190 N.E. 884 | Ill. | 1934
This cause comes here from the Appellate Court for the Second District by appeal and certificate of importance. That court reversed a decree of the circuit court of Lake county without remanding the cause.
The appellant, Thomas R. Tennant, filed a bill in equity in July, 1929, in the Lake county circuit court, against the appellees, Harry Epstein, Anna Epstein, his wife, Chester H. Epstein, their son, and the Grayslake Gelatine Company, an Illinois corporation. The bill prayed for cancellation of 32,000 shares of common stock which formed a stock dividend, for re-payment of cash dividends thereon, and, in the alternative, for relief not in question in this court. The individual parties to the suit are, and have been from its organization, the sole owners of the shares of the corporation. In 1922 the company was formed to manufacture gelatine. Earlier, on December 1, 1921, after negotiations had been carried on for a considerable period between *28 Harry Epstein and Tennant, they entered into a contract. This contract provided for the purchase by Epstein of a certain manufacturing plant, and that a corporation was to be formed with 1500 shares of preferred stock, with the same preferential rights and interests later provided for in the articles of incorporation. The contract provided that the board of directors, after the company had been organized, should vote a salary of $1000 per month to Harry Epstein as president, and that immediately after. adopting by-laws the company was to enter into a contract to employ Tennant for five years as general manager and supervisor of production at a like salary. It also provided that Harry Epstein would transfer 100 shares of common stock to Tennant at the expiration of each year of this contract. Tennant was to put in $10,000 for 100 shares of preferred stock. The Epsteins were to get the remaining 1400 shares of preferred stock and 2000 shares of common stock.
On March 20, 1922, Epstein's attorney, Hamilton Moses, mentioned the fact that all shares in an Illinois corporation were required to have voting power. At his suggestion 30,000 shares of preferred and 2000 shares of common stock were provided for, all of the par value of five dollars instead of what the contract required. The Epsteins received 28,000 and Tennant 2000 shares of preferred. The Epsteins first received the 2000 shares of common, and during the life of the contract with Tennant he received 500 shares of common stock as agreed. Epstein's lawyer became a witness in the case. He admitted that either Tennant or Harry Epstein in the conversation with reference to the articles of incorporation on March 20, 1922, at the office of Moses, said they were going to engage in the gelatine business, and that such matters as the kind and number of shares of stock were matters of law, about which they knew nothing. The witness Moses, among other things, said that it was stated that they (Tennant *29 and Epstein) wanted the stock issued in such a way that there would be a certain, definite amount paid by way of interest, and that Tennant had to get his money to pay interest on what he had to raise to put into the business. He stated with reference to the form of stock certificate prepared by his firm, that "as I read it, it incorporated every idea that was intended to be evidenced by the certificate of incorporation." In this connection he also said that it was his idea that the preferred stock was to get no more cash dividends than the seven per cent cumulative dividend provided for in the articles of incorporation and stock certificate. As to the change in number of shares, etc., from the provision made therefor in the contract of December 1, 1921, he said: "They [meaning the articles of incorporation] were prepared while Mr. Tennant and Mr. Epstein were there, after we had the talk in which I explained to them that I did not think they should have 1500 shares of preferred stock of the par value of $100 per share and 2000 shares of non-par stock." In reply to a question as to whether he explained to Tennant what effect the change would make on his rights as owner of twenty-five per cent of the common stock, he said: "I told him that it would not be fair to have the holders of the common stock, 2000 shares, have a greater power in the control of the company than the persons who paid in $150,000 for 1500 shares of stock. I explained to them that in Illinois you could not make a stock as to an Illinois corporation a non-voting stock. I said it would not be fair for one who had made a $10,000 investment to have greater control than those who paid $150,000." Again, he answered that they were "just discussing it from the voting standpoint," in response to a question as to whether the change did bring about a different effect and whether such effect had been pointed out to Tennant. At another place he testified that "I never thought of it," when asked whether on March 20, 1922, or prior thereto, he had contemplated *30 what effect the change in number of shares of the two kinds would make in the event of a stock dividend. He admitted that holders of the preferred stock were not intended to receive cash dividends beyond seven per cent per annum, payable quarterly, but stated that in his opinion stock dividends were not excluded by this limitation, and that since they were not technically "dividends," in that by a stock dividend the corporation was not divorced from the cash but merely transferred it to its capital account, holders of preferred stock would be entitled to receive stock dividends. With reference to the by-laws he said: "If you will remember the by-laws, it provided that any new stock should be distributedpro rata. That was the clause we put into that by-law that is a little different than any you have ever seen in by-laws before. It was incorporated in the by-law by us."
The articles of incorporation provided, with reference to stock, as follows: "The preferred stock shall be seven per cent (7%) cumulative dividend preferred, and shall be a first lien on the assets of the company, in event of its dissolution, over the common stock of said company, and shall be entitled to payment of seven per cent (7%) cumulative dividend annually before any dividend shall be declared and paid upon the common stock of the company." The by-laws provided:
"Section 1. The capital stock of this corporation shall consist of 30,000 shares of preferred capital stock, of the par value of five dollars each, and 2000 shares of common capital stock of the par value of five dollars each.
"Preferred stock. Sec. 2. The preferred stock shall be seven per cent cumulative dividend preferred, and shall be a first lien on the assets of the company, in the event of its dissolution, over the common stock of said company, and shall be entitled to the payment of a seven per cent cumulative dividend annually before any dividend shall be declared and paid upon the common stock of the company. *31
"Increase. Sec. 3. Should the capital stock of the company at any time be increased, such increase shall be offered to, and may be subscribed to by, the then existing shareholders in proportion to their shareholdings at that time at not less than par."
All of the stock certificates, evidencing ownership in both preferred and common stock, provided: "The holders of the capital preferred stock shall receive from the surplus or net earnings of the corporation, dividends at the rate of seven per cent (7%) per annum at the par value of such stock, and no more, payable quarterly. Such dividends shall be cumulative, and as often as any such dividends shall have accrued and remain unpaid, no dividends shall be paid to the holders of the common stock of the corporation. In the event of any liquidation, dissolution or winding up, whether voluntary or involuntary, of the corporation, the holders of the preferred stock shall be paid the par value of their shares, and all dividends accrued thereon, before any payment or distribution shall be made to the holders of the common stock."
The appellant, Tennant, testified that Harry Epstein approached him and asked him to go into the gelatine manufacturing business with him. He stated to Epstein that he had received a similar offer from a Buffalo gelatine manufacturing company and that the offer included twenty per cent of the common stock of the company. Epstein offered a like amount, and when Tennant said that was not enough, raised it to twenty-five per cent, which Tennant still stated was not enough. Epstein asked what gelatine could be produced for, and, basing his reply on his experience with a similar company, Tennant replied forty-five cents per pound. Epstein then stated they could sell gelatine at fifty-five cents a pound, and that if they built a plant which would produce one million pounds a year, Tennant's one-fourth of the common stock would entitle him to one-fourth of the dividends, which would *32 be approximately twice the salary of $1000 per month offered by Epstein to Tennant. This conversation is not denied.
Harry Epstein, Anna Epstein, his wife, and Tennant were the incorporators and signed the articles of incorporation. They became the first directors of the company. Harry Epstein was president and Anna Epstein seems to have been the secretary when Tennant received his stock certificate dated March 24, 1922, and a year later Chester H. Epstein had become the secretary. Tennant was notified in 1927 that his contract would not be extended or renewed. That year he was removed from the board of directors. The company prospered. It was stipulated that on May 22, 1929, the surplus and undivided profits were $321,408.55. May 21, 1929, a resolution was adopted by the directors declaring a dividend of common stock, 32,000 shares of the par value of five dollars each, which were distributed one share to the holder of record of each share of common and preferred stock on March 21, 1929. There was transferred from the surplus to the capital account $160,000. Until later no dividends were paid on common stock, but the annual seven per cent dividend had been paid on 30,000 shares of preferred stock from 1922 to 1929. April 23, 1929, a cash dividend of forty-nine per cent, called an "equalizing dividend," was voted by the board of directors on the par value of the 2000 shares of common stock. Cash dividends were declared on all the common stock after the stock dividend.
The decree of the chancellor ordered that the resolution adopted at the meeting of the stockholders of the corporation on April 2, 1929, to increase the capital stock from $160,000, consisting of 30,000 shares of preferred and 2000 shares of common stock, to $510,000 by increasing the number of shares of common stock to 72,000, be vacated, set aside and canceled. It was also ordered that the action of the board of directors of the company taken on May 21, *33 1929, declaring a stock dividend of 32,000 shares of common stock to all stockholders of record, be set aside and that the stock certificates so issued be surrendered to the corporation and canceled. Tennant had voted against the increase in stock at the stockholders' meeting. Cash dividends made subsequent to the stock dividend date were ordered re-paid to the corporation. The directors were enjoined from paying more than seven per cent per annum on preferred stock and an accounting was ordered taken.
The question presented by this record is whether the holders of preferred stock in this company have a right to share in a stock dividend to be paid for out of the undivided earnings and surplus in addition to the seven per cent annual cash dividend. The preference which preferred stock enjoys over common stock as to dividends is entirely a matter of contract. The contract is generally set forth in the charter or articles of incorporation, by-laws or stock certificates. No case has been found from our own jurisdiction bearing upon the point of the right of preferred stock to share in dividends beyond the amount of preference stated. Decisions of other jurisdictions are helpful only to the extent that the language contained in the contract between the shareholders is similar to that under consideration here and if the statutes there are similar to our own. Collins v. Portland Electric Power Co.
It is elementary that the statute in force when the contract between the shareholders was made is a part of their contract. Where no statute exists the contract itself is all that need be looked to to determine the preferential rights of preferred stockholders. (Williams v. Renshaw, 220 N.Y. Sup. 532,
What, then, did the parties here intend? Epstein's attorney who drew up the articles of incorporation, the stock certificates and by-laws testified that the declaration of a stock dividend was not contemplated at the time the corporation was organized. We are left to determine what the parties must have meant from a consideration of the language they used, the circumstances surrounding the parties and their conduct. (Continental Ins. Co. v. United States,
We think the results reached in Stone v. United StatesEnvelope Co. supra, Niles v. Ludlow Valve Manf. Co.
202 Fed. 141,
Another act adverse to appellees' contention is found in the payment of the forty-nine per cent dividend on the value of the 2000 shares of common stock in 1929 and the payment of but the limited seven per cent on the value of 30,000 shares of preferred stock in that year prior to the stock dividend. Appellees contend that by payment of this "equalizing" dividend the case of Stone v. United States Envelope Co. supra, is rendered inapplicable, but cite Englander v. Osborne,
The position of the appellees is that the preferred stockholders are as much parties to the business venture as the common stockholders and are entitled to all the rights of the common stockholders except as modified by statute and contract. (Star Publishing Co. v. Ball, supra; Englander v. Osborne,supra.) In other words, they say that the preferences contained in the articles and the stock certificates are merely delimitations of the preferences and not of the rights of the stockholders. The effect of this would be to make the preferred shares participating when no mention of such a right or interest is contained in the articles of incorporation. The parties had the duty, under the law, to provide for this additional right if they intended to create it.
It is contended that the by-law which gave all stockholders equal right to subscribe to new stock at not less than par entitled appellees to share in the stock dividend. The answer to this is, that the act requires the rights, privileges and interests to be set out in the articles of incorporation and to be again contained in the stock certificates. The contention is also made that what is said in the stock certificates is not controlling, but that since the words "no more" are not found in the articles while they do appear in the certificates, this gives the right to share in a stock dividend to preferred stockholders. For the same reasons this contention is unsound. What the parties did was to interpret and construe the meaning of the articles of incorporation by expanding what was said therein. The obvious purpose of having articles of incorporation and requiring by statute the statement of rights, privileges, etc., therein and in stock certificates, is to make convenient and certain the necessary information as to these matters for the use and protection of the investing public. *38
Cases involving income taxes and the construction of wills are cited to the effect that stock dividends are not dividends of cash. While this is true, the holders of the majority of the stock in this company cannot do indirectly what they cannot do directly. They cannot, by a stock dividend based upon a by-law intended to cover the situation which would arise if new capital were required, create a right to additional cash dividends in the holders of preferred stock, to the plain detriment of the appellant as one of the holders of the original common stock.
It is strongly urged, first, that since no mention is made of the distribution of surplus assets in case of dissolution, the holders of preferred stock would be entitled to share pro rata with holders of common stock after principal and dividends were paid on the preferred stock and a like payment of principal and dividends on common stock. From this it is urged, secondly, that the holders of preferred stock should share in the division of a present surplus executed through the medium of a stock dividend. For two reasons this is illogical and unsound: First, it was not necessary in the stock certificates to use the words "no more" to limit payment of dividends to seven per cent per annum; second, the so-called "consistency rule" does not permit appellees, who are a majority in voting power, to withhold dividends on common stock, pile up a surplus, indefinitely vote a stock dividend to themselves not provided for in the articles of incorporation, and thus deprive the holders of common stock of cash dividends they might have received had these things not been done. The purpose is obvious when it is recalled that cash dividends on all common stock were declared after the stock dividend.
It is strenuously argued that the stock dividend should be allowed to stand because if declared pro rata it would effect no change in voting control. While this is true, it very materially changes a more important right, viz., the right to dividends if and when declared. If the rights were *39
as contended by appellees it would be pertinent to ask, Why would anyone invest $10,000, or any other sum, in common stock in this company? In Cratty v. Peoria Law Library Ass'n,
For the reasons indicated, the judgment of the Appellate Court is reversed and the decree of the circuit court of Lake county is affirmed.
Appellate Court reversed, circuit court affirmed. *40