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Franzblau v. Capital Securities Co.

Decided: March 9, 1949.


Civil action. On motion for summary judgment.

Stein, J.s.c.


[2 NJSuper Page 520] The plaintiff holds 300 shares of the preferred capital stock of the defendant company. The total number of such shares, presently issued and outstanding, is 12,122. Those shares are of the par value of $30.00 each and entitle the holders to cumulative dividends at the rate of 7% a year. Also presently outstanding are 238,299-3/5 shares of the company's common stock, originally of the par value of $10.00 and now, by reason of the reduction hereinafter mentioned, of the par value of $1.00 each. The said two classes of stock were authorized by the company's certificate of incorporation, filed on September 26, 1927. Dividends on the preferred stock were paid to and including the installments due on August 1, 1931.

No dividends have been paid since that date and as of December 31, 1948, there were unpaid and in arrears 69 quarterly dividends at the rate of 1-3/4% each. Those cumulative and unpaid dividends amount to $36.22 1/2 per share and to $439,119.45 on the entire outstanding issue of preferred stock. During this period of default no dividends were paid on the common stock. It is not disputed that the company's failure to pay dividends during this period of over seventeen years was due to insufficiency of earnings; that for many years within that period the defendant company's business was operated at a deficit, which deficit was charged off against capital surplus created in 1932 by reducing the par value of the common stock from $10.00 each to $1.00 each. This $9.00 reduction in par amounted to $2,249,809.74. In 1932 that amount was transferred from capital to capital surplus and against that capital surplus was charged off each year the company's operating deficit. Thus the impairment of capital was avoided. The financial statement of the company as of the end of 1948 shows that its total assets amount to $2,280,865.79 and that its true net worth amounts to $1,248,663.64, of which $580,299.60 represents its capital and $668,364.04 represents its capital surplus. As already indicated, this surplus does not reflect any earnings of the company but is what remains of the result of the reduction in 1932 of the par value of the common stock from $10.00 to $1.00 per share.

On September 30, 1948, the directors of the company inaugurated what has been called the "plan of conversion" for the purpose of satisfying, and thus eliminating, the dividends in arrears on the preferred stock. The plan was to change and convert each of the presently outstanding 12,122 shares of 7% cumulative preferred stock, with a par value of $30.00, together with all accumulated and unpaid dividends accrued and in arrears thereon into one full paid and non-assessable share of 5% Cumulative Prior Preferred Stock of the par value of $50.00, and upon such conversion also to pay in cash to the preferred stockholders $2.50 for each share of the old preferred stock converted into the new preferred stock. The plan was declared advisable by a resolution of the board of directors,

under which the capital structure of the company was by amendment to its certificate of incorporation to be reclassified, so that it would consist, as heretofore authorized, of 300,000 shares of common (same being inclusive of its presently outstanding shares of common stock) of the par value of $1.00 each and a new issue of 12,122 shares of 5% Cumulative Prior Preferred Stock of the par value of $50.00 each. The proposed amendment included certain other new features intended for the benefit and greater protection of the holders of the preferred stock.

At a duly called stockholders' meeting held on January 17, 1949, the Board's resolution, proposed amendments to the charter, and the entire underlying plan of conversion were considered by the stockholders of both classes. Fifty-five preferred stockholders holding in the aggregate 10,493 shares of preferred stock voted in favor of the resolution, the amendments and the plan of conversion. Only twenty-two persons holding 1629 shares of preferred stock did not appear or vote. No negative votes were registered. Of the holders of the common stock one hundred thirty-nine persons holding 181,583-1/10 shares voted in favor of the proposed project. There were no negative votes. Thus 86.56% of the preferred stock and over 76% of the outstanding common stock voted in favor of the plan of conversion. This was substantially more than the two-thirds vote required by the statute (R.S. 14:11-1,-2,-3).

The complaint alleges that at the conclusion of the stockholders' meeting the defendant's president, who presided thereat, announced that the plan of conversion was effective and was binding upon all the holders of the company's stock. The plan itself, transmitted to the stockholders in advance of the meeting, clearly indicates the intent to make the plan mandatory. It is clearly stated that when the certificate of amendment is filed, the holders of the existing preferred stock would be required forthwith to surrender such stock for cancellation and that thereupon the new stock would be issued and the cash payment made, and that after the date of such filing the holders of the old preferred stock "shall have no further or other rights or interest by reason of the ownership thereof, except such as

arise from the right of such holders to receive, upon such surrender of such certificates, certificates for an equal number of shares of the 5% Cumulative Prior Preferred Stock and also the cash payment hereinafter provided" ($2.50 per share).

Plaintiff attacks the plan of conversion as both illegal and unfair and charges that the plan violates not alone his rights as a preferred stockholder but also the rights of those other preferred stockholders who did not assent to the plan by voting therefor. The plaintiff asks for a judgment declaring the plan of conversion illegal and inequitable as against the non-assenting preferred stockholders and he seeks injunction against the plan being enforced against him and them. The other non-assenting preferred stockholders are before this court by force of its order appointing the plaintiff as the representative of the whole class of non-assenting preferred stockholders and directing that the plaintiff give notice to the others of the nature and pendency of this action and of the opportunity afforded by the Court to intervene within twenty days after such notice is given. The notice was duly given but no other preferred stockholder intervened.

Is the plan of conversion illegal as against plaintiff and the other non-assenting preferred stockholders or is it binding upon all of them? Plaintiff argues that the certificate of incorporation of the company constitutes a contract not alone between the company and all its stockholders but also between the stockholders inter sese , that that contract assures to the holders of the preferred stock the ultimate payment of the accumulated and unpaid dividends, that the dividend rate is similarly assured and may not be reduced, that the foregoing rights constitute vested property rights which may not be altered or impaired by any number of stockholders less than all and that such immunity may be invoked by a single dissenting stockholder. With this general statement there can be no quarrel, but it has no application to the case at hand. That the company's charter constitutes a binding ...

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