Court Opinion

ID: 3680256
Source: CourtListenerOpinion
Date Created: 2016-07-06 06:25:51.956757+00
Date Added: 2024-06-11T15:28:03.880654
License: Public Domain

Counsel for the plaintiff have filed a petition for modification of the opinion by eliminating therefrom the holding that the board of directors have the power under the law, the charter, the by-laws and the facts disclosed in the instant case to distribute the fund derived from the sale of corporate assets to the preferred stockholders, thereby ratably redeeming and cancelling such stock as could be fully redeemed by such distribution. They also petition for a rehearing or modification of the opinion with respect to the holding regarding the allowance of attorney fees. Counsel for the defendants likewise petition, seeking to have the opinion clarified in some respects. We shall as briefly as may be consider the petitions in the above order.
Nothing need be added to the opinion by way of showing that the contract between the holders of preferred stock and common stock and the corporation contemplated that the board of directors should have the power to sell assets and distribute the proceeds to preferred stockholders in redemption or retirement of their stock. Such is clearly the contract in fact as is pointed out in the opinion. But the plaintiff contends that any provision expressed in a preferred stock certificate for the redemption of such stock that does not fix a time for retirement or a price to be paid would not be a compliance with the statute (Comp. Laws 1913, § 4558) and that, consequently, the preferred stock in this corporation is not redeemable in the manner stated. The certificates say that the stock is subject to recall and reissuance upon any pro rata distribution on the preferred stock of the proceeds realized upon sales of any of its properties, and consequent reduction of the preferred capitalization. It is true that this does not fix a time for redemption with reference to the calendar, nor does it state in words the price to be paid. But must it be inferred from this that the preferred stock is invalid as regards the preference?
Section 4558 of the Compiled Laws of 1913 reads:
"Every corporation shall have power to create two or more kinds of stock of such classes, with such designations, preferences and voting powers, or restriction or qualification thereof, as shall be stated and expressed in the articles of incorporation; and preferred stock may, if desired, be made subject to redemption at no less than par, at a fixed *Page 252 
time and price, to be expressed in the certificate thereof; and the holders thereof shall be entitled to receive and the corporation shall be bound to pay thereon a fixed yearly dividend, to be expressed in the certificate, payable quarterly, half yearly or yearly before any dividend shall be set apart or paid on the common stock, and such dividends may be made cumulative."
It will be noted that the power to create two or more kinds of stock is expressly conferred, but whether or not they are created depends altogether upon what is expressed in the articles of incorporation. It is mandatory that the classes shall be statedand expressed in the articles of incorporation, but the following clause in the statute does not employ mandatory language. It is permissive. It says, that the preferred stock may, if desired, be made subject to redemption at no less than par, at a fixed time and price, to be expressed in the certificate thereof. We fail to see in this language any evidence of legislative intention to strike down any portion of the preferred stock contract for failure to incorporate in the certificate a fixed time or a fixed price or place of redemption. In view of the difficulty, frequently presented, of determining whether or not one is a preferred stockholder or a creditor, a provision of this sort in a statute dealing with preferred stock would tend to set at rest the contention which might otherwise be reasonably urged, in the event of the issuance of redeemable preferred stock, that such stockholder was in reality a creditor. See 6 Fletcher, Cyc. Corp. §§ 3630, 3631. It will be noticed that there are no express limitations upon the preferences permitted. They are such "as shall be stated and expressed in the articles of incorporation," not such as shall be so stated and also incorporated in the certificates. The clause in the statute that "preferred stock may, if desired, be made subject to redemption at no less than par, at a fixed time and price, to be expressed in the certificate thereof," is in substance a statement that though the stock evidence a definite obligation or option for the payment of a given amount of money at a given time and place, thus possessing the common characteristics of an ordinary debt, it shall nevertheless be preferred stock. (In the instant case the articles of incorporation express the preference and the power of the board of directors to make a pro rata distribution of proceeds of sales of assets or property.) In any event the statute does not purport to require that a definite time be fixed for *Page 253 
redemption rather than a time to be determined by a contingent event, such as the sale of assets, and so far as the matter of price is concerned the reasonable interpretation of the indorsement on the certificates in question is, in our opinion, to prescribe payment at the par value and the stipulated unpaid dividends.
The stock in question was redeemable stock, and the power to redeem it was, as pointed out in the original opinion, in the board of directors subject to be exercised upon their option. The effect of a redemption or retirement of preferred stock in accordance with the contract under which it was issued "necessarily involves a reduction of the capital stock of the corporation," (6 Fletcher, Cyc. Corp. § 3646), unless it is redeemed and converted into an obligation of some other form. Appropriately enough, the stock certificates in this case practically express this rule of law by stating that the stock is subject to recall and reissuance upon any pro rata distribution on the preferred stock of the proceeds realized from sales of any of its properties, "and consequent reduction of the preferred capitalization." (Italics supplied.) In other words, upon the redemption by the corporation of preferred stock from proceeds of the sale of assets the preferred stock is retired and the preferred capitalization reduced.
But in their petition counsel for the plaintiff assert: "It must ever be borne in mind in a consideration of this case that the old North Dakota Improvement Company turned over the assets to the Western Realty Company under an express promise written in the charter, the by-laws and the stock certificates that if retirement was made of the preferred stock, either by the common stockholders or otherwise, it must be done through the action of the stockholders, and (2) could only be brought about by their action. This is manifested by the fact that under the terms of the contracts, if retirement of the preferred stock was had, the common stockholders were required to pay the full face of the certificates plus six per cent cumulative dividends."
Here counsel overlook that portion of the by-laws (article 3 of § 10), quoted in the original opinion, expressly conferring upon the board of directors the right to make a pro rata distribution of the proceeds of the sale of assets "and in accordance with law reduce the preferred capitalization to the extent of the sum distributed." This is further recognized, as previously shown, by the stipulation printed upon the *Page 254 
stock certificates. Counsel are likewise mistaken in assuming that the stipulation providing for the redemption and retirement of the preferred stock by the common stockholders is an indication that the directors were not to have the power. This right is wholly independent of the right of the corporation through its directors to redeem the stock, as a careful analysis of the by-laws and the contract printed on the certificate clearly shows.
Answering, generally, counsel's argument that it is only the stockholders who can reduce capitalization, it is only necessary to point out that the charter and the by-laws provide that the directors may redeem preferred stock through the distribution of capital assets and that they, the directors, may so reduce the preferred capitalization to the extent of the sum distributed. To deny this power which is thus a part of the stock contracts would be to permit the preferred stockholders, by exercising their voting power, to abrogate their contract.
Further answering the contention that the capital stock of a corporation can only be decreased by vote of the stockholders in pursuance of the procedure outlined in § 4557, Compiled Laws of 1913, as amended by chapter 46, Laws of 1921, it may be stated that the following section expressly authorizes the issuance of a kind of stock which may be made subject to redemption, and when stock is redeemed it is retired. It is no longer a part of the capital of the corporation and "where retirement is specifically authorized by the statute, statutory requirements as to the manner in which stock may be reduced do not apply." 6 Fletcher, Cyc. Corp. § 3644. Hence, an authorization of the directors to redeem and effect a consequent reduction of the capitalization is not a direction to submit the matter to the stockholders under other provisions of law. See Mannington v. Hocking Valley R. Co. (D.C.) 183 Fed. 133, for a discussion of the effect of charter and statutory provisions for redemption of stock, including the power of the board of directors to carry out contracts or options for retirement as a part of the corporate business devolving upon it. See also Baldwin v. Miller  Lux, 152 Cal. 454, 92 P. 1030; Schulte v. Boulevard Gardens Land Co. 164 Cal. 464, 129 P. 582, 44 L.R.A.(N.S.) 156, Ann. Cas. 1914B, 1013.
Further consideration of the question of the allowance of attorney fees in the light of the petition for rehearing has served to confirm our *Page 255 
original views rather than cast any doubt upon what was said upon that subject in the original opinion.
Counsel for the defendants in their petition set out wherein the opinion seems to them to be lacking in clarity. In the end, however, their deductions are fairly accurate and perhaps the opinion may best be "clarified" by correcting such inaccuracies as appear in the deductions of counsel. Such deductions we quote below:
"(1) That the attempted reduction of the preferred stock without the payment of accrued cumulative dividends is illegal and that the decree enjoining such reduction should be affirmed."
This is correct.
"(2) That a portion of the stock might be retired by the payment of the full amount thereof plus all accrued cumulative dividends."
Limited to preferred stock, pro-rating the amount to be so retired among the various holders, and discharging the cumulative dividends only on the amount to be thus retired, the deduction is correct.
"(3) That no reduction of the preferred stock may be had which would in any manner tend to alter the relative voting powers of the two different classes."
We do not know whence counsel derive this deduction. The opinion specifically points out that as a result of the retirement of preferred stock through redemption there will necessarily result some disparity or alteration of voting power. Of course, stock that is retired would no longer vote and it is only preferred stock that would be retired and it only to the extent it would be redeemed.
"(4) That the fund in question may be lawfully distributed to the preferred stockholders in payment or partial payment of accrued cumulative dividends and that this may be done by the directors."
We have had no occasion to consider whether the fund might be distributed in payment or partial payment of accrued cumulative dividends alone. The opinion, we think, clearly enough points out wherein the directors are authorized to redeem the stock by the payment of the amount due, par and dividends, i.e., so much pro rata as they can fully redeem with funds available from the sale of assets.
The petitions are denied.
CHRISTIANSON, Ch. J., and BIRDZELL and NUESSLE, JJ., and HUTCHINSON, Dist. J., concur. *Page 256