Gaskill v. Gladys Belle Oil Co.

• Decision Date: 22 May 1929
• Citation: 16 Del.Ch. 289,146 A. 337
• Court: Court of Chancery of Delaware
• Parties: MOSES E. GASKILL, v. GLADYS BELLE OIL COMPANY, a dissolved corporation of the State of Delaware

146 A. 337

16 Del.Ch. 289

MOSES E. GASKILL, v. GLADYS BELLE OIL COMPANY, a dissolved corporation of the State of Delaware

Court of Chancery of Delaware, New Castle

May 22, 1929

Charles F. Curley, for the preferred stockholders.

James H. Hughes, Jr., of the firm of Ward & Gray, opposed.

OPINION

THE CHANCELLOR.

In this matter the question presented is whether or not holders of preferred stock may receive out of the capital assets of the dissolved corporation payment in full of its par value together with all unpaid dividends in arrear before anything is received by the common stock.

The certificate of incorporation of the dissolved company provided for two kinds of stock--preferred and common. The only preference specified in the certificate as belonging to the preferred stock was set forth in the following language:

"The holders of the preferred stock shall be entitled to receive out of the surplus or net profits of the business of the corporation in each year cumulative dividends at the rate of twelve per centum (12%) per annum and no more, payable quarterly, semi-annually or annually as the Board of Directors may from time to time determine."

The company was organized on February 14, 1919. On the nineteenth of the same month the certificate of incorporation was amended, but the preference belonging to the preferred stock was left as originally created. On the next day the subscribers to the capital stock held a special meeting for the purpose of amending the by-laws. At said meeting the by-laws were amended, inter alia, by providing as follows:

"Section 34. The certificates of stock of the corporation shall be numbered and shall be entered in the books of the corporation as they are issued. They shall exhibit the holder's name and number of shares, and shall be signed by the president or a vice-president, and the treasurer, or an assistant treasurer, or the secretary or an assistant secretary.

"The Two Million (2,000,000) shares of Preferred Stock of the par value of One ($ 1.00) Dollar per share, authority to issue which is conferred by the Certificate of Incorporation of this Company, shall be forever entitled to the special provisions and rights hereinafter set out in this By-Law, and the issuance of proper certificates of ownership of such preferred stock to purchasers thereof, and the acceptance of such certificates by such purchasers create and constitute a covenant between this company and the several owners of such preferred stock, in which the full faith and credit of this company is forever pledged to the complete performance of the following undertakings:--

"First Each share of preferred stock shall entitle the owner thereof to the same voting privileges at all meetings of shareholders to which the owner of a share of common stock is entitled.

"Second Before any dividend or dividends are declared and paid upon the common stock of this company, all owners of preferred stock shall be entitled to and shall receive out of the net earnings of the company, a fixed cumulative dividend at the rate of twelve (12%) per cent per annum, payable monthly.

"Third: In case any fiscal year a dividend or dividends exceeding twelve (12%) per cent shall be paid on the common stock of the company, the owners of preferred stock shall be entitled to and shall receive coincident with the payment of such dividend or dividends in excess of twelve (12%) per cent on the common stock an additional dividend or dividends equal to the excess over and above twelve (12%) per cent paid upon the common stock.

"Fourth: In case of liquidation or dissolution, voluntary or involuntary, the owners of preferred stock shall be paid in full, both the par value of their shares and any unpaid and accrued dividends thereon before any amounts whatever shall be distributed to the owners of common stock; and in case of liquidation or dissolution, the funds of the company available for distribution to shareholders shall be devoted--first: To the liquidation in full of Preferred Stock and all accrued and unpaid dividends as hereinbefore provided; secondly: To the liquidation of outstanding common stock plus an amount per share equal to the excess per share of dividends paid from the time of incorporation on preferred stock over and above the amount paid on the common stock; and thirdly: To a pro rata distribution of such funds among all shareholders, regardless of the class of stock held by them, share and share alike.

"This By-Law, reciting the terms of the contract, existing between this Company and the several owners of its preferred stock, is by its adoption given the same force and effect as if it was a part of the Certificate of Incorporation of this Company, and same shall be repealed, amended or in any way altered only with the consent of the holders of two-thirds of the preferred stock of this Company."

It will thus be seen that whereas the extent of the preference which was allowed the preferred stock by the certificate of incorporation was the right to be paid cumulative dividends out of surplus or net earnings in each year, the by-laws undertook to give to the preferred stock certain other preferences which would arise upon liquidation and dissolution.

The preferences as defined in the by-laws were expressed on the face of the preferred stock certificates.

The claimant is demanding the full measure of preference assumed to be granted by the by-laws and the exceptants resist the demand on the ground that the exclusive source from which preferred stock is entitled to derive its preferential rights is the certificate of incorporation of the company, and that nowhere in the certificate can justification be found for the preference now claimed. The question therefore is whether or not a by-law provision defining preferential rights which are broader than those defined in the certificate of incorporation is valid and binding under our statute.

That the preference allowed by the certificate is different from that assumed to be allowed by the by-laws can admit of no doubt. The former is as to dividends declarable only out of surplus or net profits in each year. If there is no surplus, or there are no net earnings, as is the case here, there is no fund available to which the designated preference can attach itself. To allow the preference in such a case to fasten itself upon capital assets would be to allow the preference a wider privilege than the contract defining it specifies. This is not permissible for the obvious reason that with respect to capital all outstanding stock, whatever its source, is entitled, in the absence of statute or of a contract provision to the contrary, to a ratable participation in the distribution of the capital to which all have contributed. Lloyd v. Pennsylvania Electric Vehicle Co., 75 N.J.Eq. 263, 72 A. 16, 21 L. R. A. (N.S.) 228, 138 Am. St. Rep. 557, 20 Ann. Cas. 119; In re London India Rubber Co., 5 Law Rep. Eq. 519; Birch v. Cropper, 14 App. D.C. 525; In re Accrington Corporation Steam Tramways Co., 2 Ch. 40, 101 Law T. (N.S.) 99; People v. New York Bldg. Loan Co., 50 Misc. 23, 100 N.Y.S. 459. The cases cited by the claimant which bear on the point, instead of being opposed to this proposition, recognize it as the law. For instance, in McGregor v. Home Ins. Co., 33 N.J.Eq. 181, Vice-Chancellor Van Fleet took pains to state that he thought "it must be admitted, according to the general current of authority, that preferred stock, in the absence of an express stipulation or direction to the contrary, simply gives the holder a right of preference in the division of profits, and not in the distribution of capital." The only reason why the rule thus recognized by him as the law was not the controlling rule in the case before him was that the statute under which the corporation was created was construed as enacting otherwise. And in Hamlin v. Toledo, etc., R. Co., (C. C. A.) 78 F. 664, 36 L. R. A. 826, and in Toledo, etc., R. Co. v. Continental Trust Co., (C. C. A.) 95 F. 497, cited by the claimant, it was observed that "ordinarily preferred stock is entitled to no preference over other stock, in relation to capital." The existence of an express agreement giving a preference on capital, however, not prohibited by local law or by the charter, made the general rule inapplicable in those cases.

The preferred stock in this case, according as it is defined in the certificate of incorporation, must therefore be taken as a stock which has no preferential right to be paid off out of the capital before anything is received in liquidation by the common stock.

But, if we look to Section 34 of the by-laws for our definition of the rights of the preferred stock, we find it has such a preferential right.

I therefore repeat that the question presented is whether or not a by-law provision defining preferential rights which are broader than those defined in the certificate of incorporation is valid and binding under our statute.

The general act (Revised Code 1915, c. 65) under which the dissolved company was incorporated is quite explicit in its provisions touching the kinds of stock which may be issued. In Paragraph 4 of Section 5 it requires that the certificate of incorporation shall set forth, inter alia, a description of the different classes of stock if there be more than one and the terms on which the respective classes are issued. And Section 13 in conferring power to issue stock of various kinds provides as follows:

"Every corporation shall have power to create two or more...