Case Name: RUSS v. FEDERAL MOGUL CORPORATION
Court: Michigan Court of Appeals
Jurisdiction: Michigan
Decision Date: 1982-01-19
Citations: 112 Mich. App. 449
Docket Number: Docket No. 52541
Parties: RUSS v FEDERAL MOGUL CORPORATION
Judges: Before: J. H. Gillis, P.J., and Bashara and K. N. Sanborn, JJ.
Reporter: Michigan appeals reports; cases decided in the Michigan Court of Appeals.
Volume: 112
Pages: 449–458

Head Matter:
RUSS v FEDERAL MOGUL CORPORATION
Docket No. 52541.
Submitted June 22, 1981, at Detroit.
Decided January 19, 1982.
Leave to appeal applied for.
Arthur A. Russ, Sr., and others brought an action in the Oakland Circuit Court for declaratory and injunctive relief to prevent a vote on a proposed amendment to the articles of incorporation of Federal Mogul Corporation. Under the terms of a 1967 agreement, defendant purchased all of the assets of National Grinding Wheel Company, Inc., in exchange for 120,000 shares. of defendant’s Series A preferred stock. The 1967 agreement provided that the holders of preferred stock should have the right to vote on any matter coming before any meeting of defendant’s shareholders on the basis of one vote for each share of preferred stock held. The agreement went on to provide that holders of preferred stock are entitled to vote separately as a class when dividends on the preferred stock fell into arrears in an aggregate amount equal to six quarterly dividends. It finally indicated the four specific instances where defendant could not take corporate action without the affirmative vote of a specified majority of holders of outstanding preferred stocks:
(1) The authorization of classes of stock ranking prior to the preferred stock either in the payment of dividends or in the distribution of assets;
(2) Alterations or changes in preferences or limitations with respect to the preferred stock in any material respect prejudicial to the holders thereof;
(3) An increase in the total number of authorized shares of preferred stock; or
(4) The authorization or increase of any class of stock ranking on a parity with the preferred stock.
At the 1980 annual shareholders’ meeting, defendant’s board of directors proposed that the articles of incorporation be amended by the addition of article VI. The article required the vote as a single class of "noninterested shareholders” resulting in majority approval before a business combination involving the corporation may be transacted. Business combinations included mergers, liquidations and other transactions involving at least $1,000,000. "Interested shareholders” may not join in the vote. An interested shareholder was one who holds 10% or more of the outstanding common stock and is a party to the transaction. In their complaint, plaintiffs assert that they should be allowed to vote as a separate class as preferred shareholders on the proposed amendment. The court, Alice L. Gilbert, J., granted judgment for defendant. Plaintiffs appealed. Held:
Reference for Points in Headnote
19 Am Jur 2d, Corporations § 632.
The Michigan Business Corporation Act provides that the holders of outstanding shares of a class of stock may vote as a class upon a proposed amendment to the articles of incorporation when the proposed amendment would increase or decrease the aggregate number of authorized shares of the class or alter or change the powers, preferences or special rights of the shares of the class so as to affect the class adversely. The proposed amendment does nothing to trigger that provision of the statute allowing plaintiffs to vote as a separate class.
Affirmed.
K. N. Sanborn, J., dissented. He would hold that, since plaintiffs’ stock has a valuation in excess of $1,000,000, their "special right” to conversion would be "altered or changed” under the amendment, that the change affects the class, and that plaintiffs have the right to vote as a class. He would reverse.
Corporations — Voting as a Class — Business Corporation Act.
The Michigan Business Corporation Act provides that the holders of outstanding shares of a class of stock may vote as a class upon a proposed amendment to the articles of incorporation when the proposed amendment would increase or decrease the aggregate number of authorized shares of the class or alter or change the powers, preferences or special rights of the shares of the class so as to affect the class adversely (MCL 450.1615; MSA 21.200[615]).
Boltz, Roth & Silver, for plaintiffs.
Dickinson, Wright, McKean, Cudlip & Moon (by Fred W. Freeman and Robert P. Ufer), for defendant.
Before: J. H. Gillis, P.J., and Bashara and K. N. Sanborn, JJ.
Circuit judge, sitting on the Court of Appeals by assignment.

Opinion:
Bashara, J.
Plaintiffs, preferred shareholders of defendant corporation, brought this action for declaratory and injunctive relief to prevent a vote on a proposed amendment to the corporate articles of incorporation. They appeal a judgment entered in defendant's favor.
A proper resolution of this dispute requires a recitation of the facts in some detail. Under the terms of a 1967 agreement, defendant purchased all of the assets of National Grinding Wheel Company, Inc., in exchange for 120,000 shares of defendant's Series A preferred stock. Each shareholder of National received a portion equal to his or her percentage of the outstanding capital stock of National. Plaintiffs or their predecessors received 73,026 shares of the Series A preferred stock, presently held by them. The 1967 Agreement provided that the holders of preferred stock should have the right to vote on any matter coming before any meeting of defendant's shareholders on the basis of one vote for each share of preferred stock held. The parties to the agreement intended that: "the holders of Preferred Stock and the holders of Common Stock [vote] together as one class". The agreement provided that holders of preferred stock are entitled to vote separately as a class when dividends on the preferred stock fell into arrears in an aggregate amount equal to six quarterly dividends. It finally indicated the four specific instances where defendant could not take corporate action without the affirmative vote of a specified majority of holders of outstanding preferred stocks:_
(1) The authorization of classes of stock ranking prior to the preferred stock either in the payment of dividends or in the distribution of assets;
(2) Alterations or changes in preferences or limitations with respect to the preferred stock in any material respect prejudicial to the holders thereof;
(3) An increase in the total number of authorized shares of preferred stock; or
(4) The authorization or increase of any class of stock ranking on a parity with the preferred stock.
At the 1980 annual shareholders' meeting, defendant's board of directors proposed that the articles of incorporation be amended by the addition of article VI. Succinctly stated, the article requires the vote as a single class of "noninterested shareholders" resulting in majority approval before a business combination involving the corporation may be transacted. Business combinations include mergers, liquidations and other transactions involving at least $1,000,000. "Interested shareholders" may not join in the vote. An interested shareholder is one who holds 10% or more of the outstanding common stock and is a party to the transaction.
In their complaint, plaintiffs assert that they should be allowed to vote as a separate class as preferred shareholders on the proposed amendment. The trial court disagreed and refused to grant the injunction. Consequently, the vote was held with all shareholders voting as one class and the amendment was overwhelmingly approved. However, it is undisputed that if plaintiffs had been allowed to vote as a separate class as preferred shareholders, the amendment would not have been adopted.
Plaintiffs argue that under the articles of incorporation and the Michigan Business Corporation Act (act), MCL 450.1101 et seq.; MSA 21.200(101) et seq., they were entitled to vote as a separate class. We agree with the trial court's conclusion that this argument is without merit.
Article IIIB5(a)(ii) of the articles provides that the corporation shall not "alter or change the preferences or limitations" regarding the preferred stock without the approval of two-thirds of the outstanding preferred shareholders. Similarly, § 615 of the act, MCL 450.1615; MSA 21.200(615), states, in pertinent part:
"(1) The holders of the outstanding shares of a class may vote as a class upon a proposed amendment, whether or not entitled to vote thereon by the articles of incorporation, if the amendment would increase or decrease the aggregate number of authorized shares of the class, or alter or change the powers, preferences or special rights of the shares of the class or other classes so as to affect the class adversely." (Emphasis added.)
Since the amendment would clearly not increase or decrease the number of authorized shares of preferred stock, the statute gives plaintiffs the right to vote as a class only in the event that the amendment would alter the powers, preferences or special rights of the preferred shareholders.
As preferred shareholders, plaintiffs must vote with common shareholders as one class except in certain circumstances enumerated in the articles, or in the 1967 agreement with the shareholders of National. None of those circumstances contravene the statute, supra. In those situations, plaintiffs have the right to vote as a class. Preferred shareholders enjoy liquidation preferences, dividend privileges and rights to redeem or convert their shares.
We have reviewed the amendment and plain tiffs' rights as preferred shareholders and find that there exists no alteration of the special privileges owned by preferred shareholders. Nor did defendant corporation take any action which would require the affirmative vote of the preferred shareholders under the four criteria, previously referred to, from the 1967 agreement. Plaintiffs' assertion that they would qualify as "interested shareholders" under the amendment, thereby decreasing their right to vote, is without merit. Plaintiffs collectively would own only 3% of the common outstanding stock in the event they exercised their rights to conversion. Thus, they are not presently interested shareholders.
Similarly, plaintiffs' assertion that their conversion rights would be adversely affected is also not supported by our interpretation of the amendment. Assuming, arguendo, that plaintiffs' stock value is over $1,000,000 and that a conversion qualifies as a business combination under the amendment, plaintiffs still do not possess 10% of the common outstanding stock. Their rights to conversion therefore remain intact and noninterested voter approval is not required before those rights may be exercised.
Furthermore, plaintiffs' unqualified and absolute right of conversion under the 1967 agreement is specifically recognized in section B(5) of article III itself, the subject of this controversy. Defendant, in its brief and at oral argument, recognizes the right of plaintiffs to conversion under any and all circumstances.
Both parties contend that there are various ramifications of the adoption of the amendment. Defendant argues that the amendment is a protective device for the good of the majority. Plaintiffs assert that the management of defendant corpora tion pushed the measure through by obtaining proxies in order to prevent any significant change of corporate composition and to guarantee their continuing positions in the business. Assuming that plaintiffs are correct in their assertion that the value of their stock is lessened by the amendment, we do not find the act nor article IIIB5(a)(ii) to be applicable. Any decrease in value of the stock will be across the board and will not affect the preferred shareholders as a class. See Hartford Accident & Indemnity Co v W S Dickey Clay Manufacturing Co, 26 Del Ch 411; 24 A2d 315 (1942).
The remaining arguments raised by plaintiffs were not addressed by the trial court. The declaratory judgment is affirmed and the matter is remanded to the trial court for consideration of the remainder of plaintiffs' complaint.
Costs to abide the final outcome.
J. H. Gillis, P.J., concurred.
As defendant indicates, § 615 of the Michigan statute took its language from § 242(c)(2) of the General Corporation Law of the State of Delaware, Del Code Ann Title 8, § 101 et seq.
In comment on the predecessor statute, the Delaware Supreme Court stated in Hartford Accident & Indemnity Co v W S Dickey Clay Manufacturing Co, supra, 419:
"Where the corporate amendment does no more than to increase the number of shares of the preferred or superior class, the relative position of the subordinated shares is changed in the sense that they are subjected to a greater burden. The peculiar, or special, quality with which they are endowed, and which serves to distinguish them from shares of another class, remains the same." (Emphasis added.)