64 N.J. Eq. 173 | New York Court of Chancery | 1902
This is an application for a preliminary injunction to restrain the -Trenton Potteries Company from carrying into effect an agreement for funding arrears of dividends on preferred stock and for exchange of stock certificates. The Trenton Potteries Company filed its certificate of organization on May 29th, 1892. The certificate authorizes the issue of preferred stock to the amount of twelve thousand five hundred shares and of common stock to the amount of seventeen thousand five hundred shares. It provided that the holders of preferred stock should be entitled to receive, and the company should be bound to pay, a yearly cumulative dividend of eight per cent., payable, quarterly, from surplus or net profits, before any dividend should be set apart or paid on common stock. All this stock was issued.
Shortly prior to July 1st, 1902, an agreement was entered into between the Trust Company of the Republic, on behalf of the holders of preferred and common stock, and the Trenton Potteries Company, having for its general object the substitution of non-cumulative for cumulative dividend-paying preferred stock, and the funding of dividends in arrears. The agreement was to be carried into-effect by an amendment to the certificate of incorporation and of the by-laws, and by the surrender by the ratifying stockholders of their stock certificates in exchange for new ones conforming to the provisions of the agreement. The amendment received the assent of more than- two-thirds in interest of each class of stockholders. The objecting complainants, one of whom is a preferred stockholder and three of whom are common stockholders, did not consent and did not attend the meeting at which the amendment was adopted.
The amendment to the certificate of incorporation contains this clause:
*175 “The holders of said preferred stock shall be entitled to receive,, and the company shall be bound to pay thereon, a yearly cumulative dividend of eight per centum, payable quarterly, from surplus or net profits arising from the business of the company before- any dividends shall be set apart or paid on the common stock; provided, however, that the dividends on the preferred- stock held by such shareholders, their successors in title and assigns,, who have ratified or shall ratify a certain agreement (the agreement in question) * * * a copy of which agreement is hereto attached and made part of this certificate shall, from and after the said 1st day of July, 1902, be non-cumulative.”
The agreement provides, in paragraph 6, that
“this agreement is intended to bind all the stockholders of the company who shall ratify the same and their shares of stock, and, also, their respective successors in title.”
The complainants base their application largely upon the decision in Pronick v. Spirits Distributing Co., 13 Dick. Ch. Rep. 97. But that case differs from the present one in this vital particular: There it was sought, by an.amended certificate, to reduce the dividend on all the preferred stock against the will of non-assenting stockholders. Here both- the amendment and the agreement, in explicit language, provide that the proposed change shall operate only upon those who consent; consequently the contract of the complainant Willcox, contained in his stock certificate, remains-unchanged.
If the agreement is unlawful, it must be, not because it is •attempted to change the contract, but because it is sought to divert the surplus. The insistment, on this head, is that the agreement gives an exclusive benefit to those who ratify, by allowing them interest on the funded dividends and making this interest a first charge upon the net earnings.
The clauses objected to read as follows:
“Whereas, Owing to- various causes the company for several years, and on the several dividend days therein, to wit, from September 10th, 1894, to December 10th, 1899, both inclusive, had no profits with which to pay dividends to 'its shareholders, in. consequence whereof the dividends on said preferred stock have fallen into arrears so that the arrears now due, in respect of the dividends on such preferred shares, amount to $550,000, being forty-four per cent, of the par value of such preferred shares.
*176 “Now therefore, the company shall, when this agreement becomes binding, * * * issue to each holder of preferred stock who shall have ratified this agreement a funding certificate or certificates in the form hereto attached for so much of the arrears of $550,000 aforesaid as shall be owing in respect to the preferred stock held by him.
“(2) The principal sum specified in each such certificate shall carry interest at the rate of four per cent, per annum, but such interest as regards each year shall be payable exclusively out of the net profits of the company of that year and shall not be cumulative. Such interest shall be payable in priority to any dividend on the capital stock for such year.”
Two questions arise: (1) Does the agreement, in fact, provide that the interest fund shall he-made a first charge upon all the net earnings? (2) If it does, is the complainant Willeox entitled to a preliminary injunction to restrain its execution?
The agreement, on first reading, seems to make the fout per cent, interest payment a first charge. This is not so clear on further consideration. It is drawn upon the assumption that all the stockholders will agree to it. It is, in terms, a contract between the potteries company and the trust company, “on behalf of the holders of preferred stock and the holders of the common stock”—a description broad enough to include all the holders of both classes of stock. But the trust company could, as a matter of fact, only become the agent or trustee of those who assented; and its benefits and obligations are, in paragraph 5, expressly limited to these. It must, then, be read in this sense. So reading it, the words “capital stock” in that clause of paragraph 2, which declares that “such interest shall be payable in priority to any dividends on the capital stock for such year,” would merely refer to the capital stock of those who assented. This construction is greatly fortified by the following considerations:
The “interest” referred to in paragraph 2 is interest on unpaid dividends. It is not payable at all events, but only out of net profits. It is not even payable out of net profits generally, but, in the words of the agreement, “interest as regards each year- shall be payable exclusively out of the net profits of that year and shall not be cumulative.” So that what is really meant is not interest, properly so called, but a dividend on funding certificates. Nothing is better settled in the books than the
I think it plain, therefore, that if the potteries company are going to provide for the payment of a dividend to some of the members of the class of preferred stockholders, they must provide a like dividend for other members of the same class.
The agreement in the case at bar does not, in terms, deny to the non-assenting stockholders participation in any dividend. It does declare that it shall bond only those who ratify. The rights of those who do not ratify are not, in anywise, alluded to. But one of those rights, and that, perhaps, the most valuable, is that the preferred stockholders shall share equally in the surplus earnings. To hold that this right has been taken away by doubtful implication would be unwarranted.
There is another consideration leading to the same conclusion. In Andrews v. Gas Meter Co., supra, the company had power, under the Companies’ act, to alter its articles of association. It was in the exercise of this power that a new class of shareholders was created, and even in this way difficulty was felt in conceding that a preference could be given. In the case at bar no attempt is made, by the amended certificate, to give the power to prefer part of the class of preferred stockholders to another part in the payment of dividends. All that is there authorized is that dividends on the preferred stock shall, as to those who consent, be, after July 1st, 1902, non-cumulative. It is quite impossible to attribute to an agreement, in terms binding only on those who assent, the same force and effect that was, in the English case, given to an amendment to the articles made in the manner authorized by the Companies’ act and, in terms, binding on all.
I think, therefore, that the agreement must be read in the light of well-established legal rules, and that, so read, it is not to be construed as providing for an unequal distribution of the surplus earnings among the preferred stockholders; and that it will be the duty of the directors, when out of net earnings
But if the agreement should be read as an attempt to vary the rights of non-assenting stockholders, it does not follow that an injunction should issue restraining the consummation of the scheme. The amendment of article third is, as I have said, unobjectionable. The proposed plan, formulated in the agreement, is manifestly beneficial to the company, and is desired ‘by the great majority of its shareholders, common and preferred. No irreparable injury can result to the complainant Willcox if it be carried into effect. If, after it has been consummated, any attempt is made to pay dividends to the other preferred shareholders, in preference to himself, he can easily, by a proper proceeding in this court, assert his legal right to a proportionate share, notwithstanding the provisions of the agreement, if it shall 'be read as denying his rights.
As to the objection taken to the scheme by the common stockholders, it seems to be quite untenable. It is manifestly for their benefit that the preferred stockholders should waive their right to the immediate payment of the dividends that have accumulated in the past and their right to all cumulative dividends in the future in consideration of a small reservation out of the earnings for a redemption fund and of a small payment thereout of interest, so called, both reservation and interest being noncumulative and being given in lieu of the company’s obligation immediately to pay, out of all surplus earnings, all past dividends.
. This works to the benefit of the common stockholders, in that it greatly accelerates their chances of participation in dividends, by postponing the payment of the considerable sum of $550,000, which is no longer an immediate and prior charge upon all surplus earnings: If the earnings in any one year exceed the eight per cent, dividend due the preferred stockholders for that year and the two above-mentioned items, amounting together to less than $50,000 per annum, the directors will be able to devote the excess to the payment of a dividend to the common stockholders,
