Rath v. Rath Packing Co., 51868

Citation136 N.W.2d 410,257 Iowa 1277
Decision Date29 July 1965
Docket NumberNo. 51868,51868
PartiesHoward G. RATH, Marion Rath Chenette, Elizabeth Rath Berner, and Howard G. Rath, Jr., Appellants, v. The RATH PACKING COMPANY, Joe Gibson, William Cameron, Wesley W. Jennings, and Harry G. Slife, Appellees, Needham Packing Company, Inc., Additional Defendant-Appellee.
CourtUnited States State Supreme Court of Iowa

Lynch, Dallas, Smith & Harman, Cedar Rapids, for appellants.

Swisher, Cohrt, Swisher, Finch & McCann, Waterloo, and Sullivan & Cromwell, New York City, for appellees.

GARFIELD, Chief Justice.

The question presented is whether an Iowa corporation may carry out an agreement with another corporation, designated 'Plan and Agreement of Reorganization,' which amounts to a merger in fact of the two without approval of holders of two thirds of its outstanding shares, as provided by section 496A.70, Code 1962, I.C.A., and its articles of incorporation. The question is one of first impression of Iowa. We must disagree with the trial court's holding this may be done.

Plaintiffs, minority shareholders of Rath, brought this action in equity to enjoin carrying out the agreement on the ground, so far as necessary to consider, it provides for a merger in fact with Needham Packing Co., which requires approval of two thirds of the holders of outstanding Rath shares and that was not obtained. The trial court adjudicated law points under rule 105, Rules of Civil Procedure, in favor of defendants Rath and its officers, and entered judgment of dismissal on the pleadings. It held approval of the plan by holders of a majority of Rath shares was sufficient. Plaintiffs appeal.

Plaintiffs own more than 6000 shares of Rath Packing Co., an Iowa corporation with its principal plant in Waterloo, Iowa, existing under Code 1962, chapter 496A, I.C.A. (Iowa Business Corporation Act). Rath has 993,185 shares outstanding held by about 4000 owners. It is engaged in meat packing and processing, mostly pork and allied products. Its yearly sales for the last five years were from about $267,000,000 to $296,000,000. Its balance sheet as of January 2, 1965, showed assets of about $56,500,000, current liabilities of about $20,600,000, and long-term debt of about $7,000,000.

Needham Packing Co. is a corporation organized in 1960 under Delaware law with its principal plant in Sioux City, Iowa. Its total shares outstanding, including debentures and warrants convertible into stock, are 787,907, held by about 1000 owners. Both Rath and Needham stock is traded on the American Stock Exchange. Needham is also engaged in meat packing, mostly beef. Its annual sales were from about $80,000,000 to $103,000,000. Its balance sheet as of December 26, 1964, showed assets of $10,300,000, current liabilities of $2,262,000, and long-term debt of $3,100,000.

Pursuant to authority of Rath's board prior to April 2, 1965, it entered into the questioned agreement with Needham, designated 'Plan and Agreement of Reorganization,' under which Rath agreed to: (1) amend its articles to double the number of shares of its common stock, create a new class of preferred shares and change its name to Rath-Needham Corporation; (2) issue to Needham 5.5 shares of Rath common and two shares of its 80-cent preferred stock for each five shares of Needham stock in exchange for all Needham's assets, properties, business, name and good will, except a fund not exceeding $175,000 to pay expenses in carrying out the agreement and effecting Needham's dissolution and distribution of the new Rath-Needham stock to its shareholders, any balance remaining after 120 days to be paid over to Rath; (3) assume all Needham's debts and liabilities; and (4) elect two Needham officers and directors to its board.

Under the plan Needham agreed to: (1) transfer all its assets to Rath; (2) cease using its name; (3) distribute the new Rath-Needham shares to its stockholders, liquidate and dissolve; and (4) turn over to Rath its corporate and business records.

If the plan were carried out, assuming the new preferred shares were converted into common, the thousand Needham shareholders would have about 54 per cent of the outstanding common shares of Rath-Needham and the four thousand Rath shareholders would have about 46 per cent.

Under the plan the book value of each share of Rath common stock, as of January 2, 1965, would be reduced from $27.99 to $15.93, a reduction of about 44 per cent. Each share of Needham common would be increased in book value, as of December 26, 1964, from $6.61 to $23.90, assuming conversion of the new Rath-Needham preferred.

In the event of liquidation of Rath-Needham, Needham shareholders would be preferred to Rath's under the plan, by having a prior claim to the assets of Rath-Needham to an amount slightly in excess of the book value of all Needham shares. Needham shareholders are also preferred over Rath's under the plan in distribution of income by the right of the former to receive preferred dividends of 80 cents a share--about five per cent of Needham's book value. Shortly prior to the time terms of the plan were made public Rath and Needham shares sold on the American Exchange for about the same price. Almost immediately thereafter the price of Needham shares increased and Rath's decreased so the former sold for 50 per cent more than the latter.

At a meeting of Rath shareholders on April 26, 1965, 60.1 per cent of its outstanding shares, 77 per cent of those voted, were voted in favor of these two proposals: (1) to amend the articles to authorize a class of 80 c preferred stock and increase the authorized common from $1,500,000 shares ($10 par) to 3,000,000 shares (no par); and (2) upon acquisition by Rath of the assets, properties, business and good will of Needham to change Rath's name to Rath-Needham Corporation and elect as its directors Lloyd and James Needham. Holders of 177,000 shares voted against these proposals and 218,000 shares were not voted. The plan was not approved by the shareholders except as above stated.

Rath officers vigorously solicited proxies for the meeting by personal travel, telephone and through a professional proxy soliciting agency. This action was commenced five days prior to the meeting and four days thereafter a supplement and amendment to the petition were filed.

I. We will summarize the provisions of Code Chapter 496A, I.C.A., so far as material to the appeal.

Section 496A.74 provides that a foreign corporation and a domestic one may merge if permitted by laws of the state where the former is organized and '1. Each domestic corporation shall comply with the provisions of this chapter with respect to the merger * * * of domestic corporations * * *.'

Section 496A.68 states that two or more domestic corporations may merge pursuant to a plan approved in the manner provided in this chapter. The board of each corporation shall approve a plan setting forth: (1) the names of the merging corporations and the survivor; (2) terms of the merger; (3) manner of converting shares of each merging corporation into shares of the survivor; (4) any changes in the articles of incorporation of the survivor; (5) other provisions of the merger deemed necessary or desirable.

Section 496A.70 provides for approval of the plan of merger by the shareholders of each merging corporation and '[a]t each such meeting, a vote of the shareholders shall be taken on the proposed plan * * *. * * * The plan * * * shall be approved upon receiving the affirmative vote of the holders of at least two-thirds of the outstanding shares of each such corporation, * * *.'

Section 496A.71 states that upon such shareholder approval articles of merger shall be executed by each corporation setting forth: (1) the plan of merger; (2) the number of shares of each corporation outstanding; (3) as to each corporation, the number of shares voted for and against the plan. The articles shall be filed with the secretary of state and county recorder and a certificate of merger shall be issued by the former.

Section 496A.73 provides that upon issuance of the certificate the merger shall be effected and (1) the merging corporations shall be a single corporation--the one designated in the plan as the survivor; (2) the separate existence of the merging corporations, except the survior, shall cease; (3) the survivor whall have all the powers and be subject to the same duties as a corporation organized under chapter 496A; (4) the survivor shall have all the rights, franchises and properties of the merging corporations; (5) the survivor shall be liable for all obligations of the merging corporations; (6) the articles of incorporation of the survivor shall be deemed amended to the extent that changes therein are stated in the plan of merger.

Section 496A.77 states that any shareholder shall have the right to dissent from any merger to which the corporation is a party.

Section 496A.78 gives a dissenting shareholder, by following the procedure there outlined, the right to paid the fair value of his shares as of the day prior to that on which the corporate action was approved.

The above sections are those on which plaintiffs rely. They contend these statutes specifically provide for effecting a merger and the same result cannot legally be attained at least without approval of the holders of two thirds of the shares and according to dissenters 'appraisal rights'--i. e., the right to receive the fair value of their stock by compliance with the specified procedure.

Defendants contend and the trial court held compliance with the above sections was not required and defendants could legally proceed under other sections of chapter 496A which merely authorize amendments to articles of incorporation and issuance of stock. The sections just referred to provide (section 496A.55) that a corporation may amend its articles in any respects desired and in particular: change its name, change the number of shares of any class, change shares having a par value...

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