Court Opinion

ID: 3372940
Source: CourtListenerOpinion
Date Created: 2016-07-05 18:14:33.958824+00
Date Added: 2024-06-11T12:47:03.402739
License: Public Domain

The question presented is narrow. It is one of interpretation, and relates to the following language as employed under Article V of the corporate charter:
"V. Except as otherwise required by the statutes of the State of Delaware, or as herein otherwise provided, the holders of the common stock shall exclusively possess voting power for the election of directors, and for all other purposes, and the holders of the preferred stock shall have no voting power; provided, however, that if at any time the corporation shall be in default in respect to the declaration and payment of dividends in the amount of two years' dividends on the *Page 369 
preferred stock, then the holders of a majority of the preferred stock shall have an election to exercise the sole right to vote for the election of directors and for all other purposes, to the exclusion of any such right on the part of the holders of the common stock until the corporation shall have declared and paid for a period of a full year a 6% dividend on the preferred stock, when the right to vote for the election of directors, and for all other purposes, shall revert to the holders of the common stock. The election on the part of the holders of the preferred stock shall be consummated and effectuated by a notice to the corporation of their decision to exercise such right by holders of a majority of the preferred stock. During the time within which the holders of the preferred stock are exercising under this election the right to vote upon their stock, the holders of the common stock shall have no right to vote upon their stock. The said right of the preferred stock and its holders to exercise an election to vote shall survive any exercise of such election and a subsequent reversion of the right to vote to the common stock and its holders, and shall be a continuing privilege and right of said preferred stock; and the subsequent right to a reversion of the voting power to the common stock in the event of the payment of a full year's 6% dividend shall be a continuing privilege and right of said common stock and its holders."
From the date of its organization in 1929 until May 4, 1936, the directors of the corporation were elected by the holders of a majority of the common stock. Prior to the stockholders' meeting held on May 4, 1936, the holders of a majority of the preferred stock gave notice to the corporation, since there existed a default in the declaration and payment of dividends of 6% on the preferred stock in an amount of two years' dividends, that they, the preferred stockholders, elected to exercise their sole right to vote for the election of directors for the ensuing year at the 1936 stockholders' meeting.
During the years 1936, 37, 38, 39, 40 and 41 various amounts of dividends were declared and paid on the preferred stock, and various dividends were passed. It was not until the year 1942 that four dividends aggregating 6% were declared and paid on the preferred stock. The sole right of the preferred stockholders to elect the directors was not challenged by the holders of the common stock from May, 1936, through 1942. It was during the stockholders' meeting on *Page 370 
May 4, 1943, that the holders of a majority of the common stock asserted that they possessed the sole right to vote for the election of directors for the ensuing year, for the reason that a full year's dividend at 6% had been declared and paid to the holders of the preferred stock during the year 1942; thus causing the right to elect the directors to revert to the holders of the common stock under the provisions of Article V aforesaid.
A demurrer was interposed by the preferred stockholders to such an interpretation as asserted. Rather, they said that as of December 12, 1942, and thereafter, the corporation was in default in respect to the declaration and payments of dividends in the amount of two years' dividends upon the preferred stock, and, while the voting period of the preferred stock was terminated by reason of the payment of a full year's dividend at 6%, yet, the right to an election was not terminated but survived, and such right was subject to no further conditions than those to which it previously was subjected, and that it may be exercised as often and as long as the corporation shall be found to be in default of the payment of 6% dividends on the preferred stock in the amount of two years.
Necessity does not require a restatement of the facts and the application thereof to the provisions of said article prior to May, 1943, except to say that as of this date the corporation was in default for a period greater than two years in the payment of dividends on the preferred stock. This is so for the reason that it is conceded by the litigants that the preferred voting period which commenced in 1936 came to an end by reason of the payment of a 6% dividend during the year 1942 on the preferred stock, and that thereupon the right to vote reverted to the holders of the common stock. The question is, could the holders of the preferred stock as of the meeting held on May 4, 1943, elect to exercise a new or second voting period without the corporation being in a new or second default in the payment of dividends? *Page 371 
The appellees on page 5 of their brief state:
"The preferred stockholders needed to retain exclusive voting power in view of this tremendous default quite as much as if there had not been a period in the course of the default when 6% dividends were paid in the course of a year. Surely they needed to retain the voting power much more than when first they had the right to exercise it by reason of the existence of a default in the amount of two years' dividends."
The need of the preferred stockholders to retain the voting power is not material. The question relates only to their right of election as of the 1943 meeting.
In considering the language with the thought of proper interpretation, the thing looked for is the association of ideas that it expresses. With this in mind the words employed must be given their plain and ordinary meaning in the order of the grammatical arrangement in which they are found.
Now before an attempt is made to interpret the language of said article the legal significance of the words "preferred stock" must be understood. Surely, their use, unless supplemented by a definition of their significance, carries no special import.Gaskill v. Gladys Belle Oil Co., 16 Del. Ch. 289,146 A. 337. This being so the holder of preferred stock must look to the language of the charter for the discovery of his special rights, and, since special rights attaching to stock are in the category of exceptions, such rights must be clearly expressed, as a presumption will not exist in their favor. Holland v. NationalAutomotive Fibres, Inc., 22 Del.Ch. 99, 194 A. 124. It is with this understanding that I shall interpret the entire language, in order to ascertain the respective rights of the respective classes of stock as of the 1943 meeting.
Four sentences constitute the paragraph of Article V to be interpreted. Under the first sentence the language clearly denotes that the exclusive voting rights and power of management are to repose in the common stock, except upon the occurrence of a certain condition precedent, "that if at any time the corporation shall be in default in respect to the *Page 372 
declaration and payment of dividends in the amount of two years' dividends on the preferred stock, then the holders of a majority of the preferred stock shall have an election to exercise the sole right to vote for the election of directors and for all other purposes." It is apparent up to this point that the voting power does not shift to the holders of the preferred by reason of the occurrence of the condition precedent. It remains in the holders of the common unless the preferred elect to exercise their sole right to vote. This characteristic furthers the previously announced intent that the voting power should repose in the common stock. Certainly this exception was included as a protection to the preferred stockholders, and the exercise of the right granted rests solely within their discretion. Now, in the event the right of election is exercised, the duration of its existence is expressed in clear and unequivocal language. It shall continue "until the corporation shall have declared and paid for a period of a full year a 6% dividend on the preferred stock." Upon the happening of this event, the language is equally clear and definite as to what shall occur "when the right to vote for the election of directors, and for all other purposes, shall revert to the holders of the common stock."
It is conceded by the appellees on page 25 of their brief that, if the paragraph ended here, the rights previously given to the holders of the preferred stock would be seriously impaired, in view of the fact that the corporation was still in default in respect to the declaration and payment of dividends on the preferred stock in an amount of two years. This is so, I presume, for the reason that in the absence of a saving clause the exercise of an election exhausts the right given to the preferred stockholders under this sentence.
The second sentence defines the procedure by which the holders of the preferred stock shall designate their election.
The third sentence provides that the holders of the common stock shall have no right to vote during the time within *Page 373 
which the holders of the preferred stock are exercising their sole right to vote under their election.
The fourth sentence provides "the said right of the preferred stock and its holders to exercise an election to vote shall survive any exercise of such election and subsequent reversion of the right to vote to the common stock and its holders, and shall be a continuing privilege and right of said preferred stock, and the subsequent right to a reversion of the voting power to the common stock in the event of the payment of a full year's 6% dividend shall be a continuing privilege and right of said common stock and its holders." Now what was intended by the employment of this language? The majority of the court admits that the voting period of the preferred ended in 1942 at which time the right to elect the directors reverted to the holders of the common, yet, they say that by reason of the fourth sentence the right to an election as set forth in the first sentence was not terminated but survived, and was subject to no further condition than those to which it was previously subjected; that is, the corporation being in default in the declaration and payment of dividends in an amount of two years. If such a preference or right was intended, it must be said that it was not clearly expressed either by words of explicit import or by necessary implication. It is evident to me that by their interpretation they have rewritten the contract. They have ignored the language of the until clause of the first paragraph, and, by reason thereof, have changed the position of the respective stockholders from that as clearly indicated.
I am of the opinion that the right of election that existed prior to 1942 was terminated in the year 1942, and that the voting power shifted as of then to the holders of the common stock. The language of the fourth sentence does not enlarge the rights previously granted to the holders of the preferred stock in the first sentence, nor can it be said to grant a new voting right to either the preferred or the common stockholders. It is clear to me that under this sentence the only *Page 374 
function of the language is to make it plain that the right of the preferred to exercise an election, and the subsequent right of the common to a reversion, when once vested would not be forever lost, but that they become contingent, so to speak, and may be regained as rights in praesenti when another state of events occur to satisfy the conditions upon which the exercise of those rights respectively depend. This sentence was designed to preserve the rights, but not the particular condition which gave rise to the exercise thereof.
My conclusion is that the holders of the common stock possessed the sole right to vote for the election of directors for the ensuing year, as of the 1943 stockholders' meeting.
                       On Petition for Reargument.
Petition for reargument denied.
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