Frank v. Wilson & Co., Inc.

• Decision Date: 05 May 1943
• Citation: 27 Del.Ch. 292,32 A.2d 277
• Parties: DANIEL S. FRANK, and LEOPOLD NEWBORG, FRANK J. G. WEINBERG, HERBERT J. MARX and F. A. MORGAN EASTON, Trading as Newborg & Company, Complainants Below, Appellants. v. WILSON & CO., INC., a Delaware corporation, Respondent Below, Appellee
• Court: Supreme Court of Delaware

32 A.2d 277

27 Del.Ch. 292

DANIEL S. FRANK, and LEOPOLD NEWBORG, FRANK J. G. WEINBERG, HERBERT J. MARX and F. A. MORGAN EASTON, Trading as Newborg & Company, Complainants Below, Appellants. v. WILSON & CO., INC., a Delaware corporation, Respondent Below, Appellee

Supreme Court of Delaware

May 5, 1943

APPEAL from a decree of the Court of Chancery for New Castle County dismissing the bill of complaint. For opinion below see 24 Del.Ch. 237, 9A.2d 82.

Decree of the court sustained.

William Prickett, for appellants.

Aaron Finger, of the firm of Richards, Layton & Finger, for appellee.

LAYTON C. J., RICHARDS, RODNEY and SPEAKMAN, JJ., sitting.

OPINION

LAYTON, Chief Justice.

The suit below was one of several brought by holders of Class A stock of the respondent corporation to protect their rights in such shares against invasion under a plan of recapitalization consummated in 1935. See Keller, et al v. Wilson & Co., Inc., 21 Del.Ch. 13, 180 A. 584; Sapperstein v. Wilson & Co., 21, Del.Ch. 139, 182 A 18; Bay Newfoundland & Co. v. Wilson & Co., 24 Del.Ch. 30, 4 A.2d 668; Id., 24, Del. Ch. 288, 11 A.2d 278; Id., 26, Del.Ch. 270, 28 A.2d 157. The Keller and Sapperstein suits were brought shortly after the recapitalization plan had been declared operative. The Bay Newfoundland Company suit and this suit were brought after this court, reversing the decree of the Chancellor in the Keller case (21 Del.Ch. 391, 190 A. 115), had decided that the amendment to the corporate charter was a nullity as against non-assenting Class A stockholders.

As briefly as possible the facts are these: Daniel S. Frank, one of the complainants below and the real party in interest, was the owner of 405 shares of the Class A stock of the respondent corporation, registered, however, in the name of Newborg & Company. At or about the end of the year 1934, there were issued and outstanding 227,233 shares of the corporation's 7% cumulative preferred stock, of the par value of $ 100.00, 313,205 shares of Class A stock of no par value in effect a second preferred stock, entitled to annual cumulative dividends at $ 5.00 a share, and 434,466 shares of common stock. The bill of complaint was silent as to the arrearages of dividends accumulated on the preferred stock, but, as will appear, there were large arrearages. The complaint alleged that the arrearages of dividends accumulated on the Class A stock amounted to $ 21.25 a share, a total of $ 6,656,265.00. The corporation and its subsidiaries had an earned surplus in excess of $ 8,000,000.00. In these circumstances on December 14, 1934, the corporation's board of directors approved a plan of recapitalization, and called a meeting of the stockholders to be held on February 19, 1935, to take action thereon. Notice of the meeting, to which a copy of the plan was attached, was sent to the stockholders on December 31, 1934. The plan purported to convert the preferred stock with all accumulations of dividends into a no par cumulative preferred stock entitled to annual dividends of $ 6.00, on the basis of 1.4292 shares of the new stock for each share of the old; to convert the Class A stock with all accumulations of dividends into common stock, on the basis of five shares of common stock for each share of Class A stock; and to increase the number of the common shares. Newborg & Company, acting for its undisclosed client, Frank, instructed the corporation to vote the 405 shares of the Class A stock against the plan and amendment to the corporate charter; and these shares were so voted. The required amendment was approved by a very large vote of the several classes of stock. Only 100 of the preferred shares, 900 of the Class A shares, [32 A.2d 279] and 50 of the common shares were voted against the amendment, while 163,945 of the preferred shares, 209,155 of the Class A shares, and 317,279 of the common shares were voted in favor of it. On February 23, 1935, a certified copy of the amendment to the corporate charter was filed in the office of the Secretary of State. On February 26, 1935, a dividend of $ 1.50 a share was declared on the new preferred stock, and a dividend of $ .125 a share was declared on the common stock, payable on June 1, 1935, to stockholders of record on May 15, 1935. On March 28, 1935, the company wrote Newborg & Company stating that they had not exchanged their Class A certificates for common stock certificates; that a dividend of $ .125 a share on the common stock had been declared; and that it would facilitate the receipt of dividends on their shares if the exchange of certificates was made before the date of the payment of the dividend. This letter was not answered. In April, 1935, Frank learned from a newspaper item that one Herman Sapperstein, an attorney at law and an owner of Class A stock, had brought an action in the Court of Chancery against the respondent to establish his rights as owner of such shares; and on April 12, he retained Sapperstein to represent him in connection with the litigation; but no attempt was made by Frank to intervene in the action. On May 22, 1935, Newborg & Company wrote the respondent inquiring whether the dividend payable on June 1 would be paid to the holders of Class A stock, and were told in reply that the old Class A shares would be treated as reclassified under the plan of recapitalization adopted by the stockholders, and the dividend would be paid to common stockholders of record on May 15. In the meantime, on May 24, 1935, the Chancellor, in an action brought by Joseph Keller and another, holders of Class A shares, held that the amendment was legally sufficient to convert the Class A shares into common shares, to destroy the dividend preference incident to those shares as related to the future, and to cancel the preference as it related to the past and accumulated dividends. Keller, et al., v. Wilson & Co., Inc., 21 Del.Ch. 13, 180 A. 584, supra. On June 1, 1935, the respondent sent to Newborg & Company a check in the sum of $ 253.13, representing, as stated on the check, a common stock dividend at $ .125 a share; and with the check was a notice that while the exchange of certificates had not been made, the company felt that a sufficient time had not elapsed between the meeting of the stockholders on February 23, 1935, and the date of the first dividend payment; that it had been decided to treat all shares as having been converted, and to pay the dividend to all Class A stockholders on the basis of five shares of common stock for each share of Class A stock; and, again, it was suggested that the receipt of dividends would be facilitated by an early exchange of stock. The check and notice were received without demur. Like quarterly dividends were paid on August 31, and December 2, 1935, and were received by Newborg & Company without protest. On December 4, 1935, the bill of complaint filed in the Sapperstein suit was dismissed. Sapperstein so advised Frank, and told him that he had not decided whether or not he would take an appeal, and three months later was still undecided. Frank did nothing. Through the year 1936 like dividends were declared and paid on the common stock and were received by Newborg & Company without objection; and they paid no attention to two letters written during the year to them suggesting that they exchange their Class A shares for common shares. In November, 1936, Frank learned through a newspaper item that this court had reversed the decree of the Chancellor in the Keller case, and he promptly retained one of the counsel for the complainants in that suit to represent him to take such action by intervention or otherwise as might be necessary to protect his rights. Thereafter, he was told by his attorney that the Keller suit was about to be settled, and upon his insistence a formal application to intervene in the suit was made, and denied without prejudice on August 4, 1937. Keller v. Wilson & Co., 22 Del.Ch. 175, 194 A. 45. During the year 1937, quarterly dividends on the common stock were declared and paid, and were received by Newborg & Company without objection or protest; and it was not until January 22, 1938, that the complainants filed their bill of complaint. The bill prayed that the amendment be declared to be null and void in so far as it purported to convert the 405 shares of Class A stock into 2025 shares of common stock without first paying the arrearages of dividends accumulated on the Class A stock at the time of the amendment; and a declaratory judgement was sought advising the complainant of the rights to which he was entitled by virtue of his ownership of the unexchanged shares. By an amendment to the bill, it was further prayed that the complainant be relieved from the consequences of his acceptance of dividends declared and paid on common stock as a relievable mistake of law. The respondent demurred, alleging laches, acquiescence and general want of equity. It was stipulated that the complainant, Frank, had full knowledge of the correspondence between Newborg & Company and the respondent corporation, and that the dividend checks were turned over to Frank by Newborg & Company, or were cashed with his knowledge and consent.

Preliminarily it is necessary to consider a motion made by the complainant to strike from the respondent's brief a statement of fact and argument based thereon. In the brief is this statement "The bill of complaint does not state the amount of accumulated dividends on the 7% Cumulative Preferred stock. However, it appears from the opinion of this court in Keller, et al., v. Wilson & Co., Inc., 21 Del.Ch. 391, 190 A. 115, 116-117, that on February 1, 1935, there were accumulated and unpaid dividends on the preferred stock amounting to $ 26.25 per share, or a total of $ 5,965,260 on the...