Johnson v. Bradley Knitting Co.

• Decision Date: 27 June 1938
• Citation: 280 N.W. 688,228 Wis. 566
• Parties: JOHNSON v. BRADLEY KNITTING CO. et al.
• Court: Wisconsin Supreme Court

228 Wis. 566

280 N.W. 688

JOHNSON

v.BRADLEY KNITTING CO. et al.

Supreme Court of Wisconsin.

June 25, 1938.

Dissenting Opinion June 27, 1938.

Appeal from a judgment of the Circuit Court for Walworth County; Jesse Earle, Judge.

Modified and affirmed.

FOWLER, FRITZ, and FAIRCHILD, JJ., dissenting.

Action commenced December 31, 1936, by appellant who is a stockholder of the defendant, Bradley Knitting Company, to restrain said company and its officers from carrying out a plan of reorganization through certain amendments of its articles which it is alleged would materially affect plaintiff's rights as a stockholder of both common and preferred stock in said company. Case was tried to the court, resulting in findings of fact and conclusions of law favorable to the defendants' contention that the amendments were valid and binding upon the plaintiff. Judgment was entered October 18, 1937, dismissing the complaint on the merits with costs. From this judgment, the plaintiff appeals.

The defendant company was originally organized in 1903 under the name of Globe Knitting Mills with an authorized capital stock of $50,000, consisting of 500 shares of $100 each. The articles of organization provided that they might be amended by a resolution adopted at any meeting of the stockholders by a vote of at least two–thirds of all the stock then outstanding. In 1908, the articles of the Globe Knitting Mills were amended, changing its name from “Globe Knitting Mills” to “Bradley Knitting Company”. In 1911, Article Third (relating to capital stock) was amended, increasing the capital stock to $450,000, of which $300,000 was to be common stock and $150,000 preferred stock, to consist of 4,500 shares of the face or par value of $100 each. As to the preferred stock, the amendment provided: “Said preferred stock shall receive out of the profits or net earnings of the company an annual, cumulative dividend of seven per cent of said face or par value, before any dividends are paid upon the common stock, but the holders of such preferred stock shall not be entitled to vote at the meetings of the stockholders of the company. The preferred stock shall not be entitled to any dividends in excess of said seven per cent and arrears thereof. Said preferred stock shall also have preference over the common stock, not however, exceeding the par value thereof, in the distribution of the corporate assets:–and shall be redeemable at the option of the company on or after February 1, 1914, at $105 per share, and accrued dividends, and on or after February 1, 1921, at par and accrued dividends, in such manner and upon such notice as the By–Laws may provide.”

In 1916, the articles were again amended, increasing the capital stock from $450,000 to $1,000,000 to consist of $500,000 of common stock and $500,000 of preferred stock. The privileges and restrictions upon the preferred stock were the same as those relating to the preferred stock above quoted, except the amendment provided that it was redeemable at the option of the company, on or after February 1, 1919, at $105 per share and accrued and accumulated dividends, and on or after February 1, 1922, at $103 per share and accrued and accumulated dividends.

The articles were again amended in December, 1919, increasing the capital stock from $1,000,000 consisting of $500,000 of preferred stock and $500,000 of common stock, to $1,500,000 of 7% cumulative first preferred stock and $500,000 of 7% second preferred stock, so that at the time appellant purchased his stock from the defendant company, the articles of organization of said company contained substantially the following provisions with reference to the capital stock of the corporation:

(1) Authorized capital stock, $2,000,000, consisting of 15,000 shares of 7% cumulative first preferred stock, 5,000 shares of 7% second preferred stock and 20,000 shares of no–par common stock.

(2) First preferred stock is subject to redemption by lot at $110 per share, plus accumulated dividends.

(3) The company covenants, commencing with the year 1922, to set aside out of net profits, after paying first preferred dividends and prior to paying any other dividends, an annual sinking fund of 3% of the first preferred stock then outstanding, to be used for the purpose of redeeming the first preferred stock.

(4) The company covenants to maintain at all times net quick assets equal to 120% of the par value of the outstanding first preferred stock.

(5) The company covenants that it will not, while any preferred stock is outstanding, create any mortgage or any other encumbrances on any of its properties, except purchase money mortgages or liens on afteracquired property, without the consent of three–fourths in amount of the first preferred stock.

(6) No dividends are to be paid on the second preferred stock until the sinking fund provision has been met, and dividends to date paid on the first preferred, and unless the remaining quick assets equal 120% of the value of the first preferred stock outstanding.

(7) Dividends on second preferred stock shall be noncumulative so long as any of the first preferred stock is outstanding. Upon retirement of the first preferred stock, the second preferred succeeds to all of its rights and privileges.

(8) The preferred stocks have no voting power unless four quarterly dividends are unpaid, whereupon voting power passes exclusively to the preferred stocks during the default.

(9) If any surplus net profits remain after meeting the dividends and other requirements hereinabove set forth for the preferred stocks, the common stock is entitled to a dividend of not to exceed $7 per share. Any surplus net profits after paying the common stock $7 per share is divided equally between the common stock and the second preferred stock until the second preferred stock receives $10 per share as a dividend. After a dividend of $10 per share to the second preferred stock, all remaining surplus profits go to the common stockholders.

(10) Upon liquidation, dissolution or winding up of the corporation, the proceeds after payment of debts go first to pay the first preferred stockholders $100 per share, second to pay the second preferred stockholders $100 per share and the balance, if any, to the common stockholders.

All of Article Third, setting forth the rights of the three classes of shareholders, was printed on each of the plaintiff's certificates of stock.

Prior to December, 1936 (the time when the challenged amendments were made), the company had outstanding 15,501 shares of no–par common stock, 9,986 shares of 7% cumulative first preferred stock of $100 par value, and 4,824 shares of 7% non–cumulative second preferred stock of $100 par value, of which appellant owned 1,900 shares of the common, 86 shares of the first preferred and 335 shares of the second preferred. He acquired the 86 shares of first preferred at various time between January 7, 1921, and January 9, 1931. He acquired the 335 shares of second preferred at various times between February 2, 1920, and March 19, 1929. He acquired all of his common stock prior to October 5, 1929.

The substance and effect of the challenged amendments are as follows:

(1) Reducing the future dividend rate on first preferred from 7% to 5%.

(2) Changing ratios of net quick assets to the par value of outstanding first preferred from 120% to 60%.

(3) Reducing the percentage of profits to be set aside annually as a first preferred sinking fund from 3% to 2%.

(4) Offering holders of first preferred a convertible dividend warrant having a face value of $20 is discharge of the accumulated dividends on each share in the amount of $35 if accepted.

(5) Increasing the common stock from 20,000 shares to 50,000 shares without giving present common stockholders their preemptive right to purchase a sufficient quantity thereof to maintain their relative voice in the affairs of the company.

More than 75% of each class of stock voted in favor of the amendment. The appellant and one other small stockholder were the only ones who voted against the amendment. The trial court's findings cover the facts are indicated and further found: “That plaintiff has suffered and will suffer no substantial injury from the proposed amendment of the Articles of Organization whose validity is challenged herein.”

As conclusions of law, the court found:

“(1) That at all times material herein Section 1 of Article XI of the Constitution of Wisconsin and Sections 180.07 and 182.13 of the Wisconsin Statutes were and are in law a part of the Articles of Organization of Bradley Knitting Company.

“(2) That said Statutes grant the power to make the challenged amendments to the Articles of Organization involved herein, and that no constitutional rights of plaintiff are violated because such statutes were and are a part of said articles.

“(3) That the matter of dividend warrants found in Finding 4 hereof upon the First Preferred stock is not involved in this controversy for the reason that the action of a stockholder in accepting the offer of said warrants is voluntary and the rights of a non–accepting stockholder are not before the court in this action.

“(4) That plaintiff has not established sufficient injury from the challenged amendment in the Articles of Organization to entitle him to the injunctive relief sought.”

Poss, Toelle & Schuler, of Milwaukee (Benjamin Poss and Joseph P. Brazy, both of Milwaukee, of counsel), for appellant.

Jeffris, Mouat, Oestreich, Wood & Cunningham, of Janesville, for respondents.

MARTIN, Justice.

The appellant contends that the court erred:

(1) In holding that our statutes permit a corporation to amend its articles as indicated in the foregoing statement of facts against his objections.

(2) In holding that the matter of wiping out accrued dividends on the first preferred stock was not before the court in the present action.

(3) In holding that the plaintiff has not suffered and will not suffer sufficient injury...