Sternbergh v. Brock
| Decision Date | 22 June 1909 |
| Citation | 225 Pa. 279 |
| Parties | Sternbergh, Appellant, <I>v.</I> Brock. |
| Court | Pennsylvania Supreme Court |
Before MITCHELL, C. J., FELL, MESTREZAT, ELKIN and STEWART, JJ. Affirmed.
Cyrus G. Derr and D. T. Watson, for appellants.—The terms and conditions of issuance of the $3,000,000 of preferred stock of the American Iron & Steel Manufacturing Company must, under the pertinent circumstances appearing in the cause, be construed to entitle the holders of such preferred stock to receive cumulative yearly dividends of five per centum, payable quarterly, before any dividend shall be set apart or paid on the common stock and as not giving the holders of the said preferred stock any right to participate in the profits of the said company beyond the said dividend of five per centum per annum: R. R. Co. v. Jackson, 77 Pa. 321; Fidelity Trust Co. v. Lehigh Valley R. R. Co., 215 Pa. 610; Bridgewater Navigation Co., L. R. 39 Ch. Div. 1; Chicago Ry. Co. v. Northern Pacific Ry. Co., 101 Fed. Repr. 792; Heller v. Nat. Marine Bank, 89 Md. 602 (43 Atl. Repr. 800); Burt v. Rattle, 31 Ohio, 116.
Practically it is true that the investing public assume and understand that preferred stock is never entitled to more than its specified and fixed dividends, even though the certificate is silent as to further dividends in case a higher dividend is paid on the common stock: Hare v. Horton, 27 Eng. Com. Law Rep. 160; Scott v. B. & O. R. R. Co., 49 Atl. Repr. 327.
The construction placed upon the terms and conditions of issuance of the said $3,000,000 of preferred stock by the board of directors of the said company and acquiesced in by all the shareholders, preferred and common, namely, that the holders of the said preferred stock should not participate in any division of profits by the corporation beyond the dividend of five per centum per annum expressly stipulated for, must, under the pertinent circumstances appearing in this case, be adopted adhered to, and enforced by the court: Ringrose v. Ringrose, 170 Pa. 593; Berridge v. Glassey, 112 Pa. 442; People's Nat. Gas Co. v. Wire Co., 155 Pa. 22 (25 Atl. Repr. 749); Nickerson v. Atchison, etc., Co., 17 Fed. Repr. 409; Lyon v. Motley, 30 N. Y. Sup. 218.
Persons who have become members of the American Iron & Steel Manufacturing Company by stock purchase since the adoption by the board of directors and the stockholders of the construction that the rights of the preferred stockholders with respect to dividends are limited to a dividend of five per centum per annum are bound by such construction, and no rights possessed by them require or warrant any deviation therefrom: Erny v. Schmidt Co., 197 Pa. 475; Church v. R. R. Co., 78 Fed. Repr. 526.
John G. Johnson, for appellees.—The rule as laid down generally, as well as in Pennsylvania, in the case of preferred shares of stock, is, that in the absence of an expressed intention to the contrary, the holder, after the payment to the common shares of a percentage equal to that paid to him, is entitled to participate pro rata in further dividends: Fidelity Trust Co. v. Lehigh Valley R. R. Co., 215 Pa. 610.
The corporation would not be bound by any understanding antecedent to that adopted at or after its formation: Bailey v. R. R., 84 U. S. 96; Bridgewater Nav. Co., L. R. 39 Ch. Div. 1.
OPINION BY MR. JUSTICE POTTER, June 22, 1909:
On July 7, 1899, four manufacturing concerns, the Pennsylvania Bolt and Nut Company, J. H. Sternbergh & Son, the Lebanon Iron Company and the East Lebanon Iron Company, entered into an agreement, by which they were to transfer to a proposed corporation, the whole of their respective "plants, franchises, good-will, business, patents, trademarks and property of every sort and kind." The agreement further provided that they should receive for the property so transferred full paid and nonassessable preferred stock of the proposed corporation, of the par value of $50.00 per share, of which $3,000,000 worth were to be issued and divided among them in designated proportions. The agreement also provided: "The said preferred stock shall have an accumulative preference of Five Percent (5%) dividend annually, payable quarterly on the first days of January, April, July and October, and the first preference as to the distribution of the assets of the Company; and further none of the property or franchises of the proposed company can be mortgaged without the consent of at least a majority of the preferred stock." Common stock to the extent of $17,000,000 was also to be issued, divided into 340,000 shares, with a par value of $50.00 each upon which $5.00 per share was to be paid in cash.
In pursuance of this agreement the American Iron & Steel Company was incorporated on August 21, 1899, under the laws of Pennsylvania, for the manufacture of iron and steel products. The capital named in the articles of incorporation was twenty shares, with a par value of $1,000, but this was increased, by action of the stockholders on August 23, 1899, to $20,000,000, divided in $3,000,000 of preferred and $17,000,000 of common stock, all of a par value of $50.00 a share.
By resolution adopted at the stockholders' meeting of August 23, 1899, it was provided "that the preferred stock whose issue was thereby authorized to the amount of $3,000,000 should be entitled, (a) `to receive a cumulative yearly dividend of five per cent, payable quarterly on the first days of January, April, July and October, in each year before any dividends shall be set apart or paid on the common stock; (b) to be paid in full both principal and accrued dividends in the event of liquidation or dissolution of the company before any amount shall be paid to the holders of the common or general stock; (c) to require the consent in writing of a majority of the holders thereof to the creation of any mortgage.'"
The stock was issued as provided for in the agreement and the resolution of the stockholders. On February 27, 1905, the common stock was reduced, after an assessment of $2.50 a share had been levied, to 51,000 shares, of the par value of $2,550,000, making the total capital stock $5,550,000.
From the organization of the company until the year 1907, the holders of preferred stock were paid the stipulated five per cent annual dividend, and no more, while all profits above the amount so paid were distributed by dividends to the common stockholders. In March, 1907, a quarterly dividend of two per cent was declared by the directors upon all the stock, both preferred and common, which was at the rate of eight per cent per annum.
J. H. Sternbergh, who was a holder of the common stock, filed this bill in equity against the directors and treasurer of the company and the corporation itself, alleging that the preferred stockholders were not entitled to receive more than five per cent per annum on the par value of their stock, and praying the court to enjoin the payment to them of the dividend declared in excess of one-quarter of that amount.
Answers and replication were filed, and the case was tried before AUDENRIED, J., who found that the plaintiffs were not entitled to an injunction and recommended that the bill be dismissed. Exceptions to the findings of the trial judge were dismissed by the court in banc, and a decree made dismissing the bill, with costs. Plaintiffs have appealed, and have assigned for error the dismissal of their exceptions, and the decree dismissing the bill.
Three questions are raised by the arguments of counsel on this appeal.
1. Whether preferred stock issued by a company incorporated...
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