Consolidated Film Industries, Inc. v. Johnson

• Decision Date: 15 June 1937
• Citation: 192 A. 603,21 Del.Ch. 417
• Court: Supreme Court of Delaware
• Parties: CONSOLIDATED FILM INDUSTRIES, INC., a corporation of the State of Delaware, Defendant Below, Appellant, v. NORMAN JOHNSON, Complainant Below, Appellee

192 A. 603

21 Del.Ch. 417

CONSOLIDATED FILM INDUSTRIES, INC., a corporation of the State of Delaware, Defendant Below, Appellant, v. NORMAN JOHNSON, Complainant Below, Appellee

Supreme Court of Delaware

June 15, 1937

[Copyrighted Material Omitted] [Copyrighted Material Omitted]

Appeal from an order of the Court of Chancery, for New Castle County, granting a preliminary injunction.

Case heard on the motion of Norman Johnson, the appellee, to dismiss the appeal.

The amended bill filed in the court below, in substance, alleged:

That the complainant was the holder of 100 shares of the participating preferred stock of Consolidated Film Industries, Inc., the defendant below, and that 400,000 shares of that stock had been issued, and were then outstanding; that out of an authorized issue of 600,000 shares of the par value of $ 1.00 per share 524,973 shares of common stock had, also, been issued and were then outstanding; that the preferred stock had no par value, but under the defendant's charter, was entitled to cumulative dividends of $ 2.00 per share per annum before any dividends could be paid on the common stock, and after annual dividends of $ 2.00 per share had been paid on the common stock the preferred stock was, also, entitled to participate with that stock in all additional dividends as if all shares were one and the same class; that on October 1st, 1936 the fixed dividends on the preferred stock were in arrears to the extent of $ 5.00 per share; that corporate earnings to a considerable amount were available for dividend purposes that on October 23rd, 1936, at an adjourned meeting of the stockholders of Consolidated Film Industries, Inc., the defendant in the court below, it was reported that an amendment to the certificate of incorporation of that company, proposed by a prior resolution of the board of directors, had been adopted by the requisite vote of the stockholders. That amendment provided, in substance, for the following plan:

The then issued and outstanding participating preferred stock, including the right to all cumulative and unpaid dividends thereon, was to be re-classified into 500,000 shares of preferred stock of no par value, and 100,000 shares of new common stock of the par value of $ 1.00. The then outstanding 524,973 shares of common stock were to be re-classified into 349,982 shares of new common stock of the par value of $ 1.00 per share. The new preferred stock was to be entitled to a fixed cumulative dividend at the rate of $ 1.00 per share in priority to the payment of dividends upon the the common stock, and after the payment of said fixed cumulative dividend all other dividends were to be divided equally between the holders of preferred stock, that is one-half of the additional dividends to the holders of preferred stock pro rata, and the other half of such additional dividends to the holders of common stock, pro rata.

That this change in the corporate charter of Consolidated Film Industries, Inc., the defendant, would take away from the complainant and other preferred stockholders considerable amounts in accumulated and unpaid dividends.

The amended bill, also, alleged:

1. On information and belief, that at the stockholders' meeting of October 23rd, 1936, the proposed amendment to the corporate charter of Consolidated Film Industries, Inc., the defendant below, was not adopted by the vote of the required number of holders of each class of stock in the corporation.

2. That if, in fact, said proposed amendment was adopted by the required vote of the preferred stockholders in favor of it, that vote was obtained by fraud and deceit on the part of the directors of the corporation; and that, except for the practice of such fraud and deceit, the consent of such stockholders to such amendment could not have been obtained by the management of Consolidated Film Industries, Inc.

3. That on information and belief a large part of the issued and outstanding capital stock of Consolidated Film Industries, Inc., to-wit: 150,000 shares out of 524,973 shares of common stock thereof, issued and outstanding, were owned by a certain Setay corporation, which said corporation was controlled by Herbert Y. Yates, President of Consolidated Film Industries, Inc., and in which the other directors of Consolidated Film Industries, Inc., were largely interested. That on information and belief the directors of Consolidated Film Industries, Inc. were otherwise in a large measure interested in the common stock of Consolidated Film Industries, Inc., and that the alleged amendment to the certificate of incorporation above set forth was proposed and adopted by the directors of the said corporation for the sole purpose of improving the position of the common stockholders of said corporation, at the expense of the preferred stockholders thereof.

4. That the alleged amendment to the certificate of incorporation was null and void in so far as it assumed to destroy the rights of the complainant and others similarly situated to cumulative dividends accrued and accruing up to the effective date of that amendment.

5. That the said proposed amendment was null and void in its entirety because the provisions thereof, providing for the destruction of the rights of the complainant and others similarly situated to accrued and accruing cumulative dividends up to the effective date of the said amendment was such an integral part thereof that they could not be separated therefrom without entirely changing the terms of the said amendment; and that neither the board of directors nor the stockholders of Consolidated Film Industries, Inc., had approved of the proposed amendment without the provisions thereof providing for the destruction of the rights of the complainant and others similarly situated to accrued and accruing cumulative dividends up to the effective date of that amendment.

In connection with paragraph 2, above referred to, specific allegations of fraud, based on certain statements in and alleged material omissions from a letter of the president of the defendant corporation to its stockholders, dated September 11th, 1936, were, also, contained in the bill, but it seems unnecessary to specifically refer to these allegations.

The amended bill, also, alleged that the complainant was advised and believed that no certificate of amendment to the certificate of incorporation of Consolidated Film Industries, Inc., pursuant to the above mentioned resolution of the board of directors of Consolidated Film Industries, Inc., had then been filed in the Office of the Secretary of State, at Dover.

The prayers of the amended bill, in substance, were:

1. That a subpoena issue.

2. That a restraining order issue, restraining the defendant, its officers, agents, servants and employees, from filing the alleged amendment to its corporate charter in the office of the Secretary of State, at Dover, and from recording any certified copy of any such purported amendment in the office of the Recorder of Deeds, for New Castle County, until the further order of this court.

3. That a rule issue directed to the defendant above named, requiring it to appear in the court below on a day certain to show cause why a preliminary injunction should not issue in conformity with the restraining order, above mentioned.

4. That, upon final hearing, the Chancellor decree that said alleged amendment is null and void insofar as it assumed to convert each share of the preferred stock presently outstanding, together with the right to all accumulated, accrued and unpaid dividends thereon, held by the complainant and others similarly situated, into one and one-quarter shares of new preference stock and one-quarter share of new common stock.

5. That upon final hearing, the Chancellor decree that said proposed amendment is null and void insofar as it assumes to destroy the rights of the complainant and others similarly situated, to dividends accrued and accruing upon their preferred stock presently outstanding up to the effective date of said proposed amendment.

6. That upon final hearing, the Chancellor decree that said proposed amendment is null and void insofar as it fails to provide for the payment to the complainant, and to others similarly situated, of cumulative dividends accrued and accruing up to the effective date of said proposed amendment prior to the payment of any divident whatsoever upon the common stock of the defendant corporation to be outstanding upon the effective date of said amendment.

7. That upon final hearing, the Chancellor decree that said proposed amendment is null and void in its entirety and that a permanent injunction may issue perpetually enjoining and restraining the defendant, its officers, agents, servants and employees, from filing or causing to be filed in the office of the Secretary of State, at Dover, any certificate of said proposed amendment or from recording in the office of the Recorder of Deeds, for New Castle County, Delaware, any certified copy of any certificate of said proposed amendment.

8. That the complainant may have such other and further relief in the premises as to the Chancellor may seem meet and proper.

The defendant's answer to the complainant's amended bill admitted that the complainant was, and for some years had been, the registered holder of 100 shares of its participating preferred stock, and that a certificate therefor, registered in his name, was then and for some years had been outstanding.

It alleged, however, that the defendant was without knowledge as to whether the complainant was then, or for some years had been, the real owner and holder of the shares of stock represented by the said certificate, or whether any such certificate was then, or for some years had been, held by him.

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