Johnson v. Lamprecht
| Decision Date | 18 May 1938 |
| Docket Number | 26847. |
| Citation | 133 Ohio St. 567,15 N.E.2d 127 |
| Parties | JOHNSON et al. v. LAMPRECHT et al. |
| Court | Ohio Supreme Court |
Syllabus by the Court.
1. An optional plan of recapitalization of a corporation, which provides that preferred stockholders may either retain their stock or exchange it for a new prior preferred stock by waiving their right to accumulated and unpaid dividends, in the absence of fraud, will not be enjoined in an action by minority stockholders if the plan does not violate the statutes or provisions of the articles of incorporation.
2. The provisions of section 8623-22, General Code, authorize the exchange of old stock for new stock in a corporation.
3. When there is a change in the terms and conditions of a stock by reason of an amendment to the articles of incorporation dissenting shareholders have a remedy under the provisions of section 8623-72, General Code. If fraud or illegality is found in the enactment of the amendment, the remedy under that section is not exclusive.
The National Refining Company, an Ohio corporation, on October 8 1936, submitted to its shareholders a plan for recapitalization. On December 9, 1936, the plaintiffs, who were minority holders of the preferred stock, instituted this action to enjoin the directors of the company from placing the plan in operation, and prayed for a mandatory injunction to compel the corporation to declare and pay a dividend on the preferred stock.
Thereafter the board of directors of the National Refining Company did declare a dividend of $8 per share, payable December 21, 1936, to the preferred shareholders of record at the close of business December 14, 1936.
On December 22, 1936, an amended plan of recapitalization was submitted to the shareholders of the National Refining Company. The terms of the amended plan are identical with the former plan submitted, except the payment of the dividend declared was taken into consideration.
The amended plan of recapitalization contemplated an amendment to the corporate charter which was voted upon at a special meeting held January 19, 1937, in Cleveland, Ohio. At that time there were issued and outstanding 49,864 shares of noncallable 8 per cent. preferred stock, and 463,295 shares of common stock. Of this number, 34,891 shares of preferred stock and 398,310 shares of the common stock were voted in favor of the amendment, which constituted a majority of more than two-thirds of the holders of each class of stock. The amendment was therefore declared adopted.
On February 18, 1937, the plaintiffs, who owned 2,628 shares of the preferred stock, and who had not voted in favor of the amendment to the articles of incorporation which sought to carry out the amended plan of recapitalization, filed an amended and supplemental petition seeking to enjoin the action of the board of directors, as well as praying that a dividend be declared.
The articles of incorporation, in reference to the preferred stock, provide as follows:
'(1) The common stock shall be subordinate to the rights of the preferred stock, except that both preferred and common stock shall have equal voting powers.
'(2) The corporation shall not be at liberty, without the consent in writing first obtained of the holders of two-thirds (2/3) in amount of the preferred stock issued and outstanding----
'(a) To create or issue any other or further shares ranking in any respect pari passu with or in priority to the aforesaid issue of preference shares.
'(b) Nor to create any charge except arising in the ordinary course of business and necessitated thereby, upon the net profits of the corporation which shall not be subordinate to the rights of the preference shares.
'(c) Nor to reserve a surplus fund which shall not be chargeable with the payment of the accrued dividend on the preference shares.
'(3) The said preference shares shall carry and be entitled to a fixed cumulative preferential dividend at the rate of, but never exceeding eight per centum (8%) per annum on the par value thereof, and such dividend shall be declared quarterly in January, April, July and October in each year, or at such other times as the board of directors shall see fit and determine.
'If in any year dividends amounting to eight per centum (8%) per annum shall not be paid on such preferred stock, the deficiency shall be a charge on the net profits and be payable, but without any interest, Before any dividends shall be paid upon or set apart for the common stock.
'(4) The balance of the net profits of the corporation after the payment of said cumulative dividend at the rate of eight per centum (8%) per annum to the holder of the preferred stock may be distributed as dividends among the holders of the general or common stock, as and when the board of directors shall in their discretion determine.' (Italics ours.)
The amendment adopted provided for the issuance of 66,500 shares of prior preferred stock without par value, 50,000 shares of preferred stock with a par value of $100 per share, and 1,200,000 shares of common stock. The prior preferred stock was to be redeemable at $105 per share.
The amended plan of recapitalization proposed that holders of the preferred stock who desired to exchange their 8 per cent. stock would receive in exchange one and one-third shares of the new prior preferred callable stock, and three-fourths of a share of common stock. If the holders of the preferred stock did not desire to make the exchange, they were to be permitted to retain their 8 per cent. preferred stock, which, while it would be preferred to the common, would be secondary to the prior preferred stock to be issued.
After the $8 dividend was declared, and prior to the adoption of the plan, there were accumulated and unpaid dividends on each share of the old preferred stock amounting to $18 at the end of 1936. An additional $2 dividend was due January 1, 1937. The three-quarters of a share of common stock was conceded to be worth approximately $6.
The admitted purpose of the amendment adopted by the corporation was to eliminate the payment of the $14 of accumulated and unpaid dividends. On December 31, 1929, the company had a surplus, according to its books, of $6,985,713.18 and cash assets of $4,877,933.25. On December 31, 1935, the surplus was $2,263,334.50 and the cash available $2,347,730.57.
The purpose of the plan was set forth in the original letter to the stockholders from the president of the company wherein it is said:
In the court of common pleas the plan was enjoined although the prayer that a dividend be declared was denied. On appeal on questions of law and fact to the Court of Appeals, judgment was rendered in favor of the defendants and the injunction dissolved.
A motion to certify the record was allowed by this court.
M. B. & H. H. Johnson, John H. Watson, Jr., John T. Scott, and Robert W. Wheeler, all of Cleveland, for appellants.
Tolles, Hogsett & Ginn, William B. Cockley, and Louis S. Peirce, all of Cleveland, for appellees.
The sole question is whether the amended plan of recapitalization of the National Refining Company, which was adopted by more than two-thirds of the shareholders, is of such a character that a court of equity should prevent it from being placed in operation at the instance of minority holders of the present preferred stock.
If the plaintiffs, as minority stockholders, make the exchange proposed, they will receive one and one-third shares of a 6 per cent. prior preferred stock for their present 8 per cent. preferred stock. The stipulated income yield on the investment will, therefore, be the same after the exchange as before .
However, in place of the right to receive $20 in unpaid and accumulated dividends now past due, by making the exchange the stockholder will receive only three-quarters of a share of common stock, which was conceded to have a value of $6. The net loss to those who make the exchange will be approximately $14 per share. In addition, the preferred holder will have to surrender a noncallable stock for one which may be redeemed.
The court of common pleas held that 'the plan if adopted would destroy the rights of the holders of the presently existing preferred stock to the accumulated and unpaid dividends.' In reaching this conclusion the court said:
If the amended plan of recapitalization compelled the preferred shareholder to make the exchange and thereby suffer not only a loss of approximately $14 per share, but also have a callable stock substituted for a noncallable one, we would have serious doubts as to the validity of such a proposal.
It is generally held that, when the statutes and articles of incorporation permit, a prior preferred stock may be issued upon obtaining the vote required either by the statute or articles. See Davis v. Louisville Gas & Electric Co., 16...
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