Davis v. Louisville Gas & Electric Co.

• Decision Date: 01 June 1928
• Citation: 142 A. 654,16 Del.Ch. 157
• Court: Court of Chancery of Delaware
• Parties: JOHN J. DAVIS, CHARLES R. LONG, VIRGINIA M. LONG, EMILY M. DOWNS, CLARENCE J. HELLMAN, ROBERT ALEXANDER, BESS F. DAVIS, WINTHROP NEWALL BREED and UNITED STATES TRUST COMPANY, EXECUTORS OF THE WILL OF JOSHUA B. F. BREED, deceased, MCKEE GREER and LOUISVILLE TRUST COMPANY, EXECUTORS OF AND TRUSTEES UNDER THE WILL OF FRANK T. GREER, deceased, EDWIN T. BREED, LILLA N. BREED, ISAAC F. STARKS and ARTHUR C. SCHUFF, v. LOUISVILLE GAS AND ELECTRIC COMPANY, a corporation of the State of Delaware

142 A. 654

16 Del.Ch. 157

JOHN J. DAVIS, CHARLES R. LONG, VIRGINIA M. LONG, EMILY M. DOWNS, CLARENCE J. HELLMAN, ROBERT ALEXANDER, BESS F. DAVIS, WINTHROP NEWALL BREED and UNITED STATES TRUST COMPANY, EXECUTORS OF THE WILL OF JOSHUA B. F. BREED, deceased, MCKEE GREER and LOUISVILLE TRUST COMPANY, EXECUTORS OF AND TRUSTEES UNDER THE WILL OF FRANK T. GREER, deceased, EDWIN T. BREED, LILLA N. BREED, ISAAC F. STARKS and ARTHUR C. SCHUFF, v. LOUISVILLE GAS AND ELECTRIC COMPANY, a corporation of the State of Delaware

Court of Chancery of Delaware, New Castle

June 1, 1928

INJUNCTION BILL to restrain the filing of an amendment to the defendant's certificate of incorporation. The defendant was incorporated on February 17, 1913, with an authorized capital of one hundred and twenty thousand shares of preferred stock (one hundred dollars par) and sixty thousand shares of common stock (one hundred dollars par). By amendment to its certificate of incorporation adopted July 29, 1913, the authorized capital was increased to one hundred and fifty thousand shares of preferred and eighty thousand shares of common. By further amendment of the certificate adopted June 26, 1925, the capital structure of the defendant was changed so as to substitute for its then authorized classes of preferred and common shares an authorized capital of one million, three hundred thousand shares of stock without nominal or par value, consisting of eight hundred thousand shares of Class A common stock and five hundred thousand shares of Class B common stock. This is the defendant's capital structure at the present time.

The Class A common has no voting rights. It is redeemable at any time at $ 32.50 per share. Upon dissolution or liquidation it is entitled to receive $ 25.00 per share before anything is paid to Class B common, after which payment Class B is entitled to the remainder. Class A is entitled to receive a dividend out of earnings at the rate of $ 1.50 per share per annum before Class B is entitled to receive anything. After the Class A's dividend of $ 1.50 is provided for, Class B is entitled to receive dividends at the rate of $ 1.50 per share per annum out of the remaining surplus or net profits. Whenever each class has received for any quarter dividends at the rate of $ 1.50 per annum, the directors are authorized to declare additional dividends for such quarter out of the remaining surplus or net profits up to but not in excess of the rate of fifty cents per share per annum to the holders of both classes. Thereafter, further dividends may be declared for the then current quarter to the two classes in the proportion, share for share, of one for Class A and four for Class B; that is to say, for each twenty-five cents declared to a share of Class A, each share of Class B shall be entitled to receive one dollar.

It is now proposed to amend the certificate of incorporation by changing the terms and conditions of Class A and Class B stock by providing that whenever for any quarterly dividend period dividends at the rate of $ 1.60 per annum have been paid to Class A stock and a like dividend has been paid to Class B stock, any further dividends shall be declared on both classes share and share alike without distinction as to classes. It is further proposed to destroy by amendment the right of the corporation to redeem Class A stock at $ 32.50 per share.

A stockholders' meeting was called for May 16, 1928, to pass upon the proposed amendment. On that day the meeting convened and the vote was, as follows: 359,649 shares of Class A common (outstanding 507,381) and 244,864 shares of Class B common (outstanding 257,956) voted in favor of the amendments, while 1824 shares of Class A and 6150 shares of Class B voted against the amendment.

Though the vote was favorable to the amendment, yet the officers of the corporation have, by agreement, withheld the filing of amending papers with the Secretary of State pending decision upon the present motion for a restraining order.

It is now asked that a restraining order issue restraining the corporation from taking the necessary steps under the law to effectuate the amendment.

Heard on bill, answer and affidavits.

The restraining order will not issue.

Josiah Marvel, of the firm of Marvel, Layton & Morford and James I Boyce, and Percy N. Booth and John J. Davis, both of Louisville, Ky., for complainants.

Andrew C. Gray, of the firm of Ward & Gray, and Clarence

A Southerland and John H. Roemer, of the firm of Cummins Roemer & Flynn, of Chicago, Ill., for defendant.

OPINION

THE CHANCELLOR

The complainants are holders of Class B stock. They contest the right of the defendant to amend its certificate of incorporation in the manner proposed for two reasons--first because the corporation is without lawful power to adopt the amendment, and second, conceding the power to exist, the changes proposed by the amendment are nevertheless unfair, inequitable and a fraud upon the complainants, and should therefore be enjoined.

Logically the first contention should be disposed of first, because if it be well grounded the second need not be considered.

First, then, has the corporation power under the law to adopt the amendment in question? The complainants concede that if the defendant corporation has the power which the amendment to Section 26 of the General Corporation Law, under which the defendant was incorporated, undertakes to confer upon corporations, then the question of power to adopt the capital changes proposed must be answered in favor of its exercise. The corporation was created in 1913. That the corporation possessed all the powers conferred upon it not only by its certificate of incorporation, but as well those which the act itself conferred upon all corporations created under it, cannot be questioned. Peters v. U. S. Mortgage Co., 13 Del.Ch. 11, 114 A. 598; Morris, et al., v. American Public Utilities Co., 14 Del.Ch. 136, 122 A. 696; Bouree, et al., v. Trust Francais, Inc., 14 Del.Ch. 332, 127 A. 56. Section 26 of the act is the section dealing with amendments to corporate charters, and the power to amend conferred by that section as it existed at the time this corporation was created was consequently conferred upon it by the law creating it. The complainants contend that the power to amend thus conferred on the defendant at the time of its creation by Section 26 of the act was not such as to embrace within its scope a power to effect so fundamental and radical a change in the corporate structure as the proposed alteration contemplates. Whether this contention is tenable will not now be considered. For the moment, it will be assumed that it is and that the power to effect changes of the kind under consideration was not conferred by Section 26 as it existed in 1913 when the defendant was created.

The Section (26) was amended in 1927 (35 Del. Laws, c. 85, § 10). Power to enact amendments was reserved by the state in Section 82 of the act under which the defendant was created. That section provides:

"This chapter may be amended or repealed, at the pleasure of the Legislature; * * * this chapter and all amendments thereof shall be a part of the charter of every such corporation except so far as the same are inapplicable and inappropriate to the objects of such corporation."

Section 26 in its 1927 amended form was so worded as to confer upon corporations a power to amend their certificates of incorporation sufficiently comprehensive to embrace the sort of amendment proposed to be effected by the defendant in this case. The complainants concede this. But they argue, the defendant cannot justify the proposed amendment under Section 26 as amended in 1927, for the reason that it was beyond the power of the Legislature to authorize such a change in the contractual relations existing between the corporation and its stockholders and between the stockholders inter sese as the proposed amendment to the certificate contemplates. The contract now subsisting between the corporation and its members as well as among the stockholders of the two classes, gives to the B common the right to retire the A common at $ 32.50 a share, and when a certain point is reached in distributing earnings as dividends a further right to receive thereout one dollar to every twenty-five cents paid to the A stock. These rights, say the complainants who are B stockholders, constitute material and fundamental contract rights which they now enjoy and which but for the power conferred by the 1927 legislation the corporation and the majority of stockholders however great could not take from them without their consent. Hence it follows, they argue, that in so far as the 1927 enactment undertakes to disturb these rights, it is invalid as an act impairing the obligation of a contract.

In support of this contention reference is made to the case of Morris, et al., v. American Public Utilities Co. supra, wherein the threefold nature of a corporate contract is pointed out. In that case it was said that a corporate charter embodies a contract with three aspects. It creates a contractual relation between the creating sovereign and its corporate creature, between the corporation and its stockholders and between the stockholders inter sese. The complainants insist that when a state creates a corporation and reserves to itself a power to alter or amend the creating act, it must be understood that the reserved power of amendment can extend only to that phase of the contract which concerns the interest of the state and its public policy; and that it cannot be extended so far as to touch or in any wise tamper with the purely private aspects of the corporate contract as it exists between the corporation and its stockholders and between the classes of...