Harry WEINBERG, on Behalf of Himself and All Other Sockholders of Baltimore Brick Company Similarly Situated, Plaintiff Below, Appellant,
BALTIMORE BRICK COMPANY, a corporation 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, C. Gordon Pitts, Defendants Below, Appellees. Joseph Moskowitz and Sylvia Martin, on Behalf of Themselves and All Other Stockholders of Baltimore Brick Company Similarly Situated, Intervening Plaintiffs Below, Appellants,
Class action on behalf of common stockholders of corporation, to enjoin corporation from declaring dividends on its preferred cumulative stock while common capital of corporation was impaired. The Court of Chancery, New Castle County, 108 A.2d 81, denied relief. Common stockholder appealed. The Supreme Court, Southerland, C. J., held that where corporate charter provided that first preferred stock shall receive dividend out of net earnings of the company, corporation could pay such dividends from current earnings within limit set by statute, and was not restricted to making such payments from earned surplus only.
See also 112 A.2d 517.
[35 Del.Ch. 226] Appeal from an order of the Court of Chancery of New Castle County refusing to enjoin the payment of dividends. Affirmed.
Arthur G. Logan and Aubrey B. Lank, of Logan, Marvel, Boggs & Theisen, Wilmington
(T. Muncy Keith and Leighton S. Dorsey, Wilmington, and Raphael Walter and Lawrence I. Weisman, Baltimore, Md., of counsel), for appellants.
Henry M. Canby, of Richards, Layton & Finger, Wilmington, and William Marbury, of Piper & Marbury, Baltimore, Md., for appellees.
SOUTHERLAND, C. J., and WOLCOTT and BRAMHALL, JJ., sitting.
SOUTHERLAND, Chief Justice.
The question in this case is whether the charter of the Baltimore Brick Company contains a restriction preventing the company from declaring preferred dividends out of current net earnings while there is a capital deficit in respect of the common stock.
[35 Del.Ch. 227] The company was incorporated in Delaware in September, 1902. It was organized to take over the assets and business of its predecessor, a New Jersey corporation of the same name. The company has outstanding 10,563 shares of first preferred stock and 8,344 shares of common stock. The rights of the first preferred stockholders under the Delaware charter are identical, we are advised, with their rights under the New Jersey charter. The dividend rights are as follows:
‘ Said First Preferred stock shall entitle the holder to receive each year, out of the net earnings of the company, a fixed yearly dividend of five per centum (5%) before any dividend shall be paid upon or set apart for the said Second Preferred or said common stock, and the dividends on the said First Preferred stock shall be cumulative, no dividend being paid upon the Second Preferred or Common stock until the arrears of the dividends due on the First Preferred stock shall first have been paid.’
The liquidation preference is as follows:
‘ The holders of the said First Preferred stock in case of liquidation or dissolution of the company, shall be entitled to be paid in full, before any amount shall be paid to the holders of the Second Preferred or Common Stock.’
The preferred shares have full voting rights. In addition, the preferred stockholders are entitled to elect six members of a board of nine directors.
A considerable amount of first preferred stock had been issued by the New Jersey corporation in connection with a refinancing of its funded debt. In 1902 an arrangement was effected with the bondholders whereby the latter surrendered the six per cent bonds and received in lieu thereof a smaller principal amount of five per cent bonds and a large number of shares of first preferred stock. In 1902 all of the assets were transferred to the Delaware company.
The company has a large arrearage of accumulated and unpaid preferred dividends. In recent years, beginning in 1950, the company has declared several dividends on its preferred stock. On June 30, 1954, a further dividend of $2.50 a share was declared, payable August 2, 1954. This action was objected to by the directors elected [35 Del.Ch. 228] by the common stockholders, including plaintiff, who is the owner of a majority of the outstanding common shares. Plaintiff thereafter brought suit in the court below to enjoin the payment of the dividend, alleging that the company had no ‘ net earnings', that its common capital was impaired, and that the payment of the dividend would be in violation of law. The court declined to enjoin the payment of the dividend already declared, but temporarily restrained the declaration and payment of further dividends, and set the case down for hearing on a rule for preliminary injunction.
At the hearing the parties agreed that the company has net earnings for the current and preceding fiscal years available for the payment of dividends, and that the preferred capital is not impaired. They were and are in disagreement whether there is an impairment of the common capital. This latter issue the Vice Chancellor did not resolve,
since he was of opinion that even if the common capital was impaired the dividend was nevertheless lawful, 108 A.2d 81. This holding plaintiff brings here for review.
The case turns upon the construction of the phrase ‘ net earnings' in the charter provisions relating to the preferred stock. At the time when the Brick Company was incorporated the Delaware statute regulating the payment of dividends was the General Corporation Law of 1901. 22 Del.L.Ch. 394. Section 34 of that act provided as follows:
‘ The Directors of every corporation created under this Act shall have power, after reserving over and above its capital stock paid in, such sum, if any, as shall have been fixed by the stockholders, to declare a dividend among its stockholders of the whole of its accumulated profits, in excess of the amount so reserved, and pay the same to such stockholders on demand; provided, that the corporation may, in its certificate of incorporation, or in its by-laws, give the Directors power to fix the amount to be reserved.’
Section 35 provided in part as follows:
‘ No corporation created under the provisions of this Act, nor the directors thereof, shall make dividends except from the surplus or net profits arising from its business. Dividends may [35 Del.Ch. 229] be paid in cash or capital stock at par, but otherwise the corporation shall not divide, withdraw, or in any way pay to the stockholders, or any of them, any part of its capital stock, or reduce its capital stock, except according to this Act, * * *.’
In Wittenberg v. Federal Mining & Smelting Corporation, 1926, 15 Del.Ch. 147, 133 A. 48, 55, the Chancellor construed these statutes and held that in the light of the language of Section 34, the phrase ‘ net profits' in Section 35 meant ‘ such as appear from the entire business of the company from its inception’ . Since the corporate capital was depleted, there were no net profits, and no dividends could be declared. The decision was affirmed by the Supreme Court.
Shortly thereafter these sections were amended by the act of 1927, 35 Del.L.Ch. 85, and again amended in 1929, 36 Del.L.Ch. 135. These amendments are now codified in 8 Del.C. § 170, which reads as follows:
‘ The directors of every corporation created under this chapter, subject to any restrictions contained in its certificate of incorporation, may declare and pay dividends upon the shares of its capital stock either (1) out of its net assets in excess of its capital as computed in accordance with the provisions of sections 154 and 242-244 of this title, or (2) in case there shall be no such excess, ...