Harry WEINBERG, on behalf of himself and all other stockholders of Baltimore Brick Company similarly situated, Plaintiff,
BALTIMORE BRICK COMPANY, a body corporate of the State of Delaware, Louis S. Zimmerman, George C. Warehime, Jr., Jesse Slingluff, Sr., Jesse Slingluff, Jr., William O'Meara, Joseph A. Brown, Hall Hammond, and C. Gordon Pitt, Defendants.
Stockholder, on behalf of himself and all other stockholders of corporation, similarly situated, brought action against corporation and others to enjoin corporation from declaring dividends on its first preferred cummulative stock until an alleged impairment of capital had been corrected. The Court of Chancery, Marvel, Vice Chancellor, held that where charter of corporation provided that first preferred stock should entitle holder to receive each year, out of corporation's net earnings, a fixed yearly dividend of 5%, and corporation's corporate earnings were sufficient for current preferred dividends, and capital assets were sufficient to pay preferred stockholders in full on distribution of assets, payment of preferred dividends by corporation would not be enjoined.
Temporary restraining order, dissolved, and order in accordance with opinion.
Thomas M. Keith and Leighton Dorsey, Wilmington, and Raphael Walter and Lawrence I. Weisman, of Nyburg, Goldman & Walter, Baltimore, Md., for plaintiff.
[34 Del.Ch. 587] Henry M. Canby, of Richards, Layton & Finger, Wilmington, and William L. Marbury, of Piper & Marbury, Baltimore, Md., for defendants Baltimore Brick Company, George C. Warehime, Jr., Jesse Slingluff, Jr., William O'Meara and Joseph A. Brown.
MARVEL, Vice Chancellor.
Plaintiff, the owner of 4,540 shares of common stock of the defendant corporation out of 6,656 such shares outstanding, brings this derivative action to enjoin the corporate defendant from declaring dividends on its first perferred cumulative stock until an alleged impairment of capital has been corrected. Plaintiff is one of three minority common stock directors, there being six preferred directors. Two other common stockholders have recently been permitted to intervene and have filed complaints similar to plaintiffs to which
responsive pleadings are not yet due. Other relief sought by plaintiff and interveners has to do with the revision of defendant's accounting practices and the attempted recoupment of earlier dividends, but the matter now to be decided is whether the corporate defendant can continue to declare current dividends on its first preferred stock. The next regular meeting of directors for such purpose is to be held Wednesday, September 29.
The answers of the corporate defendant and of four of the individuals defendants, who have appeared, concede that dividends on the first preferred stock of the corporation have been declared as recently as June 30, 1954, but deny that the corporate defendant lacks net earnings, that its capital is impaired, or that the payment of dividends would violate Sec. 170 of Title 8 Delaware Code 1953.
It is conceded by plaintiff that corporate earnings for the current or preceding fiscal year are sufficient for preferred dividends and that the capital of the corporation is sufficient to redeem the preferred stock, but plaintiff insists that the statute and the corporate charater do not permit the payment of dividends from current earnings when capital is impaired.
On July 22, the Chancellor declined to restrain the payment of preferred dividends declared by the directors on June 30, 1954, but enjoined the corporate defendant from declaring or paying additional dividends until further order of the Court. Thus, the matter of future [34 Del.Ch. 588] dividends comes on for decision on the return of the rule issued by the Chancellor directing the corporate defendant to show cause why a preliminary injunction should not issue banning payment of preferred dividends. Plaintiff specifically charges that the figure of $1,781,215.43 carried in the statement of the corporate defendant in a land and plant account is incorrect because of sales of land, the abandonment of brick kilns, buildings and equipment used in defendant's business of manufacturing bricks, with no corresponding reduction in the account. Plaintiff claims that this account as of March 31, 1954 was grossly overstated and that accordingly, instead of having an earned surplus as of that date in the stated amount of $694,084.86, the corporation had a substantial deficit. Defendant argues in reply that substantial good will was included in the original setting up of defendant's corporate books some fifty years ago, and that such books, while set up and kept in a manner now considered archaic, disclose an earned surplus. The defendant further claims that a recent appraisal of its property supports the conclusion of its books; that plaintiff cannot be heard to complain of matters in which he participated or acquiesced for a substantial time as a director and that as a common stockholder plaintiff is not injured by the payment of preferred dividends because of a charter provision allegedly governing the payment of accumulated dividends to preferred stockholders on dissolution. Defendant also argues that as a matter of law, Sec. 170 of the Delaware Law authorizes the payment of current dividends under the agreed facts.
At this preliminary stage, the Court has before it the pleadings, opposing affidavits, briefs on the motion and argument of counsel.
In the Court's opinion, it is unnecessary to review the accounting background of this company, which has been in business as a Delaware corporation since 1902, and to resolve the conflicting sworn contentions on the availability of net profits as a source for dividends or to consider defendant's other defenses, in view of the Court's legal conclusion on the operation of present Sec. 170 of the Delaware Law on the agreed facts.
Paragraph 4 of the corporate charter of Baltimore Brick Company (ex. A. to the complaint) provides in part:
[34 Del.Ch. 589] ‘ Said first preferred stock shall entitle the holder to receive each year, out of the net earnings of the company, a fixed yearly dividend ...