McQuillen v. National Cash Register Co.

• Decision Date: 04 May 1939
• Docket Number: No. 2274.,2274.
• Citation: 27 F. Supp. 639
• Parties: McQUILLEN et al. v. NATIONAL CASH REGISTER CO. et al.
• Court: U.S. District Court — District of Maryland

27 F. Supp. 639

McQUILLEN et al. v. NATIONAL CASH REGISTER CO. et al.

No. 2274.

District Court, D. Maryland.

May 4, 1939.

COPYRIGHT MATERIAL OMITTED

Arthur Berenson, of Boston, Mass., and Samuel J. Fisher, of Baltimore, Md., for plaintiffs.

Piper, Watkins & Avirett (by James Piper and R. Dorsey Watkins), of Baltimore, Md., for National Cash Register Co.

Marbury, Gosnell & Williams (by William L. Marbury, Jr., and William L. Rawls), of Baltimore, Md., for Edward A. Deeds, Ezra M. Kuhns, Stanley C. Allyn, J. H. Barringer, and William Hartman.

Bartlett, Poe & Claggett (by J. Kemp Bartlett, Jr.), of Baltimore, Md., for Lee Warren James.

WILLIAM C. COLEMAN, District Judge.

This is a minority stockholders' suit against the National Cash Register Company and other defendants, originally fourteen in number, by which it is sought to have this Court declare null and void (1) an issue of stock by the company, and (2) an option given to Edward A. Deeds, chairman of its board of directors and executive committee, for the purchase of certain of the company's shares, in consideration of his services to the company.

This court has already rendered two written opinions in this proceeding, in addition to its rulings upon various motions. On December 14th, 1935, it was decided that since the National Cash Register Company is a Maryland corporation, this court had jurisdiction in rem to entertain the suit because the company's property, represented by certificates of stock, has a situs within the Maryland district, that is to say, at the corporation's domicile, which is, therefore, the appropriate place to settle disputes over the legality of the issuance of such stock; and that thus the provisions of Section 57 of the Judicial Code (28 U.S.C.A. § 118), providing for substituted service upon non-resident defendants in suits to remove any encumbrance, lien or cloud upon title to real or personal property, cognizable by the District Court in the district in which such property is situated, were applicable. See D.C., 13 F. Supp. 53. Again, on March 17th, 1938, this Court, following a hearing on various motions presented by defendants, some to dismiss the bill of complaint, as amended, in its entirety, and others to dismiss portions of it, decided that whereas the motions should be sustained with respect to the major portion of the allegations of the amended bill of complaint, nevertheless, plaintiffs were entitled to be heard on the merits with respect to that part of it which related to the two corporate acts above referred to. See 22 F.Supp. 867. The present opinion contains the Court's findings of fact and conclusions of law with respect to these two matters, a large amount of testimony having been taken, both in open court and by deposition, and extensive arguments of counsel having been heard, accompanied by the submission of briefs.

As already stated, originally, there were fifteen defendants, including the company, but in the course of the litigation, this court dismissed the suit for want of jurisdiction as to all defendants except the company and five individuals — S. C. Allyn, J. H. Barringer, Edward A. Deeds, William Hartman and Ezra M. Kuhns, who appear specially and only for the purpose of protecting the interests which they may have in any property within the Maryland District, pursuant to this court's prior decisions.

For the sake of clarity, this opinion will be divided into two sections. In the first, we will deal with the contested stock issuance, i. e. the issuance of 200,000 shares of stock known as "C" stock, in exchange for the 400,000 "B" shares outstanding; in the second, we will deal with the contested option to defendant Deeds.

Issuance and Exchange of the "C" Shares.

Since, in its opinion of March 17th, 1938, this Court dealt at considerable length with the details of the original capitalization and recapitalization of the National Cash Register Company, a repetition of many of these details may be here omitted. Suffice it to repeat, by way of introduction to the plaintiffs' claim to the effect that this stock transaction was irregular and invalid, that the National Cash Register Company was incorporated in January, 1926, with two classes of stock, "A" preferred, with an authorized issuance of 1,100,000 shares, and "B" preferred, with an authorized issue of 400,000 shares, both of these classes of stock being of no par value. By the company's charter, the "A" shares carried cumulative dividends of $3 per share, while the "B" shares carried a dividend of like amount but non-cumulative. Upon dissolution or payment of dividends in excess of $3 per share, the "A" and "B" shares were to be placed on a parity. The "A" and "B" stock had equal voting rights per share except for the election of directors, in which case the "B" shares had the right to elect a majority and the "A" a minority, so long as the company was not in default in the payment of two quarterly dividends on the "A" stock, or the net earnings for the previous fiscal year amounted to $3 per share of "A" stock. While any such default existed, each share of stock of each class had equal voting rights for directors. The corporate action of which the plaintiffs complain was taken at a special meeting of the stockholders of the company, duly called by the board of directors and held on December 15th, 1932. At that time the unpaid dividends on the company's "A" stock had accumulated to an exceedingly large amount, namely, $5,801,250, no dividends having been paid since the fall of 1931, due to the economic depression. At this meeting, it was voted by the combined vote of the holders of more than two-thirds of the shares of the "A" stock and "B" stock outstanding and entitled to vote, considered as a single class, to do the following three things: (1) To reduce the amount of issued capital stock from $42,000,000 to $24,420,000, and to authorize the filing of articles of reduction; (2) to amend articles 5th and 6th of the company's charter so as to authorize the issuance of 200,000 shares of "C" stock, with the same rights as to dividends, distribution on dissolution and voting rights as the "A" shares carried, this new stock to be issued in exchange for "B" stock at the rate of one share of "C" for 2 shares of "B" stock; and (3) to issue 238,000 new shares of "A" stock to the holders of record of "A" stock, pro rata, as a split-up.

The plaintiffs, by reason of trusteeships, owned at the time this suit was brought (July, 1934) and still own, 100 "A" shares of the company, for which they paid approximately $8000 in 1928 and 1929. In June, 1934, these shares had a market value of about $1,600, so plaintiffs claim they have lost about 80% of the cost price of the stock, regardless of dividend loss.

Briefly summarized, the gist of plaintiffs' claim of irregularity and illegality on the part of the defendants may be divided into three parts: (1) That the plan of this recapitalization was conceived in iniquity and unfairness to the "A" stockholders in that the company, through its officers and directors who owned or controlled the "B" shares, and less than two-thirds of the "A" shares, illegally dominated and brought about the issuance of the "C" shares, and their exchange for the "B" shares, thereby giving the "B" shareholders rights to which they were not entitled, and thereby in turn depriving the "A" shareholders of their rights; (2) that the votes of stockholders requisite for the accomplishment of these results was lacking at the meeting; and (3) that the documents essential to a lawful amendment of the charter, in order to accomplish these results, were irregularly executed.

The Court has reached the conclusion that there is no merit whatsoever in any of these contentions. For the purpose of presenting its reasons in as succinct a manner as possible, it will be helpful to consider the questions presented under the three following headings, in sequence: (1) The corporate action taken; (2) how it was taken; and (3) the authority by statute and charter to take it.

The corporate action taken. A statement of the three purposes of the special meeting of stockholders called for December 15th, 1932, has already been given. This meeting was called pursuant to action of the board of directors on November 18th, 1932. Under date of November 19th, 1932, a formal notice was sent to all stockholders of record, accompanied by a letter to which was appended a consolidated balance sheet of the company as of September 30th, 1932, and which contained the following statement:

"The plan, and its effects upon the outstanding Common A Stock and Common B Stock, may be summarized as follows:

"Common A. Stock. The 1,190,000 shares of A stock now outstanding including 90,000 shares issued for subsequently acquired property would be increased by 238,000 shares (20%), distributed as a split-up pro rata among the holders of the present A stock. A new class of stock would be authorized as Common C, entitled to the same rights per share as the A stock with respect to distributions on liquidation, voting and dividends, including dividends per share equal to dividends declared per share on the A stock as arrears. Arrears on the A stock now aggregate $5,801,250. The C stock would be authorized in the amount of 200,000 shares, all of which would be issuable in exchange for the 400,000 outstanding shares of B stock. Upon the completion of such exchange, and the retirement of all of the B stock, the A and C stocks would become and constitute a single class of Common Stock, entitled to elect all of the directors of the Company under all conditions.

"Common B. Stock. Holders of B stock who exchange such stock for C stock would surrender their right to participate in the election, under the conditions outlined below, of a majority of the directors; such holders would receive one-half share of C stock for each share of B stock, and would suffer a further diminution of...