Keller v. Wilson & Co. Inc

• Decision Date: 24 May 1935
• Citation: 180 A. 584,21 Del.Ch. 13
• Parties: JOSEPH KELLER and EDNA RIVES, on behalf of themselves and all other stockholders of defendant, Wilson & Co. Inc., similarly situated. v. WILSON & CO. INC
• Court: Court of Chancery of Delaware

180 A. 584

21 Del.Ch. 13

JOSEPH KELLER and EDNA RIVES, on behalf of themselves and all other stockholders of defendant, Wilson & Co. Inc., similarly situated. v. WILSON & CO. INC

Court of Chancery of Delaware, Kent

May 24, 1935

STATEMENT OF THE CASE. The complainants are the holders of Class A stock of the defendant. They challenge the legality of an amendment to the defendant's certificate of incorporation which the stockholders assumed to adopt on February 19, 1935, and which was duly filed on February 23 1935, by which a plan of recapitalization of the defendant was sought to be effectuated.

The Class A stock which was without par value is changed by the amendment into common stock on the basis of five shares of common for one of Class A. Before the change, the Class A stock was preferred as to dividends in the amount of five dollars per share over the common stock, and the dividends after a certain date were cumulative. When the amendment was adopted on February 19, 1935, dividends had accumulated on the Class A stock in the amount of $ 21.75 per share. The amendment, by converting the Class A stock into common stock not only destroys the dividend preference of that stock as the same related to the future, but undertakes to wipe out the preference as it relates to the past and accumulated dividends.

Since the amendment was adopted, the defendant has declared a dividend on the common stock payable June 1, 1935, without having first paid or set aside for payment the accumulations on the old Class A stock. Common stock which was outstanding before the amendment participates on a per share basis in the declared dividend equally with common stock issued to the old Class A stockholders in lieu of their old stock.

The prayers are (a) that the amendment be decreed "to be null and void only, however, in so far as it purports to convert plaintiff's aforesaid shares of Class A stock of the defendant and the accumulated unpaid dividends thereon into five shares of common stock of said dividend, without paying said accumulated dividends," and (b) that the plaintiffs be decreed to be entitled to be paid all accumulated and unpaid dividends on their said Class A stock of said defendant, and an additional current dividend at the rate of $ 5.00 per annum on said Class A stock before any dividend or dividends whatsoever are paid to the holders of the common stock.

The defendant has demurred to the bill. In disposing of the demurrer the following opinion was filed by the Chancellor.

Demurrer sustained.

Charles L. Terry, Jr., of the firm of Terry & Terry, and Abraham L. Pomerantz, of New York City, for complainants.

Hugh M. Morris and Edwin D. Steel, Jr., for defendant.

OPINION

THE CHANCELLOR:

The question in this case is one of corporate power. The bill does not attack the fairness of the recapitalization. The sole contention is that the corporation has no lawful power to destroy the preferential right of the Class A stock to its old dividend privilege. That the right to the preference in its future operation may be lawfully altered is not controverted by the complainants' solicitors. Morris v. American Public Utilities Co., 14 Del.Ch. 136, 122 A. 696, 703, settles that question in favor of the power to effect the change.

The question here is whether the right to the payment of past dividend preferences which have accrued can be taken away by amendment to the charter duly adopted in accordance with the terms of the statute. The Morris Case, just cited, which was commented on with approval by the Supreme Court of this State in Penington v. Commonwealth Hotel Construction Corp., 17 Del.Ch. 394, 395, 155 A. 514, 75 A. L. R. 1136, decided that there was no power in a corporation under the then existing law to so amend its charter as to destroy the accrued right of preferred stockholders to be paid all accumulated dividends in arrear at the date of the amendment, before any dividends could be paid on existing junior stock.

That which the corporation sought to accomplish in that case was reposed for its justification on Section 26 of the Act as the same existed in 1923 [Rev. Code 1915, § 1940, as amended by act March 20, 1917 (29 Del. Laws c. 113, § 12)] and this court held that while "preferences" could be altered by way of amendment of the corporate charter, yet the right to be paid cumulative dividends which had been matured by time prior to the proposed amendment was not a "preference" within the meaning of the section.

In 1927, however, Section 26 (Rev. Code 1915, § 1940) was amended by the Legislature (35 Del. Laws, c. 85, § 10) so as to broaden to a very material extent the power of self-amendment which corporations created under the act might exercise. I think there can be no doubt on this--that the legislative amendment of 1927 was purposely adopted in order to obviate the consequences of the Morris Case. In that year Section 26 of the general act under which the defendant corporation was created was amended so as to permit corporations to exercise a power of amendment of their articles of incorporation, inter alia, "by increasing or decreasing its authorized capital stock or reclassifying the same * * * or * * * by changing the * * * preferences, or relative, participating, optional, or other special rights of the shares." The amendment, in view of the Morris Case which provoked it, certainly was intended to embrace within its scope something more than mere "preferences." It was intended to authorize amendments affecting cumulated dividends as well, such being the type of amendment which the Morris Case presented. Any corporation which is entitled to exercise the power of self-amendment conferred by Section 26 as it has existed since 1927, has the power to amend its certificate of incorporation by destroying the right of a cumulative preferred stock to be paid its arrearages of dividends, provided of course the requisite number of shares of the affected stock give their consent. Yoakam v. Providence Biltmore Hotel Co., (D. C.) 34 F. (2d) 533, 543-544; Harr, et al., v. Pioneer Mechanical Corp., (C.C.A.) 65 F. (2d) 332; certiorari denied, 290 U.S. 673, 54 S.Ct. 92, 78 L.Ed. 581; Lowell v. United Milk Products Corp., et al., (D. C. N. D. Ohio, E. D. 1934).

In Morris v. American Public Utilities Co., this court observed that there is...