Opinion
No. 35617.
Filed July 3, 1964.
1. Corporations. There is a uniform rule applied in the liquidation of a corporation that the rights of participation in the distribution of the assets depend on the corporation's memorandum and articles of incorporation. 2. ___. In the decisions the term "memorandum" is employed generally to describe the documentary records properly enacted by a corporation having controlling effect in the exercise of its corporate and fiscal functions. 3. ___. In the absence of specified rights or limitations all stockholders are entitled to share equally in liquidated surplus assets. 4. ___. Provisions in corporate articles and memoranda that holders of preferred stock shall be paid the par value of their stock before any liquidation dividends are paid to the holders of common stock is exhaustive and means that the preferred stock shall have its par preference on liquidation and nothing more.
Appeal from the district court for Douglas County: DONALD BRODKEY, Judge. Affirmed.
Edgar M. Morsman, Morsman, Fike, Sawtell Davis, and Renne Edmunds, for appellants.
Finlayson, McKie Kuhns, for appellees.
Heard before WHITE, C.J., CARTER, MESSMORE, YEAGER, SPENCER, BOSLAUGH, and BROWER, JJ.
This action was brought in the district court for Douglas County, Nebraska, by Louise Kountze Squires and John C. Kirmse as plaintiffs on their own behalf and on behalf of all holders of preferred stock of The Balbach Company, against The Balbach Company, The Engler Company, and Paul E. Engler, defendants. Its object is to procure a declaratory judgment determining the amount per share they and the other preferred stockholders similarly situated should receive on winding up the affairs of the defendant, The Balbach Company, a corporation, on voluntary dissolution by action of the stockholders. The two named corporations are one and the same and will be referred to herein as the corporation or the defendant corporation.
At the conclusion of the trial, the district court held that the preferred stockholders were entitled to the par value of their stock with dividends at $8 per annum from January 1, 1962, to the date of payment less $2 per share which had already been paid, and that the common stockholders were entitled to the remainder. The costs were taxed to the plaintiffs except the costs of the First National Bank of Omaha as trustee which were directed to be paid by the defendant corporation.
From this judgment plaintiffs have appealed assigning as error that the judgment is contrary to the law and the evidence.
There is no objection made to the dissolution of the corporation. The controversy involved concerns only the proper distribution of the assets on liquidation between the holders of preferred and common stock. The facts herein have been stipulated by the parties subject to certain objections to certain portions thereof on the grounds of marginality and competency which pose no question of significance herein.
The Balbach Company was incorporated June 21, 1919. Its name subsequently was changed to The Engler Company but its corporate capacity remained; unchanged.
The original articles of incorporation contained Article IV which, so far as it is of significance to our decision, reads as follows: "The amount of authorized capital stock of this corporation is the sum of Five Hundred Thousand Dollars ($500,000), divided into shares of the par value of One Hundred Dollars ($100) each, which shall be fully paid when issued, and nonassessable. * * * Two Thousand (2000) shares of said capital stock shall be common stock, and Three Thousand (3000) shares thereof shall be preferred stock. The preferred stock shall be preferred as to dividends and as to assets in case of liquidation, and shall be issued with such provisions as to payment of dividends thereon and the rate thereof and as to retirement, a with such other provisions as may be fixed and determined by resolution of the Board of Directors prior to its issuance."
No rate of dividend payable to holders of preferred stock is declared in this article and it is not stated to what extent such stock shall be preferred in the event of liquidation.
From the plaintiffs' petition and from the stipulation of facts, however, it is apparent that the rights of the present shareholders of the corporation are governed by an amendment to Article IV dated December 7, 1920, and the contents of the certificates of stock issued to preferred stockholders thereafter.
As amended at that time, Article IV, insofar as it relates to the present case, follows: "The authorized capital stock shall be Five Hundred Thousand Dollars (500,000.00), divided into five thousand (5000) shares of the par value of One Hundred Dollars ($100.00) each, * * *. Two Thousand (2000) shares of said five thousand (5000) shares shall be common stock, and three thousand (3000) of said five thousand (5000) shares shall be preferred stock. Holders of preferred stock shall be paid cumulative dividends of eight per cent (8%) per annum, payable quarterly, before any dividends shall be paid holders of common stock. After dividends of eight per cent (8%) have been paid holders of common stock, all further dividends shall apply equally to preferred and common stock. In case of liquidation, holders of preferred stock shall be paid the par value of their stock in full before any liquidation dividends are paid to the holders of common stock."
On the certificates of preferred stock the following appears: "The holders of the Preferred stock shall be entitled to equal voting rights with the holders of Common stock and shall be entitled to receive from the surplus or any profits of the Corporation when and as declared by the Board of Directors, dividends at the rate of eight per centum (8%) per annum * * *. The dividends on the Preferred stock shall be cumulative, and shall be paid before any dividends are paid on the Common stock, and after dividends of eight per centum (8%) per annum have been paid on the Common stock, the Preferred and Common stock shall participate equally in all further dividends.
"In the event of the winding up or dissolution of the Corporation, whether voluntary or involuntary, the holders of the Preferred stock shall receive the par value of their shares with any unpaid dividends thereon, before any payments are made to holders of the Common stock."
The quoted provisions from the amended article of incorporation and the recitations set out from the preferred stock certificates are quite clear with respect to dividends which might be declared before liquidation. Each share of preferred stock was entitled to receive an 8 percent dividend. If there was an excess each share of common stock was entitled to an 8 percent dividend and if it was proper to make further distribution they were to be equally and proportionately divided between the preferred and common stock.
Distribution of dividends which accrued prior to January 1, 1962, to the preferred stockholders have been fully paid and $2 per share have been paid to them on those accruing thereafter. Although in view of our decision past dividend payments are not of importance, it may be said that from 1936 to 1952, with the exception of 1945, dividends were paid equally to the shareholders of each class of stock although the declared dividends were not always the same from year to year. In 1945 the dividend on, the common stock was 4 percent and from 1953 to 1961, the dividends on the common stock varied from nothing to 4 percent. There was, however, an earned surplus balance in 1945 of $90,415.03 and thereafter the earned surplus balance increased rapidly each year until in September 1961, it had grown to $944,125.69. The distribution of this surplus balance on liquidation is the question now present for determination in this case.
In determining the question before us, there appears at the outset that there is a uniform rule applied in the liquidation of a corporation that the rights of participation in the distribution of the assets depend on the corporation's memorandum and articles of incorporation. See, In re National Telephone Co., (1914) 1 Ch. D. 755; Scottish Insurance Corp. v. Wilsons, (1949) 1 All E. L. R. 1068; Mohawk Carpet Mills v. Delaware Rayon Co., 35 Del. Ch. 51, 110 A.2d 305; Continental Insurance Co. v. United States, 259 U.S. 156, 42 S.Ct. 540, 66 L.Ed. 871.
In the decisions the term "memorandum" is employed generally to describe the documentary records properly enacted by a corporation having controlling effect in the exercise of its corporate and fiscal functions. That is the sense in which it is employed in this opinion.
From the cases cited and those to be cited it appears that there are certain rules which have been generally announced in certain jurisdictions relating to the distribution of assets on liquidation of a corporation.
One is that in the absence of specified rights or limitations all stockholders are entitled to share equally in liquidated surplus assets.
Another is that courts universally adhere to the rule that the rights of respective classes of stockholders are determined by the terms of the articles and memorandum of the corporation except as may be limited by statute.
Difficulty has ensued as in the present case concerning the precise application of the foregoing principles when the articles and memorandum are not explicit on its face.
The question of participation rights upon dissolution had been somewhat obscured by a conflict of authority on the related problem of the right of preferred shareholders to participate in additional dividend distribution beyond their stated priority before dissolution. In England, Will v. United Lankat Plantations Co., (1914) A. C. 11, and in the United States, Niles v. Ludlow Valve Mfg. Co., 202 F. 141, certiorari denied, 231 U.S. 748, 34 S.Ct. 320, 58 L.Ed. 465, further participation was denied in such a situation. However, in Englander v. Osborne, 261 Pa. 366, 104 A. 614, 6 A.L.R. 800, it was held that after the common stock had received a dividend equal to that received by the preferred stock, both were entitled to share equally in any excess. It would seem that the problems were so analogous that it would be inconsistent not to imply a limitation to further participation in dissolution from a stated preference to repayment if such is the proper rule as to annual dividends. The English courts until recently had treated the question as entirely distinct, on the grounds that one theory refers to rights in a going concern while the other refers to rights in liquidation. In re William Metcalfe Sons, Ltd., (1933) 1 Ch. 142. This case was overruled and the distinction eliminated by the decision of the House of Lords hereinafter discussed. The Metcalfe case is cited only to show the analogy existing in the situation with respect to both dividends and liquidating assets that has now been resolved in England by the application of the same rule to both situations by the House of Lords.
As to the dividends, the article and memorandum in the case before us are quite clear. It provided the preferred stockholders were to receive 8 percent annual dividends before any dividends were paid on common stock and that thereafter 8 percent per annum should be paid to the common stock, after which the two classes of stock were to participate equally in further dividends. In the present case, these dividends to the preferred shareholders have hitherto been paid in accordance with these provisions of the articles of incorporation and we need concern ourselves no further with them. Indeed in Continental Insurance Co. v. United States, supra, the court observed that the power to declare dividends which was not exercised could not be resorted to to increase the rights of the holders of the preferred stock on liquidation.
The defendant corporation maintains that the provisions in the amended article IV providing that, "In case of liquidation, holders of preferred stock shall be paid the par value of their stock in full before any liquidation dividends are paid to holders of common stock," are in their nature an exclusive declaration of the rights of the preferred shareholders. This is in accordance with the decision of the Court of Chancery of New Castle County, Delaware, in Mohawk Carpet Mills v. Delaware Rayon Co., supra, decided in 1954. The liquidation clause in the Mohawk case provided: "In case of liquidation or dissolution of the company, after the payment of the full par value of the preferred stock, as hereinbefore provided, the holders of the Class A Stock (preferred) shall be entitled to receive cash to the amount of the par value of their Class A Stock (preferred) before any payment in liquidation is made to the holders of the Class B Stock (common)." The similarity of this liquidation clause to the one in the instant case will be noted. The court said: "In the case at bar the provision giving the Class A (preferred) holders cash to the amount of the par value of their stock before any payment in liquidation is made to the holders of Class B stock (common) is clearly exhaustive. It can mean nothing other than that Class A stock (preferred) shall have its $15 par preference on liquidation and nothing more. The remaining assets of Delaware Rayon Company, such as they are, must be distributed among the holders of Class B stock (common)."
In 1949 this same question in England came before the House of Lords in Scottish Insurance Corp. v. Wilsons, supra. There the colliery assets of the corporation involved had been nationalized under an act of Parliament, making it certain compensation. The result was that the company could no longer pursue the objects for which it was incorporated and its avowed intention was in due course to go into voluntary liquidation. The provisions of its articles in regard to winding up the company are more briefly set out in the dissenting opinion of Lord Morton, page 1087, as follows: "(Article) 159. In the event of the company being wound-up, the preference shares (first issue) shall rank before the other shares of the company on the property of the company, to the extent of repayment of the amounts called up and paid thereon. (Article) 160. In the event of the company being wound-up, the preference shares (second issue) shall rank before the ordinary shares but after the said preference shares (first issue) on the property of the company to the extent of repayment of the amount called up and paid thereon." The holding of the House of Lords is set out as follows on page 1069: "Held: (i) * * * on a true construction of the company's articles, subject to the payment to the preference stockholders of their capital and their preferential dividend, if any not yet paid, and subject also to the discretionary applications by the directors under arts. 139 and 141(a), the whole of the reserve funds and other assets of the company, including the proceeds of sale of the capital assets, were appropriated to the ordinary stockholders to the exclusion of the preference stockholders: Will v. United Lankat Plantation Co., Ltd. ([1914] A. C. 11; 109 L. T. 754), applied; and, therefore, as the preference stockholders had no right to anything beyond what they would receive under the proposed reduction of capital, and as the articles gave them clear notice that there was no assured permanence of their right to a cumulative 7 per cent. dividend, their complaint that payment off in the present circumstances was unfair and inequitable was groundless. * * *
"(ii) * * * arts. 159 and 160 contained a complete statement of the rights of the preference stockholders in the winding-up for the reason that the whole of the profits and assets, of the company (subject to payment of the amounts called up and paid on the preference stock) had been appropriated before liquidation to the ordinary stockholders, and there was nothing in the articles to indicate that the rights of the preference stockholders. if they had not already been paid off, would be increased by attributing to them part of the profits and assets which had been appropriated to the ordinary stockholders: Re Bridgewater Navigation Co. ([1891] 2 Ch. 317; 65 L. T. 576), approved; Re William Metcalfe Sons, Ltd. ([1933] Ch. 142, 148 L. T. 82), overruled. Therefore, as the preference stockholders would not be entitled on a winding-up to anything more than a return of their paid-up capital, apart from any considerations arising out of the Coal Industry Nationalization Act, 1946, 25, their objections to the proposed reduction had no substance."
Thereafter the Court of Appeals in England in Isle of Thanet Electric Supply Co., (1949) 2 All E. L. R. 1060, in considering a similar case involving voluntary liquidation, followed this opinion to the same conclusion. The opinion sets out the applicable portions of the articles of incorporation and the reasons for the decision as follows: "With these considerations in mind, I turn back to art. 3 of the articles of association in this case. As regards the rights as to profits, the whole of the distributable profits are expressly dealt with. They are to be applied, first, in paying to the holders of the preference stock `a fixed cumulative preferential dividend at the rate of six per cent. per annum on the amounts for the time being paid up or credited as paid up thereon respectively in priority to the ordinary shares'; secondly, in paying a noncumulative dividend at the rate of six per cent. per annum, calculated on the same basis, to the holders of the ordinary shares; and the balance is then distributable between the two classes of shares pari passu. Nothing could be more plainly exhaustive than that language. Then, as regards the rights in a winding-up, the holders of the preference shares are stated to be entitled to certain payments in priority to the ordinary shares. Those payments are, first, repayment of the capital paid up on the preference stock, and, second, any arrears of dividend, whether earned or not. The question then is whether there is anything to suggest that the language regarding the rights of the holders of the preference stock in a winding-up is not exhaustive, I can find nothing. The onus now, as I have said; is, in my view, on the holders of the preference stock to show that the provision is not exhaustive, and, in my judgment, they have failed to discharge that onus."
In 12 Fletcher, Cyclopedia Corporations (Perm. Ed.), 5449.1, p, 278, the question before us was discussed as follows: "The English cases formerly held that the preferred shares had participation rights beyond their liquidation preference even though a contrary rule obtained with respect to participation beyond the dividend preference. However, recent English cases have removed such apparent inconsistency holding that the, liquidation preference is exhaustive." In the same section the text further discussed the case of Mohawk Carpet Mills v. Delaware Rayon Co., supra, cited in the notes, saying: "In the first American case to cover this point the charter provided that in the case of liquidation or dissolution of the company, after the payment of the par value of the preferred stock, the holders of the Class A stock (preferred) should be entitled to receive cash to the amount of the par value of their Class A stock (preferred) before any payment in liquidation was made to the holders of Class B stock (common). The court held that the provision giving Class A holders (preferred) cash to the amount of the par value of their stock before any payment in liquidation was made to the holders of Class B stock (common) was clearly exhaustive. It can mean nothing more than that the Class A stock (preferred) should have its $15.00 par preference on liquidation and nothing more. In other words all assets remaining after the holders of Class A stock (preferred) had received the par value were to be distributed to the Class B stockholders (common)."
The law review reports, 53 Michigan Law Review 887, and 30 Notre Dame Lawyer 679 both review the cited case of Mohawk Carpet Mills v. Delaware Rayon Co., supra, and both state it is the first American case to interpret such limitations in articles of incorporation with regard to the rights of the two classes of stock on liquidation.
The plaintiffs point out that the decision in Mohawk Carpet Mills v. Delaware Rayon Co., supra, is not by the court of last resort in Delaware. They cite cases, some of which will now be discussed, which they contend should support a rule that the assets of the defendant corporation in the case before us should be divided between the two classes of stockholders.
Continental Insurance Co. v. United States, supra, was a case in which the Supreme Court of the United States was reviewing the reorganization and enforced readjustment of the corporate structures of the Reading Company and subsidiary, affiliated, and related companies which by a previous decree of that court had been held to be operating as an unlawful combination in restraint of trade under the Sherman Anti-Trust Act. In the process it was necessary to determine the rights of stockholders in the "old" Reading Company on its liquidation. It held that the assets should be divided between both preferred and common shareholders. That the decision was based on memorandum of the company clear and unambiguous is made apparent by the opinion of the court. "The record discloses that in 1904, when the Reading Company made its application to the New York Stock Exchange to have its stock listed, it contained the following statement:
"`The Preferred and Common stocks have equal voting power and in liquidation or dissolution of the corporation will share equally in pro rata distribution of assets.'
"Coming as this must have come from the representatives of both the preferred and common stockholders, it is significant evidence of what they then thought of their respective rights and has the additional weight of a representation to future purchasers of the two classes of stock as to the kind of interests they were buying in the company.
"Our conclusion that the claim on behalf of the common stockholders is invalid is based on the construction of the words of the agreement itself and hardly needs authority to sustain it. It is, however, in accord with the general common-law rule that stockholders common and preferred share alike in the assets of a liquidating corporation, if the preference is only as to dividends. (Citing cases.) This is the rule in Pennsylvania. North American Mining Co. v. Clarke, 40 Pa. St. 432. The cases in which a different conclusion has been reached are where the contract or law determining the rights of the preferred stockholders has an express or clearly implied restriction as to the share which they may take in the assets on liquidation. Niles v. Ludlow Valve Mfg. Co., 196 Fed. 994; Russell v. American Gas Co., 152 App. Div. 136." It is obvious that the decision was based on an agreement which could not have been otherwise interpreted. Neither can inferences be drawn from the other statements in the court's opinion which set out different rules that are patently no basis for the decision of the court. The cited case has no application.
The Equitable Life Assurance Society v. Union P. R.R. Co., 212 N.Y. 360, 106 N.E. 92, L.R.A. 1915D 1052, did not involve liquidation of the railroad corporation. It was a case in which the railroad had received some $80,000,000 from two sources. One was the retirement of its bonds in exchange for stock in which the stock given in exchange was received by the bondholders at $75 a share above par and hence involved a gain in that amount. The second was a profit on the sale of stock in other corporations held by the company. The preferred stockholders contended this gain was not profits from the ordinary business of the railroad and should be treated as capital assets. The court held it was ordinary profits and the preferred stockholders being limited to receive dividends not exceeding 4 percent, it might be distributed to the common stockholders without prejudice to the rights of preferred stockholders. It has no application here.
The case of Sternbergh v. Brock, 225 Pa. 279, 74 A. 166, 133 Am. S. R. 877, 24 L.R.A. N.S. 1078, is cited by the plaintiffs. It did not involve liquidation but only annual dividends. By a resolution at a stockholders meeting it was provided that the preferred stock should receive an annual dividend of 5 percent each year before any dividends were to be set apart on the common stock. For several years the preferred stockholders had received only the designated 5 percent. In March 1907, the directors voted an 8 percent dividend on both common and preferred stock. A holder of common stock sought to enjoin the payment of more than 5 percent to the preferred stockholders. The court held that the preferred stockholders should receive the dividends voted by the directors. The case turned to a great extent on the statute of the State of Pennsylvania authorizing the issuance of this preferred stock which further stated: "* * * the holders of which preferred stock shall be entitled to receive such dividends thereon as the board of directors of the corporation may prescribe, payable only out of the net earnings of the corporation." The cited case has no application here.
Other cases cited, including Niles v. Ludlow Valve Mfg. Co., supra; Guaranty Trust Co. of New York v. Galveston City R. Co., 107 F. 311; and Russell v. American Gas Electric Co., 152 App. Div. 136, 136 N.Y. S. 602, have been examined and it appears in each instance that their decisions throw no light upon the case before us.
On review of the authorities cited, the case of Mohawk Carpet Mills v. Delaware Rayon Co., supra, is the only case in the United States we have found, or to which we have been referred, that is decisive of the issue presented. It is in accord with the present decisions of the courts of England and the reasoning of these authorities appears sound.
We conclude that provisions in corporate articles and memoranda that holders of preferred stock shall be paid the par value of their stock before any liquidation dividends are paid to the holders of common stock is exhaustive and means that the preferred stock shall have its par preference on liquidation and nothing more.
It follows that the judgment of the trial court was without error and should be and is affirmed.
AFFIRMED.