Bove v. Community Hotel Corp. of Newport, R. I.

• Decision Date: 16 January 1969
• Docket Number: No. 383-A,383-A
• Citation: 249 A.2d 89,105 R.I. 36
• Parties: Michael J. BOVE III et al. v. The COMMUNITY HOTEL CORPORATION OF NEWPORT, RHODE ISLAND et al. ppeal.
• Court: Rhode Island Supreme Court

Page 89

249 A.2d 89

105 R.I. 36

Michael J. BOVE III et al. v. The COMMUNITY HOTEL CORPORATION OF NEWPORT, RHODE ISLAND et al.

No. 383-Appeal.

Supreme Court of Rhode Island.

Jan. 16, 1969.

Carroll, Kelly & Murphy, Ambrose W. Carroll, Providence, for plaintiffs.

Edwards & Angell, Knight Edwards, Benjamin P. Harris III, Providence, for defendants.

OPINION

JOSLIN, Justice.

This civil action was brought in the superior court to enjoin a proposed merger of The Community Hotel Corporation of Newport, Rhode Island, a defendant herein, into Newport Hotel Corp. Both corporations were organized under the general corporation law of this state and are hereinafter referred to respectively as 'Community Hotel' and 'Newport.' No oral testimony was presented and a trial justice sitting without a jury decided the case on the facts appearing in the exhibits and as assented to by the parties in the pretrial order. The case is here on the plaintiffs' appeal from a judgment denying injunctive relief and dismissing the action.

Community Hotel was incorporated on October 21, 1924, for the stated purpose of erecting, maintaining, operating, managing and leasing hotels; and it commenced operations in 1927 with the opening of the Viking Hotel in Newport. Its authorized capital stock consists of 6,000 shares of $100 par value six per cent prior preference cumulative preferred stock, and 6,000 shares of no par common stock of which 2,106 shares are issued and outstanding. The plaintiffs as well as the individual defendants are holders and owners of preferred stock, plaintiffs having acquired their holdings of approximately 900 shares not later than 1930. At the time this suit was commenced, dividends on the 4,335 then- issued and outstanding preferred shares had accrued, but had not been declared, for approximately 24 years, and totalled about $645,000 or $148.75 per share.

Newport was organized at the instance and request of the board of directors of Community Hotel solely for the purpose of effectuating the merger which is the subject matter of this action. Its authorized capital stock consists of 80,000 shares of common stock, par value $1.00, of which only one share has been issued, and that to Community Hotel for a consideration of $10.

The essentials of the merger plan call for Community Hotel to merge into Newport, which will then become the surviving corporation. Although previously without assets, Newport will, if the contemplated merger is effectuated, acquire the sole ownership of all the property and assets now owned by Community Hotel. The plan also calls for the outstanding shares of Community Hotel's capital stock to be converted into shares of the capital stock of Newport upon the following basis: Each outstanding share of the constituent corporation's preferred stock, together with all accrued dividends thereon, will be changed and converted into five shares of the $1.00 par value common stock of the surviving corporation; and each share of the constituent corporation's no par common stock will be changed and converted into one share of the common stock, $1.00 par value, of the surviving corporation.

Consistent with the requirements of G.L.1956, § 7-5-3, ¹ the merger will become effective only if the plan receives the affirmative votes of the stockholders of each of the corporations representing at least two-thirds of the shares of each class of its capital stock. For the purpose of obtaining the required approval, notice was given to both common and preferred stockholders of Community Hotel that a special meeting would be held for the purpose of considering and voting upon the proposed merger. Before the scheduled meeting date arrived, this action was commenced and the meeting was postponed to a future time and place. So far as the record before us indicates, it has not yet been held.

The plaintiffs argue that the primary, and indeed, the only purpose of the proposed merger is to eliminate the priorities of the preferred stock with less than the unanimous consent of its holders. Assuming that premise, a preliminary matter for our consideration concerns the merger of a parent corporation into a wholly-owned subsidiary created for the sole purpose of achieving a recapitalization which will eliminate the parent's preferred stock and the dividends accumulated thereon, and whether such a merger qualifies within the contemplation of the statute permitting any two or more corporations to merge into a single corporation.

It is true, of course, that to accomplish the proposed recapitalization by amending Community Hotel's articles of association under relevant provisions of the general corporation law ² would require the unanimous vote of the preferred shareholders, whereas under the merger statute, only a two-third vote of those stockholders will be needed. Concededly, unanimity of the preferred stockholders is unobtainable in this case, and plaintiffs argue, therefore, that to permit the less restrictive provisions of the merger statute to be used to accomplish indirectly what otherwise would be incapable of being accomplished directly by the more stringent amendment procedures of the general corporation law is tantamount to sanctioning a circumvention or perversion of that law.

The question, however, is not whether recapitalization by the merger route is a subterfuge, but whether a merger which is designed for the sole purpose of cancelling the rights of preferred stockholders with the consent of less than all has been authorized by the legislature. The controlling statute is § 7-5-2. Its language is clear, all-embracing and unqualified. It authorizes any two or more business corporations which were or might have been organized under the general corporation law to merge into a single corporation; and it provides that the merger agreement shall prescribe '* * * the terms and conditions of consolidation or merger, the mode of carrying the same into effect * * * as well as the manner of converting the shares of each of the constituent corporations into shares or other securities of the corporation resulting from or surviving such consolidation or merger, with such other details and provisions as are deemed necessary.' ³ (italics ours) Nothing in that language even suggests that the legislature intended to make underlying purpose a standard for determining permissibility. Indeed, the contrary is apparent since the very breadth of the language selected presupposes a complete lack of concern with whether the merger is designed to further the mutual interests of two existing and nonaffiliated corporations or whether alternatively it is purposed solely upon effecting a substantial change in an existing corporation's capital structure.

Moreover, that a possible effect of corporate action under the merger statute is not possible, or is even forbidden, under another section of the general corporation law is of no import, it being settled that the several sections of that law may have independent legal significance, and that the validity of corporate action taken pursuant to one section is not necessarily dependent upon its being valid under another. Hariton v. Arco Electronics, Inc., 40 Del.Ch. 326, 182 A.2d 22, aff'd, 41 Del.Ch. 74, 188 A.2d 123; Langfelder v. Universal Laboratories Inc., D.C., 68 F.Supp. 209, aff'd, 3 Cir., 163 F.2d 804.

We hold, therefore, that nothing within the purview of our statute forbids a merger between a parent and a subsidiary corporation even under circumstances where the merger device has been resorted to solely for the purpose of obviating the necessity for the unanimous vote which would otherwise be required in order to cancel the priorities of preferred shareholders. Federal United Corp. v. Havender, supra; Hottenstein v. York Ice Machinery Corp., 3 Cir., 136 F.2d 944; 7 Fletcher, Cyclopedia of Corporations, chap. 43, § 3696.1, page 892.

A more basic problem, narrowed so as to bring it within the factual context of this case, is whether the right of a holder of cumulative preferred stock to dividend arrearages and other preferences may be cancelled by a statutory merger. That precise problem has not heretofore been before this court, but elsewhere there is a considerable body of law on the subject. There is no need to discuss all of the authorities. For illustrative purposes it is sufficient that we refer principally to cases involving Delaware corporations. That state is important as a state of incorporation, and the decisions of its courts on the precise problem are not only referred to and relied on by the parties, but are generally considered to be the leading ones in the field.

The earliest case in point of time is Keller v. Wilson & Co., 21 Del.Ch. 391, 190 A. 115 (1936). Wilson & Company was formed and its stock was issued in 1925 and the law then in effect protected against charter amendments which might destroy a preferred shareholder's right to accumulated dividends. In 1927 that law was amended so as to permit such destruction, and thereafter the stockholders of Wilson & Company, by the required majorities, voted to cancel the dividends which had by then accrued on its preferred stock. In invalidating that action the rationale of the Delaware court was that the right of a holder of a corporation's cumulative preferred stock to eventual payment of dividend arrearages was a fixed contractual right, that it was a property right in the nature of a debt, that it was vested, and that it could not be destroyed by corporate action taken under legislative authority subsequently conferred, without the consent of all of the shareholders.

Consolidated Film Industries, Inc. v. Johnson, 22 Del.Ch. 407, 197 A. 489 (1937), decided a year later, was an almost precisely similar case. The only difference was that Consolidated Film Industries, Inc. was not created until after the adoption of the 1927 amendment, whereas in the earlier case the statutory amendment upon which Wilson &...