Calnan v. Guar. Sec. Corp.

• Decision Date: 03 June 1930
• Citation: 171 N.E. 830,271 Mass. 533
• Parties: CALNAN et al. v. GUARANTY SECURITY CORPORATION. HERMANNS et al. v. GUARANTY SECURITY CORPORATION et al.
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

271 Mass. 533

171 N.E. 830

CALNAN et al.

v.GUARANTY SECURITY CORPORATION.

HERMANNS et al.

v.GUARANTY SECURITY CORPORATION et al.

Supreme Judicial Court of Massachusetts, Suffolk.

June 3, 1930.

Appeal from Superior Court, Suffolk County.

Minority stockholders' suits by Michael Calnan and others against the Guaranty Security Corporation and by Anna M. Hermanns and others, against the Guaranty Security Corporation and others. The suits were consolidated into one suit. From decrees for defendants, plaintiffs appeal.

Affirmed.

J. B. Jacobs, of Boston, for appellants.

J. H. Devine and A. Lincoln, both of Boston, for appellees.

PIERCE, J.

These are two suits in equity brought by minority stockholders of the defendant Guaranty Security Corporation (herein called the Guaranty Corporation) against that company, the Finance Corporation of New England (herein called the Finance Corporation) and the individual defendants, who are directors of both companies, to enjoin the sale of the assets of the Guaranty Corporation to the Finance Corporation in exchange for bonds of the Finance Corporation to be delivered to the preferred shareholders of the Guaranty Corporation; or, if it shall appear that such sale of the assets of the Guaranty Corporation is proper and legal, then for a decree that the Finance Corporation be ordered to pay the plaintiffs the fair cash value for their stock.

These cases were consolidated into one suit. They were heard in the superior court by a judge who filed a statement of his rulings and findings, and an order for a decree ‘dismissing these bills with costs to the defendants.’ The consolidated suits are before the court on the appeals of the plaintiffs from the final decree dismissing the bills with costs to the defendants, and from an interlocutory decree denying the plaintiffs' motion to strike out paragraphs seventeen and twenty-three of the defendant's answer in the Calnan Case. The record of the appeals does not contain the evidence, if any, which was received at the hearing.

The material facts as disclosed by the statement of the judge of the superior court in substance are as follows: The Guaranty Corporation was organized December 16, 1918, under the Business Corporations Law of this commonwealth, with preferred and common stock. The preferred stock has a par value of $10 a share, is preferred as to dividends but has no voting power. The Finance Corporation was organized under the Business Corporations Law of this commonwealth on December, 3, 1918, with preferred and common stock; its common stock, but not its preferred stock, has voting power. Both corporations were organized for the purpose of lending money on real estate and on construction and other loans. Prior to 1924 they had no connection with each other. Early in that year the common stock of the Guaranty Corporation had become of no value and the preferred stock was worth considerably less than par. At the hearing in 1929 the common stock was still of no asset value and the preferred stock was worth only slightly more than it was in 1924. In February, 1924, the Finance Corporation purchased forty-two thousand, one hundred and forty-four shares of the common stock of the Guaranty Corporation and thereafter, in its own name or in the name of its nominees, owned sixty-eight thousand shares of the common stock of that company out of a total issue of eighty-nine thousand, two hundred and twenty-eight shares. During the same month it voted to purchase, and pursuant thereto acquired, seventy-five thousand, three hundred and forty-six shares of the preferred stock out of the one hundred and twenty-nine thousand, three hundred and thirty-eight shares outstanding, for which it paid either in cash or bonds not more than $2.50 per share, with the financial results that it had an investment of $188,365 in preferred stock and $65,000 in common stock-that is, a total investment of at least $253,365 in stock of the Guaranty Corporation. At no time has the Finance Corporation made active or concerted efforts to purchase the stock of the Guaranty Corporation, but has purchased it as it was offered to it by individuals or on the market. It is to be noted that by January 6, 1925, the Finance Corporation had secured a total of fifty thousand, three hundred and twenty-one shares of common stock of the Guaranty Corporation, which gave it a majority of the outstanding common stock of eighty-nine thousand, two hundred and twenty-eight shares, and the voting control of the corporation.

Since February 19, 1925, the Guaranty Corporation has been almost constantly, and at times the Finance Corporation also has been, engaged in litigation arising out of suits brought by some of the minority stockholders of the Guaranty Corporation and as a result the business of the Guaranty Corporation has been seriously affected. The trial judge found that the Guaranty Corporation on March 19, 1929, ‘was insolvent, but would have been solvent provided its stock liability could be eliminated’; that ‘The Finance Corporation, on the other hand, was solvent, although there was only a limited market for its bonds and most of its bonds which were offered and sold by the holders thereof were bought in by the Finance Corporation for about fifty cents on the dollar.’

At the annual meeting of the stockholders of the Guaranty Corporation on March 19, 1929, pursuant to the call for that meeting, it was voted to sell‘ all of its assets in accordance with the balance sheets as of March 18, 1929,’ exhibited at the meeting, upon the agreement of the Finance Corporation ‘to assume all the liabilities of the Guaranty Security Corporation’ and ‘to issue to the preferred shareholders of the Guaranty Security Corporation during the period of six years from the date of transfer of its assets, its twenty-year five per cent Gold Debenture Bonds dated June 1, 1927, with June 1, 1929, and subsequent coupons attached, payable June 1st and December [271 Mass. 538]1st of each year, upon the surrender by the shareholders of their preferred and common stock duly endorsed, each preferred shareholder to be entitled to bonds at the par value of $5.75 for each share of preferred stock so surrendered when accompanied by the common stock also owned by such preferred shareholder.’ It was further voted that ‘upon acceptance by the Finance Corporation of New England of the offer of the shareholders of the Guaranty Security Corporation to sell its assets in exchange for bonds as hereinbefore stated, the Treasurer be, and hereby is, authorized to effect the transfer of said assets of the Guaranty Security Corporation to the Finance Corporation of New England and is empowered and directed for and in behalf of this corporation to sign, seal, acknowledge and deliver all legal documents necessary or incidental in the pursuance of the aforesaid votes.’ Before the vote was put, counsel representing the minority stockholders asked to have recorded their objections to any officer or employee of the Finance Corporation or the Finance Corporation voting, on the ground that they were disqualified; and, the vote being put, he desired to be recorded as voting in opposition.

In reference to the action of the stockholders and its legal effect, the trial judge found that ‘The vote in favor of the sale was carried by 68,806 votes, which was more than two thirds of the stock outstanding and entitled to vote’; that ‘44,517 votes were cast by the stock owned by the Finance Corporation’; that ‘If the votes cast by the Finance Corporation were cast without authority or without right, then less than a majority voted on the question and, of course, the question was not carried in the affirmative by a two-thirds vote.’ He found and ruled, however, ‘that the votes cast by the Finance Corporation were cast with authority and that the corporation had the right to vote the stock owned by it.’ He found that the ‘purpose of this vote was to consolidate the two corporations for the more economical administration of the affairs of both corporations and would probably result, if carried into effect, in the ultimate dissolution of the GuarantyCorporation. The Finance Corporation has in the past purchased the preferred stock of the Guaranty Corporation, which has a par value of $10 per share, paying for it when it paid in bonds at the rate of $5.75 in bonds, and would redeem its bonds at the rate of $2.50 per bond. In this way, the preferred stock of the Guaranty Corporation has a market value of 25% or $2.50 cash per share.’

On evidence introduced as to the solvency or insolvency of the Finance Corporation, he states: ‘The assets of this corporation consist of mortgages, real estate taken under foreclosure, notes secured by collateral, and shares of stock in other corporations. While I am unable, on the evidence introduced, to determine with any degree of accuracy the value of the stock or of the bonds of the Finance Corporation, I do find that its net assets are more than sufficient to enable it to discharge its obligations in the usual course of business, but that this would not be the case if an immediate and enforced liquidation was necessary.’

He further found ‘that there was no fraud on the part of any officer or director of the Guaranty Corporation or of the Finance Corporation in connection with the vote of the stockholders to sell the assets of the Guaranty Corporation to the Finance Corporation, nor was there any actual fraud on the part of any of the officers of directors...