Court Opinion

ID: 6820801
Source: CourtListenerOpinion
Date Created: 2022-07-23 19:06:55.343958+00
Date Added: 2024-06-11T16:04:07.040323
License: Public Domain

■Hudgins, J.,
dissenting.
The capital structure “of the Craddock-Terry Company, as of November 26, 1938, was as follows:

Shares Rate Par Total

1 st Preferred... 12,500 6% $100.00 $1,250,000.00
2nd Preferred.. 12,500 6% 100.00 1,250,000.00
Class “C”...... 9,956 7% 100.00 995,600.00
Common .....32,514 o 100.00 3,270,400.00
$6,766,000.00
Less: Deficit November 26, 1938............ 1,819,795.87
Book Value $4,946,204.13
The assets were valued at $5,191,616.17, which included $238,682.60 in cash on hand and in the banks. The current liabilities were only $194,317.67, which did not include $51,-*255094.37 in cash reserved for contingencies. The business for the year ending November 26, 1938, showed net earnings of $62,556.81, less income taxes.
This table of assets and liabilities reveals that no creditor is interested in this litigation. The rights of the holders of the shares of stock were fixed by the charter and the stock certificates. The pertinent provisions of the charter and the certificates of stock were as follows:
“(b) All Preferred stock issued under authority of this resolution shall be preferred as to earnings to the extent of six per cent per annum, and said dividends shall be cumulative, and said Preferred stock shall also he preferred as to assets in liquidation
“(e) No encumbrance of any character shall be placed by the Board of Directors or stockholders, in shape of mortgage, hen or otherwise upon the property of the Company, unless the same shall provide first for the retirement of the Preferred stock with accumulated dividends upon the terms and conditions as set forth above.” (Italics supplied.)
Except for the preference given the first preferred over the second preferred stock, with some minor differences,, the preference provisions of the other two classes of preferred stock are substantially the same.
In Powell v. Craddock-Terry Co., 175 Va. 146, 7 S. E. (2d) 143, we construed the first sentence in paragraph (b) above to mean that the holders of preferred stock were entitled to a cumulative six per cent per annum dividend out of earnings. In so holding, we stated: “We have been
pointed to no decision nor have we been able to find any in which accumulated and unpaid dividends were allowed to a preferred stockholder in the distribution of a corporation’s assets unless such preference was clearly and expressly set forth in the charter.” (Italics supplied.)
There were no earnings at the time of the decision, February, 1940, out of which any dividends might have been declared. Indeed, as stated in the majority opinion, the capital had become impaired to the extent of $1,819,795.87.
Those who acquired the first preferred stock in the *256corporation did so upon the express written guarantee that their rights were superior to those who held the other three classes of stock and that the corporation could ndt create a mortgage on the assets, whether real or personal, without first buying the preferred stock and accumulated dividends. This the corporation was not financially able to do.
The value of the assets, after payment of corporate debts, was not equal to the par value of the outstanding four classes of stock. The value of these assets was more than equal to the par value of the first, second and third (class “C”) classes of stock. Under the corporate structure, the deficit would reduce the value of the common stock by the amount of the deficit. The accumulated dividends would inure to the benefit of the holders of the three classes of preferred stock in the order of stated priorities. Therefore it was apparent that the holders of the common stock would receive no dividends for a number of years.
Confronted with this situation, the directors decided to amend the charter. The proposed amendment reduced the rate of interest on accumulated dividends and permitted the corporation to create liens upon any of its assets without being forced to buy the preferred stock. The Corporation Commission refused to allow this amendment to the charter because it would seriously impair vested rights of the holders of the preferred stock.
It was after the Corporation Commission refused to permit the charter to be so amended that three or more of the stockholders and directors conceived the scheme of forming a new corporation for the purpose of buying all the assets, including the good will, of the old corporation and paying the stockholders of the old corporation with stock in the new corporation. This offer of purchase was accepted by more than eighty per cent of the stockholders in the old corporation and the transfer of good will and all assets was consummated. The provisions of the charter of the new corporation are substantially the same as those set forth in the proposed amendment to the old charter.
*257The appellees, a minority of the holders of the different classes of preferred stock in the old corporation, decided to assert their rights in the assets of the old corporation, for which purpose they instituted this suit in equity. I repeat, this is not a controversy between the creditors of a corporation and the stockholders, but it is a controversy between the holders of the preferred stock and the holders of the common stock in the same corporation. The respective rights of the parties are set forth in the provisions of the charter and in the certificates of stock. Each of these expressly states that the “preferred stock shall also be preferred as to assets in liquidation.”
The majority opinion holds that a sale and transfer of all the assets of the old corporation and a distribution of the purchase price is not a liquidation, yet the opinion, with approval, quotes Garrett Co. v. Morton, 35 Misc. Rep. 10, 71 N. Y. S. 17, to the effect that liquidation is “the act or operation of winding up the affairs of a firm or company by getting in the assets, settling with its debtors and creditors, and appropriating the amount of profit and loss.”
The debts of the old corporation have been paid. All assets of the corporation have been transferred to another person. The proceeds received from the sale of these assets, in the form of new stock, have been distributed to the stockholders who consented to the sale. The old corporation has no assets or property of any description with which to conduct any business. Whatever profit or loss there may be is included in the value of the stock in the new corporation distributed to the old stockholders, or in such assets as should have been reserved for the benefit of dissenters. These facts, it seems, should be convincing evidence of “liquidation.”
If this conclusion is not correct, then the statute permits common stockholders in any solvent corporation, under the guise of “reorganization,” to destroy the rights of preferred stockholders, regardless of provisions in the charter and in the certificates of stock. If the Corporation Commission was right in refusing to permit the charter of the old *258corporation to be amended because such amendment would impair vested rights of preferred stockholders, then it is not permissible for the same stockholders to accomplish the same results indirectly under the guise of reorganization. It is a matter of little moment to the preferred stockholders whether their rights are impaired by an amendment to the old charter or by the formation of a new corporation by the same parties who acquired the common stock with full knowledge that their rights as stockholders were subservient to the rights of the holders of other classes of stock.
The sale of this preferred stock was a contract, and that contract cannot be changed directly or indirectly. Section 10, Article 1, of the Federal Constitution. This was held in the Dartmouth College case. We look to the substance and not to the shadow of things. A contractual right cannot be abrogated by statute or even by a State constitutional provision.
The majority opinion indulges in prophecies as to the virility and future values of the preferred and common stock in the new corporation. In the same opinion the appellees are reprimanded for their refusal to surrender a vested right in exchange for a mere hope that the same directors, in their management of the identical assets in a new corporation, will increase the profits. I do not think that the fact that a minority stockholder, who seeks the aid of a court of equity in order to enforce his rights, is thereby making “a merciless assault” upon the corporation or the other stockholders. Pertinent legal principles should be applied, whether the litigant makes a good or a bad bargain. It is not the function of a judge to praise or condemn litigants who merely exercise the right to choose one of two courses in a business transaction.
For the reasons stated, I think the decree of the trial court should be affirmed.
Holt and Spratley, JJ., concur in this dissent.