Scott v. Baltimore & O.R. Co.

• Decision Date: 13 June 1901
• Citation: 49 A. 327,93 Md. 475
• Parties: SCOTT v. BALTIMORE & O.R. CO. et al. JAMES v. SAME.
• Court: Maryland Court of Appeals

49 A. 327

93 Md. 475

SCOTT v. BALTIMORE & O.R. CO. et al.

JAMES v. SAME.

Court of Appeals of Maryland

June 13, 1901

Appeals from circuit court of Baltimore city; Albert Ritchie, Judge.

Actions by Henry P. Scott and Nathaniel W. James against the Baltimore & Ohio Railroad Company and others. From a decree in favor of defendants in both cases, plaintiffs appeal. Affirmed.

Argued before McSHERRY, C.J., and FOWLER, BRISCOE, BOYD, PAGE PEARCE, SCHMUCKER, and JONES, JJ.

John N Steele, John I. Donaldson, and John G. Johnson, for appellants.

Wm Guthrie, J.S. Lemmon, and Hugh L. Bond, Jr., for appellees.

PAGE J.

The main question presented in the two cases contained in these records involves the right of the preferred stockholders of the Baltimore & Ohio Railroad Company to share in the distribution of the net profits of the company that may be remaining after the appropriation of 4 per centum of the net earnings to the preferred stock. It is contended by the appellants that the preferred stockholder has not only the right to receive a dividend of 4 per centum out of the net earnings before any dividend shall be set apart for the common stockholders, but to share pro rata with the common stockholders in the distribution of the residue, or, as an alternative proposition, to share equally with the holders of the common stock in any part of the net earnings that may be distributable after the payment of a dividend of 4 per cent each to the holders of both common and preferred stock. The legal title to both kinds of the stock is now vested in trustees, who hold it for five years, or for an earlier date, in their discretion, with such powers and duties as are particularly described; and they have issued to the real owners of the shares "certificates of beneficial interest," which entitle the said owners to receive stock certificates for their shares, when the time the said trustees are to hold it shall expire, and in the meanwhile to receive payments equal to the dividends collected by the trustees. The persons holding these "certificates of beneficial interest" are therefore the real owners of the stock, and for the purposes of this opinion we may so regard them. The question as to the relative rights of these two classes of stock cannot be answered by regarding only the characterization of one of them as "preferred," because of the fact that this term, standing alone, means only a stock that differs from other stock in having a preference of some sort attached to it, without expressing the special nature of the preference. Ordinarily the term "preferred stock" is understood to designate such stock as is entitled to dividends from the income or earnings of the corporation before any other dividends can be paid. 1 Cook, Stock, Stockh. & Corp.Law, par. 267; Henry v. Railway Co., 1 De Gex & J. 606. But, though this may be true, yet, to determine in each case the special properties and qualities it possesses, resort must be had to the statute or contract under which it was issued. "Preferred stock takes a multiplicity of forms, according to the desire and ingenuity of the stockholders and necessities of the corporation itself. It is a matter of contract (Cook, Stock, Stockh. & Corp.Law, par. 269), or depends upon statute." Heller v. Bank, 89 Md. 611, 43 A. 800. It always, however, represents, pro tanto, the capital of the company, and has about it no elements or rights other than those that are conferred upon it by the statute or contract to the authority of which it owes its existence. In all other respects the preferred stockholder is upon the same footing as the common stockholder. He is not a creditor of the company. His stock represents the amount of his ownership in the capital. He may vote at the meetings of the company as the common stockholders may do, and, in general terms, do and perform such things and be subject to such obligations as the common stockholders are subjected to, except as the terms under which his preferred stock was issued may preclude. Mackintosh v. Railroad Co. (C.C.) 34 F. 582; In re Barrow Haematite Steel Co., 59 Law T. (N.S.) 500. The rights of the preferred stockholders are in the same manner limited or extended. The preferred dividends may be made cumulative or noncumulative. The dividends may be a fixed amount for each year, to be paid out of earnings, or they may be a percentage, not exceeding a certain amount, to be determined by the directors at their discretion; and the preferred stockholder who has received his preferred dividend may still have a share of the net earnings that may remain. These are all matters for the determination of which the statute or contract must be looked to. The whole doctrine on this subject was summed up in a few words by the lord chancellor when he said, in the case of Henry v. Railway Co., 1 De Gex & J. 636: "The expression 'preferred shareholder' is equivocal. It by no means clearly indicates what are the rights of those to whom it applies. I do not think it can fairly be said to be an accurate expression, whichever of the two constructions be put upon it. All which the language fairly imports is that some preference is given to the persons to whom the language applies. How far the preference is to extend must be ascertained by other media than the mere expression itself." Heller v. Bank, 89 Md. 610, 43 A. 800; State v. Cheraw & C.R. Co., 16 S.C. 530; Warren v. King, 108 U.S. 389, 2 Sup.Ct. 789, 27 L.Ed. 769; Kent v. Mining Co., 78 N.Y. 159; Elkins v. Railroad Co., 36 N.J.Eq. 236; Gordon's Ex'rs v. Railroad Co., 78 Va. 501. The solution of the question with which we are now dealing must depend, therefore, upon the construction to be placed upon the agreement of the parties as expressed in the stock certificates, that must be taken as the embodiment of the contract, and the final expression of the entire measure of the dividend rights of the parties. Greer v. Van Meter, 54 N.J.Eq. 270, 33 A. 794. Evidence, therefore, of negotiations which preceded this final consummation of the agreement, and of conversations as to the intentions of the parties, cannot be accepted, for the reason that all these are merged in the written instrument, which must be taken to express the final intention. Bailey v. Railroad Co., 17 Wall. 96, 21 L.Ed. 611; Cassard v. McGlannan, 88 Md. 168, 40 A. 711, Lazear v. Bank, 52 Md. 78, 36 Am.Rep. 355. But evidence of the situation of the parties, the objects and purposes for which the agreement was made, and, in a case like this, when it is important to decide whether the certificate contains the whole agreement, all the agreements and resolutions which preceded and authorized the issue of the stock, may be resorted to, for the purpose, not of altering the contract, but of arriving at the real intention of the parties as expressed in the written contract. 1 Cook, Stock, Stockh. & Corp.Law, § 269, and authorities cited in note. In Boardman v. Railway Co., 84 N.Y. 173, the court said: "We think the whole proceeding relating to the issue of the stock may be taken in consideration as constituting one and an entire transaction. The resolutions were competent evidence to show authority to issue the stock; the proposal and other proceedings to carry out the purpose of the resolutions and the certificate, as evidence of what stock was actually issued, and in part the terms upon which it was so issued. Altogether, these papers evince what the intention was." St. John v. Railway Co., 10 Blatchf. 271, Fed.Cas.No. 12,226, affirmed in 22 Wall. 136, 22 L.Ed. 743; Rogers v. Land Co., 134 N.Y. 197, 32 N.E. 27; Railroad Co. v. Brydon, 65 Md. 218, 3 A. 306; Chicago, R.I. & P.R. Co. v. Denver & R.G.R. Co., 143 U.S. 596, 12 Sup.Ct. 479, 36 L.Ed. 277; Mumford v. Railroad Co., 2 Lea, 393, 31 Am.Rep. 616; Bank v. Gerke, 68 Md. 456, 13 A. 358. But, apart from this general principle, which seems to be well established, as we have stated, it is not important in this case, from the fact that all the instruments of writing relied on are connected together by references one to the other. The certificate "of beneficial interest" and the certificate of stock refer to the resolutions of the company adopted on 14th April, 1899,--these to the "proposition made by Mr. Vorhees," and this to the plan and agreement of reorganization, etc. So that a purchaser of a certificate of stock, or of "beneficial interest" therein, has had full notice of all these instruments of writing. They should therefore be regarded as instruments in pari materia, and may be resorted to, to ascertain with precision whether the parties intended that the whole contract should be and was embodied in the certificate of stock. Bailey v. Railroad Co., 17 Wall. 96, 21 L.Ed. 611.

Having thus stated some of the general rules applicable to the matter before us, we will now proceed to examine the facts.

The Baltimore & Ohio Railroad Company was incorporated by the act of 1826, c. 123, of the general assembly of Maryland. By the second section of the act its capital stock was fixed at $3,000,000, in shares of $100 each; and by the thirteenth section it was provided that, if that proved insufficient for the purpose of the act, it was made lawful for the president and directors, etc., from time to time to increase the number of its shares as they might deem necessary. This power was exercised from time to time, so that when the company went into the hands of receivers, in 1896, there was outstanding common capital stock to the amount of $25,000,000, par value. The first issue of preferred stock made under the act of 1835, c. 395, was of $3,000,000, par value, to the state of Maryland. By the terms of the ninth section of that act, the state, as the holder thereof, was entitled to receive "a perpetual dividend of six per...