Matter of Silberkraus

O’Brien, J. Appellants are the holders of a small minority of shares of the second preferred stock of Schaffer Stores Company, Inc. They claim that the preferential right of such shares has been altered by the amended certificate of incorporation which, on March 31, 1926, over their objection, was authorized by a majority of more than two-thirds. They assert a right to an appraisal of the value of their shares and payment therefor by the corporation. The application of section 38, subdivision 12, of the Stock Corporation Law (Cons. Laws, ch. 59) is directly involved. By the original certificate, the stock of this corporation was classified as first preferred authorized at $125,000, second preferred authorized also at $125,000, and some common. The preferences of the first preferred consisted in its right to seven per cent cumulative dividends and to payment at par on distribution of assets at dissolution. The only preference of the second preferred consisted in a right, equal with the first preferred, to payment at par upon distribution of assets. By the amended certificate, both preferred stocks were retired. Such retirement was effected by virtue of section 36 of the Stock Corporation Law. Instead of the old first and second preferred with an authorized combined capital of $250,000, only one class of preferred is now authorized *244 with a capital of $500,000. It is designated as convertible preferred seven per cent cumulative and its preferential rights are similar to those of the old first preferred. A holder of the old second preferred, exchanging his stock for the new convertible, will acquire shares possessing the preferential right to distribution of assets at par similar to the right that attached to his old shares. To that is added a right to a preferred dividend which his old shares did not possess. The question is whether the preferential right of the outstanding shares of the old second preferred has been altered by the amended certificate of incorporation. It must be answered by the interpretation placed upon section 38, subdivision 12, of the Stock Corporation Law which reads as follows: “ If the certificate alters the preferential rights of any outstanding shares, any holder of such shares not voting in favor or such alteration, within twenty days after the meeting at which such alteration was authorized, may object thereto and demand payment for his shares, and thereupon such stockholder or the corporation may have his shares appraised as provided in section twenty-one, all of the provisions of which section shall in all respects be applicable.” A preference is a superiority either in the receipt of dividends or in the distribution of assets upon dissolution. Preferential rights are such rights as attach to shares possessing a preference. On the retirement of a class of stock all rights adhering to the shares of that class are destroyed. When a class ceases to exist every preferential right attached to it falls. Neither a preference nor a preferential right can survive the thing to which it is appended. The right itself is distinct from the value of the right. For example, a class of stock with priority in the receipt of dividends restricted to one per cent possesses a preference and consequently a preferential right over another class of stock which is entitled to dividends only after payment to the superior class. Yet in the case of a corporation earning *245 large profits, such a preferential right obviously is less valuable than a practical right to dividends of twenty per cent belonging to the common stock. So viewing the right as separate from value, it may be either beneficially or disadvantageously changed. Whenever it is changed in either way, it is altered, and when the change is effected by the amended certificate, a preferential right is altered by that certificate. In Matter of Dresser (247 N. Y. 553) this court decided that the authorization of new shares having preference superior to those of the old ones does not alter the preferential rights of the outstanding shares. There, a new class of preferred stock was superimposed upon an existing preferred class. The old preferred was not retired nor, in principle at least, were its preferential rights displaced. They remained the same, subject only to the preferences of the new class. The value of the old stock’s preferences may or may not have been affected. The rights themselves were not changed. In theory, they remained constant. So within the intent of section 38, subdivision 12, as we held, no alteration occurred. Here, a different state of facts is present. Neither the preferential right of the old stock nor even the old stock itself persists. Both disappear. The stock is retired and, with its retirement, its preferential right falls. A right to participation at par in the distribution of assets is attached to the new stock but the fact that that right is similar to the old ones belonging to the two classes of stock which have been abolished does not prevent an alteration of the abolished right. Abolition is alteration. The right incidental to the new convertible is different from the rights similar in their nature which attached to the old classes. When those stocks were retired, each right was detached from the stock to which it belonged and each was transferred to the new class. There they commingled and lost their identity. The new right which sprang in part from each of the old is no more the one that belonged to the second preferred *246 than a child is the same person as either parent. An edifice built from timbers of two demolished structures is different from both. The severance of the preferential right from the old stock and the destruction of that stock constitute an alteration of the preferential right of the outstanding shares of the extinguished stock. After the conclusion has been reached that preferential rights of outstanding shares have been altered by the certificate, the value of those shares immediately prior to the alteration becomes the central point for consideration. A right may be altered without inflicting damage. Often a benefit may accrue. When, as matter of law, the conclusion cannot be avoided that the alteration has produced advantages to the outstanding shares, the holder might not become entitled to purely theoretical and. technical relief. When, however, the result of the alteration is not entirely clear, the wishes of the stockholder rather than the conception of the courts should prevail. Let him be the one to decide whether he shall avail himself of the opportunity to acquire new stock which he deems of lesser worth or whether he shall take the appraised value of his outstanding shares. Here a serious question arises whether appellants are benefited by the change. The majority stockholders think they are, but these appellants take a different view. The stock which they now own paid dividends of ten per cent. The new stock is limited to seven per cent. The old shares might acquire a market value far in excess of par. The new shares are callable at 110. Under the old certificate, only $250,000 of stock was entitled to par on the distribution of assets, while under the new one twice that amount can participate. Since the question of benefit is arguable, the better result can be attained by intrusting the stockholder with power to decide. That, we think, is the purpose of the statute. (Matter of Timmis, 200 N. Y. 177.) The order of the Appellate Division should be reversed *247 and that of the Special Term affirmed, with costs in this court and in the Appellate Division.