General Investment Co. v. American Hide & Leather Co.

The opinion of the court was delivered by Gummeee, Chief-Justice. The American Hide and Leather Company was organized in May, 1899, under the General Corporation law of 1896. By its certificate of incorporation it was authorized to issue $35,000,000 worth of capital stock, divided into three hundred and fifty thousand shares of the par value of $100 each, fifty per cent, of the authorized issue to be preferred stock and fifty per cent, common stock. Pursuant to this authorization, there were actually issued one hundred and twenty-five thousand four hundred and eightv-three shares of preferred stock and one hundred and twelve thousand seven hun *328 dred. and forty-one shares of common stock, the unissued stock still remaining in the company’s treasury. Under the provisions of the certificate of incorporation the holders of preferred stock were entitled to receive each year out of the surplus net profits of the corporation a yearly dividend of seven per centum, if declared, before any dividend should be set apart or paid on the common stock. These dividends were to be cumulative, so that, if any year’s dividends amounting to seven per centum were not paid on the preferred stock, the deficiency was to be payable, subsequently, before any dividends were set aside or paid on the common stock. In the latter part of the year 1934 the board of directors of the corporation, considering it to be for the benefit of the company that changes should be made with relation to the capital stock of the company, both that issued and outstanding, and that still remaining in the treasury of the corporation, issued a notice to the stockholders containing a suggested plan for the accomplishment of this purpose, and providing, for a meeting of the stockholders to pass upon the question of the adoption or rejection thereof, after having first adopted a resolution that the changes specified in the notice were advisable. In brief, the plan, as set out in the bills of complaint, was to substitute for thirty-five thousand shares of the unissued preferred stock of the company a new issue of thirty-five thousand shares of eight per cent, cumulative prior preference stock, having priority both as to its principal and cumulative dividends at the rate of eight per cent, over the outstanding preferred stock, and to be subject to redemption at any time after three years from the issue thereof at fifteen per cent, above par. The plan further provided for a decrease of the total capital stock by canceling ten thousand of the preferred shares and sixty thousand shares of the common stock still 'remaining in the company’s treasury. It also provided for the purchase for retirement of thirty thousand shares of outstanding preferred stock at not above par, and that, in making such purchase, the Chase Securities Corporation, the holder of fifteen thousand shares *329 thereof, should be entitled to sell to the company its holdings at a price of, approximately, $69 per share, the price to be paid, to some extent, out of a fund accumulated by the company and held in its treasury, which fund, as complainants aver, represents accumulated accrued and unpaid dividends on the outstanding preferred stock. In compliance with this notice, the holders of, approximately, three-fourths of the outstanding preferred capital stock and seven-tenths of the outstanding common stock attended the meeting, either in person or by proxy, and voted in favor of the adoption of the proposed plan. Before the scheme was acted upon, however, the present bills of complaint were filed, praying an injunction restraining the corporation from carrying it into execution, upon the ground that it was without warrant of law and injuriously interfered with the rights of the complainants. A preliminary injunction having been refused, an appeal was taken to this court to review the validity of the order of refusal. The principal contention on the part of the appellants is that the issuing of cumulative prior nrefeiancfc^s.t.Qck carrying a dividenrl-.-ft^-eÚ¥.ht-p.er cent., and giving it precedence over ~e-x-isting-preferrerl_stock; both in payment of dividends and the repayment of principal upon dissolution, is in violation of the vested .nights, of the holders of such stock, and, consequently, without warrant of law. The question presented is not an entirely novel one in this court. In the case of Berger v. United States Steel Corp., 68 N. J. Eq. 506, it was contended that a scheme for the retirement of a large block of preferred stock by exchanging for it bonds of an equal amount, to be issued by the corporation for the purpose, involved an absolute change of the previous status of those preferred stockholders who should decline to make the exchange by subjecting their stock to the prior claim and lien of those who should take the bonds, thus injuriously affecting their right to the payment of dividends and to preference in the distribution of capital upon dissolution. It was considered by the court of chancery that a scheme producing such results was in violation of the vested rights of the pre *330 ferred stockholders, and, for this reason, an injunction was ordered restraining the corporation from putting it into execution. The case was then appealed to this court, and we dissented if rom the conclusion of the court of first instance. Id. 809. ¡We held that although the rights of the complainant, who'was a preferred stockholder, might be injuriously affected in the respects indicated, yet that fact could not operate to nullify powers conferred upon the corporation 'Ey) the act under which it was organized (our present Corporation act), and then pointed out that the proposed plan was clearly within the powers thus conferred. A like situation, we think, is presented in the present case. Section 27 of the statute provides that any corporation organized under it may, at any time during its existence, and without regard to the character of its outstanding stock, “create one or more classes of preferred stock,” providing the board of directors shall resolve it to be advisable to do so, and two-thirds in interest of each class of stockholders shall thereafter approve such proposed action. The power thus conferred is only curtailed by those other provisions of the statute which declare the limits beyond which the corporation may not go in issuing such new stock. Nowhere in any of those provisions is there an intimation that the corporation in exercising this power shall not create any one or more classes of preferred stock which shall confer upon the holders thereof rights superior to those of the holders of previous issues of preferred stock, and, in the absence of such intimation, the power thus broadly conferred bjr the legislature is not to be limited by judicial decision. It is further argued in support of this point that the proposed change is not permitted by the articles of incorporation ; that those articles constitute a contract between the stockholders inter esse, which cannot be altered except by the unanimous consent of such stockholders. The answer to this argument is that the fifth section of the statute declares that '“this act shall be a part of the charter of every corporation * * * hereafter formed hereunder;” and that, consequently, the twenty-seventh section of the act, the scope of *331 which we have discussed, is in an integral part of the stockholders’ contract, and, so, is binding upon every stockholder. The next point submitted by counsel for the appellants is that they are entitled to be afforded an opportunity of selling to the corporation for retirement their pro rata holdings of the total amount of shares, the purchase of which is contemplated, and that this right is injuriously affected by the preference given to the Chase Securities Corporation in the making of such purchase.. We concur in the view that, in the purchasing of this stock for_retirement, it should be acquired ratably from each stockholder who desires to sell. It was so held by us in the Berger Case, supra; and, if it be true that the proposed scheme is in violation of that right— which seems, at least, doubtful — the respondent company should be restrained from refusing to afford the complainants the opportunity to dispose of their stock to the corporation to the extent indicated. Next, it is asserted on behalf of the appellants that thev' corporation is without power to appropriate to the purchase of the stock proposed to be retired accrued dividends belonging to the preferred stockholders, which now remain in the treasury of the company. If the purpose indicated is to be attributed to the corporation, the appellants are entitled to have it restrained from using so much of these accrued dividends as are applicable to the stock held by 'them, respectivety, in the purchase contemplated by the plan which has been adopted by the shareholders. The appellants are"" not concerned, however, with this proposed action of the corporation so far as it relates to the accumulated dividends payable to other stockholders, who either have not made any complaint against the carrying into execution of the proposed plan, or who have by their votes approved of it. s' Lastly, we are told that the provision for the redemption of the so-called cumulative prior preference stock, in whole or in part, at any time after three years from the issue thereof, for fifteen per cent, above par, is a violation of section 18 of the Corporation act as amended in 1901 (Comp. *332 Stat. p. 1608), which prohibits the payment of dividends on preferred stock in excess of eight per cent.; and the argument is that the payment of this premium is, in legal effect, the payment of a dividend in excess of the limit fixed by the statute. This argument, however, overlooks the earlier provision of the section, which declares that “preferred stock may, if desired, be made subject to redemption at any time after three j^ears from the issue thereof at a price not less than par.” The fixing of a minimum price connotes a maximum, the amount of which the legislature designedly left to the discretion of the corporation; and that this was the legislative design is made clear by the fact that the statutory provision as originally enacted required that the redemption price, which should not be less than par, be expressed in the stock certificate (P. L. 1896 p. 288), and that the amendment of 1901 makes no change therein except by eliminating the requirement that the redemption price shall be stated in the stock certificate. Reading the whole section together, we have no doubt that the fixing of the redemption price at a figure above par is not a violation of the clause therein limiting the amount of dividends to be paid upon such stock. For the reasons stated, the order appealed from will be affirmed, with the modifications indicated.