Moore v. Splitdorf Elec. Co.

• Decision Date: 16 October 1933
• Docket Number: No. 71.,71.
• Citation: 168 A. 741
• Parties: MOORE et al. v. SPLITDORF ELECTRICAL CO.
• Court: New Jersey Supreme Court

168 A. 741

MOORE et al.

v. SPLITDORF ELECTRICAL CO.

No. 71.

Court of Errors and Appeals of New Jersey.

Oct. 16, 1933.

Appeal from Court of Chancery.

Suit by Robert H. Moore and others against the Splitdorf Electrical Company. From two separate orders made by the Vice Chancellor, the complainants appeal.

First order affirmed, and second order reversed, and record remitted for appropriate action.

Minturn & Weinberger, of Newark, for appellants.

McCarter & English, of Newark, for respondent.

PERSKIE, Justice.

This appeal brings up for review two orders, (1) August 15, 1932, and (2) September 13, 1932, made by Vice Chancellor Bigelow in the course of the proposed reorganization of the respondent company. The uncontradicted facts fully appear in the report of the special master and in the memorandum filed by the Vice Chancellor. The twenty-five grounds of appeal urged as constituting reversible error are condensed and argued under four points. They are in the following form:

1. The court erred in denying the appointment of a receiver in accordance with the prayer of the bill.

2. The court erred in continuing the existing officers and liquidating trustees.

3. The plan presented is not a fair and equitable one to creditors or owners of the debentures and is prejudicial to their interests.

4. The order that the complainants pay counsel fee and master's fee is illegal and unwarranted.

Points 1 and 2 are directed at the first order. We pass over these objections, for we think they are without merit.

The appointment of a receiver is not a matter of absolute legal right. It is a discretionary power. Sound discretion should be exercised by the court before any such appointment is made. The following are typical of the many cases so holding: New Foundland R. R. Construction Co. v. Schack, 40 N. J. Eq. 222, 1 A. 23; Kelly v. Kelly-Springfield Tire Co., 106 N. J. Eq. 545, 152 A. 166; Shonnard v. Elevator Supplies Co., 111 N. J. Eq. 94, 161 A. 684. There was no abuse of this sound discretion. We desire to make further observation that complainants offered no proof in this case. We, therefore, likewise pass over the further objections contained within the points aforesaid to this order which questions the propriety of the court's permitting the directors of the respondent company to act as its trustees in liquidation. Notwithstanding that practically all the directors of the new company were the same as those of the old company and represented both buyer and seller (Shanley v. Fidelity Union Trust Co., 108 N. J. Eq. 564, 138 A. 388), the proof was plenary and justified the finding that the price for the sale of a large part of the assets of the old company to the new company wns a fair price.

This brings us to the third point. Under this contention we believe there is presented the primary question involved on this appeal. That question is, whether in pursuance to a plan of reorganization which involved the sale of a large part of the assets of an insolvent company to a new company whose directors are practically the same as those of the insolvent company, but which sale upon inquiry was found to be fair and the plan of reorganization to the interest of both creditors and stockholders, a minority holder of debenture bonds of the admittedly insolvent corporation may be compelled against his will to surrender his debenture bonds and accept in lieu thereof stock in the new company without first being afforded the alternative of receiving his proportionate share of the proceeds of a conventional sale of all the property of the old company?

The plan, inter alia, contemplated that Edison-Splitdorf Corporation (the new company) would issue or cause to be transferred its corporate stock which consists of one class of common stock without par value, to the debenture holders and stockholders of Splitdorf Electrical Company (the old company) as follows:

(a) Each holder of $100 par value of debentures would receive two shares of the common stock of Edison-Splitdorf Corporation, and in addition thereto, the right to purchase for cash five shares of the said common stock at $5 per share.

(b) Each holder of twenty shares of common stock would receive one share of the common stock of the Edison-Splitdorf Corporation, and in addition thereto, the right to purchase for cash three shares of the said common stock at $5 per share. Provision was also made for fractional warrants for stock, etc.

Notwithstanding the conclusions of Vice Chancellor Bigelow, in which among other things he held, "The vice of the plan lies in the undue preference given stockholders," and that he would be compelled under the cases (Keen v. Maple Shade Land & Imp. Co., 63 N. J. Eq. 321, 50 A. 467; Trustees, etc., v. First National Bank of Ocean City, 87 N. J. Eq. 84, 99 A. 929) to enjoin the sale were complaint made by any creditor (the intervening complainants being stockholders only) who could be injured by it, nevertheless he was not unmindful of the troublesome question presented, for he further held: "Complainants further contend that they cannot be compelled against their will to become stockholders in the new company and that they are entitled, whatever may be their interest in the assets of the defendant, to be paid the value of that interest in lawful money. Their position seems to me to be sound, but it does not necessarily follow that the sale should be enjoined." The Vice Chancellor proceeds to answer the contention made and says: "Over 80% of the debenture holders and a great majority of the stockholders have approved the plan under consideration and are willing to accept their allotment of stock in the new company. No reason appears why they should be deprived of the benefits which they anticipate. The equity of complainants can be fully preserved by a modification of the plan whereby the stock applicable to them and which they are unwilling to take, will be issued by the new company to the trustees in dissolution. The trustees will then sell this stock for the best price they may obtain and pay the proceeds to complainant." The plan was ordered modified accordingly. Did the order so modified meet or cure the evil complained of? We think not. The gravamen of the complaint of the minority debenture holder lies, not in the fact that he cannot obtain some cash for his stock in the new company, which incidently included only part of the assets of the old company, but rather in that he was entitled as a matter of right, under the law, to the alternative of receiving his proportionate share of the proceeds of a conventional sale of all of the property of the old company.

We, therefore, approach the pertinent inquiry: Does the order confirming the plan of reorganization deprive the complainant of his rights in the premises?

In Lonsdale Securities Corporation v. International Mercantile Marine Company, 101 N. J. Eq. 554,139 A. 50, Vice Chancellor Bentley decided that, when the rights of preferred stockholders to share in a surplus fund to the exclusion of the common stockholders have become vested, equity will not permit majority stockholders to deprive nonconsenting preferred stockholders of their vested rights in said surplus fund. He says, on page 559 of 101 N. J. Eq., 139 A. 50, 51: "It has been urged that a proper spirit would cause these complainants to relinquish their strict legal rights in the common interest of the corporation and the other stockholders. Such an argument might well be addressed to the complainants by their fellow stockholders, but cannot be adopted by the court. It is trite to say that one may be generous with his own property, but it is scarcely generosity to deal lavishly with that of another. The fourth section of the existing certificate of incorporation of the defendant creates a contract between the defendant and the complainants by which the latter are clothed with certain property rights having a fixed, determinate value. In place of those rights it is intended to substitute others of a less valuable character, over the objection of the complainants. That they do object is conclusively shown by the filing of these bills. It is true that there would be placed in the hands of the owners of the new shares of stock, issued to replace the preferred shares intended to be retired, a greatly increased power of franchise, but the complainants neither seek, nor wish, to surrender their present rights for the one offered in their stead, and it is beyond the power of the corporation, this court or the Legislature to compel it." And again on page 560 of 101 N. J. Eq., 139 A. 50, 52 in the same case he further says: "Not only would the change result in an injury to the future, as well as the past, dividend rights of the preferred stockholders, but it would also interfere with and materially diminish or abolish vested rights."

The case of Outwater v. Public Service Corporation 103 N. J. Eq. 461, 143 A. 729, affirmed 104 N. J. Eq. 490, 146 A. 916, sheds some illuminating light on the rights of stockholders. In that case, Vice Chancellor Backes, on page 465 of 103 N. J. Eq., 143 A. 729, 731, stated: "The complainants' resistance and their contention that they ought not to be compelled to exchange their first lien securities for gilt-edged second lien security is not without appeal, and were the decision to rest here there would be some embarrassment in squaring the merger with fairness. But there is a more serious inequity; the preferred stock lacks permanency. It is redeemable within three years at the option of the Electric & Cas Company. Thus the merger, in effect, is nothing less than a forced sale by the majority stockholders to itself at a price fixed by it and payable at its pleasure. The preferred stock is but the equivalent of a 6 per cent. promissory note payable in three years at the option of the buyer. The merger legislation countenances no such perversion of the contractual obligations of stockholders inter...