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December 19, 1941

HUBBARD et al.

The opinion of the court was delivered by: SCHOONMAKER

Bertha H. Hubbard and Norman Johnson, stockholders of the defendant corporation, each owning fifty shares of defendant's preferred stock, originally brought this suit to enjoin the defendant from holding a stockholders' meeting to vote upon a proposed merger of defendant with two of its wholly-owned subsidiaries, i.e., the Vesta Coal Company and Shannopin Coal Company, on the ground that the recapitalization proposed in the merger was unfair, inequitable, and unlawful. The corporations involved are all Pennsylvania corporations. The plaintiffs made a motion for a preliminary injunction, which, upon hearing, was denied. Thereupon, the corporate election was held, and the requisite statutory majority voted in favor of the merger.

On July 26, 1941, Articles of Merger of said corporations were filed with the Pennsylvania State Department, and said Department issued a certificate of merger. Thereupon plaintiffs filed an amendment to their complaint, in which they asked that the said merger and the recapitalization affected thereby, be declared null and void; or, in event it be declared valid and lawful, that plaintiffs receive payment for their shares of stock in accordance with Section 908 of the Business Corporation Act of Pannsylvania, 15 P.S.Pa. § 2852 -- 908.

 On October 29, 1941, during the trial of this case, twenty-two other persons, owning 2,361 shares of the preferred stock of defendant, intervened as parties-plaintiff. The defendant answered, denying the alleged illegality of the merger. The case was then heard on complaint, answer and proofs.

 The facts of the case as to the merger are briefly these: On June 10, 1941, the defendant proposed to its stockholders a plan of merger with two wholly-owned subsidiary corporations; i.e., Vesta Coal Company and Shannopin Coal Company. At this time defendant had outstanding 587,136 shares of preferred stock, and 572,320 shares of common stock. The preferred stock had a par value of one hundred dollars per share. It was entitled to cumulative dividends at the rate of $7 per share. Upon dissolution, voluntary or involuntary, defendant was required to pay $100 per share and accrued dividends, before distribution of any assets to common stockholders.The preferred stock was redeemable in whole at $120 per share, plus accrued dividends. As of April 1, 1941, dividends had accumulated on this preferred stock to the amount of $45.75 per share. At this time th outstanding stock of the Vesta Coal Company was $7,500,000, and that of the Shannopin Coal Company was $250,000.

 Under the plan proposed, the Vesta Coal Company and the Shannopin Coal Company were to merge into the defendant Company as the surviving corporation. At the corporate meetings of the three corporations, the requisite statutory majority of stockholders voted in favor of the merger. Of the total outstanding preferred stock of defendant, 80% voted in favor of the merger, and 6.2% against it. Of the total preferred stock represented at the meeting, 93% voted in favor of the merger. As to the common stock, 87% of the outstanding stock voted in favor, and 1.6% voted against the merger. Thereupon, the defendant, as the only shareholder of the Vesta Coal Company and the Shannopin Coal Company, voted the entire stock of each of said corporations in favor of the merger. Articles of Merger were then filed with the Pennsylvania State Department as above stated.

 The plan of merger provided for a change in the capital structure of defendant corporation, in that thereafter 3,087,136 shares of capital stock were authorized so classified that 587,136 shares were to be 5% cumulative stock of the par value of $100 per share; and the remaining 2,500,000 shares were to be common stock without par value. The new preferred stock was to be divided into two series, A and B, each to consist of 293,568 shares. These two series were to be identical and without distinction, except that Series B stock was convertible into common stock.

 Under the plan, each old preferred share (including accrued but unpaid dividends) was to be converted into and exchangeable for one-half share of new preferred stock Series A, one-half share of new convertible preferred stock Series B, and one and one-quarter shares of new common stock without par value. Likewise, each share of the old common stock of the par value of $100 per share was to be converted into one share of common stock without par value.

 On August 12, 1941, defendant corporation declared a dividend of $1.25 on the new preferred stock, payable October 1, 1941, and a dividend of 60( per share on the new common stock, payable October 6, 1941. Thereupon, the original plaintiffs asked this court for a preliminary injunction against the payment of these dividends. This court, after hearing, denied the application so far as concerned the preferred stock, but did preliminarily enjoin the defendant from paying the dividend declared on the common stock, the injunction to remain in force until final determination of this case.

 On October 16, 1941, the original and intervening plaintiffs filed a petition in equity in the Court of Common Pleas of Allegheny County, Pennsylvania, asking for an appraisal of the fair value of their preferred shares.

 The merger proceedings involved in this case were had under the provisions of Article IX of the Pennsylvania Business Corporation Act of May 5, 1933, P.L. 364, 15 P.S.Pa. § 2852 -- 901 et seq., and its amendments. The corporations involved in the merger complied with that Act in the proceedings prescribed. The requisite majority of the stockholders of the corporations, both common and preferred, authorized the merger. The plaintiffs contend, however, that the Act does not apply to a merger of a corporation with a wholly-owned subsidiary corporation.

 With this contention we cannot agree. The Act contains no such limitation. Section 901 of the Pennsylvania Act provides: "Any two or more domestic business corporations, * * * may, in the manner hereinafter provided in this article, be merged into one of such domestic business corporations, hereinafter designated as the surviving corporation, * * *." This language is plain. There are no exceptions in the Act.Certainly we cannot hold that this statute excludes a merger between a corporation and its wholly-owned subsidiary, without writing into the statute something that is not there. Judicial determination cannot go that far.

 The Circuit Court of Appeals of this Circuit has upheld a transaction whereby subsidiary corporations transferred their franchises and assets to a parent corporation as a "merger" under the Pennsylvania merger statute: See Metropolitan Edison Co. v. Commissioner of Internal Revenue, 98 F.2d 807; affirmed 306 U.S. 522, 59 S. Ct. 634, 83 L. Ed. 957.

 In Delaware, where Section 59 of the General Corporation Law, Sec. 2091, Rev. Code 1935, provides that "Any two or more corporations * * * may consolidate or merge into a single corporation," the Supreme Court of Delaware, in the case of Federal United Corporation v. Havender, 11 A.2d 331, 337, held the merger of a parent ...

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