23 Del. Ch. 13 | New York Court of Chancery | 1938
: Complainants are holders of shares of seven per cent, cumulative preferred stock issued by the defendant under authority of an amendment to its charter adopted June 29, 1926.
Said stock has a par value of one hundred dollars per share; calls for an annual seven dollar per share dividend which is cumulative and must be paid before any dividends may be paid to the common stock; is entitled to receive in case of involuntary liquidation of the company or its voluntary dissolution one hundred dollars per share and an amount equal to all unpaid cumulated dividends plus a premium of ten dollars per share; is redeemable at one hundred and ten dollars per share plus an amount equal to the unpaid dividends cumulated thereon; has the benefit of a sinking fund for its retirement; and is entitled to the
On the creation of the preferred stock in 1926, the only other stock outstanding was an issue of common stock, which is now the only stock entitled to vote except as the preferred stock may vote in certain instances.
The designation, preferences, rights, privileges and voting powers of the preferred stock are set forth in Article III of the certificate of incorporation as amended on June 29, 1926. Paragraph 7 of said article is of such importance to the issue presented by the demurrer as to warrant its quotation in full. It is as follows:
“7. So long as any Preferred Stock shall remain outstanding, then without the affirmative vote or written consent of the holders of 75 per cent, of the shares of Preferred Stock at the time outstanding, the designations, preferences and voting powers of the Preferred Stock, and the restrictions or qualifications thereof, shall not be changed or altered; provided, however, that the par value, dividend rate and redemption price of the Preferred Stock, and the amount payable to the holders thereof in the event of the voluntary or involuntary liquidation, dissolution, or winding up of the corporation, shall not be reduced without the affirmative vote or written consent of the holders of one hundred per cent. (100%) of the shares of Preferred Stock at the time outstanding.”
This paragraph of the amended charter was attempted to be altered by the stockholders by an amendment purporting to have been adopted in accordance with the statutory procedure provided for in Section 26 of the General Corporation Law under which the corporation exists. Revised Code 1985, § 2058. The complainants challenge the legality of the purported amendment.
The challenged amendment was assumed to have been
At the meeting of stockholders in December, 1936, when the proposed amendment was acted upon, only fifty-five per cent, of the outstanding preferred stock voted in favor of the amendment and thirty per cent, thereof voted in opposition. The complainants contend that the amendment was incapable of lawful adoption unless seventy-five per cent, of the preferred stock voted favorably with respect to the matters to which that percentage of vote was • applicable, viz., the change or alteration of “the designations, preferences and voting powers of the preferred stock,” and one hundred per cent, of preferred stock voted favorably with respect to the matters to which it was applicable, viz., the reduction of the “par value, dividend rate and redemption price of the preferred stock and the amount payable to the holders thereof in the event of voluntary or involuntary liquidation, etc.” As the amendment did not receive the favorable vote of those percentages, the complainants assert the amendment was never legally adopted.
. The defendant contends that the specified percentages
After the alleged adoption of the amendment of December 11, 1936, viz., on August 1, 1937, the defendant sent to its stockholders notice of a plan for the readjustment of its capital structure which it proposed should be effectuated through an amendment to its certificate of incorporation. Unpaid dividends were then accumulated on the preferred stock since October 31, 1931. The proposed amendment, if adopted, would alter very substantially the rights of the existing preferred stock in numerous particulars. It would reduce the dividend rate from seven per cent, to five per cent., the dividends would accumulate only in case they had been earned but not paid in any year, the redemption price and the amount due on each share in case of liquidation were reduced, and the contingencies on which the preferred stock could elect one less than a majority of the board of directors would be more exacting than before. The proposed amendment also created new classes of stock which need not now be described, and provides a non-mandatory method of capitalizing the preferred dividend in arrearages.
The company invited written consents of the preferred stockholders to the proposed amendment and later called a special meeting of its stockholders to act thereon. Said meeting was held on November 10, 1937. The proposed amendment is claimed to have received the favorable votes of 20,595 shares of the preferred stock,' which is about seventy-two per cent, of the total preferred stock then outstanding, exclusive of what was held in the treasury of the company.
Among the shares voted in the affirmative there were
But the matter of the voting of these 1,159 shares does not appear to be of any decisive moment, for without them there still remained enough favorable votes of preferred stock to satisfy the sixty per cent, and sixty-five per cent, requirements if those percentages were the governing ones.
So the question comes back to whether the amendment to the charter of December, 1936, setting up the sixty per cent, and sixty-five per cent, percentages was lawfully adopted. If it was, the amendment of 1937 received the necessary preferred stock vote specified by the amended charter and the only question then would be whether the readjustment of capital was such as would be otherwise valid under the law, statutory and constitutional.
If the amendment of 1936 was invalid because of a lack of necessary preferred stock votes, as claimed by the complainants, and the complainants are in position to rely on such alleged invalidity, then the amendment of 1937, by which the capital structure was readjusted, was not lawfully adopted and the demurrer should of course be overruled.
The defendant contends that even if the amendment of 1936 was not lawfully adopted because of the insuffi
I now recur to the principal question of law. Did the amendment of December, 1936, receive the necessary votes of preferred stockholders to validate its adoption?
The defendant contends that the affirmative vote of
If this be true, it is plainly apparent that the protection afforded to the preferred stock by the percentages referred to becomes no protection at all, for notwithstanding a bare majority vote could not disturb the rights which before December, 1936, could not be altered or changed except by the approval of seventy-five per cent, and one hundred per cent, respectively of the preferred stock so long as those percentage provisions remained, it was always possible, if the defendant’s contention is sound, for a bare majority to eliminate those percentages entirely by appropriate amendment and then by subsequent proceedings to proceed by a like bare majority to alter and change the provisions of the charter which theretofore were exempt from alteration except by majorities equalling at least the theretofore stipulated percentages.
The corporation did not go to the full length of what the principle contended for by the defendant would allow. It did not eliminate the percentages entirely. It simply reduced them. It took two steps to arrive at the result ultimately desired, viz., the alteration of the rights of the preferred stock by less than the then specified percentages of votes, in particulars to which both percentages respectively applied. It first cut down the percentages by a majority vote less than that specified and then mustered
Now it must strike the impartial mind that that sort of thing is quite contrary to the evident purpose of the percentage provisions. If it be permissible, the protection 1 to the preferred stockholders who invested their money on the faith of those percentage safeguards, was utterly illusory. If the protection which they once had can be thus taken from them, the power to do so ought to be clearly manifest.
What is the argument by which the defendant seeks to demonstrate that such power exists ?
It is said that the amendment of 1936 did not deal with “the designations, preferences, and voting powers” of the preferred stock, and therefore touched none of the subjects as to which a seventy-five per cent, majority of the preferred stock was required. It may be conceded that the amendment did not deal with either designations or preferences. Why did it not deal with “voting powers”? The defendant answers that voting powers are attached to individual shares of stock and that such is the meaning of the phrase as used in paragraph seven of Article III of the charter. If so, the argument goes, the “voting powers” were not disturbed by the 1936 amendment because each share of the preferred stock still has the right to vote after the amendment as well as before. It appears to me, however, that the seventy-five per cent, provision deals not with voting powers in terms of individual shares. It is an incongruity to speak of a seventy-five per cent, majority as associated with an individual share out of thousands. The provision can apply only in reference to all the stock of the specified class considered as a group.
The statute in Section 26, Revised Code 1935, § 2058, provides that if a proposed amendment would “alter or change the preferences, special .rights or powers given to any one or more classes of stock * * * so as to affect such class or classes of stock adversely * * * then the holders of the stock of each class of stock so affected by the amendment shall be entitled to vote as a class upon such amendment, whether by the terms of the Certificate of Incorporation such class be entitled to vote or not; and the affirmative vote of a majority in interest of each such class of stock * * * shall be necessary to the adoption thereof.” The statute, therefore, recognizes the rights of stock as a class in matters of change and amendment of its preferences, special rights and powers, and segregates such classes into separate voting groups. I conceive the preferred stock of this corporation was set apart as a voting group by the charter and as a group possessed “voting rights.”
When the class of stock is thus segregated into a vot
Therefore in the case of the particular corporation now before the court, the majority rule of Section 26 is supplanted by the seventy-five per cent, and one hundred per cent, rules when the preferred stock class to be affected by a proposed amendment is called upon to vote with respect to matters adversely affecting the specified rights to which those percentages are applicable.
The certificate of incorporation of the defendant contains an article reserving power to the corporation to effect amendments of the certificate in the future as may now or hereafter be prescribed by statute and providing specifically that all rights of stockholders are subject to this reservation. The exercise of this reserved power is of course to be according to the terms and procedure of the statute. Solicitors for the defendant speak of this reserved power of amendment as the statutory method of amendment, which prescribes only a majority stock vote to validate the amendatory action. At the same time, they speak, as if in contradistinction, of an amendment requiring more than a majority vote by virtue of a charter provision, as a process of self amendment. Since the statute ranks higher in gradation of authority than the charter, then it must follow, say the solicitors for the defendant, that if the statute prescribes that a mere majority vote shall validate a proposed amendment, a provision in the charter that more than a mere majority shall be required, seventy-five per cent, for instance, the so-called self-amendment by the charter rule must succumb to the majority rule of
Furthermore it is to be observed that the article of the certificate of incorporation reserving a power to amend as fully as the statute permits, specifically provides in its concluding clause that the power shall be “subject, however, to the provisions .of Article III hereof,” said article being the one in paragraph seven thereof which contains the percentages herein frequently mentioned. Thus the' certificate of incorporation itself by express stipulation makes doubly sure what would otherwise be true even without the proviso (because of Section 5, subpar. 11, before referred to) viz., that the majority rule of the statute is supplanted by the percentage rules of the charter.
. I conclude under this head of the discussion that the amendment of December, 1936, altered the voting rights of the preferred stock and failed to receive the prescribed vote of seventy-five per cent, of the outstanding preferred stock in its favor. It is therefore void as against the complainants who never expressed their assent to its adoption.
With respect to the dividend rate on the preferred stock, its redemption and liquidation values, it was pro
If the 1936 amendment had received the assent of seventy-five per cent, or more of the preferred stock, then the question would arise of whether it was in the power of seventy-five per cent, or more through the guise of altering the “voting powers” of the preferred stock, to reduce the one hundred per cent, requirement to sixty-five per cent. • in respect of an amendment which looked to a reduction in the particular matters, viz., dividend rate, etc., which were the subject of the one hundred per cent, safeguard.
As, however, the 1936 amendment received less than a seventy-five per cent, assent from the preferred stockholders, the question just suggested need not be considered.
The defendant’s brief at one point argues as follows— “The view that stockholders may prescribe the method of amendment and by so doing forever withdraw or deny future stockholders the exercise of the statutory power of amendment, implies that the provisions of a corporate charter may be made irrepealable. This is precisely what complainants say when they argue that par. 7 (of Article III) may be amended only by unanimous consent of the holders of all the outstanding preferred shares.” Following the analogy of the principal which disables one legislative session from exempting its acts from amendment by a subsequent one, the defendant contends that one session, so to speak, of the stockholders is equally impotent to restrain amendment by a later one. The case of King v. Ligon, et al., 180 S. C. 224, 185 S. E. 305, is cited in
But the argument touching the point just noticed, is predicated on the one hundred per cent., or unanimity feature of paragraph seven of Article III of the charter. As before stated, I do not feel called upon to consider in this case anything more than the seventy-five per cent, feature in its applicability to “voting powers.” When seventy-five per cent, or more of the preferred shares undertake to alter the one hundred per cent, provision, if ever, it will then be time to consider whether it is permissible for a corporation in exercising the power conferred by Section 5 (subpar. 11) to make a charter provision practically irrepealable by raising the statutory rule of the majority found in Section 26 to as high as one hundred per cent. It will also then be time to consider whether the one hundred per cent, provision is capable of reduction by a seventy-five per cent. vote. As neither the amendment of 1936 nor of 1937 received as much as a seventy-five per cent, vote, it is not necessary to consider whether with respect to some of
The demurrer will be overruled.