Opinion ID: 2269158
Heading Depth: 1
Heading Rank: 1

Heading: Was the transaction ultra vires?

Text: Section 28 of the General Corporation Law, 1935 Rev.Code, Par. 2060, as amended, confers upon a corporation power to reduce its capital and affords a choice of numerous methods to accomplish the reduction. Some methods permit the directors and the majority stockholders to effect a reduction against the will of a dissentient, e. g., by drawing the necessary number of outstanding shares of any class by lot for retirement. Other methods contemplate a voluntary exchange or sale by individual stockholders; and it is with one of such methods that we are here concerned. The pertinent provisions of the statute are as follows: Such reduction of the capital of the corporation may be effected    by the purchase of shares for retirement, either pro rata from all holders of shares of that class of stock or by purchasing such shares from time to time in the open market or at private sale in both cases at not exceeding such price or prices as may be fixed or approved by the stockholders entitled to vote upon the reduction of capital to be effected in that manner,   . In the instant case the corporation elected to proceed under that provision of the quoted statute permitting a reduction of capital by the purchase of shares for retirement by purchasing such shares    at private sale. The purchase here attacked is clearly within the language of the statute, read literally. Plaintiffs insist however, and earnestly press the argument that there must be read into the phrase at private sale an implied limitation or requirement that any such purchase must be made pro rata, that is, that the opportunity to sell a pro rata portion of his holdings must be afforded to every holder of the class of stock the shares of which are to be purchased. Only so, say the plaintiffs, can there be preserved to the individual shareholders that right of uniform treatment which a court of equity should be zealous to protect. The difficulty with this contention is that to accept it is to render meaningless the specific phrase at private sale. This conclusion follows from these considerations: The existing provisions of Section 28 here pertinent stem from the Act of March 2, 1927, Vol. 35, Laws of Del., Ch. 85. Prior to 1927 the language of the section relating to the purchase of shares for retirement was most general in its nature, the statute merely declaring that a decrease of capital stock might be effected by the purchase at not above par of certain shares for retirement. 1915 Rev.Code, Par.1942. This language appears to be identical with a provision in Section 29 of the New Jersey Corporation Act of 1896. [1] In purchasing shares under this statutory authority the Court of Errors and Appeals of New Jersey held that the corporation was required to purchase pro rata, that is, to offer each stockholder of the class affected an opportunity to sell his stock at the price fixed. Berger v. U. S. Steel Corp., 63 N.J.Eq. 809, 53 A. 68; General Investment Co. v. American Hide & Leather Co., 98 N.J.Eq. 326, 129 A. 244. In 1926 the New Jersey act was amended so as to specify the methods of purchasing shares for retirement, and in 1927 the Delaware statute was amended to accomplish the same purpose. But whereas the New Jersey amendatory act specified only two methods of purchasing shares for retirement, viz., (1) a pro rata purchase from all holders of the class affected, or (2) purchase in the open market, the Delaware amendment of 1927 added a third method, viz., a purchase at private sale. [2] Now it is obvious that if the employment of the third method requires a pro rata offering, the added language serves no purpose, since the third method would then be the equivalent of the first. It is elementary that in construing a statute every clause must be given effect, Southern Production Co. v. Sabath, supra, and plaintiffs' proposed construction of Section 28 would render the phrase at private sale superfluous and meaningless. Such a construction is therefore unacceptable. We must give effect to the clear legislative intent that, in addition to the first two methods of purchase, i. e., by pro rata offerings and by open-market purchases, a third and different method is permitted, i. e., by private purchase negotiated directly with one or more shareholders willing to sell, without any pro rata offering. No other conclusion, we think, is permissible. We have adverted to the history of the present Section 28 of our statute and of the comparable New Jersey statute because plaintiffs have cited to us four decisions of the New Jersey courts since the enactment of the 1926 amendment holding that purchases by a corporation of its own stock for retirement must be made ratably from the stockholders. See Ocean City Title & Trust Co. v. Strand Properties, Inc., 106 N. J.Eq. 25, 149 A. 817; Downs v. Jersey Central Power & Light Co., 115 N.J.Eq. 448, 171 A. 306; Iback v. Elevator Supplies Co., Inc., 118 N.J.Eq. 90, 177 A. 458; King Machine Co. v. Caporaso, 2 N.J.Super. 230, 63 A.2d 270. Our courts have long recognized that our General Corporation Law of 1899 was modeled after the then existing New Jersey act, Wilmington City Rwy. Co. v. Peoples Rwy. Co., Del.Ch., 47 A. 245, and decisions of the courts of that state are persuasive in construing a section of our statute drawn from the New Jersey law. But it is likewise true that a departure by the adopting state from the phraseology employed in the model indicates a difference in legislative intent. Chicago Corp. v. Munds, 20 Del.Ch. 142, 172 A. 452, 454. Here the legislative intent to go beyond the scope of the New Jersey statute is clear. Hence none of the four New Jersey decisions above cited, which involved private sales not authorized by the statute of that state, is in point here. The same comment is applicable to the other authorities relied on by plaintiffs. In none of the cases cited in support of the quoted texts [3] or upon plaintiffs' brief was there presented to the courts for construction a statute expressly authorizing a corporation to reduce its capital by the purchase of shares at private sale for retirement. Upon this ground (and as to some of them, upon other grounds as well) the following cases are clearly distinguishable: Theis v. Durr, 125 Wis. 651, 104 N.W. 985, 1 L.R.A.,N.S., 571; Currier v. Slate Co., 56 N.H. 262; Niagara Shoe Co. v. Tobey, 71 Ill.App. 250; Gill v. Balis, 72 Mo. 424. Plaintiffs' argument that a requirement of equality of treatment among stockholders should be read into the act meets a further difficulty in the matter of open-market purchases. We understand plaintiffs' counsel to concede that such purchases cannot be made pro rata; at all events it is clear that this is so. No implied requirement of equal treatment can be read into that provision of the section permitting open-market purchases; and hence no inference can be drawn of a general legislative policy to insure equal treatment among stockholders in all purchases of stock for retirement. The research of able counsel has failed to disclose any authority in this country directly in point (possibly the provisions of our statute are in this one respect unique), but our conclusion finds support in the decision of the House of Lords in British and American Trustee and Finance Corporation v. Couper, [1894] A.C. 399. In that case it appeared that the company did business both in England and the United States, the American investments and business being managed by a committee of the board resident in the United States. Dissension developed between the English board and the American committee, resulting in an agreement between the company and its American stockholders to apply a part of the capital assets of the company to the purchase and extinction of the American-held shares. No other stockholders were afforded the opportunity to sell their shares. Petition for approval of the reduction was filed in the Chancery Division, pursuant to the Companies Acts of 1867 and 1877, which authorized, in general terms, a reduction of capital if sanctioned by the court. Upon the authority of In re Denver Hotel Company, [1893] 1 Ch. 495 indicating that any such reduction must be made ratably in respect of all stockholders, approval was refused in the Chancery Division and the Court of Appeal affirmed. The House of Lords reversed holding that the power existed under the Companies Act to make the reduction and that the petition should be approved, since nothing inequitable or unfair in the proposed arrangement was shown. The Lord Chancellor said: I do not see any danger in the conclusion that the Court has power to confirm such a scheme as that now in question or any reason to doubt that this was the intention of the Legislature. The interests of creditors are not involved, and I think it was the policy of the Legislature to entrust the prescribed majority of the shareholders with the decision whether there should be a reduction of capital, and if so, how it should be carried into effect. The interests of the dissenting minority of the shareholders (if there be such) are properly safeguarded by this: that the decision of the majority can only prevail if it be confirmed by the Court. This is a complete answer to the argument, ably urged by Mr. Romer at the Bar, that if all the shareholders of the same class were not dealt with in precisely the same fashion, the interests of the minority might be unjustly sacrificed to those of the majority. There can be no doubt that any scheme which does not provide for uniform treatment of shareholders whose rights are similar, would be most narrowly scrutinized by the Court, and that no such scheme ought to be confirmed unless the Court be satisfied that it will not work unjustly or inequitably. But this is quite a different thing from saying that the Court has no power to sanction it. Even allowing for the difference in procedure under the English Companies Acts, under which judicial approval must precede the consummation of the reduction, we think this holding a persuasive precedent. The power to purchase shares of stock at private sale for retirement may, like other corporate powers, be abused; but the existence of that possibility does not deny the existence of the power. Plaintiffs' arguments are really directed to the wisdom of the legislative policy clearly set forth in the statute. In the case of a statute expressed in vague or ambiguous language, such considerations may cast light upon legislative intent and may be given weight; here there is no room to doubt the intent, and no occasion to discuss questions of policy. For the reasons set forth, we are of opinion that Section 28 of the General Corporation Law confers upon a corporation existing under it power to reduce capital by purchasing shares for retirement at private sale, without a pro rata offering to all holders of stock of the class affected.