Summary
In Consolidated Film Industries, Inc. v. Johnson, 22 Del. Ch. 410, decided one year later, the court adhered to its opinion in the Keller case. Although presenting substantially the same issues as the Keller case, Consolidated Film Industries, Inc. v. Johnson, is, in fact, a stronger holding because the corporation there was not organized until after the 1927 amendment to the corporation act and, thus, the decision is based exclusively on the construction and interpretation of section 26, as amended.
Summary of this case from Western Foundry Co. v. WickerOpinion
December 17, 1937.
LAYTON, C.J., and HARRINGTON, RICHARDS, RODNEY, and SPEAKMAN, JJ., sitting.
Hugh M. Morris and Alexander Nichols, (Meyer H. Lavenstein, of New York City, of counsel), for appellant.
Howard Duane, for appellee.
APPEAL from a final decree of the Court of Chancery for New Castle County granting a perpetual injunction enjoining the appellant from filing a certificate of amendment of its certificate of incorporation, duly adopted by its directors and stockholders. (See ante p. 262, 194 A. 844.)
The appellant, a Delaware corporation, was organized under the General Corporation Law, on January 7, 1928. The appellee is the registered owner of 100 shares of the participating preferred stock of the corporation. With respect to this class of stock the certificate of incorporation provided as follows:
"(a) The holders of the Preferred Stock shall be entitled to receive from the surplus and/or net profits of the corporation when and as declared by the Board of Directors fixed cumulative dividends at the rate of two dollars ($2) per share per annum payable quarterly on the 1st days of January, April, July and October in each year and said fixed cumulative dividends upon the Preferred Stock shall be paid or set apart before any dividends shall be paid or set apart on the Common Stock. Said dividends on the Preferred Stock shall be cumulative so that if the Corporation shall fail on any dividend date to pay such dividends or any part thereof on all issued and outstanding Preferred Stock such deficiency in dividends shall be fully paid, but without interest, before any dividends on the Preferred Stock subsequently payable and before any dividends on the Common Stock shall be paid or set apart.
"(b) Whenever all accumulated fixed dividends on the Preferred Stock for all previous quarterly periods and the quarterly instalment of such dividends on the Preferred Stock for the current quarterly period shall have been declared and paid or set apart for payment then and not until then the directors may declare dividends on the Common Stock payable at such times as the directors may determine in amounts aggregating not to exceed two dollars ($2) per share in any year out of any remaining surplus and/or net profits. If and when the directors shall have declared dividends on the common stock to the amount of two dollars ($2) per share in any year then and not until then the directors may declare additional dividends in such year out of any remaining surplus and/or net profits, but all such additional dividends in any year shall be payable to the holders of Preferred Stock and Common Stock share for share as if all shares then outstanding were shares of one and the same class."
As of October 1, 1936, the cumulative dividends on the preferred stock were in arrears to the extent of $4.00 a share.
On August 31, 1936, the board of directors of the appellant adopted a resolution setting forth a proposed amendment to the certificate of incorporation, and calling a stockholders' meeting to be held on October 9, 1936, for the consideration of the amendment. The proposed amendment, inter alia, provided as follows:
"(i) Each of the 400,000 shares of Preferred Stock heretofore issued and outstanding immediately before the becoming effective of this amendment of the Certificate of Incorporation, including the right thereof to all accumulated, accrued and unpaid dividends thereon shall, upon this amendment of the Certificate of Incorporation becoming effective, become and be, and shall be surrendered in exchange for, (a) one and one-quarter (1¼) shares of Preference Stock, and (b) one-quarter (¼) share of Common Stock.
"Each of the 524,973 shares of Common Stock heretofore issued and outstanding immediately before the becoming effective of this amendment of the Certificate of Incorporation shall, upon this amendment of the Certificate of Incorporation becoming effective, become and be, and shall be surrendered in exchange for, two-thirds (2/3) of a share of Common Stock."
And with respect to the new preference stock, the provisions were as follows:
"(a) The holders of the Preference Stock shall be entitled to receive from the surplus and/or net profits of the Corporation, when and as declared by the Board of Directors, a fixed dividend at the rate of One Dollar ($1) per share per annum, payable quarterly on the first days of January, April, July and October in each year, and said fixed dividends shall be paid or set apart before any dividends shall be paid or set apart on the Common Stock. Said fixed dividend on the Preference Stock shall be cumulative so that if the Corporation shall fail on any dividend date to pay such dividend or any part thereof on issued and outstanding Preference Stock, such deficiency in dividends shall be fully paid, but without interest, before any dividends on the Common Stock shall be paid or set apart. Dividends on the Preference Stock shall accrue and be cumulative from the quarterly fixed dividend date next preceding the date when this amendment of the Certificate of Incorporation shall become effective.
"(b) Whenever all accumulated fixed dividends on the Preference Stock for all previous quarterly periods and the quarterly installment of such dividend on the Preference Stock shall have been declared and paid or set apart for payment, then and not until then, the Board of Directors may declare additional dividends, payable in such amounts and at such times, as the Board of Directors may determine, out of any remaining surplus and/or net profits, provided that one-half of the aggregate amount of every such additional dividend, whether payable in cash, property or stock, shall be declared and be payable to the holders of the Preference Stock as a class, and the remaining one-half thereof shall be declared and be payable to the holders of the Common Stock as a class."
By the proposed amendment, the corporation sought to convert the 400,000 shares of participating preferred stock, entitled to cumulative dividends at the rate of $2.00 a share, into 500,000 shares of participating preferred stock entitled to cumulative dividends at the rate of $1.00 per share; to exchange each share of the old preferred stock for 1¼ shares of the new preferred stock and ¼ share of the new common stock; and to cancel all rights to accumulated and unpaid dividends on the old preferred shares.
The stockholders approved the proposed amendment, the filing of which with the Secretary of State the complainant sought to enjoin.
The original certificate of incorporation reserved the right to the corporation, "to amend, alter, change or repeal any provision contained in this Certificate of Incorporation in the manner now or hereafter prescribed by law, and all the rights and powers conferred herein upon stockholders, directors and officers are subject to this reserved power."
When the corporation was organized, Section 26 of the General Corporation Law authorized amendments of certificates of incorporation "by increasing or decreasing its authorized capital stock or reclassifying the same, by changing the number, par value, designations, preferences, or relative, participating, optional, or other special rights of the shares or the qualifications, limitations or restrictions of such rights." Rev. Code 1915, § 1940, as amended by Section 10, c. 85, Vol. 35, Laws of Del., approved March 2, 1927.
The case was heard on bill and answer and accompanying affidavits. The Chancellor granted a preliminary injunction and an appeal was taken to this court, but it was dismissed for want of jurisdiction, in Consolidated Film Industries, Inc., v. Johnson, 21 Del Ch. 417, 192 A. 603, where a more complete statement of the averments of the bill and answer will be found. Thereafter the injunction was made perpetual, and a final decree entered as of September 22, 1937, and the corporation appealed.
There were a number of assignments of error, but the questions raised under them are reducible to two: first, that the Court of Chancery erred in holding that cumulative dividends accumulated by lapse of time upon the preferred stock of a corporation organized after March 2, 1927, may not be changed or extinguished by amendment to the corporate charter made pursuant to Section 26 of the General Corporation Law, Rev. Code 1915, § 1940; second, that the court erred in failing to hold that the respondent corporation had the power to amend its charter in the manner proposed under the express reservation of power contained in its certificate of incorporation, and thereby to extinguish such dividends.
Cumulative dividends accumulated by lapse of time upon preferred stock of a corporation organized after March 2, 1927, could not be changed or extinguished by amendment to corporate charter made pursuant to statute authorizing amendment of charters. Rev. Code 1915, § 1940, as amended by 35 Del. Laws, c. 85, § 10.
Statute authorizing amendment of charters of corporations was not intended to have a retrospective operation. Rev. Code 1915, § 1940, as amended by 35 Del. Laws, c. 85, § 10.
The reservation of right in corporate charter to amend, alter, or change provisions of certificate of incorporation and subjection of all rights of stockholders to reservation of power did not make right of preferred stockholder to cumulative dividends accumulated by lapse of time contingent or expectant and hence subject to cancellation, since charter provision should have no greater significance than statute which operates prospectively only and gives no power to cancel dividends on cumulative preferred stock accrued through time. Rev. Code 1915, § 1940, as amended by 35 Del. Laws, c. 85, § 10.
The authority of the State over corporations under its so-called reserved power is wide but not unlimited.
One who claims that State has conferred a power upon corporations by charter amendment to change such a substantial contractual right as right to dividends on cumulative preferred stock accrued under contract through time must point to statutory language so clear and precise as to permit of no reasonable doubt that retrospective operation was intended.
The dispute between the parties, as it is presented, grows out of that part of the proposed amendment to the certificate of incorporation of the appellant which, in the reclassification of the capital stock, seeks to cancel dividends accrued through passage of time on the cumulative preferred shares.
The question is whether the appellant corporation, under Section 26 of the General Corporation Law, Rev. Code 1915, § 1940, as amended by Section 10, c. 85, Vol. 35, Del. Laws, approved March 2, 1927, had the power to capitalize, alter or extinguish, as an incident to the proposed reclassification of its capital stock, the right of its preferred shareholders to receive accumulated dividends accrued on the preferred shares through passage of time, but not declared and paid.
The appellant insists that the right of the appellee, as a holder of preferred shares of the corporation, is not to be viewed as a vested right, but as an expectant or contingent right, for two reasons: first, for that Section 26, as it stood when the corporation was organized, conferred upon it the power to change by amendment of its certificate of incorporation, the "relative, participating, optional, or other special rights of the shares," a power which did not exist when the corporation in Keller v. Wilson Co., Inc., 21 Del. Ch. 391, 190 A. 115, 125, was organized; and, second, for that the rights and powers of stockholders are, by an express provision of the charter, made subject to the reserved power of the corporation to amend, alter, change or repeal any provision therein contained.
The appellee relies on the Keller Case, and the Chancellor based his decision on that authority. Johnson v. Consolidated Film Industries, ante p. 262, 194 A. 844. The appellant maintains that the cases are distinguishable.
In the Keller Case, the corporation was organized, and the complainant had acquired his preferred stock at a time when Section 26 of the General Corporation Law gave no power to a corporation to accomplish by way of an amendment of its certificate of incorporation, a reclassification of its capital stock by changing "the relative, participating, optional, or other special rights of the shares." Thereafter, the section was amended conferring the power, and the corporation, by an appropriate amendment, sought to cancel accumulated dividends on preferred shares accrued through time.
Apart from the constitutional aspect, one of the questions there propounded was whether the statute should be construed to operate retrospectively; and in answer, we said:
" Section 26 of the General Corporation Law is the section authorizing amendments of corporate charters. It authorizes nothing more than it purports to authorize, the amendment of charters. The cancellation of cumulative dividends already accrued through passage of time is not an amendment of a charter. It is the destruction of a right in the nature of a debt, a matter not within the purview of the section. The cancellation of the right to such dividends is foreign to the design and purpose of the section. The effect of the charter amendment, in so far as it concerns the status of the shares and the rights of the owners, speaking from the time of its accomplishment, is not denied by the complainants; but there is nothing in the language of the section, as amended, which compels a retrospective operation. The rights of cumulative preferred shareholders to the stipulated dividends accrue to them by virtue of the contract. That right exists and persists. When the necessary corporate action, under the amended statute conferring the power is taken, the status of the shares may be changed, and the right thereafter to claim the dividends as originally stipulated may be cancelled, but the amended statute under the general rule of construction, ought not to have a retroactive effect."
And, further, we said:
"The dividends accumulated in accordance with the provisions of the charter under which the stock was issued. The amendment of 1927 granted a power only. It might never have been exercised."
It is urged by the appellant that the instant case is clearly distinguishable from the Keller Case in that the corporation here was organized after the amendment of 1927, wherefore the right of the appellee, as a holder of cumulative preferred stock to dividends thereon accrued through time, was expectant or contingent, and therefore subject to abrogation by the power granted by the amendment.
We have examined carefully the able and ingenious argument of appellant's counsel, and have reviewed the Keller Case and the language there used with respect to the amendment of Section 26, to ascertain whether, in principle, the position of the appellee differs from that of the protesting shareholder in the Keller Case up to the time of the exercise of the authorized power by the corporation.
The question involves the nature and quality of the contractual right of the shareholders, preferred and common, inter sese. In the Keller Case we were in agreement with the fundamental philosophy of the decision of this court in Penington v. Commonwealth Hotel Construction Corporation, 17 Del. Ch. 394, 155 A. 514, 75 A.L.R. 1136 , where the sanctity of the contractual right of holders of cumulative preferred stock to dividends accrued thereon through time was clearly recognized. There it was said that it is well understood that the prospect for profit of the two classes of stock differ, and that the balance of profit, in the hope of which the company is formed, over and above that which must be distributed among preferred shareholders, will be paid to the holders of the common stock. The stockholders agree that the preferred dividends shall be cumulative, and that no payment of dividends shall be made on the common stock unless and until all arrearages or deficiency of dividends on the preferred stock have been paid; and, in the Keller Case, we said, in elaboration of the thought, that it might reasonably be supposed that one who invests his money in cumulative preferred stock relies largely upon the right to receive the stipulated dividends at some time; that, speaking generally, the investor seeks certainty as against a speculative rise in price; that the right to such dividends gives value to the stock easily recognizable even during period when preferred dividends are not paid; and that, as the right to such dividends is an inducement to buy, so, oftentimes, it is an inducement to retain. It may be said also that the investor in common stock has before him the possibility of a rise in price as well as of dividends. Presumably he weighs the advantages of security with a rather constant price level against the advantage of possible large gains resulting from increase in price of the common shares, and he buys the common shares with knowledge of his contractual relation with the preferred shareholder and the latter's superior position with respect to distribution of earnings.
In ascertaining their contractual rights the shareholders look to the charter and the law. In the Keller Case, at the time of the organization of the corporation and the acquirement of the preferred shares thereof by the complainant, the law did not permit the abrogation of dividends on cumulative preferred shares accrued through passage of time, and we held that the amendment of 1927 conferred only a power which, when exercised, enabled a corporation to change the status of shares and rights of owners thereof speaking from the time of the accomplishment of the appropriate corporate action, but that the language of the amendment did not point to retrospective operation.
In the instant case, the complainant, looking to the law to ascertain his contractual right, was informed that, by appropriate corporate action, the status of the preferred shares and the relative, participating or other special rights incident thereto, might be changed. He was bound to know that the language of the amendment of 1927 was broad enough to permit the corporation to change the character of the stock in which he was willing to invest his money, into a stock of another kind in which, perhaps, he would not invest, and he assumed the risk of the exercise of the power of amendment by the corporation. But, the statute informed him that the corporation was granted a power only. He was not informed that the exercise of the power not only would change the character of his stock and the rights incident thereto in the future, but also, by retrospection, would cancel his fixed, contractual right to dividends accrued through time, and which, as against common shareholders, he was entitled by virtue of his contract to have paid before distribution of earnings among them. He, therefore, was justified in the belief that he would be protected in his right to cumulative dividends accrued through time up to the time when, by corporate action, the status of his shares should be changed.
The case is precisely similar to the Keller Case except that the corporation was created since the amendment of 1927. It may be said that it has a stronger right to claim the full measure of the power granted by that amendment, but we are unable to discover a difference in principle between the two cases. In either case, as concerns the amendment of 1927, the owner of cumulative preferred shares, was entitled to rely on his contractual right which, as against common shareholders, entitled him to receive at some time the dividends accrued thereon through time until the accomplishment of the reclassification of the shares and the change of their status by the necessary corporate action under the power granted. To that time the right ought to be regarded as a fixed, contractual right, not to be diminished or cancelled against his consent, but to be recognized and protected. The language of the amended section is clear and unambiguous. It authorized the amendment of charters. There is nothing in the language to suggest that the section, as amended, was intended to have a retrospective operation.
It is argued that the reservation of the right to amend, alter or change the provisions of the certificate of incorporation, and the subjection of all rights of stockholders to the reservation of power, makes the right of the appellee contingent or expectant, and, therefore, subject to cancellation.
The language of this provision is no broader than that of Section 26 of the Corporation Law, as amended. It is not, in any degree, so perspicuous and definite. If, as we have held, Section 26 operates prospectively and gives no power to cancel dividends on cumulative preferred stock accrued through time, clearly the charter provision can have no greater significance or meaning.
It is universally agreed that the authority of the State, under its so-called reserved power is wide but not unlimited.
Many interrelations of the State, the corporation, and the shareholders may be changed. But he, who contends that the State has conferred a power upon corporations, by charter amendment, to change such a substantial contractual right as the right to dividends on cumulative preferred stock accrued under the contract through time, should be able to point to statutory language so clear and precise as to permit of no reasonable doubt that a retrospective operation was intended.
The Chancellor correctly construed the language of the opinion in the Keller Case as being applicable to the situation presented here. His decree is sustained.