Summary
finding that a complaining stockholder was barred by "the estoppel of his acquiescence"
Summary of this case from TR Investors, LLC v. GengerOpinion
July 28, 1938.
Suit by Edward F. Romer and others against the Porcelain Products, Incorporated, to declare void an amendment of the defendant's certificate of incorporation insofar as the amendment undertakes to destroy the rights of complainants to be paid dividends in arrear upon cumulative preferred stock which they had when the amendment was adopted and which, by the amendment, were reclassified into common stock, wherein Rolland E. Dalton and others intervened.
Bill dismissed.
Bill to declare void an amendment of the defendant's certificate of incorporation adopted on April 4, 1933, insofar as said amendment undertakes to destroy the rights of the complainants to be paid dividends in arrear upon cumulative preferred stock which they had when the amendment was adopted and which, by the amendment, were reclassified into common stock. The complainants did not vote in favor of the amendment. They have never surrendered their preferred certificates for exchange into the common stock which, under the reclassification, they are entitled to receive. Dividends on the common stock have been declared since the amendment was adopted. The complainants seek a decree for the arrearages on the preferred stock which were accumulated thereon when the amendment was adopted and for the dividends declared since then on the common stock which they are entitled to receive in exchange for old preferred held by them. They also seek an injunction against the declaration and payment of any further dividends on the common stock until the dividends in arrear upon their old preferred stock shall have been paid. The complainants refuse to surrender their certificates for preferred stock in recognition of the amendment until they have first been paid the dividends cumulated thereon. The defendant has refused to pay them
any dividends whatever until the old preferred certificates have been surrendered.
The defendant was organized in June, 1927. Prior to April 4, 1933, the defendant's capital consisted of two kinds of stock — a six per cent cumulative preferred stock with a par value of one hundred dollars per share and common stock having no par value. The shares of the company were issued in units of one share of preferred and one share of common. In each class there were 18,143 shares issued. Originally, every stockholder owned the same number of each kind of shares. The complainant, Edward F. Romer, held sixty shares of preferred and sixty shares of common. In September of 1932, he transferred thirty-five of his preferred shares and all of his sixty shares of common to his wife, the complainant Josephine M. Romer. The complainant, Inwalls, acquired originally and still owns one hundred and fifty-nine shares of preferred and the same amount of common.
When the reclassifying amendment was adopted on April 4, 1933, every stockholder held the identical number of shares of preferred and common stock, excepting alone Mr. and Mrs. Romer, whose separate holdings together were of an equal number of both preferred and common shares.
The reclassifying amendment turned the preferred stock into common on the basis of one-half a share of common for each share of preferred and gave one-half a share of common to each share of common then outstanding. After the amendment, therefore, the outstanding stock of the company consisted solely of 18,143 shares of common stock. Concurrently with this reclassification of stock the capital account of the company was adjusted by a reduction of capital to $907,150, thereby eliminating an excess capital charge for assets which were worth far less than they had been carried on the books as worth.
The complainants received full notice of everything that was proposed to be done. They made no objection until October 29th, 1936, when a demand was made for the first time that the complainants be paid all the dividends accumulated on the preferred stock prior to the amendment of April 4, 1933. The bill was filed on October 5, 1937, about four and one-half years after the amendment now complained against was adopted.
Heard on bill insofar as admitted by the answer, stipulation of the parties and testimony taken on depositions.
Clarence A. Southerland and Paul Leahy (of Ward Gray), both of Wilmington, for complainants.
C. Edward Duffy (of Hastings, Stockly Duffy), of Wilmington, and Homer S. Adams, of Parkersburg, W. Va., for defendant.
The Supreme Court of this State in Keller et al. v. Wilson Co., Inc., 190 A. 115, held that it is beyond the power of a Delaware corporation created prior to the amendment of the act of 1927 ( 35 Del. Laws, c. 85) so to amend its charter as to reclassify its stock in a way that would extinguish the right of a dissenting preferred stockholder to receive in cash the arrearages of dividends which had accumulated on his shares as stipulated in the charter, before dividends on junior stock could be paid. The same rule applies to a corporation created after said amendment of 1927. The Supreme Court so held in Consolidated Film Industries, Inc. v. Johnson, 197 A. 489, affirming, Del.Ch., 194 A. 844. The rule of the Keller Case is therefore applicable to all corporations existing under the act regardless of when they were created, and so is applicable to the defendant.
[2, 3] But the amendment which falls under the condemnation of Keller et al. v. Wilson Co., Inc., supra, is not void absolutely. If the stockholders are unanimous in its adoption, it is binding. A stockholder is barred from complaining against it by the estoppel of his acquiescence or by circumstances showing laches in the assertion of his objection. Trounstine v. Remington-Rand, Inc., 194 A. 95, decided by this court on July 21, 1937.
The defendant contends that the delay by the complainants of four and one-half years after the amendment was adopted before they filed their bill, is such a delay as under the circumstances ought to bar the complainants from maintaining their suit. When a corporation takes important action of the kind here challenged, action which involves a complete change in its capital structure and which alters in a radical way the character and rights attaching to its shares in the future, it would
seem that there ought to come a time when it could be safely said that the action, though originally subject to attack for want of power, has nevertheless passed into the settled status of an accepted fact. The desirability of repose to fundamental questions vitally affecting the corporation's future welfare and the great desideratum of certainty as to the exact character and rights which belong to its shares of stock, not only from the view point of the stockholders who might desire to sell their stock but of other persons who contemplate buying it, as well as from the view point of the corporation, forcefully suggest that there ought to come a time when it could be said with assurance that the status of the rights and burdens attaching to the corporation's securities is definitely fixed. It is unreasonable that an unconsenting stockholder who has been fully and promptly pre-advised of what was proposed to be done and the reasons therefor and who, after the act, was amply informed thereof, should be permitted to sit idly by to await the developments of the future in order to determine what course of action it would be best for him to pursue and then, according as his personal interests rather than those of the corporation and the other stockholders would suggest, seek to reach back over the past and attack what everyone had a right to suppose had become a matter of mere academic and historical interest. Where action affecting numerous persons, though illegal, is susceptible of ratification, he who desires to object thereto owes some duty to the others to be diligent according as circumstances would suggest in taking his position in respect thereto.
Now in the instant case, the complainants waited over four and one-half years before filing their bill. They waited fully three and one-half years before even expressing to the corporation a demand that the amendment be regarded as inoperative upon them insofar as the cumulations on the preferred stock were concerned. Through the period of that three and one-half years, Romer, who appears from the correspondence to have been the spokesman not only for himself but for his wife and Inwalls, the other complainants, said nothing to indicate his dissent from the amendment.
In fact on the one occasion when he approached the question, viz., in his letter of March 28, 1934, he indicated his acquiescence by saying that if the sixty shares of preferred and the sixty shares of common which he and his wife held were to receive sixty shares of common, as he had understood and as to which he desired to be assured, he hoped to have the stock of himself and wife exchanged for the new. The next day he was advised, and correctly so, that his understanding was in accordance with the facts. But Romer then lapsed into his former silence and did nothing.
Over two years later he emerged from his state of silence and demanded the preferred dividends and the dividends which would come to him on the common.
In the meantime the company had, because of the reconstitution of its capital structure effected by the amendment and the reduction of its capital rendered possible thereby, been put in a condition as to surplus which made possible the payment of dividends. The condition of the balance sheet was such that had it not been for the amendment, not only could no dividends have been declared on the common stock at any time down to the date of the filing of the bill, but none also could have been declared on the preferred stock which the complainants were holding.
It seems clear to me that the complainants were shrewdly biding their time and were deliberately playing with the situation.
Furthermore, other persons who relied on the capital structure of the company as fixed and definite in accordance with the terms of the amendment, bought the common stock during the period of the complainants' silence and inactivity, in complete ignorance of the fact that the complainants were intending to assert a demand which if acceded to would place a burden on the assets and earnings ahead of the common stock's equity. To be sure there were not many shares so purchased in the interval of that period — something over three hundred at prices ranging from fifteen dollars to fifty dollars per share. The interests of the purchasers are of course not large. But such as they are, they are entitled to be protected against damage thereto which, had the complainants been reasonably diligent in asserting their rights, they would be saved.
The defendant stresses the suggestion that, treating Mr. and Mrs. Romer as one, every single stockholder of the defendant
at the time the amendment was adopted was the holder of preferred and common stock in units, that is to say, each held the same number of shares of preferred as he did of common. That being so, it is quite correctly said that the amendment which changed each one's holding into a number of common shares equal to one-half of both his preferred and common shares, made no alteration whatever in the equity which each stockholder had in both the capital and the earnings of the corporation. The result would be that as dividends were declared out of earnings, the stockholder as a present holder of common stock would be in position to receive as much in the way of dividends as he would have been in to receive as a holder of both the old preferred and common. The effect of this argument, however, goes only to the fairness and the basis of exchange. I do not see that it has a bearing on the question of power which was adjudged as lacking in Keller v. Wilson Co., Inc., supra.
However that may be, I am of the opinion that the complainants by their inexcusable delay in asserting their rights under all the circumstances, should not now be heard to repudiate the implication of an acquiescence which it seems to me should be drawn from their conduct.
A decree will be entered dismissing the bill.