In re Application of Northeastern Water Co.

• Decision Date: 30 August 1944
• Citation: 28 Del.Ch. 139,38 A.2d 918
• Parties: In the Matter of the Application of NORTHEASTERN WATER COMPANY (the name of which was formerly "Northeastern Water and Electric Corporation") for a determination, pursuant to Section 61 of the General Corporation Law, of the value of certain shares of its formerly authorized $4 Preferred Stock
• Court: Court of Chancery of Delaware

38 A.2d 918

28 Del.Ch. 139

In the Matter of the Application of NORTHEASTERN WATER COMPANY (the name of which was formerly "Northeastern Water and Electric Corporation") for a determination, pursuant to Section 61 of the General Corporation Law, of the value of certain shares of its formerly authorized $4 Preferred Stock

Court of Chancery of the State of Delaware, New Castle

August 30, 1944

Clarence A. Southerland, of the firm of Southerland Berl & Potter, together with Shearman & Sterling and Archibald L. Jackson, all of New York City, for petitioner.

Caleb S. Layton, of the firm of Richards, Layton & Finger, together with Sullivan & Cromwell and Delano Andrews, all of New York City, for certain of the claimants; and with Lord, Day &amp Lord, of New York City, for other claimants.

H Newton White, Jr., of the office of Logan & Duffy, and Hall Hammond, of Baltimore, Md., for certain of the claimants.

OPINION

APPLICATION IN FORM OF PETITION under Section 61 of the Delaware Corporation Law, 44 Laws of Del. (1943), Chap. 125, Sec. 6, pp. 425-429, for a determination of the persons entitled to an appraisal of and payment for shares of the $4 preferred stock of the petitioner, Northeastern Water Company (the name of which was formerly Northeastern Water and Electric Corporation). The petitioner is the surviving corporation under a merger agreement between itself, Delaware Valley Utilities Company and Union Water Service Company. The merger became effective on November 30, 1943. The petition includes verified lists of the names and addresses of persons who have purportedly objected to the merger and demanded payment for their shares. An order upon the petition directed each person claiming to be entitled to payment to file a verified claim and notice of appearance within a certain period; authorized the petitioner to answer the claims, stating the grounds of all objections; fixed a time for a hearing upon the petition, claims and answers; directed notification to persons concerned by registered mail and by publication; and made various other directions relating to the above matters. Notice was given as required by the statute. Some 83 claims were filed. Petitioner answered each, raising objections. Heard on the petition, claims and answers, as amended.

PEARSON, Vice-Chancellor:

The corporation surviving a merger filed a petition for a determination of the persons entitled to an appraisal and payment of shares of its preferred stock, and for the appointment of an appraiser, pursuant to Section 61 of the Corporation Law. A considerable number of stockholders had filed purported objections and demands. To provide an orderly procedure for the adjudication of many matters in one proceeding, the order fixing a date for a hearing directed that persons asserting rights under the statute should file verified claims, and that the corporation might answer these, within a stated time, if it wished to object. Provision was made to divide the hearing into two parts, the first being called the "original hearing", and the second, the "adjourned hearing." The scope of the original hearing (the present stage of the proceeding) is limited by the order to a determination based upon the petition, claims and answers filed, without testimony or other proof. The main purpose of this hearing is to avoid needless proof by the immediate allowance of any claims as to which the corporation has raised no adequate defense; by the dismissal of those which fail to show a prima facie right under the statute; and by indicating those for which proof is necessary. The parties have agreed that certain of the claims should be set down for an "adjourned hearing" upon testimony and other proof. As to the remaining claims, disputed questions raised by the answers will now be considered.

1. Proof of validity of signatures to objections and demands. The petitioner's answer to most of the claims object upon the ground that petitioner has no knowledge or information sufficient to form a belief as to whether or not objections and demands received by it purporting to be signed by the claimants, respectively, were actually so signed. Petitioner asks for proof of authenticity. A person claiming the right to an appraisal and payment has the burden of showing that he is a stockholder within the statutory meaning, and that he has satisfied the conditions required of him for the perfection of that right. In re Universal Pictures Co., Inc., ante p. 72, 37 A.2d, 615, 618. To establish performance of these conditions, the claimants rely upon objections and demands which purport to be signed by them. No reason is apparent why the corporation should not be permitted to put them to their proof where it does not know the signatures to be valid, and hence, does not know that these particular objections and demands were made or adopted by these claimants. Where an answer to a bill of complaint denies knowledge of the truth of a material allegation, proof of such allegation is an essential element of the complaint's case. Consolidated F.I., Inc. v. Johnson, 21 Del.Ch. 417, 430, 192 A. 603, 609. A similar rule applies in the case of exceptions to claims in receivership proceedings. Accordingly, the claims here in question (not dismissed on other grounds) must be set down for hearing.

2. Claimants who assert the right to an appraisal and payment of old stock, but whose claims show that they now hold certificates for new stock issuable under the merger agreement: Claim of Charles H. Mellor, trustee for Barbara and Milton Chalmers. The claimant, as trustee under an agreement of trust, filed an objection and demand with respect to shares of the old stock of petitioner. However, annexed to his original claim were certificates for shares of new stock, which had been issued by the surviving corporation after the merger upon surrender to it of certificates for the old. Petitioner's original answer opposed the claim on the grounds, among others, that it was not for payment of old stock, and that the claimant had accepted the merger. On March 31, 1944, after the hearing, the claimant amended his claim, alleging that his certificates for old stock had been kept in the custody of a New York bank, pursuant to a letter of instructions. Continuing, the claimant asserts that on January 10, 1944, without authorization from claimant, the bank sent the certificates to petitioner's transfer agent for exchange for shares of new stock; and that although the certificates were not endorsed by claimant or accompanied by any instructions signed by him, and although the petitioner knew that claimant had previously made an objection and demand for payment, it wrongfully issued the certificates for the new shares which are annexed to the claim. In an amended answer, the corporation raised additional objections. By one of these, it questions the authority of the claimant, as trustee, to make the objection, demand and claim. Under our statutes, a stockholder of a merging corporation may accept the merger, and thus become bound by any lawful alteration of his rights which it prescribes. But, an objecting minority stockholder is not compelled to submit to the will of the majority to the extent of being forced into the status of a stockholder of the surviving company. Section 61 confers upon "any stockholder" of such corporation the right to elect to dissent from the merger, secure a valuation of his stock in money, and collect this as a debt due. Cole v. National Cash Credit Ass'n., 18 Del.Ch. 47, 156 A. 183; Porges v. Vadsco Sales Corporation, 27 Del.Ch. 227, 32 A.2d 148. It would seem unjustifiable to deny this right to a trustee-stockholder, in the absence of some provision in the particular trust instrument, or in the local law governing the administration of the trust, which is unequivocally inconsistent with the exercise of the right. Ordinarily, unless restricted by such means, a trustee who owns shares may exercise the powers conferred by stock ownership. 1 Restatement of the Law of Trusts, §§ 193, 231, Comment f. In the present trust agreement, there is no semblance of a restriction which could prevent the claimant from proceeding under the appraisal statute. It appears from the claim that the trust is governed by the laws of New York. It is alleged that nothing in these laws impedes claimant from participating in a proceeding under Section 61. However, the answer puts the claimant to proof of this allegation, and hence, the ultimate question of the trustee's authority cannot now be decided.

The claimant takes the position that his letter of instructions to the custodian did not authorize the latter to make the exchange. The purport of certain expressions in the letter are not altogether clear to me. It may be that at an adjourned hearing, the parties would see fit to introduce evidence to explain their meaning. A construction should be deferred until such evidence is offered, or until the matter is more fully argued by the solicitors.

If the exchange was authorized, the claim should be dismissed, and there would be no need to consider the further question whether the claimant ratified the exchange and accepted the merger. Petitioner argues that even if the exchange was unauthorized, ratification and acceptance are demonstrated by claimant's filing his original verified claim with new certificates attached, "alleging that the new certificates evidence 'the shares of stock for the valuation of which Claimant is entitled,'" and "failing to object, until the filing of the amended claim, to the action either of his bank depositary or of Petitioner in effecting the exchange." The amended claim was filed less than two months after the exchange. Petitioner does not allege that it has changed its position; nor object on...