Appeal from the District Court of the United States for the District of Delaware; Albert L. Watson, Judge.
Before BIGGS, JONES, and GOODRICH, Circuit Judges.
The intervening plaintiff, the appellant in the case at bar, is the owner of 50 shares of 7% cumulative preferred stock issued by the defendant York Ice Machinery Corporation, a Delaware corporation. The Defendant was incorporated on March 22, 1927. On January 25, 1941 the outstanding capital stock of the defendant consisted of 56,371 shares of cumulative preferred stock*fn1 and 161,481 shares of common stock. On that date the unpaid accumulated dividends on each share of the preferred stock amounted to $88.25.The defendant also had bonds due October 1, 1947, in the principal amount of $5,808,500 and 10 year 6% sinking fund gold debentures in the principal amount of $612,000 which previously had borne a due date of December 1, 1937, but which had been extended to December 1, 1943.*fn2 The defendant also owed certain unsecured 3% notes to the amount of $118,500 due December 1, 1944. Its current liabilities, on the date specified, including sums due to trade creditors and taxes, payrolls, and interest on long term indebtedness calculated on an accrual basis, amounted to approximately $1,150,000.
Its assets as of September 30, 1940, were cash in excess of $1,000,000, notes and accounts receivable of more than $3,500,000 and inventories worth $3,800,000. It possessed miscellaneous assets including customers' notes, accounts receivable, stocks, bonds, mortgages and the capital stocks of affiliated companies worth more than $900,000. The defendant also owned a plant carried on its books at a value in excess of $7,000,000.
On January 25, 1941, the asset position of the defendant was good. It was solvent and its current assets greatly exceeded its current obligations, though refinancing of its funded debt obviously was required. Specifically it appears from a balance sheet of the defendant as of September 30, 1940, that an equity of about $4,300,000 was available for the preferred stock. The unpaid accumulated dividends on the preferred stock then amounted to approximately $4,600,000.*fn3 An examination of the income account of the defendant year by year for the five years ending September 30, 1940, shows its operations resulted in net income in 1940 of $483,121, in a loss in 1939 of $185,076, in a loss in 1938 of $119,753, in net income in 1937 of $957,649 and in net income in 1936 of $165,586. The financial statement of the defendant also shows a net income of $1,202,000, for 1941.The earned surplus for this year was in excess of $800,000 contrasting with an earned surplus of $403,000 for the year 1940.
On January 25, 1941 the board of directors of the defendant sent a letter to each of its stockholders and presented for their consideration a "Plan for the Recapitalization of the Company". This letter stated in part that "During the depression years beginning in 1932 sales and earnings were sharply reduced and the [financial] situation [of the defendant] was further complicated by the heavy fixed sinking fund requirements of the funded debt which aggregate $463,000 per annum. The Company could not support this heavy drain on its resources, and in 1934 a readjustment plan was proposed and subsequently accepted by the holders of over 96% of its bonds and by all the holders of its debentures which are now outstanding. This plan provided, in the main, for the substitution of sinking funds on the two issues contingent on earnings, with the stipulation that no cash dividends could be paid on the Company's stocks until the accruals under the original fixed sinking funds had been met in full. The adoption of the Readjustment Plan by the Bond and Debenture Holders enable the Company to maintain its working capital, and the bonds, which at the time of the proposal were selling in the forties, are now at or near par."
The letter went on to say, "The aggregate unpaid Sinking Fund accruals under the original Sinking Funds at September 30, 1940, amounted to $1,850,500 and are currently accruing at the rate of $200,000 per annum. No dividends can be paid on either the Preferred or Common Stocks of the Company until these accruals have been entirely eliminated.
"* * * It is obvious from the * * * earning statement, covering the past five years, that large increase in earnings, maintained for a number of years, would be necessary to eliminate the Sinking Fund accruals of $1,850,500 and permit the payment of dividends. In the meantime, the large arrears in preferred dividends hamper re-financing of the Company's bonds on favorable terms, and even a partial refinancing by convertible bonds or debentures is not practical. Therefore, a merger is proposed with your Company's wholly owned and inactive subsidiary, York Corporation, which, if made effective, will result in your Company having only one class of stock outstanding and accomplish a desirable change of name."
The plan of recapitalization proposed by way of merger was that each share of the preferred stock of the defendant with accumulated dividends should be converted into fifteen shares of common stock of York Corporation as the "surviving" corporation, and that each share of the common stock of the defendant should be converted into one share of common stock of York Corporation. Upon consummation of the merger and the issuance of the new stock the holders of the preferred stock of the defendant will own 83.2% of all of the stock of York Corporation. The voting power of the present holders of the preferred stock of the defendant*fn4 will be increased from 24.8% to 83.2%. It should be noted that the plan of recapitalization does not purport to deal with the funded indebtedness of the defendant in any way. The directors' letter to the stockholders of the defendant also states that the common stockholders will benefit by the elimination of the prior claims of $10,047,090, representing the par value of the preferred stock plus the cumulative dividends accrued thereon as of January 25, 1941, and the preferred stockholders of the defendant will be benefited by their equity in the future earnings of York Corporation. The letter then states that it should be observed that the company's sales for the three months ending December 31, 1940, were $5,107,373, as compared to $3,588,630 in the same period of 1939; that the existing debt structure of the defendant with the sinking fund requirements and restrictions of the payment of dividends is a severe burden on the defendant and its stockholders; that refinancing of the funded debt is impeded by the arrearage of dividends on the preferred stock, and, if the plan of recapitalization is adopted, that "* * * it will be possible to consider re-financing more advantageously and it may then be to the advantage of the Company to provide a part of the monies necessary, by the issuance of convertible bonds * * * [a result] * * * obviously impossible while the Preferred Stock is outstanding."
We have quoted from the directors' letter at such length because it shows that it was the intention of the defendant to reclassify its stock by way of merger with its wholly owned subsidiary, York Corporation.
York Corporation is also a Delaware corporation. It was incorporated at the direction of the defendant on or about January 5, 1939. Its charter provides that its capital stock shall consist of 250 shares of stock without par value. The defendant purchased twenty shares of the stock of York Corporation for $1,000, the stock having a stated value of $50 a share. On October 11, 1940, the president and secretary of York Corporation issued to the defendant a certificate for 20 shares of stock. No other certificate has been issued. York Corporation has never carried on business. So far as appears from the record, it stood awaiting merger with the defendant.
The minute book of the defendant shows the following facts. Some time prior to November 19, 1937, a committee was appointed by the board of directors "* * * to consider a change of corporate name". On December 28, 1937, this committee reported that a change of name for the corporation should not be undertaken at that time in view of a plan to create a new issue of preferred stock. On November 29, 1938, nearly a year later, the president of the defendant reported that he had appointed a committee to discuss with banking houses the possibility of refinancing the company's indebtedness. At this meeting a resolution was adopted to the effect that steps should be taken to bring about some "adjustment" between the preferred stockholders and the common stockholders in order to permit a refinancing of the company's indebtedness. At the same meeting the standing committee to consider a change of the corporate name of the defendant was instructed to make further investigations in respect to that subject and was directed to report at the earliest practical date to the board. On December 23, 1938, at a special meeting of the board the committee on refinancing was instructed to formulate and submit to the board "as soon as practical a plan or plans by merger or otherwise to eliminate the preferred stock and the unpaid dividends thereon".At the same time the chairman of the committee on change of name stated to the board that the name "York Corporation" was available in Delaware.*fn5 The defendant's counsel thereupon was instructed to cause a new company to be incorporated in Delaware "with a purely nominal capital, for the purpose of pre-empting the name York Corporation" in that state. On January 23, 1939, the committee on refinancing recommended recapitalization of the defendant by conversion of the preferred stock with accumulated dividends into common stock on the basis of ten shares of common for each share of preferred stock. At the same time the committee presented to the board a form of letter to be mailed by the defendant to stockholders in order to acquaint them with the situation of the defendant and "to ascertain their approval or disapproval of the plan". On April 3, 1939, the chairman*fn6 of the committee on refinancing stated that the company had not received from its stockholders a sufficient number of acceptances to effect the plan of recapitalization or to justify proceeding with the plan. The committee stated that it was unlikely that the company acting through its own representatives could secure the assent of a sufficient number of stockholders to consummate any plan of refinancing. The committee thereupon was authorized to engage the services of investment bankers to explain the merits of any plan of refinancing that might be approved by the board.
On May 3, 1939, the committee on refinancing recommended to the board that the proposed plan be amended and that the preferred stockholders be offered twelve shares of common stock for each share of preferred stock with accumulated dividends, "the recapitalization to be made thru a merger with the 'York Corporation'". The officers of the defendant were directed to prepare an agreement for the merger of the defendant with York Corporation, the surviving corporation to have one class of stock, the preferred stockholders to receive twelves shares of stock of York Corporation for each share of preferred with accumulated dividends, the common stockholders of the defendant to receive one share of York Corporation for each share of common. On June 12, 1939, at another meeting of the board the chairman of the committee on refinancing reported that "another court decision had been handed down in Delaware which made it impractical for the company to further consider the possibility of eliminating the present issue of preferred stock by a merger".*fn7 The chairman then recommended that the plan then under consideration be changed so as to give to the preferred ...