Toner v. Baltimore Envelope Co.
| Decision Date | 01 September 1984 |
| Docket Number | No. 9,9 |
| Citation | 498 A.2d 642,304 Md. 256 |
| Parties | , 54 USLW 2233 Mary P. TONER v. The BALTIMORE ENVELOPE COMPANY, et al. Misc., |
| Court | Maryland Court of Appeals |
Craig B. Merkle and Sidney G. Leech, Baltimore (Cleaveland D. Miller and Semmes, Bowen & Semmes, Baltimore, on brief), for appellant.
Rob Ross Hendrickson, Baltimore (Boyd, Benson & Hendrickson, Baltimore, on brief), for appellees.
Argued before MURPHY, C.J., and SMITH, ELDRIDGE, COLE, RODOWSKY and McAULIFFE, JJ., and CHARLES E. ORTH, Jr., Associate Judge of the Court of Appeals of Maryland (retired), Specially Assigned.
Appellant, Mary P. Toner (Toner), is a nonvoting shareholder with a minority ownership in a closely held corporation. She complains of the corporation's having bought the nonvoting stock of some of the other shareholders without having bought her nonvoting stock. Appellant asserts that, solely because the corporation made those purchases, it became obliged to purchase all of her nonvoting stock at the same price. We shall decline, for reasons hereinafter set forth, to adopt that per se rule as Maryland law.
This case comes to us from the United States District Court for the District of Maryland under the Uniform Certification of Questions of Law Act, Md.Code (1974, 1984 Repl.Vol.), §§ 12-601 to -609 of the Courts and Judicial Proceedings Article (Courts Article). The facts are set forth in the certification order. In light of the narrow legal argument made by Toner, the federal court's statement of facts is limited to an outline of the stock purchase transaction.
The Baltimore Envelope Company (Envelope Co.), a Maryland corporation, was founded in 1930 by two brothers, Charles H. Peters, Sr. (Charles Sr.) and Arthur H. Peters (Arthur). We are next told of the situation prevailing in 1979. Charles H. Peters, Jr. (Charles Jr.), son of Charles Sr., is president of the company. Appellant Toner is a daughter of Charles Sr. Arthur has died and is survived by his widow, Elma. Arthur and Elma had three daughters, Janet P. Heaphy, Betty P. Van Horn, and Shirley P. Hall. We shall call Elma and her three daughters the Elma Branch. The capital stock of Envelope Co. is divided into two classes of common stock, Class A, which has voting rights, and Class B, which is nonvoting. There are 8,000 shares of Class A outstanding, 50% of which Charles Jr. owns and 50% of which Elma owns. Each of the above-named surviving members of the Peters family owns some of the nonvoting stock. The Board of Directors in 1979 consists of four persons, Charles Jr., Clarke E. Murphy, Jr. (Murphy), and two representatives of the Elma Branch, Griffith Hall (Hall) and Lowell Bowen (Bowen).
In discussions during 1979 among the stockholders concerning the future of the company, the Elma Branch expressed a strong desire either to sell the company or to sell their stockholdings as a unit. Also in 1979 Tri-State Envelope Corp., a business located in Pennsylvania, offered to purchase the fixed assets of Envelope Co. for $575,000. At that time both Charles Jr. and Toner expressed an interest in purchasing the shares held within the Elma Branch, but neither was financially able to do so.
At a meeting on August 9, 1979, the directors of Envelope Co. considered a motion presented by Hall that the company accept the Tri-State offer and then liquidate. Hall and Bowen voted in favor of the motion while Charles Jr. and Murphy voted against it. Murphy then proposed that Envelope Co. purchase 15,432 shares of the nonvoting stock owned by the Elma Branch at an aggregate price of $300,000. Charles Jr. stated that this offer was made in conjunction with an offer "made by an individual" to purchase the 4,000 shares of voting stock and the remaining 1,141 shares of nonvoting stock owned by Elma. Under the proposal all of the stock to be acquired would be purchased at $19.44 per share, whether it was voting or nonvoting. On the advice of Bowen, Hall left the directors' meeting. In his absence the resolution for corporate purchase of shares carried, based on the votes of Charles Jr. and Murphy, with Bowen abstaining.
Thereafter Charles Jr. and Murphy caused Envelope Co. on September 17, 1979, to borrow from a bank $325,000 secured by corporate assets. Using approximately $300,000 of these borrowed funds Envelope Co. acquired 15,432 shares of its nonvoting stock from the Elma Branch. On September 19, 1979, Murphy acquired for approximately $100,000 the 4,000 shares of voting stock and remaining 1,141 shares of nonvoting stock owned by Elma. He transferred one of the voting shares to Charles Jr. "without consideration." Based on the stockholdings before and after the transaction, as the statement of facts presents them, we set forth the following composite:
Prior to After
Purchases Purchases
--------- ---------
Issued and outstanding
Class A Voting Stock
(in shares)
----------------------
Charles Jr. 4,000 4,001
Elma 4,000
Murphy 3,999
--------- ---------
8,000 8,000
Issued and outstanding
Class B Nonvoting
Stock
(in shares)
----------------------
Charles Jr. 8,663 8,663
Toner 6,654 6,654
Elma 10,903
Janet P. Heaphy 1,890
Betty P. Van Horn 1,890
Shirley P. Hall 1,890
Murphy 1,141
--------- ---------
31,890 16,458
Toner brought suit in the United States District Court against Envelope Co., Charles Jr., and Murphy. That litigation includes a derivative claim with which we are not concerned. The remedy which Toner seeks is an order directing Envelope Co. to purchase her nonvoting stock under the same terms and conditions offered by the company to members of the Elma Branch for their nonvoting stock. To reach this result Toner makes two arguments.
One involves what she calls the "rule of non-discrimination." In this argument Toner dissects the transaction into separate steps. Step one concerns the decision to undertake the transaction and, for purposes of this argument, Toner concedes that the propriety of that decision is properly analyzed under the business judgment rule. The second step concerns the manner in which the transaction is carried out. At that step, Toner contends, "the corporation has no discretion to prefer one group of shareholders over another and accordingly its conduct in this stage is controlled by the rule of non-discrimination, rather than the business judgment rule." (Emphasis in original.)
Toner's second, and principal, argument asks us to apply, as a matter of law, the following proposition which is the first certified question stated in declarative form:
Where the directors and majority of voting shareholders of a closely held corporation caused the corporation to repurchase the nonvoting shares from some, but not all, of the corporation's nonvoting shareholders, [the corporation must] accord a minority holder of nonvoting stock who [is] excluded from the repurchase arrangement, an equal opportunity to sell her shares to the corporation under the same terms and conditions offered to other holders of nonvoting stock[.]
(1)
Toner's first argument presses the concept of nondiscrimination between holders of shares of the same class to a literal extreme. We have said that a corporation "in making a dividend, has no power to discriminate between its stockholders [of the same class]." State v. Baltimore & O.R.R. Co., 6 Gill 363, 373 (1847). 1 And see 11 Fletcher Cyclopedia of the Law of Private Corporations § 5352 (M. Wolf rev. ed. 1971 & Supp.1984) (Fletcher). Nondiscrimination between shareholders was also the basis for denying a motion to dismiss one of the claims for relief pleaded in Twenty Seven Trust v. Realty Growth Investors, 533 F.Supp. 1028 (D.Md.1982). That case arose out of a tender offer directed to the shareholders of a Maryland real estate investment trust. Following through on their earlier announcement, the trustees made a distribution in partial liquidation to all pre-tender shareholders. Those owning 1,000 shares or less received $17.19 in cash while those, including the plaintiff, owning more than 1,000 shares received $15.29 in distribution certificates and secured notes. The district court concluded that the distributions were sufficiently analogous to dividends to warrant the application of a strict nondiscrimination rule. Toner says such a rule likewise applied when Envelope Co. purchased the Elma Branch's nonvoting stock.
Envelope Co. is an ordinary business corporation governed by Md.Code (1975, 1985 Repl.Vol.), Titles 1, 2, and 3 of the Corporations and Associations Article. 2 Subject to certain limitations not relevant here, a Maryland corporation has the general power to "acquire any of its own stock...." § 2-103(10). Power to acquire "any" of its stock does not restrain a corporation from selectively acquiring some of the stock of a given class. A strict nondiscrimination rule would oblige Envelope Co. to offer to buy all of the nonvoting stock of Charles Jr., in addition to Toner's, because of the corporate purchase from the Elma Branch. The mere fact that a Maryland corporation seeks to purchase some of its own stock does not automatically create a duty to extend the offer to all other holders of shares of the same class.
Sections 2-310 and 2-311 demonstrate this conclusion. In relevant part they provide:
§ 2-310. Power to acquire own stock.
(1) Redeem shares of its own stock that the charter provides are redeemable; or
(2) Exchange convertible shares.
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