Opinion ID: 1750252
Heading Depth: 1
Heading Rank: 2

Heading: the corporate change

Text: In the latter part of 1964 and at a time when the warrants analyzed above were outstanding, Plastics was controlled and governed by a board of seven directors who agreed among themselves: (1) A part of the assets of Plastics then devoted to the production of thermoplastic products by one of the divisions of Plastics should be transferred to a newly created corporation; the newly created corporation should, in exchange, transfer all of its stock to Plastics. (The new corporation, United Fabricators and Electronics, Inc., which we refer to as United, was incorporated March 11, 1965.) (2) All of the stock of the newly created corporation to be transferred to Plastics should be distributed to Plastics shareholders of record on February 22, 1965, and warrant holders exercising their stock options by March 16, 1965. (This agreement to distribute all of the stock of the newly created corporation to Plastics shareholders of necessity made it impossible for Plastics to reserve a sufficient number of shares of United's stock to provide for the exercise of an option with respect to such stock after March 16, 1965, but before expiration of the 5-year option period.) (3) Three of the seven directors then in control of Plastics should resign and become the directors of United. The four remaining should continue in control of Plastics. (4) The United stock to be acquired by the four directors of Plastics as a result of the distribution contemplated by step (2) above should be exchanged for the Plastics stock held by the three departing directors so that the one group would be in control of United and the other in control of Plastics when the transaction was completed. Agreements were made intending to bind the seven directors and the corporations (Plastics and United) to this plan, and these agreements have been fully executed. On February 24, 1965, Plastics gave notice to holders of stock purchase warrants, including plaintiffs, reading as follows: You are hereby notified that the Directors of Plastics Corporation of America, Inc. have authorized a distribution on March 31, 1965 to the common shareholders of said corporation of one (1) share of United Fabricators & Electronics, Inc. for each two (2) shares of Plastics Corporation of America, Inc. held of record on February 22, 1965. Inasmuch as the holders of Stock Purchase Warrants of Plastics Corporation of America, Inc. are entitled to twenty days' notice of such distribution, the Directors have established March 16, 1965 as the record date for such distribution for the holders of Stock Purchase Warrants who shall hereafter become a shareholder by reason of the exercise of such Warrants. Plaintiffs did not undertake to exercise their option to purchase Plastics stock until December 1965. We assume for present purposes (but do not decide) that they made an effective exercise of the option embodied in the warrants before the expiration of the 5-year period specified in it. The theory of plaintiffs' pleading is that they are entitled upon exercise of their option before the expiration of the 5-year period to have the shares of Plastics stock specified in the warrants and in addition that number of the shares of United stock which would have been distributed to plaintiffs had they been stockholders when the distribution of United stock was in fact made; and that if specific performance is impossible, damages should be awarded. 1. In our opinion, the order of the trial court granting judgment for United against plaintiffs on the pleadings can be sustained if, but only if, any one of these legal conclusions follow from the facts summarized: (a) The warrants created no right in plaintiffs to share in the distribution of United stock in any event. (b) Any right to share in the distribution of United stock was extinguished by plaintiffs' failure to exercise their option within the time specified by the notice. (c) The right of plaintiffs to share in the distribution of United stock springs from the contracts between plaintiffs and Plastics; and United did nothing to interfere with or obstruct the performance of these contracts. 2a. If the distribution of United stock was a dividend not charged to net earnings or earned surplus, plaintiffs would have no right as against United because in such event, by the terms of the warrants, plaintiffs' position was to be protected by reducing the purchase price per share of Plastics stock by the fair value of the United stock determined as of the date of distribution. In our opinion, it cannot be held on the present record that the parties to the warrants intended a transaction of this kind to be treated as a dividend. Minn.St. 301.22, subd. 2, provides: A corporation may declare dividends in cash or property only as follows: (1) Out of earned surplus; (2) Out of paid-in surplus   ; (3) Out of its net earnings for its current or for the preceding fiscal year   . There is a difference between the transactions involved in the present case and a dividend in the usual sense of that word. In Hoberg v. John Hoberg Co., 170 Wis. 50, 173 N.W. 639, 173 N.W. 952, it was held that a corporation's pro rata distribution to its stockholders of recently acquired stock of another corporation was not a dividend, emphasizing that no attempt was made to meet a dividend obligation by the transfer. See, 13 Words and Phrases, pp. 94, 104. In determining whether a transaction constitutes a dividend, consideration must be given to the context in which the term dividend is used; the consequences that turn upon the answer to the question; and the facts of the particular case. See, 13 Words and Phrases, p. 94. We believe that it would be premature to rule as a matter of law upon the limited record now before us that the present transaction was intended to be a dividend within the meaning of the warrants. Ordinarily the object of a dividend is to enable the shareholders to enjoy the fruits of a corporate operation. It is at least inferable that the purpose of the distribution of United's stock to Plastics shareholders was intended primarily (a) to enable the directors who remained with Plastics to acquire the stock of that corporation distributed to the three directors who were taking over the management of United and (b) to give the three departing directors control of the newly created corporation through exchange of their Plastics stock for the distributed shares of United coming into the hands of the four Plastics directors who remained. In fact it is reasonable to infer that this exchange of United's stock for Plastics after the distribution was an essential part of the agreement between the seven directors and that but for this understanding the spin-off would never have taken place. So considered, we cannot say that the warrants declare clearly and unambiguously that a transaction of this character was intended to be treated as a dividend within the meaning of the language of the warrants. We do not disagree with United's contention that a spin-off can involve or be executed by a means of a dividend of a new company's stock to the old company's shareholders. See, Rockefeller v. United States, 257 U.S. 176, 42 S.Ct. 68, 66 L.Ed. 186; Siegel, When Corporations Divide: A Statutory and Financial Analysis, 79 Harv.L.Rev. 534. We hold only that the question cannot be resolved in the present situation without the aid of extrinsic evidence. 2b. If the transaction does not represent a dividend within the meaning of the warrants, then what was it? Plaintiffs contend that it was a capital reorganization (situation 6 above) or a sale of all or substantially all of the assets of the corporation to another corporation (situation 10 above). If so (unless the notice set out above served to accelerate the time within which plaintiffs' option was exercisable with respect to the distribution), the corporation was obligated by the terms of the warrants to reserve a sufficient number of shares of United stock to permit the exercise of the right of the warrant holders to acquire it for the full 5-year term of the warrants. This is so because paragraph 3 (c) of the agreement provides that, in the event of any capital reorganization or the sale of all or substantially all of the corporate assets to another corporation, lawful and adequate provision shall be made whereby the holder hereof shall thereafter have the right to purchase and receive    such shares of stock, securities or assets as may be issued or payable with respect to or in exchange for a number of outstanding shares of such capital stock equal to the number of shares or such capital stock immediately theretofore purchasable and receivable upon the exercise of the rights represented hereby had such reorganization,    or sale not taken place. The obligation to hold the required number of shares of United in reserve follows from the concluding sentence of paragraph 3(c) [12] requiring that any such shares of stock or assets be included within the term capital stock as used in the warrants. 2c. Although not free from ambiguity, we believe it would be possible for the plaintiffs to establish that the transaction here involved was a capital reorganization within the meaning of the warrants. The net result was that each Plastics shareholder held an interest represented by stock in exactly the same assets after the transaction as before. Before the transaction this interest was represented by stock in one corporation only; after the transaction the interest was represented by stock held in two corporations. All that was changed was the organization. The pertinent Federal and Minnesota income tax provisions declare transactions of this kind to be reorganizations. [13] United cites Minn.St. 301.55, dealing with compromise arrangements and reorganizations of corporations in proceedings for dissolution, for the proposition that the Minnesota Business Corporation Law views a reorganization in the common business sense that at no time two or more going business corporations will be in existence. Even if § 301.55 were to state that the reorganization for the purposes of said statute involved the going out of existence of one corporation and the coming into existence of another, [14] which it does not, still this would not necessarily delineate the outer boundaries of the meanings of the term in question. United points out that the warrant contracts provide that upon reorganization a warrant holder is entitled to receive  in lieu of the shares of the capital stock of the Company immediately theretofore purchasable and receivable certain stock or other assets of the transferee corporation. (Italics supplied.) It asserts that this shows that the parties to the warrant contracts contemplated that upon the reorganization a new corporation would take over and completely supersede the old one. However, this provision does not compel the interpretation defendant would give it. It may simply mean that the warrant holder is entitled to a certain amount of stock of the old corporation, and in addition thereto (and in lieu merely of more stock of the old corporation), a certain amount of stock of the new corporation. Especially is this interpretation justifiable in light of the fact that the words in question also control where there has been a sale of all or substantially all of Plastics' assets. In the event of a sale of only substantially all of Plastics' assets, the agreement probably contemplates the warrant holding receiving both Plastics stock and stock of the vendee. Defendant points out that the stock warrants' reference to Plastics' duty to require the successor corporation to assume the duty to honor the stock warrants covers only situations of consolidation, merger, or sale of all or substantially all of Plastics' assets and urges that this must mean that capital reorganization comprehends only situations involving a structural change within Plastics. But a change in Plastics' structure resulting in the birth of a new corporation is not necessarily excluded from the term capital reorganization by this language. The same may be said of the fact that the warrants referred to the giving of 20-day notice of the date that the books would close and a record would be taken for determining rights to vote in respect of any such reorganization. Defendant insists this means that only reorganizations upon which shareholders vote in accordance with § 301.55 are included. Again, the argument is persuasive, but not so clear that plaintiffs should not be allowed to present evidence on the matter. 2d. In the alternative, plaintiffs urge that the evidence may establish that the transaction was a sale of all or substantially all of Plastics' assets. The complaint does not allege any particular proportion of Plastics' assets as having been transferred, merely stating that the assets of its United Fabricators and Electronics Division, and certain other assets were transferred. [15] Thus, at this stage of the proceedings, no proper evidence has been adduced on such matters as the proportion of Plastics' assets which were transferred; the nature of those assets (as compared to that of the assets retained); the relationship of the assets transferred and of those retained to Plastics' past and present objects and purposes; or the degree to which the transfer was unusual and out of the ordinary course of Plastics' business. See, Stiles v. Aluminum Products Co., 338 Ill. App. 48, 86 N.E.2d 887; Philadelphia Nat. Bank v. B. S. F. Co., 41 Del.Ch. 509, 199 A.2d 557, reversed on other grounds sub nom. B. S. F. Co. v. Philadelphia Nat. Bank (Del.) 204 A.2d 746; 40 Words and Phrases, p. 821.