The opinion of the court was delivered by: GANEY
This bill was brought by Norman Johnson, a preferred stockholder of the Curtis Publishing Company, suing on behalf of himself and all other stockholders of the Company similarly situated, against the Curtis Publishing Company and Walter D. Fuller, et al., asking (1) for the enjoining and restraining of the defendant, the Curtis Publishing Company, its officers and directors, from paying or declaring any dividends on said company's prior preferred stock and paying any interest on or retiring any of said company's fifteen-year debentures, so long as any shares of said company's preferred stock remain outstanding in the hands of the public; (2) that a decree be made declaring the issuance of the prior preferred stock, the fifteen-year debentures and the common stock under the alleged plan of reorganization and recapitalization to be contrary to law and to be null and void or that the defendants, Walter D. Fuller et al., and each of them be required to account to the defendant, the Curtis Publishing Company, and to pay to the said company all monies and assets of the company which have been dissipated and wasted, and to pay to the said the Curtis Publishing Company the full consideration for the issuance of said prior preferred stock, debentures and the common stock an amount which would preserve the privileges and preferences of the plaintiff as a preferred stockholder and of other preferred stockholders similarly situated.
The plaintiff, Norman Johnson, owns one hundred shares of the preferred stock of the Curtis Publishing Company for which he paid $4,592 in February, 1940. As of December 31, 1939, the capital structure of the Curtis Publishing Company consisted of 900,000 shares of preferred stock, without a par value; 736,373 of which was held by the public and 177,580 of which were held by the company; 1,800,000 shares of common stock without par value of which 1,733,041 were held by the public and 66,959 held by the company. The preferred stock was a $7 per share cumulative dividend stock and had priority over common as to dividends and all accumulations thereon and on liquidation to be paid $100 per share and which was callable at $120 per share. The "contingent reserve and undivided profit" of the defendant company or what is ordinarily designated as earned surplus as of the above date amounted to about $20,000,000. Also as of the above date the company had a cash position of $8,690,442.39 and marketable securities on the basis of costs less reserve for amortization of bond premiums of $9,201,393.35.
During the years 1926 and 1932, inclusive, the company's net income ranged between a high of $21,534,265 in 1928 and a low of $5,567,905 in 1932. Dividends in full on the $7 preferred stock and dividends on the common stock were paid up to and including 1932. For the years 1933 to 1939, inclusive, the company's net income ranged between a high of $6,291,453 in 1936 and a low of $1,279,163 in 1938. The annual dividend requirement on the $7 preferred stock consisting of 722,420 shares required annually approximately $5,000,000, and taking the average net income for the eight year period previous to 1940 there was a net income of approximately $4,000,000 or $1,000,000 less than the annual dividend requirement on the preferred shares. Dividends on the common stock were stopped in 1932. The year 1933 marked the first year in which the full dividend of $7 was not paid, as the net income that year was only $1,313,576 and that year accordingly marked the beginning of the accumulation on the preferred stock, so that on December 31, 1939, the accumulation on the preferred stock amounted to $16.87 1/2 per share. However, during the year 1933 to 1939, inclusive, that is, beginning with the first of the years during which full dividends were not paid on the preferred stock, the company earned a total of $26,630,322 and paid out in dividends on the preferred stock $27,337,519.31. Thus it will be seen while of course the company did not pay the full dividend every year, it paid out all that it earned during those years and a little bit more, on the preferred stock, and therefore it would seem to follow that "the contingent reserve and undivided profits", or what is here designated as the surplus, which was as of December 31, 1939, about $20,000,000 could not have been built up from the net earnings of the company for these years. Accordingly, it is seen that beginning with the year 1933, the earnings of the corporation were insufficient to pay the dividends on the preferred stock and the accumulated dividends thereon which as of December 31, 1939, amounted to $16.87 1/2 and during all these years nothing was paid on the common stock.
"Resolved, That the Company issue 900,000 shares no par value cumulative Preferred Stock, subject to the following rights, privileges, preferences, terms and conditions:
"Holders of Preferred Stock shall be entitled to receive cumulative dividends thereon at the rate of $7. per share per annum, and no more, payable out of the surplus profits of the corporation quarterly on the first days of January, April, July and October in each year, before any dividends shall be paid or set apart upon the Common Stock of the Company.
"The whole or any part of said Preferred Stock at any time outstanding, may be redeemed by the corporation at its option at any dividend date, at $120. per share and all accumulated unpaid and accrued dividends thereon * * *.
"So long as any of the Preferred Stock remains outstanding, the Company will not, without the consent of the holders of two-thirds of the Preferred Stock outstanding, create any mortgage debt or other obligation which would be entitled to payment out of the assets of the corporation prior to the Preferred Stock, excepting only such obligations as may be incurred in the ordinary and usual course of business, not secured by a lien upon the Company's property, and excepting also purchase money obligations given in connection with the acquisition of new property, nor shall the Company, without such consent, create any other issue of stock which shall in any way impair the rights of the holders of the present issue of Preferred Stock.
"No dividends shall be declared or paid on the Common Stock until the current quarterly dividend on the Preferred Stock, as well as all accumulated or defaulted dividends thereon, shall have been either paid or set aside.
"In the event of bankruptcy, insolvency, voluntary or involuntary dissolution of the Company, holders of Preferred Stock shall be entitled to receive in distribution of the assets, $100. a share and all accumulated, unpaid and accrued dividends thereon before any sum shall be paid to or any assets distributed among the holders of the Common Stock * * *."
These pertinent features of the resolution above are set forth on the back of the stock certificate of the Curtis Publishing Company and form a part of the contract between the company and the individual stockholders.
Sometime in November, 1939, the directors proposed to the stockholders of the company a plan of reorganization which was destined to reduce the dividend requirement on the preferred stock of the company. The plan, being opposed by a large number of preferred stockholders, was abandoned. On April 19, 1940, the board of directors of the defendant company adopted a plan of reorganization and recapitalization and submitted the same to the stockholders meeting on the 2nd day of July, 1940. At that meeting, 12,131 stockholders were entitled to vote 722,420 shares of preferred stock, and of these shares approximately 72% were voted in favor of the plan and approximately 4% against the plan and approximately 24% were not represented at the meeting nor voted. Of the shares voting, approxiamtely 95% voted in favor of the plan and 5% voted against the plan. Approximately 92% of the shares owned by holders solely of the preferred stock of the defendant company which voted on the plan, voted for the plan and approximately 8% voted against the plan. Approximately 25% of the shares which did not elect to exchange under the plan voted for the plan. The amendment of the articles of incorpoation of the Company were accordingly filed with the Secretary of the Commonwealth on July 17, 1940, and on August 15, 1940, the plan was declared operative.
Under the proposed plan of reorganization and recapitalization, the preferred shareholders were asked to surrender their present preferred shares for cancellation, including the dividends accrued thereon which as of July 1, 1940, amounted to $20.12 1/2 per share and were offered in exchange the following new securities for each share of preferred so surrendered: A $10 share in a debenture, the principal amount of which is $7,224,200 payable in fifteen years and yielding 3%, with the provision for a sinking fund of $250,000 per year for its retirement; one share of prior preferred stock carrying fixed cumulative dividends of $3 per year, and an additional dividend of $1 a year payable and cumulative to the extent earned, having a call price of $75 a share and a value of $65 per share in liquidation, with an equal voting right with the common stock and with the additional right if six quarterly fixed dividends are in arrears to elect two directors until all arrearages are paid up and two and one-half shares of common stock. The old common stock of 1,733,041 shares was increased by 1,806,050 shares under the plan, making a total of 3,539,091 shares of common stock. In the event a holder of $7 cumulative preferred stock did not wish to exchange under the plan, ...