75 N.J. Eq. 263 | N.J. | 1909
The opinion of the court was delivered by
The question involved in this case is the distribution of a surplus remaining in the hands of the trustees in liquidation of the Pennsylvania Electric Vehicle Company after payment of the debts. The controversy is between the preferred stockholders, whose claims will absorb the whole surplus in case they are entitled to a preference in the distribution, and the common stockholders. The vice-chancellor decided in-favor of the preferred stockholders.
The question to be decided is one of contract, and the contract of the preferred and common stockholders inter sese is determined by the provisions of the statute and of the certificate of incorporation. The sections of the statute that are material to the inquiry are sections 8, 18 and 86.
Section 8, as amended in 1898 (P. L. 1898 p. 408), requires that the certificate of incorporation shall set forth the amount of the authorized capital stock, the number of shares into which the same is divided, and the par value of each share, and if there be more than one class of stock created by the certificate of incorporation, a description of the different classes, with the terms on which the respective classes of stock are created.
Section 18 authorizes every corporation organized under the act to create two or more kinds of stock, of such classes, with such designations, preferences and voting powers or restrictions, or qualifications thereof, as shall be stated and expressed in the certificate of incorporation, or in any certificate of amendment thereof. It provides that at no time shall the total amount of the preferred stock issued and outstanding exceed two-thirds of the capital stock paid for in cash or property, and such preferred stock majq if desired, be made subject to redemption at any time after three years from the issue thereof at a price not less than par, and the holders thereof shall be entitled to
The provision of the certificate of incorporation, as amended, is as follows:
“Forty thousand of said shares are to be preferred stock, the holder thereof to receive, and the company to pay, a fixed yearly dividend of six per cent, before any dividend shall be set apart or paid on the general stock.”
The company was organized in 1899, pursuant to the act of 1896.
Section 86 of the present act is substantially the same as ■section 80 of the act of 1875. Sections 8 and 18 introduced new provisions, in that the former requires that the certificate of incorporation shall contain a description of the different classes, with the terms on which the respective classes of stock are created, in case more than one class of stock is created by the certificate; and the latter, which takes the place of section 25 of the act of 1875, authorizes the creation of more than two kinds of stock, with such designations, preferences and voting powers or restrictions or qualifications thereof as shall be stated and expressed in the certificate of incorporation.
It has been held, and may be regarded as entirely settled, that calling stock “preferred stock” does not of itself determine the rights of the holders, for the extent of the preference is to be determined by the terms of the contract. McGregor v. Home Insurance Co., 33 N. J. Eq. (6 Stew.) 181; Elkins v. Camden and Atlantic Railroad Co., 36 N. J. Eq. (9 Stew.) 233.
It was also said, upon equally good grounds in the McGregor Case, that preferred stock, in the absence of an express stipulation or direction to the contrary, simply gives the holder a right of preference in the division of profits, and not in the distribution of capital. The learned vice-chancellor cited as authority the opinion of Vice-Chancellor Maline in the case of In re Lon
Section 18 provides that in case of insolvency, the debts or j other liabilities shall be paid in preference to the preferred stock, j With our present notions of the character of stock, such a provision seems unnecessary, and, unless explained, it might be supposed that it implied that preferred stockholders were to be paid as creditors next after the debts. We think,, however, that there is an explanation of the insertion of this provision in the act of 1815, growing out of the efforts that had been made in other jurisdictions to give preferred stock more the character of a security for money loaned than of an investment in the business, subject to the ordinary hazards. Attempts to give prefered stockholders the status of creditors rather than of shareholders arc referred to in Cook Corp. (3d ed.) 271. Some of these efforts were directed to securing a dividend to the preferred stockholders whether profits vnre made or not; some were directed to securing him by way of mortgage. Taft v. Hartford, Providence and Fishkill Railroad Co., 8 R. I. 310; Lockhart v. Van Alstein, 81 Mich. 76; Chaffee v. Rutland, &c., Railroad Co., 55 Vt. 110; Warren v. King, 108 U. S. 389; Miller v. Ratterman, 47 Ohio St. 141; 21 N. E. Rep. 496. In view of these cases, it is not surprising that the legislature inserted the clause in question in the act of 1815, and has retained it in the act of 1896. The effect of it 1 is to prevent the incorporators from giving the preferred stock- ¡ holders a claim superior to that of creditors by an insertion of a j provision to that effect in the certificate of organization, and inf that respect this clause still serves a useful purpose. I
It is important that investors in a corporation should be able to ascertain their rights by an examination of the certificate, and it was no doubt with that end in view that the legislature made the changes in the act of 1875, which now appear in section 8 and section 18. It is true, as was forcibly argued on • behalf of the respondents, that it can hardly be that all of the
The decree must be reversed, with costs, and the record remitted to the court of chancery for further proceedings therein in conformity with this opinion.