Shimko v. Eastern States Corp.
| Decision Date | 19 December 1958 |
| Docket Number | No. 45,45 |
| Citation | 146 A.2d 891,218 Md. 362 |
| Parties | Anthony SHIMKO, William J. Donnelly, William L. Ferguson, Donald J. Sargent, Dorothy R. Sargent, and Anne Coleman Crosby, v. EASTERN STATES CORPORATION. |
| Court | Maryland Court of Appeals |
Mortimer Shapiro, New York City (Nemerov & Shapiro, New York City, and Harry O. Levin and Marshall A. Levin, Baltimore, on the brief), for appellants.
J. Crossan Cooper, Jr., Baltimore (Francis D. Murnaghan, Jr., Venable, Baetjer & Howard, Baltimore, and Horace R. Lamb, LeBoeuf, Lamb & Leiby, New York City, on the brief), for appellee.
Before BRUNE, C. J., and HENDERSON, HAMMOND, HORNEY and W. LAIRD HENRY, Jr. (Specially Assigned), JJ.
This is an appeal from a decree of the Circuit Court No. 2 of Baltimore City, dated March 13, 1958, which denied a petition for the allowance of counsel fees to the appellants' attorneys. The petition sought to require payment thereof by the appellee.
This suit was instituted on June 17, 1955, by several holders of preferred stock of the respondent-appellee, Eastern States Corporation (Eastern), a Maryland corporation, holding in the aggregate 310 shares of Series A and 300 shares of Series B preferred stock of Eastern, to compel the application of approximately $2,000,000 of undistributed income to the payment of arrears in dividends on the preferred stocks. The bill alleged that the suit was brought by the complainants 'in behalf of themselves and all other holders of the Series A $7.00 Dividend Preferred Stock and the Series B $6.00 Dividend Preferred Stock * * * of the respondent similarly situated.' The holders of each Series of preferred stock are entitled to cumulative dividends thereon at their respective rates, payable quarterly, and no dividends may be paid on the common stock unless all accumulated arrearages, as well as current dividends, on the preferred stocks are paid or set apart for payment. The bill alleged arrearages in dividends on Series A of $113.35 and on Series B of $97.1572 per share.
The bill also alleged, inter alia, that approximately $2,000,000 of undistributed income had accumulated in the hands of Eastern, that this sum was not required by the corporation for the conduct of its business, that it would be in the best interests of Eastern and in accordance with is obligations under its charter to apply it to the payment of dividends in arrears on its preferred stock, and that failure so to apply it was unreasonable and arbitrary and constituted a breach of the fiduciary obligations of its directors. None of the directors were joined as parties.
The relief sought by the bill was as follows: (a) a mandatory injunction requiring Eastern to pay to the complainants and other holders of its preferred stocks $2,000,000 on account of preferred stock dividend arrears, (b) other and further relief; and (c) an award of reasonable counsel fees to the solicitors for the complainants, as well as their reasonable disbursements.
It is unnecessary for present purposes to review the pleadings in detail. Eastern demurred to the bill both generally and for non-joinder of its directors as parties. The trial court held the bill's allegations sufficient to charge such a breach of trust, or at least such an abuse of discretion, on the part of Eastern's directors as to call for an answer; but the court sustained the demurrer, with leave to amend, as to the nonjoinder of directors. The bill was amended and Eastern again demurred. Its new demurrer included the grounds of the old; it also went to the sufficiency of the explanation of the non-joinder of directors contained in the amended bill, and set forth more specifically the alleged insufficiency of the amended bill to state any grounds for relief.
The case was never tried, nor was there any hearing on the demurrer to the amended bill. On October 15, 1957, the trial court approved a stipulation agreed upon by the parties the first paragraph of which terminated the case, so far as the merits of the controversy were concerned, by providing that Eastern's demurrer was sustained and the bill was dismissed with prejudice and without leave to amend further.
By the second paragraph of the above stipulation the court retained jurisdiction for the sole purpose of enabling counsel for the complainants to apply for a counsel fee in the case. Such application was made, and the case was heard upon affidavits by one of the complainants' counsel and by two of Eastern's directors, one of whom was also counsel for Eastern, and the other of whom was also an officer of Eastern, its Secretary and Treasurer. There was also an affidavit relating to the stockholdings of the complainants made by an official of Eastern's stock transfer agent, and there was considerable documentary evidence besides. It was stipulated between the parties that the facts set forth in the affidavits and exhibits were true, but conclusions drawn from such facts or beliefs based thereon by either party were not admitted by the other.
Eastern is a registered, non-diversified investment company under the Investment Company Act of 1940, 15 U.S.C.A. § 80a-1 et seq. It is a holding company and not an operating company. It was incorporated in 1925. By 1929 its issued and outstanding shares of capital stock consisted of 40,000 shares of Series A and 60,000 shares of Series B preferred stock, which constituted all of the authorized shares of each Series, and of 572,132 shares of common stock. The two Series of preferred stock ranked equally with each other, except as to dividend rates. On voluntary liquidation, the holder of each share of preferred stock was entitled to payment of $100, plus all accumulated dividends. Each preferred share was redeemable at $110, plus all accumulated dividends. No change could be made in the terms or contract rights of either Series of preferred stock without the approval of the holders of 75% of the outstanding shares thereof.
By 1929 and until 1949 Eastern owned 1,000,000 shares of common stock of St. Regis Paper Company (St. Regis), which was Eastern's principal asset. See Eisler v. Eastern States Corporation, 182 Md. 329, 35 A.2d 118. St. Regis' stock has continued to be Eastern's principal portfolio asset ever since, though by 1955 the number of shares had been reduced to 771,300. St. Regis ceased to pay dividends during the depression which began in 1929, with the result that Eastern ceased to pay dividends from 1931 until January 1, 1948. In 1948 Eastern paid dividends agregating $5.65 per share on its Series A preferred stock and approximately $4.8426 per share on its Series B preferred stock. Since 1948 it has paid dividends at the full annual rates on each series of preferred stock, plus $1.75 and $1.35 per share on Series A and $1.50 and approximately $1.157 on Series B in 1955 and 1956, respectively, on account of arrearages, thus reducing dividends in arrears to the equivalent of exactly sixteen years ($112, per share for Series A and $96 per share for Series B).
Eastern's investment income since 1947 has been in excess of current dividend requirements on its preferred stocks, but accumulated dividends in arrears as of November 1, 1947, even after giving effect to the dividends payable January 1, 1948, amounted, according to Eastern's annual report for 1947, to $112.50 per share on the Series A preferred stocks and to $96.50 per share on the Series B preferred. Directors of Eastern began a study of methods and means for adjusting the large arrears which had accumulated on its preferred stocks as early as November, 1947, when the meeting was held at which the dividends on the preferred payable January 1, 1948, were authorized.
One of the major problems requiring consideration in any plan of recapitalization or readjustment to deal with these arrearages was the possible tax consequence to holders of the preferred stock, if under the plan Eastern should acquire such stock by purchase or exchange. The Board considered the problem of dealing with these arrears four times and the stockholders once between November 19, 1947 and August 24, 1949. In March, 1949, the Board recommended, and in April, 1949, the stockholders approved a amendment to Eastern's stated investment policy, by which Eastern would no longer be committed to the retention of 1,000,000 shares of St. Regis stock. This amendment was duly filed with the Securities and Exchange Commission pursuant to the Investment Company Act. The Board and Eastern's counsel then studied alternative plans for the acquisition of Eastern's preferred stock either through purchase on tenders or through an exchange of St. Regis stock. The latter plan, with adjustments in cash, was adopted and was submitted to Eastern's preferred stockholders under date of August 30, 1949. A favorable income tax ruling as to the effect of the exchanges was obtained on September 2, 1949.
This exchange plan was unsuccessfully attacked by a holder of common and preferred stock of Eastern in a suit which was filed in the Circuit Court No. 2 of Baltimore City and was removed to the United States District Court. See Brown v. Eastern States Corporation, D.C., 86 F.Supp. 887, affirmed 4 Cir., 181 F.2d 26. The District Court found against the contentions of the attacking stockholder. The Court of...
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