Goldman v. Postal Telegraph, Civil Action No. 342.

• Decision Date: 23 November 1943
• Docket Number: Civil Action No. 342.
• Citation: 52 F. Supp. 763
• Parties: GOLDMAN v. POSTAL TELEGRAPH, Inc.
• Court: U.S. District Court — District of Delaware

52 F. Supp. 763

GOLDMAN v. POSTAL TELEGRAPH, Inc.

Civil Action No. 342.

District Court, D. Delaware.

November 23, 1943.

H. Albert Young, of Wilmington, Del., and Seymour M. Heilbron and Gerald Weatherly (of Hays, St. John, Abramson & Schulman), both of New York City, for plaintiff.

C. S. Layton (of Richards, Layton & Finger), of Wilmington, Del., and Eustace Seligman (of Sullivan & Cromwell), of New York City, for defendant.

LEAHY, District Judge.

Diversity and the requisite amount establish jurisdiction.

The occasion has never arisen for the Delaware courts to determine where a certificate of incorporation provides a preference stock is to be paid $60 per share upon liquidation before any distribution is to be made to the common stockholders whether an amendment under Sec. 26 of the Delaware Corporation Law¹ which attempts to provide that such preferred stockholder shall receive on dissolution less than the stated figure of $60 a share is valid.² Absent a precise holding by the state court, a federal court must examine all the available data as to what the state tribunal would probably decide under such facts.³

I. The Plan. Postal Telegraph, Inc., incorporated under the laws of Delaware in 1939 (herein called "Postal"), agreed to transfer to Western Union Telegraph Company (herein called "Western Union"), another Delaware corporation, all its assets. At the time of the agreement plaintiff owned 500 shares of non-cumulative preferred stock of Postal which, by the terms of Postal's certificate of incorporation, entitled all preferred stockholders to a payment of $60 a share on liquidation before any distribution could be made to its common stockholders. On July 5, 1943, defendant Postal proposed to its stockholders three resolutions authorizing (1) the sale of all its assets to Western Union, conditioned upon the approval by Postal's stockholders of an amendment to its certificate of incorporation referred to in (2); (2) the amendment of Postal's certificate of incorporation so as to provide that the holders of defendant's noncumulative preferred stock would receive in lieu of $60 per share on liquidation one share of Western Union B stock;⁴ and (3) formal dissolution of Postal. At the stockholders' meeting held on August 10, 1943, these resolutions were passed by a requisite vote over plaintiff's express objection. This suit followed.

The Postal-Western Union agreement provides that for the transfer of all the assets of Postal to Western Union, Postal will receive as part consideration 308,124 shares of Class B stock of Western Union. The entire amount of Class B stock to be received from Western Union will have a value substantially less than the aggregate liquidation preference of the preferred stock of Postal. Consequently, under its certificate of incorporation Postal's common stockholders — whose equity is deeply under water — would be entitled to receive nothing if ordinary liquidation occurred. Subject to various adjustments which do not have my immediate attention, Western Union will assume approximately $10,800,000 of Postal's liabilities. Postal's economic position is shown by its steady losses, aggregating over $13,500,000 from February 1, 1940, to May 31, 1943. These losses have been financed, in part, by advances from the Reconstruction Finance Corporation. In facing further corporate existence, two courses were open to Postal: (a) To submit to government ownership or (b) to seek some type of merger with or absorption by Western Union.

In order to complete the proposed transfer of assets to Western Union, the vote of a majority of the outstanding stock of Postal was required under the Delaware law, sec. 65. See Rev.Code of Delaware of 1935, c. 65, Sec. 2097. Postal's outstanding preferred was 256,769.9 and the number of shares of common was 1,027,076.6. Hence, if all the preferred voted in favor of the plan, it would still be necessary to obtain the affirmative vote of approximately 400,000 shares of common. In order to obtain such vote, Postal's directors determined it advisable that the preferred's rights on liquidation be modified, so as to provide that out of the 308,124 shares of Class B stock of Western Union to be received by Postal, 256,770 shares would be distributed share for share for each of Postal's preferred and the balance of the Class B — 51,354 shares — would be distributed to Postal's common stockholders, which was to be in the ratio of 1/20 of a share of Class B Western Union stock for each share of common stock of Postal.

As part of the plan, Western Union would also change its present 1,045,592 shares of capital stock into an equal number of shares of Class A stock without par value, which stock would be entitled to a non-cumulative dividend of $2 per share in each year before any dividends could be paid upon the Class B stock. After such dividend payment, the Class A and Class B stock are to participate on an equal basis in any dividends. I shall not pause, at this moment, to discuss certain collateral factors which entered into the considerations for the adoption of the plan, such as the former duplication of Postal's facilities with those of Western Union, the elimination of competitive factors, the more efficient utilization of personnel and equipment, the reduction of expense, improved service to the public, or the more effective means to compete with other methods of communication.

Plaintiff here seeks, on behalf of himself and all other non-assenting shareholders,⁵ to enforce the liquidating rights which he contends are secured to him by the certificate of incorporation of Postal prior to the adoption of the resolution to amend it under Sec. 26. Defendant moved to dismiss on the ground that the complaint failed to state a cause of action.

Two issues are raised by the pleadings: (1) Whether the amendment to Postal's certificate of incorporation is authorized under Sec. 26 of the Delaware Corporation Law, and (2) if Sec. 26 authorizes the present amendment whether the statute to this extent is constitutional.

II. The Delaware Law. The national and Delaware bars generally together with the legal literature⁶ especially have been unwilling to look directly at the radiations from the Delaware opinions which disclose what reclassification acts may be accomplished under Sec. 26 of the Delaware Corporation Law.

After much contemplation I concluded this is not the occasion to trace in limine the growth of the Delaware law in the field of corporate reclassification or rearrangement of stockholders' rights in order to show the development of a logical pattern of judicial thought on this and allied questions. Because the Delaware decisions are so crystalline in outline, I am mildly surprised there could be disagreement of interpretation as to just what may not be accomplished under the corporation statutes of that state.

Defendant's certificate of incorporation provides that, in the event of liquidation or dissolution, the holders of preferred stock are entitled to be paid $60 per share, plus all unpaid dividends (of which there are none), before any distribution is made to the holders of the common or junior stock. Sec. 26 provides that an amendment to a certificate of incorporation may alter or change "preferences" theretofore provided for a preferred stock, if the vote of a requisite majority is had. Because at common law, in the absence of agreement to the contrary, all shares of stock, by whatever name they may be known, stand upon an equal footing, preferences, being in derogation of the common law rule, must be strictly construed. Gaskill v. Gladys Belle Oil Co., 16 Del.Ch. 289, 146 A. 337; Machen, Corporations, Sec. 517. Historically, preferential rights consist generally of two classes of preferences, viz.: (1) Preferences as to dividends and (2) preferences in distribution of assets upon liquidation, or winding-up.⁷

The right of preferred to priority in distribution of assets upon liquidation is clearly a preferential right within the meaning of the Delaware statutes. In Morris v. American Public Utilities Co., 14 Del.Ch. 136, 122 A. 696, 705, there was involved the right to reduce by amendment the redemption price of preferred stock from $105 per share to $100, the par value of the shares. In holding the amendment valid, the late Chancellor Wolcott wrote: "Whether such a change may be said to be the alteration of a preference within the meaning of, and therefore authorized by, section 26 I need not pause to consider, for section 13, which authorizes the issuance of preferred stock supplies sufficient authority for the change here involved. That section provides that any or all classes of preferred stock may be made subject to redemption at such price not less than par `as may be expressed in the certificate of incorporation or an amendment thereof'". The Morris case is, in principle, applicable, since an analogous provision exists in Sec. 13 (Rev.Code of Delaware of 1935, c. 65, Sec. 2045, p. 464) with respect to the rights of the holders of the preferred stock upon distribution of assets. Sec. 13, after providing that every corporation shall have the right to issue one or more classes of stock with such preferences as may be stated and expressed in the certificate of incorporation or any amendment thereto, provides that "The holders of the preferred or special stock of any class or of any series thereof shall be entitled to such rights upon the dissolution of, or upon any distribution of the assets of, the corporation as shall be stated and expressed in the Certificate of Incorporation, or any amendment thereto * * *." (Italics supplied.)

It plainly appears, therefore, that Sec. 13 contemplates such rights are subject to amendment under Sec. 26. As the right of the preferred stockholder here involved is a preferential right within the meaning of the Delaware Corporation Law (i e., the stock is preferred on dissolution), I hold such right is...