Lead Opinion
Opinion, by.
This is the third, 1 hopefully the last, stage in the adjudication of the rights of the parties in this controversy.
Willis L. King died in 1936 having created in his will a trust for his widowed daughter-in-law for life with remainder to her three sons. Among the original assets, of. the trust estate were 778 shares of-7% cumulative preferred stock, and 783 shares of common stock, of the Jones & Laughlin Steel Corporation. In 1937 the trustee sold 300 of the latter shares leaving 483 sharеs of common in the trust. At the time of testator’s death unpaid .dividends- on the preferred shares had accrued to the extent of $26.25 per share; by the year 1941- this arrearage had increased to $46.25 per share. While the . Jones & Laughlin Corporation had a book surplus far in excess of the amount that would have been required to pay those dividends its assets apparently were not sufficiеntly liquid "for that purpose, and, as no dividend could be declared;on the common stock until the arrears on the preferred-stock had been paid, the corporation resorted—as others have done under similar circumstances
2
—to a method by which the potential rights of the preferred stockholders could be, satisfied'and-the way-cleared for the declaration оf .dividends on the common stock- The device thus adopted was that of a merger between-the Jones & Laughlin Corporation and two of its Wholly owned subsidiaries, with a resulting recapitalization. There was issued new
5%
cumulative, preferred stock in exchange for the old preferred ón a share for- share basis, and there was given in exchange for each share of the old common оf the par
*632
value of $100 one share of new common of no par value. Those exchanges do not enter into or affect the problem with which we are here concerned, but the recapitalization further involved a distribution of 1% shares of the new common stock for each share of the old preferred. As a result the King Estate, in addition to 778 shares of new preferred and 483 shares of new common in exchange for its old holdings, received 972% shares of new common stock (778 X 1%), which, three years later, the trustee sold
3
in the market for $20,-809.93 and it is the proper apportionment of those proceeds between the life- tenant and the remaindermen which is the problem presently presented. Such apportionment was ordered by the decree of this Court entered October 1, 1946
(King Estate,
While it cannot be said, of course, that the additional common stock distributed by the Jones & Laughlin Corporation in this instance constituted a stock dividend in the ordinary sense of that term, it
was
issued in order to compensate the preferred stockholders for the effective cancellation of their right to receive the accumu
*633
lated unpaid dividends on their stock, and the reasons which call for an apportionment in the case of an actual stock dividend apply equally to a situation such as that here presented, for here too а trust estate has become the recipient of a large number of additional shares of stock and the same problem must therefore be met as to who, life tenant or remaindermen, is entitled to that accretion. Since this stock was given, if not in express payment of accumulated arrears of dividends, at least in lieu of, or compensation for, the surrender of the right to receive such dividends, it would naturally result that the life tenant is entitled to the stock thus acquired and therefore to the proceeds of its sale,—a right subordinated, however, as in every case where the doctrine of apportionment applies, to the necessity of maintaining the intact value of the stock held by the Estate in the Jones & Laughlin Corporation as it existed at the time of tеstator’s death. The problem therefore resolves itself into the simple question:
4
What proportion of the 972 additional shares received by the trust estate would it have been necessary to set aside to corpus in order to preserve the intact value of the stock of the Jones & Laughlin Corporation held by the Estate? Of course the merger did not in any way impair the intact vаlue of the preferred stock, which remained in the amount of $100 per share, but, due to the fact that the assets of the corporation were now represented by a greater number of shares of common stock, there obviously resulted an impairment of the intact value of the 483 shares of common stock held by the Estate, and that impairment must be taken into account since all the stock owned by the Estate in the Jones & Laughlin Corporation must be regarded for this purpose as a single, integrated investment. At the time of testator’s death the intact value
*634
of the common stock was admittedly $158.80 a share, making a total value of the 483 shares of $76,700.40. The award of 1¼ shares of common stock for each share of preferred amounted to a total issue by the сorporation of 733,920 new shares, which, added to the original number of shares of common stock of the corporation of 576,320, made a new total of common stock outstanding-of 1,310,240 shares. The book value of the assets of the corporation at the time of the merger, after deducting the par value of the outstanding preferred stock, amounted to $116,176,053, and the division of that amount by the 1,310,240 shares shows that the book value of each share of common stock after the merger was $88.67. What then was the situation of the Estate as the result of the merger? Instead of holding 483 shares of common stock the intact or book value of which was $76,700.40, it now held 1455 shares (483 + 972) of a book value of $88.67 per share or a total of $129,014.85. Thus, by the merger, the Estate, due to the fact that it held a large block of preferred stock and, at that time, a much smaller holding of common stock, profited in the total value of its stock in the Jones & Laughlin Corporation to the extent of $52,314.45. It is therefore obvious that, at $88.67 per share, the Estate would have had to own, in order to preserve the intact value of its common stock, only 865 shares of the new common ($76,700.40 $88.67), and consequently had to rеtain for corpus, out of the 972 new shares it received, only 382 shares in addition to the 483 shares already held by it (382 + 483 = 865) ; by the same token, the remaining 590 of the new shares represented the portion of the stock received which was not required to maintain intact value and was therefore clearly allocable to the life tenant. The result is that the fund of $20,809.93 received from the sale of the 972 shares must be apportioned on that basis, namely, 382/972 or $8,178.03 to corpus and 590/972 or $12,631.90 to the life tenant. Such a method of appor
*635
tionment is prescribed in all of our adjudicated cases; for example:
Earp’s Appeal,
The adjudication by Judge Boyle erred in this—that it was based only on a consideration of the impairment of the intact value of the common stock as between the time of the testator’s death and the time immediately prior to, instead of immediately after, the merger, thus wholly ignoring the real question as to the impairment resulting from the merger itself. On the other hand, the decision of the court en banc erred because it was based on the mistaken conception that the intact value of the stоck had to be maintained, not by the book value of the additional stock awarded to. the Estate, but by the sale price of the stock when sold by the trustee three years after the merger. The necessity of preserving intact value does not mean a preservation in the sense of the estate’s actually obtaining the amount of that intact value in cash, but only a preservation of its book value; intact value and market value are, for this purpose, wholly unrelated; many stocks sell on the market for less than one-tenth of 'their book values, while other *636 stocks, especially if speculative in nature, sell for many times their book values; the value of a stock in the market depends upon a myriad of factors other than the actual inventory value of the company’s assets as reflected in the books of the corporation. Thus, while the intact value of the Jones & Laughlin common stock at the time of testator’s death was $158.80 a share, the stock had nothing like that value in cash on the market, and that a like discrepancy between market value and book value existed when the stock was sold is obvious from the fact that the priсe realized of $21.67 per share was far less than the book value at that time.
In
Moss’s Appeal,
In
Smith’s Estate,
*638
To the same effect is
Stokes’ Estate, No. 1,
The dеcree of the court below is reversed, and the record is remitted with direction to award $8,178.03 of the fund for distribution to the trustee to be held for the remaindermen, and $12,631.90 to the life tenant; costs to be paid out of the estate.
Notes
King Estate,
For example, the Pittsburgh Crucible Steel Company, as to which see
Fisher’s Estate,
More accurately, the trustee sold the ½ share immediately, and it was the remaining 972 shares which three years later realized the sum of $20,809.93.
The merger having antedated the enactment of the Uniform Principal and Income Act of May 3, 1945, P. L. 416, the provisions of that statute do not apply here.
Concurrence Opinion
Concurring Opinion by
When this matter was last here before, 1 three members of the Court dissented on the grounds (1) that the rule of apportionment applicable to extraordinary corporate distributions of surplus earnings, a portion whereof accumulated prior to the dеath of the settlor of an interested trust, has no proper place in the disposition of additional shares received by a trust estate under circumstances such as this case presents, (2) that the additional common shares received by the King estate upon the trustee’s voluntary exchange of old corpus preferred stock for new preferred on a share for share basis (each of $100 par) were paid and accepted in discharge and extinguishment of the stockholder’s right to the accumulated and unpaid dividends on the old preferred and (3) that the proceeds realized by the trustee from its sale of the additional shares represented income and, as such, were distributable in their entirety to the life tenant. 2
*639 Without retracting or in any way depаrting from our former dissentient views, I concur in the action taken by the majority on the instant appeal as constituting an accurate application of the rule heretofore laid down by this court in this estate which, thereupon, became “the law of the case”.
King Estate,
Fisher’s Estate,
Dissenting Opinion
Dissenting Opinion by
As it is conceded that our two prior decisions in this estate established the law of the case (i.e., that this transaction was an exchange and not payment of deferred dividends), the single question for decision is whether the intact value required to be preserved is that fixed as of the date of the inception of the trust ór that determined as of the date of the merger. The majority accept the latter date, whereas under all our prior cases the former date has been consistently applied.
This Court defined intact value in
Waterhouse’s Es
tate,
In the footnotes the following cases are cited in support of this principle:
Earp’s Appeal,
The word value, as used in the expression
“intact value”
is measured
in terms of money: Jones v. Integrity Trust Co.,
At death, December 11, 1936, decedent possessed 778 shares of preferred stock, par $100, which was its intact value; he also owned 783 shares of common stock, par $100, with an intact value of $158.80 (see findings of fact, Judge Mitchell in 349 Pa. (p. 53a) and Judge Boyle in this appeal (p. 3a), which are not excepted to.
The trustee sold 300 shares of the 783 shares of common stock, leaving 483 shares of common still in the trust. (The distribution of these proceeds are not involved in this litigation).
*641 INTACT VALVE of old shares
778 shares of preferred stock at $100 $77,800.00
483 shares of common stock at $158.80 76,700.40
$154,500.40
With the above stock in the trust, and with its
intact value
(as of date of death) as above, the merger and exchange of stock took place as described in
King Estate,
“The recapitalization and merger did not affect the capital nor increase or decrease the surplus. The assets and financial situation of the corporation remained unchanged. The trustee, owner of the stock,, neither gained nor lost by the transaction. The same property interest was represented by the new certificates оf stock that had been indicated by the old. There have been no stock dividends declared, no corporate dissolution, no distributions of corporate assets, and no sale of any of the new stock by the trustee.”
(Note : In the merger there was no change in assets; the assets in the reorganization were identical and remained as theretofore; there was no new contribution of capital.)
INTACT VALVE OE NEW STOCK
Intact value of old shares (as above) ..... $154,500.40
Intact value of new shares therefore was:
*642 389 shares Class A preferred at $100 $38,900
389 shares Class B preferred at $100 38,900
$77,800
1455 shares of new common at $52.71 ....... 76,700.40
154,500.40
(Note: 483.shares old common at $158.80, total $76,700.40, is equivalent, with identical assets, to 1455 new shares at $52.71, $76,700.40.)
The trustee sold 178 shares of preferred (intact value $100 per share), at $70 and 1000 shares of common (intact value $52.71) at $21.67, with the following result:
INTACT VALUE
178 shares preferred at $100..... $17,800
1000 shares common at $52.71..... 52,710
$70,510
SALE PRICE
178 shares pfd. at $70........... $12,460
1000 shares common at $21.67..... 21,670
34,130
IMPAIRMENT OF INTACT VALUE.......... $36,380
As the loss above in the intact value, to wit, $36,380, exсeeded the amount of the proceeds from the sale, all of the fund here accounted for should be awarded to principal, which was done by the court in banc below as we directed in our former decision. The decree of the court below should not be reversed or modified because the court in banc did precisely what this Court directed should be done. It is for this reason I dissent.