63 N.J. Eq. 506 | New York Court of Chancery | 1902
(after statement of case).
Upon the questions which are necessary and material to be decided on the application for preliminary injunction I reach the following conclusions:
First. The reasonableness or judiciousness, in its business aspect, of a reduction of the preferred stock of the steel corporation, and the distribution of capital resulting therefrom, by the conversion of stock into bonds, is, upon the facts now presented, altogether a matter of management of the affairs of the corporation, upon which the decision of the directors and stockholders, given in the manner required by law, is final, so far as relates to its business aspects. As to its business aspects, I may further say that the plan for a conversion has been matured after most careful deliberation by business men and has been approved by a very large proportion of the stockholders of the corporation— being as large as six hundred to one; and as the question of conversion relates to the management and disposition of the assets of a purely business corporation, the execution of the plan now proposed to be carried out should not be interfered with, on the opposition of a non-assenting stockholder, except upon the ground that the plan is illegal, and is clearly illegal.
Second. Under' the laws of the State of New Jersey, at the time of the issuance of the preferred stock of the steel corporation, and up to the time of the approval of the act of March 28th, 1902, amending the General Corporation act, the steel
In the formal proceedings adopted to carry out the present plan the first step of the stockholders was the formal approval of the action of the directors in accepting the act of 1902, “and particularly the second section of said act, permitting and providing for the redemption and retirement of the preferred stock out of bonds or the proceeds of bonds,” and the second step of the stockholders was the consent that, to the extent that holders should consent, two million shares of preferred stock be redeemed and retired out of bonds or proceeds of bonds. These two steps were the first and second resolutions adopted. These resolutions expressed the business act of business men, who claimed, and supposed, they had the right, under the act of 1902, to readjust their relations as stockholders and to convert stock into bonds. Surely it is idle to claim that this transaction, which was, in fact, a conversion, and was understood at the time of the exer
This power now claimed to exist previous to the act of 1902 extended, if it did exist, to common stock as well as preferred, for these statutes and powers relating to mere purchases make no discrimination. The courts should therefore, in my judgment, be inclined rather to the strictest construction in reference to the -important power now claimed, and hold that, under these previous statutes, corporations organized under the general law do. not have the general power of converting stock into bonds.
The central position of the defendants’ case, as presented before me, and upon and about which their whole case turned, was that legally the transaction was a purchase of the stock. But, in form as well as in substance, this transaction is, in my opinion, not a purchase by the company of its stock as property, but is, in legal form as well as substance, a distribution of capital to
The transaction being thus essentially a reduction of capital, in connection with a distribution among stockholders, of the capital available, and being nothing else, the next question is what must be the character of such distribution. There are no statutes governing this subject of distribution, and, in their absence, an equal ratable distribution is the only one which can be made. The right to such equal ratable share in the capital, while it is being employed, and its distribution, when distribution is made, is an essential property right of a stockholder, and indeed it is the only essential right. It is the very right called his “share,” and evidenced by his certificate. The right to his share of the dividends is due to his ownership of a share in the capital stock. And when the capital is available for distribution the stockholder’s “share” entitles him to a share in that capital, as his property, which can no more be taken from him, without his consent, than can any other property.
If the steel corporation has the power to mortgage its assets for the purpose of raising the funds for distributing the assets available for general distribution among stockholders of a class
Third. So far as the act of March 28th, 1902, authorizes, or purports to authorize, the redemption and retirement of a portion of the preferred stock of the steel' corporation out of bonds as distinguished from the proceeds of bonds, under the plan proposed, it changes those proportionate property rights of the preferred stockholders, as between themselves, which existed at the date of the passage of the act, and impairs such property rights of the non-assenting stockholders to the benefit of the assenting stockholder who comes in under the plan. Those proportionate rights, as they then existed, were to share equally in the distribution of capital, and these were, in fact, the essential property rights evidenced by the certificate of stock.
Courts differ in their decision as to how far powers which are given to stockholders by the charter or certificates of the company, in relation to the management of the stock and which are incidental to the ownership of the stock, are subject to alteration and repeal by subsequent legislation. Eor instance, in regard to the relative voting rights, some courts hold that a change in the relative voting rights of stock is not a change in essential property rights. The case in the United States supreme court, upon which Judge Lacombe relied on deciding an application relating to this same plan of reduction, malíes the clear and express distinction between the interference with a vested property right and the interference with a right which, although it may, to some extent, be of value in relation to giving the person a voice in the management of the property, along with his other co-owners, is not yet, in law, an impairment of his vested property rights. In this case (Looker v. Maynard, 179 U. S. 46, decided in the supreme court of the United States, in October
In our state the supreme court has taken a different view upon the question as to whether the voting right of stockholders, as between themselves, which existed under charter or certificates is subject to alteration and repeal by the legislature, and has held that it was not, because this voting power was a property right. In re Newark Library Association, 35 Vr. 217, 219 (1899). But the court of errors and appeals, on the appeal in the case, expressly withheld their decision upon this question, and disposed of the case upon another point., Ibid. 265. In reference to the rights which result to a stockholder from membership and property rights, the latest decision of our court of appeals is the case of German Mutual Fire Insurance Co. v. Schwartzwaelder, 14 Dick. Ch,. Rep. 589. In that case an act of the legislature was passed, after the incorporation of a mutual fire insurance company, authorizing its conversion into a joint stock company. As a member of the mutual insurance company, defendant’s rights arose from taking out an insurance policy. This was a very small property right, and one which, by the-terms of the policy, was subject to termination upon the giving of a notice of cancellation by the company. The court of errors and appeals decided that the subsequent law authorizing the-change of the mutual company into a joint stock company was a change of a substantial right of the member, who became, and continued to be, such by reason of his policy, and was therefore-unconstitutional. A sinking instance of the difference in the operation of subsequent legislation upon the property rights- and upon the voting right appears in this very act of March 28th, 1902. By the first section two-thirds in interest of stockholders present at meetings were given the power which previously belonged only to two-thirds of the whole stockholders, whether present or not. Such subsequent regulations of the voting power
I think, therefore, the act of March 28th, 1902, being passed after the vesting of this property right of equal share on distribution of capital, had no effect to give an authority to make this change, and as this is the only legislative authority for the reduction of the preferred stock and the distribution of capital connected with the reduction, or for redemption and retirement of preferred stock out of the bonds in the manner proposed, the 'execution of the plan proposed for the distribution of capital must be enjoined, as against the complainant, unless she assents^ thereto. The act being unconstitutional for this reason, I do j not consider or pass on the other ground of unconstitutionality ! urged, namety, that it is a special act conferring corporate , powers. Part of this plan contemplates the issuing of bonds for the purpose of raising money for general corporate purposes, and the votes of the stockholders were taken separately upon that part of the plan. It has not been suggested that the $50,000,000 could not be raised, and no injunction in this case should at all affect that. This act of March 28th, 1902, authorizes the reduction or retirement out of bonds or the proceeds of bonds. The resolution of the directors was also that the retirement should be out of the bonds or proceeds of bonds; it included both methods. The only way in which this present plan comes to be restricted to a redemption out of the bonds alone, as distinguished from the proceeds of bonds, is the fact that, in connection with the resolution of the directors, there is also an approval of the' contract with the bankers, and that in the contract with the bankers the only offer is that of a redemption'out of the bonds. The only question now considered is the . effect of a plan for redemption out of bonds, and the injunction 1 will go only against issuance or delivery of any bonds under the bankers^ contract, except the $50,000,000 bonds issuable and deliverable for cash subscriptions.
Fourth. The complainant had notice, on-or about May 10th, 1902, of the adoptions of the resolutions of the directors ap