Drenk, J.c.c. (temporarily assigned).
This is a class action brought by Leeds and Lippincott Company, a New Jersey corporation, against certain named defendants and the remaining preferred and common stockholders of plaintiff corporation. A verified complaint was filed with the court on March 27, 1957. On the same day an order was entered providing that a copy of the complaint, accompanied by a letter of explanation from plaintiff's attorneys, be mailed to each of plaintiff's stockholders. The accompanying letter was to advise each stockholder of his right to file an answer in the action without first seeking the permission of the court.
On September 13, 1957, an order was entered granting plaintiff's application for permission to file an amended complaint. Plaintiff was ordered to mail copies of the amended complaint, accompanied by a letter of explanation from its attorneys, to each stockholder and to each attorney who had filed an answer in the cause.
Answers to the amended complaint were filed by Ethel R. Nevius, Adam S. Borst, Randal Holden, Miriam E. Mellin, Ida Boffey Bacon, Thomas P. Knapp, William L. Knapp and Helen Lippincott Parrish. Thomas P. Knapp and William L. Knapp appeared pro se. All others were represented by counsel. All of the answering defendants, excepting Helen Lippincott Parrish, filed answers and counterclaims in their capacity as preferred stockholders of plaintiff. All except Helen Lippincott Parrish disputed the position taken by plaintiff in its amended complaint. Defendant Parrish filed an answer and counterclaim as a common stockholder in which she agreed with and approved of the position taken by the plaintiff in its amended complaint.
The jurisdiction of the court is invoked under the Uniform Declaratory Judgments Act, N.J.S.A. 2 A:16-50 et seq. All answering parties have conceded that the action is properly brought and all have joined in asking that the court adjudicate the issues raised by the pleadings.
The broad issue which the court is asked to determine is the respective rights of the preferred and common stockholders
of the plaintiff in relation to each other and to the corporation. The particular issues raised are: (1) can the company redeem the preferred stock at $50 per share; (2) in the event of a recapitalization, reorganization, dissolution or winding up of the corporation, are the preferred stockholders entitled to more than $50 per share; and (3) do the preferred stockholders have a presently vested interest in the surplus of the plaintiff?
In December of 1936 plaintiff filed a petition in the United States District Court for the District of New Jersey for permission to reorganize under the provisions of section 77B of the National Bankruptcy Act, 11 U.S.C.A. § 501 et seq. As a result of this action, an amended plan of reorganization was approved in that court on January 4, 1938. One of the provisions of the reorganization approved by that court was the amendment of article IV of plaintiff's certificate of incorporation. The pertinent part of the amended certificate follows:
"The holders of the preferred stock shall be entitled to receive, when and as declared, from the surplus or net profits of the corporation yearly dividends at the rate of Two Dollars and fifty cents ($2.50) per share per year, and no more, payable at such time or times as the Board of Directors shall determine, provided that the dividends payable for any year may be declared and paid within the first three months of the succeeding year, as a dividend for the preceding year, if such dividends so declared and paid are designated as being for the preceding year, and provided further, that notwithstanding the amount of net profits for any year, no dividends shall be paid on the preferred stock, until the Net Earnings of the corporation, as herein particularly defined, for any year for which the dividend is to be paid shall exceed the sum of Seven hundred thousand ($700,000.00) Dollars, and then only to the extent of any such excess. * * *
The dividends on the preferred stock shall be non-cumulative; provided, however, that no dividends shall be paid for any year on common stock in excess of the net profits for that year remaining after payment of Two Dollars and Fifty cents ($2.50) per share for each year on the preferred stock, until dividends earned, but unpaid for any prior year or years on the preferred stock, shall have been paid, but in no other respects shall dividends on preferred stock be cumulative.
No dividends shall be paid on common stock in any year, or for any year, until the full dividend of Two Dollars and Fifty Cents
($2.50) per share for such year has been paid on the preferred stock, and for prior years as set forth in the preceding paragraph [ i.e. , if dividends are to be paid on the common stock in excess of the net profits]. When all dividends as aforesaid [ i.e. , cumulative dividends on the preferred stock when dividends on common are to be paid in excess of net profits] have been declared and shall have become payable on the preferred stock , the Board of Directors may declare dividends on the common stock, out of Net Earnings in excess of Seven Hundred Thousand ($700,000.00) Dollars, payable then or thereafter, with limitations as aforesaid [ i.e. , after payment of preferred stock dividends that have been declared and paid for that year and for prior years where they are cumulative because of dividends in excess of net profits being paid on the common stock].
In the event of the recapitalization, reorganization, dissolution, or winding up (whether voluntary or involuntary) of the affairs of the Corporation, the holders of the preferred stock shall be entitled to be paid or preferred to the extent of Fifty ($50.00) Dollars per share , before any amount shall be paid or distribution made to the holders of the common stock; and after the payment, distribution or preference to the holders of preferred stock to the extent of Fifty ($50.00) Dollars per share , the remaining assets and funds of the Corporation shall be divided and paid to the holders of common stock according to their respective shares. * * *
At any time after its issue, the preferred stock, or any part thereof, or any share or shares thereof, may, by a vote of a majority of the Board of Directors, be redeemed by paying to the holders thereof, the sum of Fifty ($50.00) Dollars per share. If less than all the shares then issued and outstanding is to be redeemed, the shares so to be redeemed shall be selected by lot, or by purchase and payment of shares pro rata as the Board of Directors may determine. * * *" (Italics and explanation in brackets added)
It is the contention of both plaintiff and defendant Parrish, that the correct interpretation of the amended certificate of incorporation would result in the following findings:
(a) The preferred stock is non-cumulative in every respect as to the corporation itself. Cumulative features, if any, apply only as between the preferred and common stock. The result is that the plaintiff should not segregate on its books the amount of preferred dividends earned in excess of $700,000 in each year but not paid.
(b) After dividends of $2.50 have been paid to the preferred stockholders in any year, the excess of current earnings for that year may be paid to the common stockholders, but the ...