STEVENS, V. C.

Bill by William R. Wilcox and others against the Trenton Potteries Company and others. Heard on application for preliminary injunction. Denied.

Halsey M. Barrett, for complainants.

Lindabury & Griggs, for defendants.

STEVENS, V. C. 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 29, 1892. The certificate authorizes the issue of preferred stock to the amount of 12,500 shares, and of common stock to the amount of 17,500 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 8 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 1, 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 noncumulative for cumulative dividend-paying preferred stock and the funding of dividends in arrear. The agreement was to be carried into effect by an amendment to the certificate of incorporation and of the bylaws, 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: "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 8 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 first day of July, 1902, be noncumulative." 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. Distributing Co., 58 N. J. Eq. 97, 42 Atl. 586. 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 nonasseuting 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 Wilcox, 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 44 per cent. of the par value of such preferred shares: * * * 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 4 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 be made a first charge upon all the net earnings? (2) If it does, is the complainant Wilcox entitled to a preliminary injunction to restrain its execution? The agreement, on first reading, seems to make the 4 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 distinction between interest chargeable upon all the assets and arising out of the forbearance of a debt and dividends payable out of earnings. We must regard, not the names of things, but their substance. If the 4 per cent. payment is a dividend, it is plain that it cannot be made to some of the class of preferred stockholders to the exclusion of others. This is the language of all the eases. Andrews v. Gas Meter Co. [1897] 1 Ch. 361, is not a case to the contrary. It was there held on appeal (overruling Hutton v. Hotel Co., 2 Drew. & S. 52, and the decision below) that a limited company, having no authority, under its memorandum or articles of association, to create any preference between different classes of shares, may, by special resolution, alter its articles so as to authorize the directors to issue preference shares by way of increase of capital. This only goes to the extent of deciding that where, by the memorandum of association, it is provided that the capital shall be divided into shares "with power to increase the capital as provided by the articles of association," the capital can be increased by the creation of a new class of preferred shareholders, who shall take in priority to the classes originally constituted. It is open to doubt whether this decision is in accord with the weight of authority in this country (see 2 Thomp. Corp. § 2244), but its rationale is as follows: A general power to issue stock, authorized by the companies act, and given by the memorandum of association, includes a power to divide the stock into classes; and to divide the same into classes not merely at the outset, but at any time. On this construction of the language of the memorandum, and because the terms of that instrument entered into every contract, express or implied, which the company might make with its stockholders, it was held to follow as a logical consequence that it was no breach of the original contract to provide for the formation of a new class of shareholders to which might be given a preference over the other classes then in esse, whether common or preferred. But it is evident this is a very different thing from asserting that, as between members of an already existing class, whose contract is equality inter sese, the company may subsequently, and without any reservation of power in the first instance, vary their rights at pleasure. I have been referred to no case which so holds, and I doubt very much whether any such case can be found. In Allen v. Gold Reefs [1900] 1 Ch. 656, it was merely held that the company had power to extend its lien for indebtedness to sliares already issued and full paid. 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 nonassenting stockholders participation in any dividend. It does declare that it shall bind only those who ratify. The rights of those who do not ratify are not in any wise 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 1, 1902, noncumulative. 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 beconstrued 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, they set aside a sum equal to 4 per cent. of the funding certificates, to set aside apart a proportionate sum, whether that sum be called interest or dividend, for the benefit of those who do not assent.

But if the agreement should be read as an attempt to vary the rights of nonassenting stockholders, it does not follow that an injunction should issue restraining the consummation of the scheme. The amendment of article 3 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 Wilcox 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 him self, 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 then 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 reserva tion 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 8 per cent. dividend due the preferred stockholders for that year and the two abovementioned 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, discharged of their obligation to make up dividends in arrears. It is hard to understand how such an arrangement can be an irreparable injury to common stockholders,—an injury which calls for the immediate interposition of this court by preliminary injunction. If illegal, Its illegality is not apparent. The case, on this branch of it, comes within the familiar rule of Citizens' Coach Co. v. Camden Horse Ry. Co., 29 N. J. Eq. 299.