Morris v. American Public Utilities Co.

• Decision Date: 23 November 1923
• Citation: 14 Del.Ch. 136,122 A. 696
• Court: Court of Chancery of Delaware
• Parties: HENRY S. MORRIS, OSCAR HECKER and LEWIS J. LINK, v. AMERICAN PUBLIC UTILITIES COMPANY, a corporation organized and existing under the laws of the State of Delaware

122 A. 696

14 Del.Ch. 136

HENRY S. MORRIS, OSCAR HECKER and LEWIS J. LINK, v. AMERICAN PUBLIC UTILITIES COMPANY, a corporation organized and existing under the laws of the State of Delaware

Court of Chancery of Delaware, New Castle

November 23, 1923

[Copyrighted Material Omitted]

INJUNCTION BILL. American Public Utilities Company, the defendant, was incorporated under the General Corporation Law of this State (Revised Code 1915, § 1915 et seq.) on June 8, 1912. The amount of its authorized capital was fixed at $ 40,000,000, divided into 400,000 shares, of the par value of $ 100 each. Of this amount 200,000 shares were preferred stock and 200,000 shares common stock. By the certificate of incorporation the following provision was made with respect to the rights and privileges of the preferred stock:

"The holders of the preferred stock are entitled to receive, when and as declared from the surplus or net profits of the corporation, yearly dividends at the rate of, but never exceeding, six per centum per annum on the par value thereof payable quarterly, on dates to be fixed by the by-laws. The dividends on such preferred stock shall be cumulative, and shall be payable before any dividends on the common stock shall be paid or set apart, so that if in any year dividends amounting to six per centum shall not have been paid on such preferred stock, the deficiency shall be payable before any dividends shall be paid upon or set apart for the common stock. * * * The right and privilege is reserved to the corporation on any dividend payment date to redeem all or any part of the preferred stock of the corporation by paying to the holders thereof one hundred and five dollars ($ 105) per share and the amount of all cumulative dividends accrued and unpaid thereon at the date fixed for such redemption."

The complainants are holders of 375 shares of the preferred stock of the defendant corporation, the same having been originally issued by the defendant prior to April 1, 1918. Since the filing of the bill other parties complainant have been permitted to intervene. The interveners hold a total of 513 shares of the preferred stock.

Since the organization of the defendant, preferred dividends of six per cent. have been declared and paid on the preferred stock outstanding for each of the years 1912 to 1917, inclusive. Commencing on April 1, 1918, the defendant declared preferred dividends of one and one-half per cent. payable in scrip for each of five quarters. The total dividends payable in scrip equaled seven and one-half per cent., of which three per cent. was paid off on April 1, 1923, leaving a balance thereof unpaid of four and one-half per cent.

No dividends have been declared and paid since April 1, 1919 either in cash or otherwise, down to June of the present year. On the preferred stock issued prior to April 1, 1919, in addition to the balance of four and one-half per cent. due in scrip, dividends in arrear and unpaid have accumulated in the total amount of twenty-four per cent. up to April 1, 1923.

A meeting of the stockholders of the defendant corporation was held at Grand Rapids, Michigan, on February 19, 1923, at which a proposed amendment to the certificate of incorporation was adopted whereby paragraph four of the original certificate was stricken out and a new paragraph four substituted therefor. The paragraph thus dealt with was the paragraph which defined the authorized capital of the company, the shares into which it was divided, and the number and classes of stock, together with the rights, preferences and restrictions of each class. The amendment received the support of 27,851, shares out of 44,659 shares of preferred stock outstanding and 21,512 shares out of 28,240 shares of common stock then outstanding. No shares of common stock and 417 shares of the preferred stock voted in opposition to the amendment.

The amendment is a lengthy one and only the substance and effect thereof will be stated. Whereas, before, the classes of stock consisted of common and a single kind of preferred, now under the amendment the classes of stock consist of common and three kinds of preferred. The total authorized capital remains as before at $ 40,000,000, consisting of 400,000 shares of the par value of $ 100 each. The three kinds of preferred stock are designated by the amendment as "prior preferred stock," "participating preferred stock" and "six per cent. preferred stock."

The prior preferred stock is entitled to a seven per cent. cumulative dividend commencing from April 1, 1923, before dividends any other class of stock are paid, and is entitled on dissolution to be first paid off at par and accumulated dividends before anything is paid on any other class of stock. It is redeemable at any time at the option of the company in whole or in part at $ 110 and accrued dividends. The amendment authorized 100,000 shares of this class of stock of the aggregate par value of $ 10,000,000.

The participating preferred stock is entitled to dividends at the rate of four per cent. , commencing April 1, 1923, for the year 1923, five per cent. for the year 1924, six per cent. for the year 1925, and seven per cent. for the year 1926 and each year thereafter. The right to these dividends is subordinate to the dividend rights of the prior preferred stock, but takes precedence over the six per cent. preferred stock and the common stock. In case the earnings in any year are such as to justify a dividend to the common stock as high as six per cent. and the same is declared, then the participating preferred stock is further entitled to participate in such earnings to the extent of an additional one per cent. This class of preferred stock on dissolution receives par and accumulated dividends next after the prior preferred stock and before any other class of stock receives anything. It is redeemable at the option of the company either in whole or in part at $ 105 and accrued dividends. The amendment authorizes 100,000 shares of this class of stock of the aggregate par value of $ 10,000,000.

The six per cent. preferred stock, after the dividends of the two preceding classes are provided for, is entitled to a dividend of six per cent. before any dividend may be paid to the common stock. This dividend is cumulative and commences from April 1, 1923. It is entitled on dissolution, after the preferences of the two preceding classes are satisfied, to receive par and accrued dividends, and may be redeemed at any time at the option of the company, either in whole or in part at par and accrued dividends. The amendment authorizes 50,000 shares of this class of stock of the aggregate par value of $ 5,000,000.

The amendment then authorizes 150,000 shares of common stock of the aggregate par value of $ 15,000,000, which of course is subordinate to the rights of all three classes of preferred stock, both in the matter of dividends and on dissolution.

Having thus reconstructed the authorized capital of the company, the amendment proceeds to fit the old preferred stock into the new scheme by providing that all such preferred stock outstanding at the date of the adoption of the amendment "shall thereafter for all purposes be considered six per cent. preferred stock, with the rights and preferences hereinbefore in this section stated"; that is to say, with the rights and preferences in substance as above outlined. It is further provided by the amendment that holders of outstanding preferred stock may surrender the same and for each share so surrendered together with cash or dividend scrip in the amount of $ 7.50, receive in exchange eight-tenths of a share of the new participating preferred stock.

By the amendment no class of preferred stock is entitled to vote at meetings of stockholders, except when it is proposed to amend the certificate in a way which will affect the preferences of a particular class, in which event the holders of stock of that class may vote.

As stated, the amendment making the foregoing changes in the certificate was adopted at a stockholders' meeting. The bill assails the legality of the meeting because of alleged defects in the call and notice thereof, but at the argument this aspect of the bill was abandoned. It is admitted that the requisite majority of both the outstanding preferred stock and of the common stock voted in favor of the amendment. The bill also attacks the right of the corporation under the law of this State to adopt by way of amendment to its certificate such an alteration in its capital structure as the amendment in question accomplishes.

None of the complainants or interveners voted for the amendment, nor have any of them agreed or assented thereto. No question is made as to the competency of the complainants or interveners to raise the question involved.

After the adoption of the amendment, the directors of the corporation on June 16, 1923, declared a quarterly dividend of one and three-fourths per cent. on the prior preferred stock and a quarterly dividend of one per cent. on the participating preferred stock, both payable on July 1, 1923. No provision was made for the payment of the accrued and unpaid dividends upon the old cumulative preferred stock held by the complainants.

The bill alleges that the amendment above referred to is void and of no binding effect upon the complainants and others similarly situated; but if, however, the amendment should be held to be legally adopted and otherwise valid, yet the bill alleges the corporation has no right under the law to declare and pay dividends upon any of the new classes of preferred stock until it has first declared and paid the accrued dividends due on the old preferred stock held by the complainants.

The prayer is that the amendment be declared void as against...