Cyclopedia of the Law of Private Corporations

effect in the articles of incorporation, or the stock certificates, or the

(5) by retirement of shares owned by the corporation; or (6) by reducing the par value of the shares. The first and second of the above methods are compulsory on the shareholder. Berger v. United States Steel Corporation, 63 N. J. Eq. 809, 53 Atl. 68, rev'g 63 N. J. Eq. 506, 53 Atl. 14; Allen v. Francisco Sugar Co., 193 Fed. 825. See also Lazear v. American Steel Foundries, 86 N. J. Eq. 252, 100 Atl. 1030, 98 Atl. 642.

In Lazear v. American Steel Foundries, 86 N. J. Eq. 252, 100 Atl. 1030, 98 Atl. 642, it was held that by a delay of three years a preferred stockholder had lost his right to object that the method adopted for retirement was not compulsory on him.

Under the power conferred by §§ 27 and 29 of the Act of 1896 any class of the stock of companies organized under such act may be retired in toto. Lazear v. American Steel Foundries, 86 N. J. Eq. 252, 100 Atl. 1030, 98 Atl. 642.

Since the act provides that its provisions shall be a part of the charter of every corporation organized under it, a preferred stockholder of such a corporation has no right to retain his shares in opposition to any lawful method thereby provided for retiring them. Lazear v. American Steel Foundries, 86 N. J. Eq. 252, 100 Atl. 1030, 98 Atl. 642; Berger v. United States Steel Corporation, 63 N. J. Eq. 809, 53 Atl. 68, rev'g 63 N. J. Eq. 506, 53 Atl. 14.

As a part of a plan for reducing its stock, a corporation may provide for the retirement of its preferred stock in toto, to be paid for partly in cash, partly in debentures and partly in common stock. Lazear v. American Steel Foundries, 86 N. J. Eq. 252, 100 Atl. 1030, 98 Atl. 642. See also American Steel Foundries v. Lazear, 204 Fed. 204.

Under the fourth method a corporation has authority to retire shares of preferred stock purchased with bonds or the proceeds of bonds issued for that purpose. United States Steel Corporation v. Hodge, 64 N. J. Eq. 607, 60 L. R. A. 742, 54 Atl. 1, rev'g 64 N. J. Eq. 90, 53 Atl. 601; Raymond v. United States Steel Corporation, 63 N. J. Eq. 830, 53 Atl. 1125; Berger v. United States Steel Corporation, 63 N. J. Eq. 809, 53 Atl. 68, rev'g 63 N. J. Eq. 506, 53 Atl. 14; C. H. Venner Co. v. United States Steel Corporation, 116 Fed. 1012.

And it also has the right to retire shares of its common stock purchased in the same manner. Allen v. Francisco Sugar Co., 193 Fed. 825.

Under this method of retirement it is optional with the shareholder to sell his stock to the corporation or to retain it. The offer to purchase pro rata must be made to all of the stockholders, but if the like option is given to all, it is not necessary that shares in fact be purchased pro rata from each. Berger v. United States Steel Corporation, 63 N. J. Eq. 809, 53 Atl. 68, rev'g 63 N. J. Eq. 506, 53 Atl. 14.

Such a purchase and retirement of preferred stock does not deprive a stockholder who does not elect to sell of any vested right. Berger v. United States Steel Corporation, 63 N. J. Eq. 809, 53 Atl. 68, rev'g 63 N. J. Eq. 506, 53 Atl. 14.

A holder of common stock cannot question the legality of the retirement of preferred stock by this method. Raymond v. United States Steel Corporation, 63 N. J. Eq. 830, 53 Atl. 1125. P. L. 1902, p. 217, 2 Comp. St. 1910, p. 1616, § 29a, authorizing corporations to retire preferred stock out of bonds or the proceeds of bonds is not special legislation, but applies alike to all corporations, and is general in its operation, requiring the existence of condi

contract under which the stock is issued.54 And it has been held that when a corporation is authorized to issue preferred stock it may attach a provision for its redemption.55

Valid provisions for redemption are binding upon the holders of

tions which all corporations have equal opportunity under the law to conform to, and to which all may attain. Berger v. United States Steel Corporation, 63 N. J. Eq. 809, 53 Atl. 68, rev'g 63 N. J. Eq. 506, 53 Atl. 14.

It is a restraining and not an enlarging act, and its provisions must be observea to render the retirement by purchase out of bonds or the proceeds of bonds legal. Berger v. United States Steel Corporation, 63 N. J. Eq. 809, 53 Atl. 68, rev 'g 63 N. J. Eq. 506, 53 Atl. 14; United States Steel Corporation v. Hodge, 64 N. J. Eq. 807, 60 L. R. A. 742, 54 Atl. 1, rev'g 64 N. J. Eq. 90, 53 Atl. 601; Alabama Consol. Coal & Iron Co. v. Baltimore Trust Co., 197 Fed. 347; Allen v. Francisco Sugar Co., 193 Fed. 825.

It changes the mere form of accomplishing that which the Act of 1896 permits to be done, and affects no vested right of a stockholder in a corporation organized under that act, in view of the reserved power of the legislature to amend it. Berger v. United States Steel Corporation, 63 N. J. Eq. 809, 53 Atl. 68, rev'g 63 N. J. Eq. 506, 53 Atl. 14.

In view of the reserved power of amendment and the fact that a corporation had authority under the Act of 1896 to issue bonds for the purpose of retiring preferred stock, it does not impair the contract rights of preferred stockholders. C. H. Venner Co. v. United States Steel Corporation, 116 Fed. 1012.

By its terms it applies exclusively to preferred stock and does not repeal the provisions of the Act of 1896 in so far as it concerns the retirement of common stock. Allen v. Francisco Sugar Co., 193 Fed. 825.

The Ohio statute provides that a railroad corporation which issues preferred stock shali reserve the privilege of redeeming and canceling the same at par, at any time after three years from the date of its issue. Mannington v. Hocking Valley Ry. Co., 183 Fed. 133.

The Act of April 28, 1873, P. L. 79, authorizes the corporation to provide for the redemption of preferred stock. Warren v. Queen & Co., 240 Pa. 154, 87 Atl. 595.

54 United States. Weidenfeld Northern Pac. R. Co., 129 Fed. 305.

Georgia. Savannah Real Estate, Loan & Building Co. v. Silverberg, 108 Ga. 281, 33 S. E. 908; Coggeshall v. Georgia Land & Investment Co., 14 Ga. App. 637, 82 S. E. 156.

Iowa. See Pendleton v. Harris-Emery Co., 124 Iowa 361, 100 N. W. 117.

Kansas. Abrahams v. Medlicott, 86 Kan. 106, 38 L. R. A. (N. S.) 137, 119 Pac. 375.

Kentucky. Westerfield-Bonte Co. v. Burnett, 176 Ky. 188, 195 S. W. 477; Rider v. John G. Delker & Sons Co., 145 Ky. 634, 39 L. R. A. (N. S.) 1007, 140 S. W. 1011.

New York. Hackett v. Northern Pac. R. Co., 36 Misc. 583, 73 N. Y. Supp. 1087.

the stock.56 Nor can creditors complain where such provisions appear in the articles of incorporation, since the recitals therein are notice to them of the reserved right to redeem,57 and creditors whose claims accrue after the redemption will be held to have given credit upon the amount of the stock then outstanding.58

The right, when it exists, can only be exercised in conformity with the terms of the contract,59 and in the manner, if any, prescribed by the statute. But where retirement is specifically authorized by the statute, statutory requirements as to the manner in which stock may be reduced do not apply.61 All arrears of dividends must be paid when the contract so provides.62 And it has been held that where the preferred dividends are required to be paid in cash, the corporation cannot deduct from or set off against the arrears a stock dividend declared and paid to the preferred and common stockholders alike during the period of default.63

The retirement or redemption is not an organic or fundamental change in the composition or business of the corporation, when unanimously agreed upon by the stockholders and authorized by the statute, but is rather a part of the corporate business which devolves upon the board of directors.64 Even if the assent of the stockholders is

A provision in the statute under which the corporation was formed expressly giving it power to retire shares by purchase must be read into the certificate of incorporation under and by virtue of which the stockholders hold their stock. Berger v. United States Steel Corporation, 63 N. J. Eq. 809, 53 Atl. 68, rev 'g 63 N. J. Eq. 506, 53 Atl. 14.

A valid provision for redemption inserted in the articles of incorporation and the stock certificates pursuant to a requirement of the statute becomes a part of the contract between the corporation and its stockholders, and each preferred stockholder by his purchase and acceptance of his stock, assents to such provision and becomes

bound by it. Mannington v. Hocking Valley Ry. Co., 183 Fed. 133.

57 Mannington v. Hocking Valley Ry. Co., 183 Fed. 133.

58 Mannington v. Hocking Valley Ry. Co., 183 Fed. 133.

59 Sterling v. H. F. Watson Co., 241 Pa. 105, 88 Atl. 297.

60 United States Steel Corporation v. Hodge, 64 N. J. Eq. 807, 60 L. R. A. 742, 54 Atl. 1, rev'g 64 N. J. Eq. 90,53 Atl. 601; Berger v. United States Steel Corporation, 63 N. J. Eq. 809, 53 Atl. 68, rev'g 63 N. J. Eq. 506, 53 Atl. 14.

61 Mannington v. Hocking Valley Ry. Co., 183 Fed. 133.

62 Sterling v. H. F. Watson Co., 241 Pa. 105, 88 Atl. 297.

63 Sterling v. H. F. Watson Co., 241 Pa. 105, 88 Atl. 297.

64 Mannington v. Hocking Valley Ry. Co., 183 Fed. 133; Hackett v. Northern Pac. R. Co., 36 N. Y. Misc. 583, 73 N. Y. Supp. 1087.

necessary, it may be given at any time and in any manner which will show that they approve of the exercise of the option.65

"The manner in which a duly authorized plan" for retiring the stock is to be carried through is part of the business of the corporation, and in the absence of fraud or bad faith, is not the subject of judicial control to any greater extent than other business of the corporation. The court cannot substitute its judgment for that of the directors and majority stockholders and say that a less expensive plan could be successfully adopted." 66 Nor can the preferred stockholders question the manner in which the corporation proposes to raise the money with which to effect the retirement so long as they are assured of the par value of their stock.67

§ 3645. Right of stockholders to compel redemption. A right to require the corporation to redeem their stock is sometimes given to the preferred stockholders by the terms of their contract.68 Provisions of this character are valid and enforceable as between the stockholders and the corporation.69 It is generally held that they do not make the

05 Hackett v. Northern Pac. R. Co., 36 N. Y. Misc. 583, 73 N. Y. Supp. 1087.

66 United States Steel Corporation v. Hodge, 64 N. J. Eq. 807, 60 L. R. A. 742, 54 Atl. 1, rev'g 64 N. J. Eq. 90, 53 Atl. 601; Berger v. United States Steel Corporation, 63 N. J. Eq. 809, 53 Atl. 68, rev 'g 63 N. J. Eq. 506, 53 Atl. 14.

67 Hackett v. Northern Pac. R. Co., 36 N. Y. Misc. 583, 73 N. Y. Supp. 1087.

68 Westerfield-Bonte Co. v. Burnett, 176 Ky. 188, 195 S. W. 477; Rider v. John G. Delker & Sons Co., 145 Ky. 634, 39 L. R. A. (N. S.) 1007, 140 S. W. 1011; Booth v. Union Fibre Co., -Minn. 162 N. W. 677; Warren v. Queen & Co., 240 Pa. 154, 87 Atl. 595. See also Davis v. Second Universalist Meetinghouse, 49 Mass. 321; Kidd v. Puritana Cereal Food Co., 145 Mo. App. 502, 122 S. W. 784.

69 Westerfield-Bonte Co. v. Burnett, 176 Ky. 188, 195 S. W. 477; Rider v. John G. Delker & Sons Co., 145 Ky. 634, 39 L. R. A. (N. S.) 1007, 140 S.

W. 1011; Booth v. Union Fibre Co.,

Minn. -, 162 N. W. 677. See also Davis v. Second Universalist Meetinghouse, 49 Mass. 321.

The corporation may be compelled to redeem the stock at the time and under the conditions named in the contract. Warren v. Queen & Co., 240 Pa. 154, 87 Atl. 595.

Such a provision in the articles of incorporation is valid and not contrary to public policy, where the statute provides that the corporation may divide its stock into classes, and may give to each class such priority of right in the redemption of shares as may be prescribed in the rules and regulations prescribed by the shareholders. Westerfield-Bonte Co. v. Burnett, 176 Ky. 188, 195 S. W. 477.

A provision in a certificate of incorporation of a grocery company, which succeeded to the business of a partnership, whereby creditors of the latter, who took preferred stock in payment of their claims, were to be permitted to trade out the amount of their stock to a specified amount each

stockholder a creditor, although there is authority to the effect that they may indicate that he is one.70 As a rule, the stockholder's right to compel a redemption is subordinate to the rights of creditors.71 And statutes authorizing redemption sometimes specifically provide that the right shall exist only when no injustice shall thereby be done to the existing rights of other stockholders or creditors.72 But it has been held that a provision in a certificate of incorporation permitting holders of preferred stock to trade out the amount of the same in purchasing commodities from the corporation and requiring it, on request of the holder of such stock, to call it in at par to the amount to which the holder should be indebted to it at the time of any annual meet

year in buying groceries, it being provided that the stock should be called in at its par value to the extent of the stockholder's indebtedness at the time of any annual meeting and that the stockholder should thereby be released and discharged from such indebtedness, was held to be valid in Butler v. Beach, 82 Conn. 417, 74 Atl. 748.

Where the statute provides only that preferred stock may be made subject to redemption at par at a fixed time to be expressed in the certificate thereof, and stock is issued which is redeemable at par on three months' notice on a vote of a majority of the common stock, mandamus will not lie to compel a redemption in accordance with such a vote, even though all persons interested acquiesced in the issuance of the stock in that form, and its issuance may have had the effect of a contract. Smith v. Ferracute Mach. Co., 68 N. J. L. 237, 52 Atl. 231. 70 See § 3631, supra.

71 Westerfield-Bonte Co. v. Burnett, 176 Ky. 188, 195 S. W. 477; Rider v. John G. Delker & Sons Co., 145 Ky. 634, 39 L. R. A. (N. S.) 1007, 140 S. W. 1011; Warren v. Queen & Co., 240 Pa. 154, 87 Atl. 595; Culver v. Reno Real Estate Co., 91 Pa. St. 367.

It is not lawful for a corporation, as against its creditors, to secure the retirement of preferred stock by an appropriation of the assets of the com

pany otherwise available to creditors. Ellsworth v. Lyons, 181 Fed. 55.

The rights of the preferred stockholders in this regard are subordinate to the rights of the corporate creditors, and no part of the capital or assets of the corporation can lawfully be used to redeem the stock until the corporate debts have been paid or provided for. Westerfield-Bonte Co. v. Burnett, 176 Ky. 188, 195 S. W. 477.

A provision for redemption which permits payment of the preferred stockholders in preference to creditors is contrary to public policy and void. Spencer v. Smith, 201 Fed. 647, rev'g 190 Fed. 105.

While the preferred stockholder is not a creditor in his relations to the creditors of the corporation, and cannot as against them enforce any right he may have against the corporation, he may be treated as a creditor as against the corporation where he has a demand against it which can only be enforced as a debt. WesterfieldBonte Co. v. Burnett, 176 Ky. 188, 195 S. W. 477.

Books

Cyclopedia of the Law of Private Corporations, Volume 6