Porges v. Vadsco Sales Corp.

• Decision Date: 17 May 1943
• Court: Court of Chancery of Delaware
• Parties: ADOLPH PORGES, suing on his own behalf as a Preferred Stockholder of Vadsco Sales Corporation, and on behalf of all other Preferred Stockholders similarly situated, v. VADSCO SALES CORPORATION

32 A.2d 148

27 Del.Ch. 127

ADOLPH PORGES, suing on his own behalf as a Preferred Stockholder of Vadsco Sales Corporation, and on behalf of all other Preferred Stockholders similarly situated, v. VADSCO SALES CORPORATION

Court of Chancery of Delaware, Kent

May 17, 1943

BILL TO ENJOIN the defendant, Vadsco Sales Corporation, from consummating a proposed agreement of merger between it and its wholly owned subsidiary, Delettrez, Inc., both Delaware corporations. Complainant is a preferred stockholder of defendant. The case is before the court on complainant's motion for a preliminary injunction to prevent the consummation of the agreement pending the determination of the suit. Heard on the motion, bill of complaint, and affidavits on behalf of the parties.

Application for a preliminary injunction denied.

Max Terry and Abraham Marcus, of New York City, for complainant.

Daniel O. Hastings and Caleb R. Layton, 3rd, of the firm of Hastings, Stockly and Layton, and Joseph P. Antonow, of Chicago, Ill., for defendant.

OPINION

PEARSON, Vice-Chancellor.

The proposed merger of defendant and its wholly owned subsidiary is designed to bring about a recapitalization of defendant. The questions here concern the relative changes in the rights of the holders of defendant's two classes of stock; preferred and common. Complainant charges that the changes are so unfair and inequitable to the preferred stockholders that the consummation of the merger should be enjoined.

Defendant has outstanding (or issuable for capital stock of predecessor companies) 21,160 shares of preferred stock, and 1,015,913 shares of common stock. The preferred stockholders are entitled to preferences of cumulative dividends of 7% per annum, and distributions in liquidation in the amount of $ 100 a share, together with accumulated dividends. The stock is redeemable, at the option of the corporation, at $ 110 a share, plus accumulated dividends. The common stock has no par value and confers participation rights subordinate to the preferred stock. Each share of each class entitles the holder to one vote on all corporate matters.

From 1931 to 1939, defendant operated at a loss. For the years 1940 to 1942, its earnings resulted in net profits. No dividends have been paid on either class of stock since 1930. At the end of 1942, the deficit from operations amounted to $ 2,440,068.34; and the unpaid accumulated dividends on the preferred stock aggregated $ 1,839,156.67.

During 1942, defendant's officers, with the approval and authorization of the directors, conferred with holders of large blocks of stock of each class, respectively with the view of devising a plan of recapitalization. The plan determined upon was the proposed merger, here under attack. By the merger agreement, each share of defendant's preferred stock would be converted into one share of preferred and five shares of common stock of the surviving corporation; and each share of defendant's common stock would be converted into one-tenth of a share of common stock of the surviving corporation. The new preferred stock would have preferences of cumulative dividends of $ 2.50 per share per annum, a liquidation value of $ 50, and redemption value of $ 52.50, together with accumulated dividends. Each share of the new common and new preferred stock would confer the right to one vote, except that if at any time there should be accumulated unpaid dividends on the preferred stock in the amount of $ 6.25 per share, the preferred stockholders, as a class, would become entitled to elect a majority of the directors. The new preferred stock would be convertible, prior to 1953, into new common stock, on the basis of one share of preferred for five shares of common. The new preferred and new common stockholders would have certain pre-emptive rights. The agreement also provides for a sinking fund for the redemption or purchase of the new preferred stock.

The agreement was approved by the directors of defendant and of the merging subsidiary. Among the stated conditions precedent to the effectiveness of the agreement are provisions that it be approved by the holders of two-thirds of defendant's capital stock of both classes, and as well by the holders of a majority of defendant's preferred stock. A meeting of defendant's stockholders was called for April 14, 1943 to consider and act upon the agreement. The notice of the meeting included a copy of the agreement, description of the proposed changes in capitalization, and consolidated financial statements of defendant and its subsidiary companies as of December 31, 1942. The pertinent facts seem adequately disclosed, and indeed, complainant relies upon the financial statements to support his argument concerning book values of assets, capital stock, and net worth.

The stockholders' meeting was adjourned to May 12. Prior to the adjournment, the vote of the shareholders present in person or by proxy was canvassed, with this result: 11,894 shares of preferred stock were voted in favor of the merger and 413 shares against it; 494,335 shares of common stock were voted in favor, and 40,242 shares against it.

Complainant, as the owner of two shares of preferred stock, filed this bill to enjoin the merger. He points out that it appears from the balance sheet of December 31, 1942 that the net worth of the corporation was $ 2,219,140.52; and that the sum of the par or fixed liquidation value of the preferred stock, $ 2,116,000, plus accumulated dividends, $ 1,839,156.67, amounted to $ 3,955,156.67. In other words, that the total of these preferences of the preferred stock exceeded the net worth of the company, at the date of the balance sheet, by the amount of $ 1,736,016.15. From this complainant concludes that the common stock has no book value whatever, but that it is "under water to the extent of $ 1,736,016.15".

Taking the net worth of defendant as disclosed by the balance sheet, and the fixed liquidation value of the new preferred stock of $ 50 per share, and assuming that none of the new preferred stock would be converted into new common stock, complainant makes the following computation of the result of the recapitalization contemplated under the merger agreement:

Book value of stock issued to old

Preferred Stockholders--

New Preferred

$ 1,058,000

New Common

592,355

Total to old Preferred

$ 1,650,355

Book value of stock issued to old

Common Stockholders--

New Common

$ 568,786

On the same basis, but assuming that all of the new preferred stock would be converted into new common stock, complainant makes the further computation:

Book value of stock issued

for old Preferred

$ 1,500,138.64

Book value of stock issued

for old Common

719,001.36

The essence of the complaint is contained in the following quotation from the bill:

"The said plan of recapitalization to be accomplished by the said merger is unfair and inequitable and the treatment afforded to the present Preferred Stockholders of the defendant and the benefits afforded to the present Common Stockholders of the defendant are such as to amount to a fraud upon the present Preferred Stockholders for the reason that out of defendant's present total capital and surplus of $ 2,219,142, the present Common Stockholders will receive stock, if none of the new Preferred Stock is converted for Common, having an aggregate book value of $ 568,786 in place of their present stock which has no value whatsoever; or if all the new Preferred Stock is converted for new Common Stock, the present Common Stockholders of the defendant...