18 Del. Ch. 47 | New York Court of Chancery | 1931
The rules for preliminary injunction in these two cases were heard together. In disposing of the rules, I shall first take notice of the suit filed by the Journal Square Bank Building Company.
Bill of Journal Square Bank Building Company.
The complainant in this suit is a creditor of the defendant. As a general proposition,, it is not permitted to a creditor of a corporation to prevent its merger or consolidation with another if the statutory law of its creation authorizes it. 7 Fletcher, Cyc. of Corp., p. 8329; Id. 8411; 8 Thompson on Corporations, (3d Ed.) § 6037. A review of the cases cited in support of the text of these authors is not deemed necessary. Where there is no statutory provision specifically giving creditors of the constituent corporations a right of action against the consolidated concern, the creditors are not without remedy, for they may resort to equity to subject the assets of their debtor in the hands of the con
If creditors are in no position to object to a proposed consolidation of their debtor with another corporation because resort to equity against the debtor’s assets affords them protection, then a fortiori the express conference upon them by statute of a right of action generally by Which not only the assets of their debtor but as well the entire assets of the consolidated company, whether derived from the debtor constituent or not, may be seized in satisfaction, would render less defensible the right of creditors to prevent a consolidation.
The statute of Delaware, under which the corporations here involved were created, expressly provides that in case of merger or consolidation the rights of creditors of the constituent corporations shall be preserved unimpaired, and all debts, etc., of the constituent companies shall thenceforth, after the merger or consolidation, attach to the consolidated corporation and be enforceable against it to the same extent as if said debts, etc., had been incurred or contracted by it. Section 60, General Corporation Law (85 Del. Laws, c. 85, § 19).
The creditor in this cause, therefore, if the consolidation goes through, is made by law a general creditor of the consolidated company. The fact is that there' will be a larger collection of net assets in the hands of the consolidated company to which the complainant may look for satisfaction of its debt than it can now look to in the hands of the constituent debtor. The fact that the quick asset condition of the consolidated company will, in relation to its liabilities, render it less desirable as a debtor from the viewpoint of current financial soundness than the constituent debtor, if true as alleged, cannot serve to justify an enjoining of the consolidation on the creditor’s complaint. The complainant as creditor, as now appears, will have all the
But the Journal Square Bank Building Company objects further that it now has the right and so long as its claim lives will continue to have the right, by reason of its debtor’s having qualified by license to do business in New Jersey, to sue it in that State, a condition on which its license to do business in that State was granted being that, even though it should withdraw from the State, process might still be served upon it through the Secretary of State of New Jersey; and that this remedy of suit in New Jersey will be lost to the complainant if the merger goes through, because in that event the life of the defendant will be terminated (Section 60, Delaware General Corporation Law), and hence the complainant could no longer sue it in New Jersey. Thus, argues the complainant, a “remedy” belonging to it as a creditor will be taken from it, in violation of Section 63 of the Delaware Act (Revised Code 1915, § 1977) which provides that the “rights or remedies” of creditors of a Delaware corporation “shall not in any way be lessened or impaired * * * by the consolidation of two or more corporations. * * *” Therefore, the complainant contends, the proposed consolidation should be enjoined for the complainant’s protection, to the end that the “remedy” which the complainant now has to sue the defendant in New Jersey may not be lessened or impaired and the benefits of Section 63 thereby denied to it.
Before specifically answering this point, I pause to observe that Section 63 in terms applies only to the “consolidation” of corporations. This cause technically presents not a consolidation but a merger. But I hang nothing on that suggestion, for I apprehend that the term “consolidation” as used in the section is used in that loose sense which popular usage ascribes to it, as embracing technical mergers as well as consolidations, just as in this opinion the two words, if they have not already been, doubtless will be used
Assuming Section 63 to apply then to mergers as well as to consolidations, what is the answer to the complainant’s contention that it has a right to stay a merger in order to preserve to the complainant its right to a remedy by suit in New Jersey?
In the first place I very much doubt that the act of merging would deprive the complainant of its right to a remedy in New Jersey. Section 60 of the Delaware Act provides that “all debts, liabilities and duties of the respective constituent corporations shall thenceforth [after merger or consolidation] attach to said consolidated corporation, and may be enforced against it to the same extent as if said debts, liabilities and duties had been incurred or contracted by it.” This language is broad enough to raise a strong argument in favor of the view that the continuing liability of the constituent debtor to be sued in New Jersey by reason of past transactions in that State becomes the liability of the company into which it becomes merged or with which it is consolidated. If so, the complainant is deprived of no remedy, except possibly the right to sue the National Cash Credit Association in New Jersey eo nomine. That right, however, is purely technical. It has not sufficient of substance to move a court of equity.
But, if the consolidated company could not be sued in ■ New Jersey as an alter ego of the defendant, I still think the complainant has no ground of complaint. The “remedy” of suit somewhere will not be taken from it by the merger. It is expressly reserved to it by statute. I conceive that the word “remedies” as used in the statute refers to those recognized forms of redress which law and equity afford for the securing of rights, without regard to the situs of the juris
Bill of Cole, et al.
I now take up the case of the preferred stockholders who seek to enjoin the merger. The crucial point on which their complaint turns is one of value—whether or not they as stockholders in one of the constituents are to receive in exchange for their present holdings, stock which has a value commensurate with the asset contribution which their company is making to the common pool.
This is a question in the last analysis of what are the fair values to be ascribed to the assets of the defendant company in the merger plan.
The statute under which the contemplated merger is proposed to be put through does not compel an objecting minority of stockholders to submit to the compulsion of the majority to the extent of being forced into the status of stockholders in the consolidated enterprise. The option is given to each dissenting stockholder to elect whether he will take his allotment of stock in the consolidated company.
As a general proposition dissenting stockholders are thus put to an election by the statute. There may be circumstances, however, under which a court of equity will say that the duty to make the election does not arise. For instance where the merger is not authorized by law, a dissenting stockholder is under no duty to make his election. He may enjoin its consummation. Jones v. Rhea, 130 Va. 345, 107 S. E. 814; General Investment Co. v. Lake Shore, etc., R. Co., (C. C. A.) 250 F. 160. Furthermore, if consent to the merger be induced by fraud practiced upon a consenting company, a stockholder is under no duty to elect whether he will abide by a merger so induced or take his money. In such a case equity holds that no just alternatives are presented to him for a choice. See Bailey v. Citizens’ Gas Light Co., 27 N. J. Eq. 196; Wilson v. Trenton Pass. Ry. Co., 56 N. J. Eq. 783, 40 A. 597. Where also the merger proposes illegally to wipe out a right to accumulated dividends on preferred stock, a court of equity will enjoin it on the application of a preferred stockholder. In such a case the stockholder’s election is -invited between two alternatives one of which is highly unfair. See Colgate v. U. S. Leather Co., 73 N. J. Eq. 72, 67 A. 657, reversed on other grounds, 75 N. J. Eq. 229, 72 A. 126, 19 Ann. Cas. 1262. From these and other cases which may be cited it thus appears that the election which is given to the stockholder is one that he is not, under any and all circumstances, required to exercise. The exercise of the statutory right of merger is always subject to nullification for fraud. The cases so hold.
In the instant case fraud on the complainants is the ground on which their claimed right to an injunction is based. The fraud charged however is not actual fraud on the part of the directors and majority stockholders. It is
In the case sub judice, if there is an inequality as between the merging companies, it is not coupled with any showing, or even intimation, that those who have engineered the merger or whose voting influence is great enough to accomplish it, are themselves beneficiaries of the alleged inequality. The case therefore is one that rests on the sole fact of alleged undervaluation and overvaluation of the assets of two of the merging companies.
Where that is the case the rule adopted by this court as applicable to the sale of corporate assets would seem by analogy to supply a sound basis for guidance. While a consolidation is quite distinct from a sale, yet, from the viewpoint of the constituent companies, a sale of assets is in substance involved. Here it is the sale feature of the merger and that alone with which we are concerned. Looking
“It must be remembered, however, that a wide discretion in the matter of valuation, as in other matters, is confided to directors. As long as ‘they act in good faith, with honest motives, for honest ends,’ the exercise of their discretion will not be interfered with. ‘Courts of equity,’ says Mr. Thompson in his Works on Corporations, § 4518, ‘cannot be called upon to control the discretion of the managing bodies of corporations; otherwise, they would be choked with applications of recalcitrant stockholders. The action of a board of directors may be ill-advised or apparently unprofitable, but this furnishes no ground for invoking the restraining powers of the court.’ ”
The same presumption of fairness that supports the discretionary judgment of the managing directors must also be accorded to the majority of stockholders whenever they are called upon to speak for the corporation in matters assigned to them for decision, as is the case at one stage of the proceedings leading up to a sale of assets or a merger. No rational ground of distinction can be drawn in this respect between the directors on the one hand and the ma
I come now to the question of fact—viz: was there an undervaluation of the defendant’s assets, and if so, was it so gross as to indicate bad faith towards the opposing minority? It is significant, that if there was such a grossly unfair discrimination against the class of stockholders among whom the complainants are numbered, only 40,000 shares out of the total of 327,324 are protesting. Apparently about eighty-eight per cent, of the preferred stock outstanding is satisfied with the terms proposed. I do not mean to speak slightingly of forty thousand shares as a negligible number. The figures are given merely to point out that in the judgment of an overwhelming majority of the stock in the interest of which this suit was filed, there is nothing in the situation which warrants a protest.
There are two items of fact which were dwelt upon at the argument and treated as of great moment. I am unable to attach any importance to them. One is the fact that the projected pro forma balance sheet of the consolidated enterprise contains an asset item of $500,000 for good will. Inasmuch as this item is set up as of the future, after the proposed merger is completed, it is manifest that no allocations of stock to the merging companies were based on it, none of the merging companies showing any corresponding valuation whatever of good will either in whole or in part. The most that can be argued from the presence of this item on the projected balance sheet is that perhaps the stock to be outstanding lacks $500,000 of having as much real assets under it as would appear. But that fact, if it be true, has no bearing on the relative participations of the merging companies in the total assets thrown into the merger pool. It simply means that each company has, as to that one asset, a proportionate interest in something that is newly created, that came from none, and that may be worth mpre or less.
There remain two other matters that were pressed by the complainants as evidence of the unfairness towards their company which they claim the merger works.
The first concerns the Community Finance Service Company. This company was a wholly owned subsidiary of the defendant. It was carried by the defendant on its books at cost, one hundred thousand dollars in round num
The other matter concerns the purchase indirectly by the Franklin Plan Corporation of ninety-two thousand shares of common stock of the defendant from one Badgér, the former president of the defendant. This transaction was consummated April 8, 1921. The price agreed to be paid Badger was $1,471,991.84, for which the Franklin Plan Corporation was and still is indebted. It is claimed by the complainants that the stock purchased from Badger was
This transaction is not reflected on the Franklin Plan Corporation’s balance sheet as of March 31, 1931—the balance sheet which was disclosed to the companies which were invited to merge into it. The complainants contend that if their company goes into the merger, it will, by reason of the improvident Badger transaction, be compelled to bear a share in a debt burden of $1,168,674.95 with no corresponding share in an asset to offset it.
Whether the Badger block of stock should be written down to $303,316.89, is a question of fact that is difficult on the present showing to pass upon. The affidavit of the accountant for the defendant admits that the value of the Badger block of stock “is considerably lower than $1,471,-991.84.” He does not say how much its value is. Neither does he say that the $303,316.89 figure of the complainants’ accountant is too low. On the present showing I feel impelled to take the figure named by the complainants' accountant.
The result of the Community Finance Service Com-
This shows a total disadvantage to the preferred stockholders of the defendant of $3.04 per share, which in comparison with the book value per share ($12.11 according to the complainants and $7.50 according to the defendant) is quite heavy.
But when the matter is examined into further, the disadvantage thus shown is considerably if not entirely wiped out. It appears that the defendant carried on February 14, 1931, an asset item of total investments at $6,658,097.50. This item comprises by far the majority of its assets. These investments are in subsidiary or affiliated companies. There is no ascertainable market for them. The defendant contends that they are carried at inflated figures. The affidavit of Wood filed in the Journal Square Building Company suit (which though not technically filed in the stockholders’ suit, I nevertheless feel I should not disregard in this rule for preliminary injunction) shows that, according to the defendant’s own records, the real worth of the investments is overstated on the balance sheet of February 14, 1931, by $1,469,277. If I correctly understand his affidavit he goes outside the defendant’s books for his information upon value with respect to one item only—the Willard Securities Corporation, $500,000—which he counts as worthless. Eliminating that item, his affidavit would then disclose the defendant’s overvaluation to be $969,277, which in terms of its preferred stock is $2.96 per share.
Thus the complainants’ stock goes into the merger on a per share basis that is $2.96 per share in excess of liqui
The affidavit of the accountant for the defendant shows that the net liquidating value of the defendant’s assets as shown by its books is less than the value given for merger purposes by $1,400,000 as against the figure of $969,277 taken by me in the above calculation. If the amount of overvaluation be as much as $1,400,000, the complainants’ stock will go into the merger with a per share overvaluation of over four dollars. This is the more significant as indicating no injustice to the complainants when it is pointed out with respect to the other merging companies, that their asset condition is less, made up of investments in stock of affiliated companies and hence not so much subject to the likelihood of overvaluation.
The complainants base some contention on the market value of their shares as being $11.13. The uncontradicted quotations from the New York Times shows the fact to be that on the New York Curb the market has been $4.00 low and $4.12 high. These quotations destroy the complainants’ argument insofar as the market value is concerned.
The complainants speaking for themselves and others, vigorously complain because the stock which they bought has suffered a great market ltiss. That is unfortunate. It has however nothing to do with the merits or demerits of the proposed merger, which is to be judged in the light of values without reference to prices paid by investors.
After a rather painstaking study of the evidence before me, I fail to see anything in the proposed plan of merger which reveals any fraud, actual or constructive. The complainants therefore are not entitled to be relieved of exercising the election given to them by the statute of choosing whether they will accept stock under the merger or take the necessary steps to secure a valuation and payment in money.
The rules in both cases will be discharged.