Starring v. American Hair and Felt Co.
| Decision Date | 19 March 1937 |
| Citation | 191 A. 887,21 Del.Ch. 380 |
| Court | Court of Chancery of Delaware |
| Parties | MASON B. STARRING, JR., v. AMERICAN HAIR AND FELT COMPANY, a corporation |
BILL FOR INJUNCTION, to restrain the defendant from carrying out a call and redemption of all its outstanding common stock.
Heard on rule for preliminary injunction. The facts are set forth in the opinion of the Chancellor.
Preliminary injunction issue.
Aaron Finger, of the firm of Richards, Layton & Finger, of Wilmington, and Malcolm Mecartney, of Chicago, Ill., for complainant.
Hugh M Morris, and Edwin D. Steel, Jr., both of Wilmington, Louis Quarles, of the firm of Lines, Spooner & Quarles, of Milwaukee, Wis., of counsel, for defendant.
The defendant corporation has three kinds of stock outstanding. They are a $ 100.00 par value first preferred six per cent cumulative stock; a no par value second preferred cumulative stock, calling for a dividend of five dollars per share until July 1, 1940, and for six dollars per share thereafter; and a common stock of no par value.
The certificate of incorporation defines the rights, privileges and restrictions appertaining to the respective classes of stock. These, as applicable to dividends, are in summary as follows: the first claim on earnings for dividend purposes belongs to the first preferred, the next claim to the second preferred, and the last to the common. Before, however, the second preferred may receive any dividends, the assets of the company must bear a specified ratio to the capital represented by the outstanding first preferred stock; and the common stock may not receive any dividends until the net equity on the basis of a consolidated balance sheet equals one hundred dollars per share for the first preferred stock and seventy-five dollars per share for the second preferred stock, plus accrued and unpaid dividends in each case. After these conditions are satisfied, dividends on the common stock may yet not be declared in any year unless the net equity for the second preferred stock shall be increased in such year by an amount equal to such common stock dividend until the net equity for the second preferred shall equal one hundred dollars per share plus cumulative dividends. Thereafter unlimited dividends may be paid on the common stock.
On liquidation the first preferred is entitled to receive its par value of one hundred dollars together with accumulated dividends before anything is paid to the second preferred or the common; next, the second preferred is entitled to receive one hundred dollars per share together with accumulated dividends; and, finally, the common stock is entitled to receive all that remains from the assets after the foregoing charges are satisfied, or, if there then be no common stock outstanding, the second preferred stock shall receive all the assets remaining after the first preferred has received its specified amount.
The common stock possesses the entire voting power, subject to the arising of voting rights in the first and second preferred stock upon the occurrence of certain specified defaults in respect of dividends.
The certificate of incorporation contains this provision:
There are 160,354 shares of common stock outstanding of which 300 shares are held in the company's treasury.
The common stock is held largely by persons interested in the tanning industry. The complainant is a holder of common stock who is not a tanner. There are about two hundred so-called non-tanners holding common stock. They hold a total of not less than forty-one thousand shares. The remaining common shares are held by persons engaged in the tanning business.
The company desires its control to remain with persons engaged in that business. As the company's business is that of buying and selling cattle, calf and other animal hair and of manufacturing and selling products made from such hair, such as carpet and rug cushions, accoustic felt and insulating felts of various types, the directors and officers of the company entertain the very definite view that the control of the company should be in the hands of tanners, from whom its supply of animal hair is secured. The common stock which, in case the company prospers, furnishes the key to that control, has to the extent above indicated gotten into the hands of non-tanner holders. If common shares continue to drift into the possession of people outside the tanning industry, the management foresees the day when control might rest with the so-called outsiders.
In order to forestall this possibility, the company has by formal corporate action decided to exercise the power conferred upon it by its charter (quoted supra) to call and redeem all of its outstanding common stock at the minimum call price of five dollars per share. It asserts that the book value of the stock is less per share than the call price. The complainant asserts it to be more.
Inasmuch as the call and redemption will result in causing the sort of defaults as are referred to in the charter, the company purposes immediately to re-issue all the stock called (excepting of course the three hundred treasury shares) at the price of five dollars, as the charter requires.
Contemporaneously with the adoption of the resolution of redemption, indeed as a constituent part thereof, direction to re-issue the stock in the identical amount called was given in the following language.
It is apparent that this operation of redeeming the stock and immediately re-issuing it to the chosen ones among the old holders, is for the sole purpose of dropping the non-tanner stockholders as associates in the enterprise. Their continued presence as stockholders is not desired. The plan is the very frank and undisguised one of indirectly compelling one group of stockholders to sell their holdings to another group of stockholders (tanners) or, to the extent the latter do not desire to purchase the holdings of their former associates, to the company's officers, directors or persons closely affiliated with such tanners, officers and directors.
Not only does the defendant admit this to be the purpose; but it justifies it, first because the welfare of the company demands it, and second, because it says such was the real reason, though not expressly stated, for the presence in the charter of the redemption clause.
Now admitting for the moment that the lawful authority exists in a corporation created under the Delaware act to take a power to redeem what is familiarly known as common stock, it may be a serious question whether it can exercise such a power when the avowed purpose is simply to get rid of certain stockholders of a given class whose presence in the stockholding group is undesirable to the rest, by compelling the undesirables to sell out to the chosen ones who are permitted to stay in. This question has been suggested on the briefs, but deferred for later argument in case the question hereinafter discussed is decided against the complainant.
The solicitors for the parties have at this stage of the case directed their discussions not to the question of an inequitable exercise of lawful power, but rather to the question of the existence of the power under the statute.
1. The complainant denies and the defendant affirms that there is authority under the Delaware act whereby a corporation may be empowered to redeem the common stock. The question of...
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Goldman v. Postal Telegraph, Civil Action No. 342.
...29 Vir.L. Rev. See, too, Note: Corporate Recapitalization By Charter Amendment, 46 Yale L.Jour. 985. 7 In Starring v. American Hair & Felt Co., 21 Del. Ch. 380, 191 A. 887, 890, affirmed 21 Del. Ch. 431, 2 A.2d 249, it was said: "It preferred stock is of course a stock which in relation to ......
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Martin v. American Potash & Chemical Corp.
...may not lawfully be used in furtherance of such a purpose. Two cases are cited in support of this argument, Starring v. American Hair & Felt Co., 21 Del.Ch. 380, 191 A. 887 (affirmed per cur. 21 Del.Ch. 431, 2 A.2d 249), and Greene v. E. H. Rollins & Sons, Inc., 22 Del.Ch. 394, 2 A.2d 249. ......
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Securities and Exchange Com'n v. Sterling Precision Corp., 225
...decision, see Venner v. Public Utilities Commission, 302 Ill. 232, 235, 134 N.E. 17, 18 (1922), compare Starring v. American Hair & Felt Co., 21 Del.Ch. 380, 191 A. 887 (1934), aff'd 21 Del. Ch. 431, 2 A.2d 249 (Sup.Ct.1938) with Martin v. American Potash & Chemical Corp., 33 Del.Ch. 234, 9......
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West Waterway Lumber Co., In re
...redemption of preferred shares, but no mention is made in the statute of redeeming shares of common stock. Starring v. American Hair and Felt Co. (1937), 21 Del.Ch. 380, 191 A. 887, held that the Delaware statute impliedly prohibited redemption of common shares by expressly authorizing rede......