Peters v. United States Mortgage Company

• Court: Court of Chancery of Delaware
• Writing for the Court: THE CHANCELLOR
• Citation: Peters v. United States Mortgage Company, 13 Del.Ch. 11, 114 A. 598 (Del. Ch. 1921)
• Decision Date: 20 July 1921
• Parties: WILLIAM R. PETERS, v. UNITED STATES MORTGAGE COMPANY, a corporation of the State of Delaware, HARRY W. DUBISKE, H. W. DUBISKE & COMPANY, a corporation of the State of Delaware, WALTER LUTRINGHAUS, CHARLES D. HOWE, OTTO E. FREUND, H. T. SNELL, R. C. SMITH, A. O. EBERHART and H. J. FRANK

114 A. 598

13 Del.Ch. 11

WILLIAM R. PETERS, v. UNITED STATES MORTGAGE COMPANY, a corporation of the State of Delaware, HARRY W. DUBISKE, H. W. DUBISKE & COMPANY, a corporation of the State of Delaware, WALTER LUTRINGHAUS, CHARLES D. HOWE, OTTO E. FREUND, H. T. SNELL, R. C. SMITH, A. O. EBERHART and H. J. FRANK

Court of Chancery of Delaware, New Castle

July 20, 1921

INJUNCTION BILL. The complainant, an owner of shares of the capital stock of the defendant, United States Mortgage Company, by his bill seeks relief against that company, its officers and directors, who are made parties defendant, Harry W. Dubiske, who it is alleged owns a controlling interest in the company, and H. W. Dubiske and Company, a corporation of this state, engaged in business in Chicago, Illinois, as agent, or broker, "for the sale of stock of corporations on commission."

Among the matters complained of is a call for a special meeting of stockholders on July 21, 1921, for the purpose of considering a proposed amendment to the charter of the United States Mortgage Company, which it is alleged will seriously affect preferred stockholders, and the payment of a dividend declared June 20, 1921, of three and one-half per cent. on the preferred and common stock, alleged to have been unlawfully declared. As to these two matters temporary relief is sought, and upon presentation of the bill of complaint the Chancellor ordered a rule requiring the defendants to show cause why a preliminary injunction should not be issued restraining the submission to the stockholders' meeting of the proposed amendment to the charter, and restraining the payment of the dividend.

The rule was heard on bill and affidavits filed on behalf of the parties. The facts essential to the decision of the questions raised at the argument are sufficiently stated in the opinion of the Chancellor.

Present rule discharged, and the restraining order issued vacated.

Daniel O. Hastings, for the complainant.

Herbert H. Ward and Robert H. Richards, for the defendants.

OPINION

THE CHANCELLOR

The bill seeks inter alia to enjoin the defendants (1) from submitting to the stockholders of United States Mortgage Company for their approval a certain proposed amendment to the certificate of incorporation of said company; and (2) from paying a dividend on the preferred and common stock of said company, declared on June 20, last, but not yet paid.

1. The certificate of incorporation, in the fourth paragraph thereof, defines the authorized capital to be five million dollars, divided into fifty thousand shares of the par value of one hundred dollars each, of which two million dollars shall be common stock and three million dollars shall be preferred stock. The preferred stock is entitled to receive dividends at the rate of seven per cent per annum, and these dividends are made cumulative. After setting apart all cumulative dividends on the preferred stock, the common stock may receive from the surplus or net profits dividends at the rate of seven per cent. yearly. After these dividends have been declared and become payable the paragraph provides that the remaining surplus, or net profits, is to be divided in certain designated proportions between a surplus account, and the preferred and common stockholders.

The directors have called a special meeting of stockholders to be held on the twenty-first day of July, 1921, to-morrow, at which they purpose to submit for consideration a proposed amendment to the certificate of incorporation, which amendment would strike out the fourth paragraph, above described, and insert in lieu thereof a new fourth paragraph. The proposed new paragraph in substance alters the original in the following particulars: The preferred stock, though the same in number of shares, par value and amount as before, and though it retains its right to the seven per cent. cumulative dividend, is deprived of any opportunity to share in the apportionment of surplus and net profits remaining after payment of preferred dividends and seven per cent. on the common stock as before.

The amendment further alters the paragraph by providing for twenty thousand shares of common stock without nominal, or par value, in lieu of the common stock above described. The amendment also provides, that after setting apart all accumulated dividends on the preferred stock and seven dollars per share per annum on the no par value common stock, "further distribution of surplus or net profits by way of dividends shall, if, as and when made, be payable in such amounts as the board of directors may from time to time determine."

That the proposed amendment does materially alter the terms of the contract now existing between the corporation and its shareholders, particularly its preferred shareholders, is apparent. On the theory that such alteration of the terms of the contract by which the stock is held is not permissible because destructive of the contractual rights of the shareholder, the complainant, who alleges that he is the owner of both preferred and common stock, asks this court to enjoin the defendants from submitting the proposed amendment to the stockholders at the special meeting.

A corporation, in the sale and issuance of its stock, assumes a contractual relation to the shareholder. For the terms of the contract, the rights of the stockholder and the obligations of the corporation, reference is to be made to the appropriate provisions of the certificate of incorporation and the law of the sovereign conferring the corporate franchise. Unless there be some provision in either the law or the corporate certificate reserving the power to do so, there can be no alteration in the terms of the contract under which the shareholder, as such, possesses his rights, without his consent. If, however, the right to change or alter the stockholder's contract be reserved in a proper way, then no shareholder can complain against a proposed change therein, for the very plain reason that one of the terms by which he holds his contract is that the same may be altered.

The case of Pronick v. Spirits Distributing Co., 58 N.J.Eq. 97, 42 A. 586, cited for the complainant, recognizes this principle. In that case the following language is found:

"When this contract [evidenced by the certificate of stock] is so issued under the statute, and contains the provisions as to rate of dividend, which the statute expressly authorizes the holder to receive and obliges the company to pay, a direct obligation or contract between the stockholder and the company as to the rate of dividend is created, which cannot be altered without his consent, unless the right to do so has been expressly reserved."

The only question, therefore, in this case is whether there is power reserved in the defendant company to make the change in question. On this, there can be no doubt. Indeed, the solicitor for the complainant does not seriously contest the point.

There is impliedly written into every corporate charter in this state, as a constituent part thereof, every pertinent provision of our Constitution and statutes. The corporation in this case was created under the General Corporation Law (Rev. Code 1915, §§ 1915-2101g, as amended by 29 Del. Laws, c. 113). That law clearly reserves to this corporation the right to amend its certificate in the manner proposed. Section 26 of the act provides, among other things, as follows:

" * * * Any corporation created under the provisions of this chapter, may, from time to time, when and as desired, amend its charter of incorporation, either by addition to its corporate powers and purposes, or diminution thereof; * * * or by making any other change or alteration in its charter of incorporation that may be desired; provided that such amendment, change or alteration shall contain only such provisions as it would be lawful and proper to insert in an original certificate of incorporation made at the time of making such amendment."

This very broad power of amendment would seem to permit the amendment in question. But if the section stopped with this provision, and contained nothing further, it might still be open to question whether such permissive power of amendment could be so exercised as to deprive a stockholder of his rights under the terms of the contract by which he holds his stock. The section, however, removes this question from the realm of doubt by expressly providing in its later clauses, as follows:

" * * * Provided, however, that if any such proposed amendment would alter or change the preferences given to any one or more classes of preferred stock, authorized by the certificate of incorporation, or would increase or decrease the amount of the authorized stock of such class or classes of preferred stock, or would increase or decrease the par value thereof, then the holders of the stock of each class of preferred stock so affected by the amendment shall be entitled to vote as a class upon such amendment, whether by the terms of the certificate of incorporation such class be entitled to vote or not; and the affirmative vote of a majority in interest of each such class of preferred stock so affected by the amendment shall be necessary to the adoption thereof, in addition to the affirmative vote of a majority of every other class of stock entitled to vote thereon, but the certificate of incorporation may contain provisions requiring the affirmative vote of a larger proportion of such preferred stock for the adoption of such amendment."

In view of this language in the act, it is clear that the stockholders may amend the certificate in the manner suggested by the proposed amendment, provided all the requirements of the section are complied with.

But it is contended that the amendment proposed...