functioning. Much has been made by counsel for the complainant of the conduct of the defendant company in spending more than $5,000,000 from 1933 to 1939 in the purchase of their prefered and common stock, most of which was done in the last two or three years. However, this was done as testified to by the treasurer of the company because of the difficulty in securing sound investments, and by the purchase of preferred stock especially, there was a benefit to the company by the elimination of the claim to further dividends of $7, of back dividends, as well as to the right of liquidation at $100 per share. There were also purchases of common stock by the company, in some instances repurchases from employees who had purchased the stock from the company, but the amounts involved are not sufficient to be in any wise controlling even if it be admitted that the purchase thereof was of no benefit to the corporation. The main objection to the plan, the complainant urged, is that it resulted in a benefit to the old common stockholders and a number of instances were placed in the record in alleged substantiation thereof. Take an instance that counsel for the complainant cites where $2,383,000 is earned by the company. Before the recapitalization plan, assuming the entire earnings were declared in dividends, $2,383,000 would go to the old preferred stockholders and there would be accumulated dividends running to their benefit of $2,600,000; after the plan goes into effect, assuming a 100% exchange, all of the $2,383,000 would be taken up by the debenture and $3 being paid on the prior preferred shares, and actually nothing left over for the common stockholders. Therefore, in neither instance, assuming this earning and a 100% exchange, would the common stockholders get anything, but counsel argued the old common stockholders are potentially better off because if we deduct from this $2,600,000 fifty-one percent (51%) thereof, which would go to the preferred stockholders under the plan, there would remain $1,300,000, and to this extent the common stockholders would be benefited by not having this accumulated ahead of their common stock.
Similarly it is urged that before recapitalization $47,000,000 would have to have been realized in assets before the common stockholders would get anything in liquidation, and after recapitalization only $15,000,000 in assets would have to be realized before the common stockholders get anything, and that therefore under the plan the common stockholders would fare better by not having to realize $32,000,000 in assets. However, taking into consideration both these contentions of the complainant, the common stockholders get nothing in either case, for as has been indicated in the first instance there is nothing available actually for the common stockholders either before or after the plan as the earnings per share do not cover the $7 requirement on the preferred before the plain and under the plan after the payment of $3 per share on the prior preferred and the interest on the debentures, there is nothing left for the common stock.In the latter case there is nothing available on liquidation for the common stockholders before or after the plan, for in either instance there would be insufficient assets to provide for the respective values giving the liquidating values for the stock. Accordingly, while it may seem that under certain hypothetical circumstances the old common stockholders may be potentially better off under the plan than they were before, one must be realistic and view the plan in its practical aspect as it affects all classes of shareholders and to indulge in benefits remote from actuality would seem to serve no useful purpose.
It is to be borne in mind that the plan does not purport to extinguish any of the rights of the preferred stock nor to require that stock be converted into any other stock, nor to require its exchange for anything in substitution. So that for all that the plan provides the complainant may continue to hold his shares and the only alteration in his rights will be the consequence of the issuance of the prior preferred stock and the debentures, and accordingly I hold that the better view is that adopted by the Courts of Ohio in Johnson et al. v. Lamprecht, 133 Ohio St. 567, 15 N.E.2d 127, August 9, 1940, and of Delaware in Shanik v. White Sewing Machine Copr., Del.Ch., 15 A.2d 169, the rationale of which is, that where preferred stock issued by a corporation entitles its holders to accumlated dividends and dividends have accumulated on the stock so held, and where the corporate charter conferred on the holders of preferred stock the right to exact that common stockholders should not receive dividends or distributions in liquidation of capital until dividends at the stated rate had been paid to the preferred stockholders, the payment of dividends on a new prior preferred stock subsequently issued did not destroy the right of old preferred stockholders of accumulated dividends, and therefore payment of dividends on the new prior preferred stock could not be enjoined. In other words, in these cases the courts have stated that the right which the preferred stockholder has conferred upon him is as in the instant case, the right to exact that the common stockholders shall not receive dividends until dividends are paid to the preferred stockholders. It is unnecessary in our view of the case to decide whether or not the dividends on preferred shares of stock which accrued through lapse of time are "vested rights of property" or "fixed contractual rights" as these phrases have been used in the Keller and Johnson cases, supra, since there is no intention under this plan to divest the preferred stockholders of his right to accumulated dividends but at most to defer them. Moreover, none of the cases dealing with this subject hold that language such as is contained in the plan herein or of the amendment of the articles of incorporation of the defendant company should be construed to express or imply that accumulated dividends will not be paid nor does it on the other hand permit the inference that the corporation will not make changes in its capital structure as a consequence of which the probability of actual payment of dividends may be postponed. The case which has been cited subsequently with approval, and which makes a thorough review of the law with respect to the rights of the holders of preferred stock on which dividends have accumulated, is that of Morris et al. v. American Public Utilities Co., 14 Del.Ch. 136, 122 A. 696, 705. The court held here as in the later Delaware cases that accumulated dividends on preferred stock could not be entirely eliminated by an amendment to the articles of incorporation, to that effect. However, of particular interest is that portion of the Court's opinion in which it denies one of the prayers of the bill which sought an injunction against a payment of dividend on a newly created class of preferred stock until the accumulated dividends on the old stock were paid. This the court states "they are not entitled to for the reason that by the terms of the original certificate authorizing the preferred stock, whatever preference it has can be before dividends on common stock only. The corporation has neither declared not set apart from their earnings, any sum for a dividend on the common stock, nor is it threatening to do so. The payment of dividends to the two preferred classes caeated by the amendment which come in ahead of the class which the complainants hold is not in violation of the rights secured by them by their contract with the corporation and the injunction should, therefore, not issue as prayed". This, it is submitted, is the same situation as presented by the plan and is therefore in complete accord with the ruling of the court here. The same is true in Ainsworth v. Southwestern Drug Corp., 5 Cir., 95 F.2d 172, and to the same effect Lou W. Kreicker v. Naylor Pipe Co., 1940, 374 Ill. 364, 29 N.E.2d 502, where the court sustained the view of Johnson v. Lamprecht, supra.
It is impossible for me to enter into any further examination of the legality of the plan adopted because of the limit of time if this matter is to be decided, before a failure to decide, will amount to an injustice. It seems to me, however, that the preferred stock under the contract only had preference over the common stock, and it was not provided that it was to be free from the burden of the preferences of other classes of stock which might be created. It was senior among the class of stock which was then authorized under the contract with the stockholders. It is now junior to two new classes. What has occurred therefore is that the preference which it had originally enjoyed has been changed or altered, not however in relation to the common stock, for the preference over it is in no wise effected. However, in relation to earnings and assets, it stands no longer first but third. However, no valid objection can be raised to this since this was a condition upon which the complainant as a preferred stockholder purchased his shares.
In spite of the deferment of their position, the approximately ten percent (10%) who did not exchange under the plan, are in a rather favorable position. If we consider the earnings for and including the year 1932 and down to and including 1939, and if their position was as it is today, there would be only three years in those nine in which very substantial dividends would not be available for them. Moreover, if the past record of the company is any criterion of its future dividend policy -- since in these years all that was earned by it was paid out in dividends -- they have little cause for complaint. If we take the average earnings for these nine years -- Mr. Reis, a witness for the complainant, insisted that 1939 alone would show a better picture -- they would amount to $4,170,000, and if we deduct from this average earning the amounts necessary to take care of 90% of the debenture and prior preferred stock, there would be left available for payment on the remaining 10% of the preferred shares about enough to wipe out the arrearages presently existing on them.
Accordingly, I find that the plan is a valid one and is in no wise violative of the rights of the complainant as a preferred stockholder. In this view of the case there is no necessity for going into the question of laches presented. The prayer of the bill is denied and judgment entered for the defendant.
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