Weinberg v. Baltimore Brick Co.
| Decision Date | 10 June 1955 |
| Citation | 35 Del.Ch. 225,114 A.2d 812 |
| Parties | Harry WEINBERG, on Behalf of Himself and All Other Sockholders of Baltimore Brick Company Similarly Situated, Plaintiff Below, Appellant, Joseph Moskowitz and Sylvia Martin, on Behalf of Themselves and All Other Stockholders of Baltimore Brick Company Similarly Situated, Intervening Plaintiffs Below, Appellants, v. BALTIMORE BRICK COMPANY, a corporation of the State of Delaware, Louis S. Zimmerman, George C. Warehime, Jr., Jesse Slingluff, Sr., Jesse Slingluff, Jr., William O'Meara, Joseph A. Brown, Hall Hammond, C. Gordon Pitts, Defendants Below, Appellees. |
| Court | United States State Supreme Court of Delaware |
Arthur G. Logan and Aubrey B. Lank, of Logan, Marvel, Boggs & Theisen, Wilmington
(T. Muncy Keith and Leighton S. Dorsey, Wilmington, and Raphael Walter and Lawrence I. Weisman, Baltimore, Md., of counsel), for appellants.
Henry M. Canby, of Richards, Layton & Finger, Wilmington, and William Marbury, of Piper & Marbury, Baltimore, Md., for appellees.
The question in this case is whether the charter of the Baltimore Brick Company contains a restriction preventing the company from declaring preferred dividends out of current net earnings while there is a capital deficit in respect of the common stock.
The company was incorporated in Delaware in September, 1902. It was organized to take over the assets and business of its predecessor, a New Jersey corporation of the same name. The company has outstanding 10,563 shares of first preferred stock and 8,344 shares of common stock. The rights of the first preferred stockholders under the Delaware charter are identical, we are advised, with their rights under the New Jersey charter. The dividend rights are as follows:
'Said First Preferred stock shall entitle the holder to receive each year, out of the net earnings of the company, a fixed yearly dividend of five per centum (5%) before any dividend shall be paid upon or set apart for the said Second Preferred or said common stock, and the dividends on the said First Preferred stock shall be cumulative, no dividend being paid upon the Second Preferred or Common stock until the arrears of the dividends due on the First Preferred stock shall first have been paid.'
The liquidation preference is as follows:
'The holders of the said First Preferred stock in case of liquidation or dissolution of the company, shall be entitled to be paid in full, before any amount shall be paid to the holders of the Second Preferred or Common Stock.'
The preferred shares have full voting rights. In addition, the preferred stockholders are entitled to elect six members of a board of nine directors.
A considerable amount of first preferred stock had been issued by the New Jersey corporation in connection with a refinancing of its funded debt. In 1902 an arrangement was effected with the bondholders whereby the latter surrendered the six per cent bonds and received in lieu thereof a smaller principal amount of five per cent bonds and a large number of shares of first preferred stock. In 1902 all of the assets were transferred to the Delaware company.
The company has a large arrearage of accumulated and unpaid preferred dividends. In recent years, beginning in 1950, the company has declared several dividends on its preferred stock. On June 30, 1954, a further dividend of $2.50 a share was declared, payable August 2, 1954. This action was objected to by the directors elected by the common stockholders, including plaintiff, who is the owner of a majority of the outstanding common shares. Plaintiff thereafter brought suit in the court below to enjoin the payment of the dividend, alleging that the company had no 'net earnings', that its common capital was impaired, and that the payment of the dividend would be in violation of law. The court declined to enjoin the payment of the dividend already declared, but temporarily restrained the declaration and payment of further dividends, and set the case down for hearing on a rule for preliminary injunction.
At the hearing the parties agreed that the company has net earnings for the current and preceding fiscal years available for the payment of dividends, and that the preferred capital is not impaired. They were and are in disagreement whether there is an impairment of the common capital. This latter issue the Vice Chancellor did not resolve since he was of opinion that even if the common capital was impaired the dividend was nevertheless lawful, 108 A.2d 81. This holding plaintiff brings here for review.
The case turns upon the construction of the phrase 'net earnings' in the charter provisions relating to the preferred stock. At the time when the Brick Company was incorporated the Delaware statute regulating the payment of dividends was the General Corporation Law of 1901. 22 Del.L.Ch. 394. Section 34 of that act provided as follows:
'The Directors of every corporation created under this Act shall have power, after reserving over and above its capital stock paid in, such sum, if any, as shall have been fixed by the stockholders, to declare a dividend among its stockholders of the whole of its accumulated profits, in excess of the amount so reserved, and pay the same to such stockholders on demand; provided, that the corporation may, in its certificate of incorporation, or in its by-laws, give the Directors power to fix the amount to be reserved.'
Section 35 provided in part as follows:
In Wittenberg v. Federal Mining & Smelting Corporation, 1926, 15 Del.Ch. 147, 133 A. 48, 55, the Chancellor construed these statutes and held that in the light of the language of Section 34, the phrase 'net profits' in Section 35 meant 'such as appear from the entire business of the company from its inception'. Since the corporate capital was depleted, there were no net profits, and no dividends could be declared. The decision was affirmed by the Supreme Court.
Shortly thereafter these sections were amended by the act of 1927, 35 Del.L.Ch. 85, and again amended in 1929, 36 Del.L.Ch. 135. These amendments are now codified in 8 Del.C. § 170, which reads as follows:
'The directors of every corporation created under this chapter, subject to any restrictions contained in its certificate of incorporation, may declare and pay dividends upon the shares of its capital stock either (1) out of its net assets in excess of its capital as computed in accordance with the provisions of sections 154 and 242-244 of this title, or (2) in case there shall be no such excess, out of its net profits for the fiscal year then current and/or the preceding fiscal year.'
Then follows a provision that no dividends may be paid if preferred capital is impaired.
It is conceded that if the statute governs the matter, the dividend is legal, since clause (2) specifically removes the prior statutory requirement of the existence of a surplus for the payment of dividends from current profits.
All the provisions of the General Corporation Law are impliedly written into every corporate charter granted under it. Peters v. United States Mortgage Co., 13 Del.Ch. 11, 114 A. 598. But the expanded power over dividends contained in the 1927 and 1929 amendments is granted 'subject to any restrictions contained' in the charter. Hence the sole question presented is whether the language of paragraph Fourth of the Brick Company's charter relating to the First Preferred stock constitutes a 'restriction', and if so, the nature and extent thereof. The language relied upon by plaintiff is----
'Said First Preferred stock shall entitle the holder to receive each year out of the net earnings of the company, a fixed yearly dividend of five per centum' etc. [Emphasis supplied.]
Plaintiff's argument that the quoted language embodies a restriction upon the payment of preferred dividends runs as follows:
The designation of 'net earnings' as the source from which the dividend may be paid necessarily means that such earnings constitute the exclusive source for payment. Moreover the phrase 'net earnings', like 'net profits', means earnings accumulated over the entire life of the corporation, i. e., earned surplus. This is so, because by judicial construction both the New Jersey and Delaware statutes, at the times when the charters were filed, forbade the payment of dividends if the corporate capital was impaired. The provisions of Section 35 of the Delaware act of 1902 were copied from the comparable section of the New Jersey act of 1896 [N.J.S.A. 14:8-19], see Wittenberg v. Federal Mining & Smelting Co., supra, and the preferred stock provisions of the company's Delaware charter were copied from the New Jersey charter, and took with them the construction placed upon the phrase 'net earnings' by the New Jersey decisions. Hence, plaintiff concludes, the language of the charter restricts the source of payment of preferred dividends to earned surplus. Plaintiff makes the subsidiary point that the word 'earnings' is narrower in scope than the word 'profits'; and its use impliedly forbids payment of the dividend not only from paid-in or capital surplus, but also from 'windfall profits'.
This argument requires anaylsis. What plaintiff is asserting is that the language of the charter--'out of the net earnings'--is doubly restrictive in meaning. His contention comes to this: that the phrase is expressly restrictive because it designates an exclusive source of the dividend--earnings as opposed to a balance sheet...
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Reading Co., Matter of, s. 82-1557
... ... Taub, 638 F.2d 628, 629, 636 (3d Cir.1981) (applying Delaware law); see Weinberg v. Baltimore Brick Co., 35 Del.Ch. 225, 241, 114 A.2d 812, 821 (Del.1955); see also Del.Code Ann ... ...
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American Bemberg Corporation v. United States, 12335.
...appears to be contrary to the corporation law of Delaware. See the elaborate discussion of the Delaware statutes in Weinberg v. Baltimore Brick Co., Del.1955, 114 A.2d 812. These observations seem sufficient, when read with the careful analysis which appears in the opinion of the district c......