Emery, Y. C.
(after statement of case).
Upon the questions which are necessary and material to be decided on the application for preliminary injunction I reach the following conclusions:
First. The reasonableness or judiciousness, in its business aspect, of a reduction of the preferred stock of the steel corporation, and the distribution of capital resulting therefrom, by the conversion of stock into bonds, is, upon the facts now presented, altogether a matter of management of the affairs of the corporation, upon which the decision of the directors and stockholders, given in the manner required by law, is final, so far as relates to its business aspects. As to its business aspects, I may further say that the plan for a conversion has been matured after most careful deliberation by business men and has been approved by a very large proportion of the stockholders of the corporation— being as large as six hundred to one; and as the question of conversion relates to the management and disposition of the assets of a purely business corporation, the execution of the plan now proposed to be carried out should not be interfered with, on the opposition of a non-assenting stockholder, except upon the ground that the plan is illegal, and is clearly illegal.
Second. Under' the laws of the State of New Jersey, at the time of the issuance of the preferred stock of the steel corporation, and up to the time of the approval of the act of March 28th, 1902, amending the General Corporation act, the steel [520]*520corporation had no authority, against the consent of any holder of preferred stock, to carry out the plan now proposed for reduction of its preferred stock, and the distribution of capital arising therefrom, for the reason that it is a preferential distribution of capital among some of these holders to the exclusion of others, and not a plan for an equal ratable distribution among all the . preferred stockholders. This results from the facts that the amount of reduction by the plan proposed in the bankers’ con- , tract is necessarily connected with the distribution of the capital released for distribution by the reduction. The capital repre1“ sented by preferred stock, up to a limit of $200,000,000, is to i be reduced to the extent the holders agree to take bonds, and the j distribution of the amount released is made solely among those [„who consent to take bonds. The stock of all those who decline Il'to take -bonds is thus' made subject to the prior claim and lien ¡of those who take bonds. This leaves, as the necessary result ¡of the whole transaction, a preferential distribution of capital ¡i,among those who were originally equal. It is claimed, on beihalf of the defendants, that the preferential distribution is valid against complainant, because it was authorized by the laws in force at the time of the issuing of her stock. The consideration of the question of the extent of such authority, before the law of 1902, is necessary for this reason and for the additional reason that, on the hearing before me, all of the counsel of defendants expressly claimed that the act of 1902 was not the sole authority upon which the plan depended. Their contention in this respect was that the scope and effect of the law of 1902 was to expressly authorize a conversion of stock into bonds to be made directly, or by “short cut,” as it was called, instead of leaving the same result to be accomplished by the exercise of other powers which the company had at the issuance of the stock. This view of the act of 1902, if well founded, may put it under the ban of being unconstitutional as special legislation, for the act confers this “short cut” privilege or power only upon a special class of corporations, and if all corporations had, and still have, after the act of 1902, the same power of conversion by indirect methods, there would seem to be no possible basis of classification which should exclude any corporation from the equal privilege of the [521]*521direct or “short cut” method, and the act would therefore be unconstitutional as special legislation. I do not agree with this view of the reach of the act of 1902, one reason being that the mere enactment, if the law is valid at all for any purpose, is of itself necessarily to be interpreted as a legislative declaration, of more or less weight, bearing on the question whether the power did exist before the act. Direct legislative authority for conversion eo nomine did not exist previous to 1902, and powers for conversion of stock into bonds relied'on as existing at the time the preferred stock was originally issued are (1) the power of a corporation to purchase its own stock and, as connected with such purchase, to give bonds or mortgages, and (2) its power, under section 29 of the Corporation act, “to purchase certain shares for retirement at a price not above par,” as one method of decreasing capital stock. In Chapman v. Iron Clad, &c., Co., 33 Vr. 497 (Supreme Court, 1898), it was decided that a corporation, where its purposes require it, has the power to purchase its own stock and that, after such purchase, it continues to hold its own stock as property. But the kind of purchase here referred to is clearly the purchase made by the directors or other proper officers of the company, in the management of the business of the company, and is a purchase made on behalf of the company for the purpose of .afterwards holding it as its property. As to a purchase of stock for the purpose of retirement, under section 29, this is also a purchase by the directors or officers‘acting for the company (for which the express previous direction or subsequent approval of the stockholders may be necessary), and it is a purchase only of “certain”—that is, as it strikes me, “designated” -or “specified” shares. Purchases under both of these powers are necessarily exercises of the powers of directors to purchase, and are special and limited purchases, and it would be taking altogether too narrow a view of the matter now in hand to treat the present transaction as the exercise of either of these powers of the directors or of the company. The subject now dealt with is the readjustment, as between the stockholders themselves, and by the stockholders as such, of their previous relations to and rights in the assets or capital of the corporation. It involves an absolute change of their previous status, by changing [522]*522stockholders to creditors; it involves a lien upon the entire assets of the corporation, subject to the first mortgage (about one-fourth of the par value of the entire stock, preferred and common), and it reaches, or may reach, two-fifths of the preferred stock, being about one-fourth (par value) of the assets above the first mortgage. The conversion, ipso facto, makes, and indeed is, a reduction of capital and a distribution of the amount made available for the reduction. And the transaction was, moreover, a business undertaken by stockholders, as such, at a general meeting, at which three-fourths or more in value were represented. Can it be considered that a readjustment of rights in capital of this general character and wide scope and effect, directed and ordered by stockholders, in relation to its effect between themselves, was a transaction which was, or could be in its essence, a purchase of stock by the company, under the special and limited powers exercisable under existing laws ? As a matter of business fact, it was not the exercise of either of such preexisting powers of purchase, and that the stockholders who were dealing with each other in relation to a readjustment of their rights in the capital understood it was not such exercise, but the exercise of another and distinct power of general conversion, appears from the resolution, which expressed the form of their action.
In the formal proceedings adopted to carry out the present plan the first step of the stockholders was the formal approval of the action of the directors in accepting the act of 1902, “and particularly the second section of said act, permitting and providing for the redemption and retirement of the preferred stock out of bonds or the proceeds of bonds,” and the second step of the stockholders was the consent that, to the extent that holders should consent, two million shares of preferred stock be redeemed and retired out of bonds or proceeds of bonds. These two steps were the first and second resolutions adopted. These resolutions expressed the business act of business men, who claimed, and supposed, they had the right, under the act of 1902, to readjust their relations as stockholders and to convert stock into bonds. Surely it is idle to claim that this transaction, which was, in fact, a conversion, and was understood at the time of the exer[523]*523cise of the- power to be a conversion, can now be considered as, in either form or substance, the exercise of the limited powers to purchase stock given under the general laws. Conversion of stock into bonds of this general character must depend upon express authority, and cannot be upheld by strained construction or combination of statutes giving powers for different purposes. If a stockholder had remained quiet until bonds were issued under the contract and were put on the market, an innocent bondholder might, perhaps, be expected to appeal to a court for his protection against a negligent stockholder, by giving these statutes and powers to purchase now relied on the strained construction now claimed. But the whole proceeding of issuing the bonds is still in fieri, the matter concerns only the right of stockholders themselves (for the bankers’ contract, by its express terms, is not operative and enforceable in relation to these bonds until the bonds have been finally authorized in the manner provided by law), and the assenting stockholders and directors have hitherto claimed (or appeared to claim), in all their proceedings, that the bonds were issued under the act of 1902, and have directed the dissenting stockholder solely to that source of authority. The situation itself would seem to repel the suggestion that this is an occasion to modify the general rule that corporate powers must be clearly given, and to make, on the present claim, a new exception to the rule.
This power now claimed to exist previous to the act of 1902 extended, if it did exist, to common stock as well as preferred, for these statutes and powers relating to mere purchases make no discrimination. The courts should therefore, in my judgment, be inclined rather to the strictest construction in reference to the -important power now claimed, and hold that, under these previous statutes, corporations organized under the general law do. not have the general power of converting stock into bonds.
The central position of the defendants’ case, as presented before me, and upon and about which their whole case turned, was that legally the transaction was a purchase of the stock. But, in form as well as in substance, this transaction is, in my opinion, not a purchase by the company of its stock as property, but is, in legal form as well as substance, a distribution of capital to [524]*524stockholders in discharge and satisfaction of their rights to distribution evidenced by the certificate. If a debtor received from his creditor his (the debtor’s) note, upon delivering to the creditor a bond or chattel therefor, the debtor would, according to the nomenclature of legal forms applicable to transactions between natural persons, be said to have paid the note and discharged its obligations, and not to have purchased it. Using the language of legal form, the stock, on its exchange for bonds, is “redeemed and retired out of bonds,” and, ipso facto, extinguished; it is not “purchased by the bonds” and continued as property. If the stock is not thus extinguished ipso facto on the exchange for bonds, and the stock, for any purpose, or to any extent, has, or can fairly be claimed to have, any validity or existence whatever after the exchange, the issue of the bonds and the placing of them on the public market should be enjoined. But the legal validity of this conversion cannot turn on the correctness or precision of the characterization of its legal form. The real intent of the whole legal forms and proceedings adopted is the only sure basis for decisien.
The transaction being thus essentially a reduction of capital, in connection with a distribution among stockholders, of the capital available, and being nothing else, the next question is what must be the character of such distribution. There are no statutes governing this subject of distribution, and, in their absence, an equal ratable distribution is the only one which can be made. The right to such equal ratable share in the capital, while it is being employed, and its distribution, when distribution is made, is an essential property right of a stockholder, and indeed it is the only essential right. It is the very right called his “share,” and evidenced by his certificate. The right to his share of the dividends is due to his ownership of a share in the capital stock. And when the capital is available for distribution the stockholder’s “share” entitles him to a share in that capital, as his property, which can no more be taken from him, without his consent, than can any other property.
If the steel corporation has the power to mortgage its assets for the purpose of raising the funds for distributing the assets available for general distribution among stockholders of a class [525]*525upon a reduction of stock, the distribution must be equal among-all the stockholders of the class. This distribution of capital would be compulsory, and on refusal of a stockholder to accept his proportionate share, the corporation would still, notwithstanding his refusal, hold the funds as his funds, or owe him the amount, until it procured the surrender, by legal proceedings or otherwise, of the certificate of stock and paid his share. It may be that a stockholder thus entitled to a ratable share on distribution on a general reduction of stock could hot be compelled, against his will, to accept, in lieu of his share of the funds raised by the mortgage, his proportionate share of bonds secured by the mortgage and payable at a future time, but his refusal to accept such distribution in lieu of cash could not be made the basis for depriving him of a ratable share- of the funds-available for distribution on a general reduction of the stock, or for releasing the corporation from its obligation to him for his-share, or for allowing the payment of his share to another who-would take bonds. If, on the reduction of stock, a distribution of capital in the form of bonds be legal, under the laws previous-to the act of 1902, then the reduction authorized in the manner prescribed by the statute is compulsory and the distribution must be ratable’ and equal. On the refusal of a stockholder to take his proportionate share of the bonds, the company would continue to hold his share of the bonds for him, and dividends would cease to be payable on the stock so reduced. In the absence of statute authorizing a preferential distribution, the consent of stockholders to accept such bonds on a reduction of stock cannot be made the basis of the amount of the reduction of the stock, or of a plan to make a preferential distribution of assets among those who give such consents, and those only, on the theory that consents to accept the distribution in bonds of this character give the entire plan of reduction, in connection with the distribution of capital released thereby, the character of a purchase of the stock. Where capital is increased, the right of an existing stockholder is a preferential right only, a right to have the privilege to come in with more money. As he cannot be compelled to come in, the right cannot be other than a preferential right to-come in, terminable when he refuses to increase his stock. But [526]*526when capital is released for distribution among existing stockholders, the situation, as to the effect of an offer, is essentially different. Iiis right to a share of the capital has, by reason of its availability for distribution, now become a property right to a share in that fund, of which he cannot be deprived without his own consent. It is, in no sense, a preferential right to a share in the division, so that he can be deprived of his property, if he does not, within a certain time, or in a certain way, agree to it. Nor does his refusal to take it within any time limit vest his share in any other stockholder, or in the company, or in the appointees of either. The refusal to accept his share no more deprives him of his property right to it than the refusal of a-creditor to accept payment of a debt would pay the debt. The legal defect in the plan set out in the bankers’ contract is that it proceeds upon the theory that a stockholder’s right in distribution either is, or can be made, by any form of contract or proceeding directed by other stockholders, merely a preferential right to take his share, and not a property right. The theory is that if a stockholder docs not assent to take the share which the plan of distribution offers him, his right of property in his share, or some interest in it, or charge on it, may, as a penalty of this refusal, and through the form of a contract made by the company, be taken by the assenting shareholders, or their appointees. This taking or impairment of the share of the non-assenting shareholder, to the sole benefit of the assenting shareholders, is, in fact, the final practical result—the real intent of the execution of the plan. The plan, worked out to the end, gives assenting stockholders, or their appointees, through the form of a contract directed by the assenting stockholders themselves, an obligation of the company, secured by a lien on its assets, which makes the assenting stockholders prior to all of the stock of his former equal owner in the company’s assets, the non-assenting stockholder. No form of legal proceedings or of contract between the company and the assenting stockholders, whether it is the form of a contract or purchase of stock for retirement, or any other form, should be allowed to bring about this final result, and a court of equity, which looks behind and through forms to the real essence of the entire transaction, in-[527]*527dueling the legal forms adopted, must deal with it according to •its real intent. The plan, therefore, derives no validity or force from any powers which the company or the stockholders possessed before the act of 1902, and the next question is as to the- effect of that act, which, in terms, expressly authorized a preferential distribution of assets. The conversion, under this act, may be made with any holder or any selected class of holders, and the principle of selection made by the. bankers’ contract is that of electing to take bonds.
Third. So far as the act of March 28th, 1902, authorizes, or purports to authorize, the redemption and retirement of a portion of the preferred stock of the steel' corporation out of bonds as distinguished from the proceeds of bonds, under the plan proposed, it changes those proportionate property rights of the preferred stockholders, as between themselves, which existed at the date of the passage of the act, and impairs such property rights of the non-assenting stockholders to the benefit of the assenting stockholder who comes in under the plan. Those proportionate rights, as they then existed, were to share equally in the distribution of capital, and these were, in fact, the essential property rights evidenced by the certificate of stock.
Courts differ in their decision as to how far powers which are given to stockholders by the charter or certificates of the company, in relation to the management of the stock and which are incidental to the ownership of the stock, are subject to alteration and repeal by subsequent legislation. Eor instance, in regard to the relative voting rights, some courts hold that a change in the relative voting rights of stock is not a change in essential property rights. The case in the United States supreme court, upon which Judge Lacombe relied on deciding an application relating to this same plan of reduction, malíes the clear and express distinction between the interference with a vested property right and the interference with a right which, although it may, to some extent, be of value in relation to giving the person a voice in the management of the property, along with his other co-owners, is not yet, in law, an impairment of his vested property rights. In this case (Looker v. Maynard, 179 U. S. 46, decided in the supreme court of the United States, in October [528]*528Term, 1900), the legislature, by an act subsequent to the charter of a company, changed the power of cumulative voting, which belonged to stockholders at the time of the passage of the act. The supreme court held that this change in his voting right did not impair the property right of a stockholder, and the decision is carefully confined to a change of the right in that respect. Ibid. 51.
In our state the supreme court has taken a different view upon the question as to whether the voting right of stockholders, as between themselves, which existed under charter or certificates is subject to alteration and repeal by the legislature, and has held that it was not, because this voting power was a property right. In re Newark Library Association, 35 Vr. 217, 219 (1899). But the court of errors and appeals, on the appeal in the case, expressly withheld their decision upon this question, and disposed of the case upon another point., Ibid. 265. In reference to the rights which result to a stockholder from membership and property rights, the latest decision of our court of appeals is the case of German Mutual Fire Insurance Co. v. Schwartzwaelder, 14 Dick. Ch,. Rep. 589. In that case an act of the legislature was passed, after the incorporation of a mutual fire insurance company, authorizing its conversion into a joint stock company. As a member of the mutual insurance company, defendant’s rights arose from taking out an insurance policy. This was a very small property right, and one which, by the-terms of the policy, was subject to termination upon the giving of a notice of cancellation by the company. The court of errors and appeals decided that the subsequent law authorizing the-change of the mutual company into a joint stock company was a change of a substantial right of the member, who became, and continued to be, such by reason of his policy, and was therefore-unconstitutional. A sinking instance of the difference in the operation of subsequent legislation upon the property rights- and upon the voting right appears in this very act of March 28th, 1902. By the first section two-thirds in interest of stockholders present at meetings were given the power which previously belonged only to two-thirds of the whole stockholders, whether present or not. Such subsequent regulations of the voting power [529]*529of stockholders of corporations under the General Corporation law have never been questioned. The second section is the change now under review, impairing what I consider to be the property right.
I think, therefore, the act of March 28th, 1902, being passed after the vesting of this property right of equal share on distribution of capital, had no effect to give an authority to make this change, and as this is the only legislative authority for the reduction of the preferred stock and the distribution of capital connected with the reduction, or for redemption and retirement of preferred stock out of the bonds in the manner proposed, the 'execution of the plan proposed for the distribution of capital must be enjoined, as against the complainant, unless she assents^ thereto. The act being unconstitutional for this reason, I do j not consider or pass on the other ground of unconstitutionality ! urged, namety, that it is a special act conferring corporate , powers. Part of this plan contemplates the issuing of bonds for the purpose of raising money for general corporate purposes, and the votes of the stockholders were taken separately upon that part of the plan. It has not been suggested that the $50,000,000 could not be raised, and no injunction in this case should at all affect that. This act of March 28th, 1902, authorizes the reduction or retirement out of bonds or the proceeds of bonds. The resolution of the directors was also that the retirement should be out of the bonds or proceeds of bonds; it included both methods. The only way in which this present plan comes to be restricted to a redemption out of the bonds alone, as distinguished from the proceeds of bonds, is the fact that, in connection with the resolution of the directors, there is also an approval of the' contract with the bankers, and that in the contract with the bankers the only offer is that of a redemption'out of the bonds. The only question now considered is the . effect of a plan for redemption out of bonds, and the injunction 1 will go only against issuance or delivery of any bonds under the bankers^ contract, except the $50,000,000 bonds issuable and deliverable for cash subscriptions.
Fourth. The complainant had notice, on-or about May 10th, 1902, of the adoptions of the resolutions of the directors ap[530]*530proving the plan and of its submission to the stockholders, and on May 19th, 1903, had notice of its adoption by the stockholders. The delay of twenty days in applying for a preliminary injunction renders it proper, under the circumstances of the case, to direct that the preliminary injunction be issued upon the condition that if defendants desire to appeal from the order and to bring on the hearing of the appeal at the June Term of the court of errors and appeals, complainant will consent to the setting down of the appeal for hearing and bringing on the hearing at the June Term.