading under the firm name and style of Bodell & Co., Complainants Below, Appellants, v. GENERAL GAS & ELECTRIC CORPORATION, a corporation of the State of Delaware, Defendant Below, Appellee
• Court: United States State Supreme Court of Delaware

140 A. 264

15 Del.Ch. 420

JOSEPH J. BODELL, FREDERICK BODELL, LOUIS C. BERRY, FREDERICK B. WILCOX, HAROLD C. FIELD and ANTONIO LAZO, co-partners trading under the firm name and style of Bodell & Co., Complainants Below, Appellants, v. GENERAL GAS & ELECTRIC CORPORATION, a corporation of the State of Delaware, Defendant Below, Appellee

Supreme Court of Delaware

February 22, 1927

APPEAL FROM THE COURT OF CHANCERY. From an order entered in accordance with the opinion of the Chancellor reported ante p. 119, 132A. 442, discharging a rule to show cause and vacating a restraining order, the complainants appealed. The facts and contentions of counsel sufficiently appear in the opinion of the court.

Decree of the Chancellor affirmed.

Andrew C. Gray, of the firm of Ward, Gray and Ward, and with him Hawkins, Delafield and Longfellow, of the New York City Bar for the appellants.

William S. Hilles, and with him, Pendleton, Anderson, Iselin and Riggs, of the New York City Bar, for the appellee.

PENNEWILL C. J., and RICE, HARRINGTON, RICHARDS and RODNEY, JJ. sitting.

OPINION

PENNEWILL, C. J.:

The defendant company was organized in July, 1925, for the purpose of taking over and refinancing two then existing public utility corporations formed under the laws of the State of Maine. The capital stock consists of both preferred and common shares, all without nominal or par value. In this case we are concerned with the common stock only, which is divided into 800,000 shares of Class A common, and 400,000 shares of Class B common.

The complainants are holders of both Class A and Class B common stock. The rights of the common stocks are as follows:

After the preferred dividends are provided for, the Class A common stock shall receive a dividend (noncumulative) at the rate of $ 1.50 per annum; then the common stock Class B is entitled to receive a like dividend of $ 1.50 per annum, and in case dividends are further declared from surplus or net profits Class A common and Class B common are entitled to share equally therein.

Upon liquidation, subject to the preference of the preferred stocks, Class A common is preferred over Class B common to the extent of $ 25 per share, then Class B common receives $ 25 per share, and thereafter any remaining assets are distributable between Classes A and B common in equal amounts.

When the corporation was formed it was anticipated that a large amount of money would be required to develop its business which was of a public utility character. It was concluded that the best way to do that was to use one class of its stock for the purpose, and make that class attractive to the investing public. The original sale of this stock was of a block of 120,000 shares to bankers, who, the answer avers, and the affidavits show, were informed by the offering corporation that dividends would commence on said stock at the next dividend date fixed therefor at the rate of $ 1.50 per annum, and that the corporation would offer to the holders of said Class A common stock the right to subscribe to stock of the same class at $ 25 per share to the extent of the dividend. This right to subscribe is claimed to have had the effect of making the Class A common stock highly attractive to investors, so much so that the corporation has been able to receive for all of its Class A common stock originally and subsequently issued an average of nearly $ 42 per share and the market price of the stock has ranged between $ 50 and $ 64 per share.

The first dividend date was October 1, 1925. The holders of Class A common stock were advised that they might subscribe for stock of the same kind at $ 25 per share to the extent of their dividends.

Complainants were holders of Class A common stock and elected to exercise their option to use their dividends in payment for further stock at the price named in the letter.

On September 30, 1925, the officers of the corporation notified the bankers that in their opinion the policy adopted by the directors of allowing owners of common stock Class A to have the privilege of investing their regular dividends in additional Class A common stock at $ 25 per share was in the interest of the corporation and one that should be continued.

On November 4, 1925, the directors resolved to issue more of the Class A common stock, and to give to stockholders of all classes the right to subscribe therefor at $ 45 per share on the basis of one share for each ten shares held at the close of business on November 20, 1925.

On November 11, 1925, an offer was made to all classes of stockholders in accordance with the resolution of November 4. About 48,000 shares were subscribed for in response to this offer and in due course issued.

The offering letter contained the two following paragraphs:

"It is also the intention of the corporation to offer to the holders of its common stock, Class A, who shall be entitled to the dividend payable January 2, 1926, the right to subscribe to additional shares of common stock, Class A, to the amount of the dividends to which they are so entitled at the price of twenty-five (25) dollars per share.

"The officers and directors of the corporation believe that this policy of offering the right to subscribe to the extent of the dividends of this stock should be continued, unless some change in business or financial conditions requires its modification or abandonment."

A resolution was adopted on December 4, 1925, by which a quarterly dividend of thirty-seven and one-half cents a share was declared on the Class A common stock payable on January 2, 1926, and stockholders were given the right to use their dividends in payment for additional shares of the same stock at $ 25 per share to the extent of their dividends.

In response to this offer something like 4,310 shares of common stock, Class A were subscribed, but their issuance was restrained by order of the Chancellor upon the filing of the bill and pending a hearing on a rule for preliminary injunction.

On December 4, 1925, the book value of Class A common stock is admitted to be over $ 25 per share--how much over $ 25 per share is not stated. Class A common stock has been traded in, first on the New York Curb and since on the New York Stock Exchange. Its price since the incorporation of the defendant in July, 1925, down to January 18, 1926, as shown by market quotations, has ranged from a low of about $ 50 to a high of $ 64, and on the last-mentioned date was about $ 58 per share. The current quotation is now shown to be about $ 48 per share.

As appears from the Chancellor's opinion, it was sought by complainants' bill to enjoin the corporation from carrying out its declared intention of allowing the holders of the Class A common stock to receive additional shares of Class A common at the rate of $ 25 per share to the extent of their dividends; and generally to enjoin the defendant from issuing to the holders of its common stock, Class A, additional shares of such stock at less than the fair sales value thereof, unless there shall have been paid, or set apart for payment, to the holders of common stock B, during any calendar year, dividends at the rate of $ 1.50 per share per annum, and unless such additional shares are issued to holders of said common stock, Class B, upon the same terms as they are issued to the holders of common stock, Class A.

The rule to show cause why a preliminary injunction should not issue as prayed for in the bill of complaint was discharged by the Chancellor, and the restraining order theretofore issued was vacated.

It was from such order of the Chancellor that the appeal before this court was taken.

The defendant says that the granting or refusing to grant a preliminary injunction is a discretionary act which cannot be reviewed in this court, but "believing that the fundamental question involved in this appeal is one of the greatest importance to those interested in the securities of Delaware corporations, and without direct precedent in this State or elsewhere, and further believing that there is before this court on the record as it stands, all of the facts necessary for the final decision by this court of the fundamental question here involved, we urge no reason why the matter should not be finally disposed of by this court." The facts upon which the suit is based, and some of which we have stated, are not in dispute, and clearly appear from the record.

The complainants make no charge of fraud, bad faith or improper motive on the part of the directors of the defendant company in the issuance of the stock sought to be restrained.

The complainants contend:

"That the policy adopted by the corporation has been carried on in such a way that the corporate right to issue additional common stock has been exercised in part for the exclusive benefit of the A stockholders, rather than equally for the...