Appeal, No. 43, Jan. T., 1952, from decree of Court of Common Pleas of Northampton County, Nov. T., 1949, No. 7, in case of Carl E. Schaad and John H. West v. Hotel Easton Company. Decree affirmed.
Clyde W. Teel, with him Fackenthal, Teel & Danser, for appellant.
Charles P. Maxwell, for appellees.
Before Drew, C.j., Stern, Stearne, Bell and Musmanno, JJ.
OPINION BY MR. JUSTICE HORACE STERN
The question here presented is whether a dissenting owner of shares of preferred stock of a business corporation can be compelled, under a proposed scheme of recapitalization, to accept common stock in exchange for his holdings, with loss of his right to the then accrued, cumulative, undeclared and unpaid dividends.*fn1
Hotel Easton Company was incorporated in 1924 under the General Corporation Act of April 29, 1874, P.L. 73. According to its articles of incorporation its
capital structure consisted of 2500 shares of preferred stock of the par value of $100 each, and 2500 shares of common stock without nominal or par value; subsequently, by proper corporate action, the authorized preferred stock was increased to 7500 shares and the common stock to 3750 shares; of these amounts 7158 shares of preferred and 3039 shares of common were outstanding in 1949 when the present bill of complaint was filed. Under a provision of the by-laws purchasers of the preferred stock were given the right to purchase one share of common with every two shares of preferred, so that most of the shareholders owned both preferred and common stock, although some of them owned only preferred and others only common. The by-laws of the company, adopted at the time of the incorporation, established the different classes of stock, vested the voting powers exclusively in the common stock, and provided that the preferred stock should carry a dividend at the rate of seven per cent per annum, cumulative, to be paid before any dividend was paid on the common. The preferred stock certificates likewise stated, in conformity with resolutions adopted by the shareholders, that the holders of such stock should be entitled to receive, when and as declared, from the surplus or net profits of the corporation, yearly dividends at the rate of seven per cent per annum, and no more, payable as the Board of Directors might determine, such dividends to be cumulative and to be paid before any dividend was paid on the common stock; also that in the event of liquidation the holders of the preferred stock should be entitled to be paid in full both the par amount of their shares and the unpaid dividends accrued thereon before any amount should be paid to the holders of the common stock. Until the year 1942 the company suffered annual losses, with the resulting accumulation of a large
deficit; since then, however, substantial profits have been earned each year. The company has never declared any preferred stock dividends, so that in 1949 there were accrued, undeclared and unpaid dividends on each of the outstanding shares of preferred stock in the amount of $157.50.
On February 7, 1949, a meeting was had of the preferred and common shareholders at which a plan of recapitalization and change of share structure was adopted. The plan involved an increase in the authorized common stock without nominal or par value from 3750 to 75000 shares, and the conversion of each of the outstanding shares of the preferred, together with the accrued dividends thereon, into ten shares of the increased common, the preferred shareholders to surrender and exchange their shares accordingly; to effect these changes the articles of incorporation and by-laws were to be appropriately amended. The plan was adopted by a vote of approximately 60 per cent of the outstanding preferred stock and about the same ...