Davis v. Commonwealth Life Ins. Co.

• Decision Date: 02 December 1955
• Parties: Arch M. DAVIS et al., suing on behalf of themselves and all others similarly situated, Appellants, v. COMMONWEALTH LIFE INSURANCE COMPANY et al., Appellees.
• Court: United States State Supreme Court — District of Kentucky

Page 809

284 S.W.2d 809

54 A.L.R.2d 1286

Arch M. DAVIS et al., suing on behalf of themselves and all others similarly situated, Appellants, v. COMMONWEALTH LIFE INSURANCE COMPANY et al., Appellees.

Court of Appeals of Kentucky.

Dec. 2, 1955.

Leo T. Wolford, Louisville, for appellant.

Squire R. Ogden, Wm. H. Abell, Louisville, for appellee.

STANLEY, Commissioner.

This class action under the declaratory judgment statute, KRS, Chapter 418, was brought by the appellants, three stockholders of the Commonwealth Life Insurance Company, against the corporation and its president and secretary for the purpose of obtaining the rendition of a judgment declaring whether or not it is lawful to split up the corporate stock of the company into a greater number of shares. The proposed plan is to reduce the par value of the stock from $10 to $2 per share and to issue to the stockholders five new shares for each one now held by them. The proposal to increase the capital stock by $1,000,000 and declare a stock dividend is not involved.

The question submitted arises from a provision in the Insurance Code enacted by the General Assembly in 1950, Chapter 21, Acts of 1950 which is now Chapter 304 of the Kentucky Revised Statutes, the particular provision being Sec. 304.121, subsection (2)(c). The circuit court declared the proposed action to be legal. We affirmed the judgment by an order of November 4, 1955, and took time to prepare the opinion.

The Commonwealth Life Insurance Company was organized under Kentucky law in May, 1904, with a capital stock of $1,500,000, divided into 150,000 shares of a par value of $10. In 1951 the capital stock was increased to $2,000,000 and the number of shares to 200,000. This was effected by transferring $500,000 from the surplus of the company and issuing a stock dividend. It appears that the company's current surplus is around $9,000,000, and the market value of each share of its stock is approximately $200.

By an appropriate resolution, already adopted, the Board of Directors will submit to the stockholders a proposition to amend the charter to increase the capital stock to $3,000,000. To accomplish that, it is proposed to convert each share of the $10 par value of outstanding stock into 5 shares of $2 par value and to declare a 50 per cent stock dividend on the converted shares so that one additional share will be received for each two shares of the reclassified stock. It is also proposed to pay a cash dividend upon the new stock.

It is conceded that the stockholders will accept the plan and authorize the amendment to the Articles of Incorporation to conform unless it is declared illegal.

The proposed transactions and charter amendment are being proposed in the belief that the increased number of shareholders will be beneficial to the corporation's business and good will and advantageous to the stockholders in the creation of a wider market and greater demand for the shares of stock.

Before the adoption of the present Kentucky Insurance Code, which became effective September 1, 1950, the statutes relating to the organization of a life insurance company did not prescribe any minimum limitation on the par value of stock to be issued, although the amount of the capital stock and the number of shares had to be stated. Sec. 618, Kentucky Statutes; KRS 296.090, 1948 edition. KRS 304.121 now prescribes the requirements for the incorporation of domestic stock insurers additional to the applicable law governing the incorporation of business corporations generally. The pertinent subsection (2)(c) reads: 'Each share of capital stock shall have a par value of not less than ten dollars.' The...