Johnson v. Bradley Knitting Co.

280 N.W. 688, 228 Wis. 566, 117 A.L.R. 1276, 1938 Wisc. LEXIS 223

• Court: Wisconsin Supreme Court
• Decided: September 13, 1938
• Status: Published

Opinions

The following opinion was filed June 25, 1938:

Martin, J.

The appellant contends that the court erred:

(1) In holding that our statutes permit a corporation to amend its articles as indicated in the foregoing statement of facts against his objections.

(2) In holding that the matter of wiping out accrued dividends on the first preferred stock was not before the court in the present action.

(3) In holding that the plaintiff has not suffered and will not suffer sufficient injury from the changes to entitle him tO' injunctive relief.

The principal contentions relate to the corporate power to amend the articles of incorporation in the manner indicated against plaintiff’s objections. The appellant argues that the only legislation applicable, which is designed to and permits a modification of stockholders’ rights without regard to the wishes of the minority, is section 77B of the Federal Bankruptcy Act (11 USCA, §207).

However, appellant concedes:

“If, by charter or statutory provision in force at the time of the issuance of stock, the right to make designated changes is reserved, the stockholder, of course, consents in advance to the making of such changes. An agreement to be bound by the changes is a part of his contract and an exercise of the right by the state or by a prescribed majority to whom the power may be delegated is neither an impairment nor a breach of the contract.”

In this connection appellant contends that general or blanket language in a statute or charter authorizing amendment of the articles upon a vote of the prescribed majority will not be construed as relating to changes which impair contractual obligations or otherwise take away vested rights of the stockholders.

These contentions require a construction of the statutes involved which are sec. 180.07 (1) and sec. 182.13. They provide as follows:

“Sec. 180.07 (1) Any corporation organized for any of the purposes authorized by this chapter, may, by a vote of two thirds of all the stock outstanding, and entitled to vote, . . . amend its articles so as to modify or enlarge its business or purposes, change its name or location, increase or diminish its capital stock, change its officers or its directors, or provide anything which might have been originally provided in such articles. . . .”

“Sec. 182.13 (1) Any corporation may, in its original articles, or by amendment thereto adopted by a three-fourths vote of the stock, provide for preferred stock; for the payment of dividends thereon at a specified rate before dividends are paid upon the common stock; for the accumulation of such dividends; for a preference of such preferred stock not exceeding the par value thereof, over the common stock in the distribution of the corporate assets other than profits; for the redemption of such preferred stock, and for denying or restricting the voting power of such preferred stock.

“(2) Certificates of preferred stock and common stock shall state, on the face thereof, or on the reverse side of such certificates with an appropriate reference thereto1 on the face thereof, all privileges accorded to and all restrictions imposed on preferred stock.

“(3) No change in relation to such preferred stock shall be made, except by amendment to the articles adopted by a vote of three fourths of the preferred and three fourths of the common stock.

“(4) The articles may be amended by a three-fourths vote of the common stock to provide for a second issue of preferred stock, subject to all the rights and equities of the first issue of preferred stock, and the certificates of such second issue shall have plainly printed across the face the words, ‘Preferred Stock, Second Issue,’ and shall recite all the terms, restrictions and regulations provided in the articles in relation to such second issue of preferred stock.”

These statutes are as effectively a part of the plaintiff’s certificates of stock and of the corporate charter as though printed therein. Wandersee v. Industrial Comm. 198 Wis. 345, 347, 348, 223 N. W. 837; Anderson v. Miller Scrap Iron Co. 169 Wis. 106, 115, 170 N. W. 275, 171 N. W. 935; C. H. Venner Co. v. United States Steel Corp. (C. C.) 116 Fed. 1012; In re Interborough Consolidated Corp. (D. C.) 277 Fed. 455. In Venner Co. v. United States Steel Co., supra, the court said (p. 1013) :

“There was no express provision when the corporation was formed that bonds might be issued to retire stock, instead of purchasing it for cash. But the New Jersey act concerning corporations contains the provision so- frequently found in constitutions and statutes, that ‘the charter of every corporation shall be subject to alteration, suspension and repeal, in the discretion of the legislature/ This reservation of the right to alter a charter is as much a part of the contract entered into by the stockholders when they subscribe or buy into the corporation as is the most minute provision as to some detail of organization, specifically expressed.”

In In re Interborough Consolidated Corp., supra, the court said (p. 457):

“In the case at bar, claimant acquired her stock after the statute authorizing consolidation of corporations had been enacted. She thus held her stock with the advantages and ■ the burdens of the statute, and the statute was read into- the contract between her and the corporation.”

In the instant case, at the time plaintiff purchased his stock from the defendant company, the right to amend the articles of incorporation was reserved both by the articles of organization and the statutes above quoted, a method of amendment being provided by both. The statute provides (sec. 180.07 (1)) : “The amendment shall be adopted only in accordance with the articles, if a mode of amending the same shall have been therein prescribed.”

The articles do provide that they “might be amended by a resolution adopted at any meeting of the stockholders by a vote of at least two thirds of all the stock then outstanding.” However, where there is preferred stock, the statute (sec. 182.13 (1) ) requires a three-fourths vote to- amend its articles affecting the preferred stock. Prior to- 1913 the statute, ^ sec. 1759a, Stats. 1911, required a unanimous vote of the^ stockholders to amend the articles as to preferred stock. By ch. 533, Laws of 1913, sec. 1759a was amended so as to require only a three-fourths vote.

The precise question presented in this appeal has never been squarely passed upon by the court. In Martin Orchard Co. v. Fruit Growers C. Co. 203 Wis. 97, 233 N. W. 603, the contention was made that sec. 180.07 (1), Stats., changed the common-law rule. The court did not pass upon the question. It said (p. 103) :

“Since the application of the common-law rule above stated to the facts of this case compels a conclusion favorable to the defendants, we have not found it necessary to pass upon, and do not pass upon, the effect of this section.” [Sec. 180.07 (1), Stats.]

It is said in Martin Orchard Co. v. Fruit Growers C. Co., supra, and in State ex rel. Cleary v. Hopkins Street B. & L. Asso. 217 Wis. 179, 190, 257 N. W. 684, that:

“A fundamental and radical change in the purpose of a' corporation cannot be accomplished by an act of the corporation over the dissent of a single stockholder.”

And in Koeppler v. Crocker Chair Co. 200 Wis. 476, 479, 228 N. W. 130, the court said:

“It is contended by the defendant that under the articles of incorporation as amended in 1924 after plaintiff’s certificates were issued to him, the preferred stock of the corporation became payable only at call of the defendant and that by such amendment the plaintiff was deprived of whatever right he would otherwise have to' recover on his certificate. It seems plain, however, that the defendant could not aff'ect plaintiff’s right by any action it or its stockholders might take without his consent or participation.”.

Sec. 1, art. XI, Const., provides:

“Corporations without banking powers or privileges may be formed under general laws, but shall not be created by special act, except for municipal purposes, and in cases where, in the judgment of the legislature, the objects of the corporation cannot be attained under general laws. All general laws or special acts enacted under the provisions of this section may be altered or repealed by the legislature at any time after their passage.”

If these statutory provisions in effect at the time plaintiff acquired his stock are deemed to be conditions of the stock certificates and of the corporate charter, then the plaintiff consents in advance to the making of such changes as the statutes permit, and an exercise of the right by the state or by a prescribed majority to whom the power may be delegated is neither an impairment nor a breach of the contract. While our statutes quoted are in derogation of the common law, and must therefore be strictly construed, their provisions are unambiguous. By sec. 180.07 (1), Stats., the corporation may by a two-thirds vote of all stock outstanding amend its articles so as to modify or .enlarge its business or purposes, change its name or location, increase or diminish its capital stock, change its officers or its directors, or provide anything which might have been originally provided in such articles. Clearly, this permits the increase from twenty thousand shares to' fifty thousand shares of nopar common stock. By sec. 182.13 (1) any corporation may, in its original articles or by amendment thereto adopted by a three-fourths vote of the stock, provide for preferred stock; for the payment of dividends thereon at a specified rate before dividends are paid upon the common stock; for the accumulation of such dividends; for a preference of such preferred stock not exceeding the par value thereof, over the common stock in the distribution of the corporate assets other than profits; for the redemption of such preferred stock, and for denying or restricting the voting power of such preferred stock; and by sub. (3) of said section, it is provided that:

“No change in relation to such preferred stock shall be made, except by amendment to the articles adopted by a vote of three fourths of the preferred and three fourths of the common stock.”

In the instant case, all the amendments were adopted by more than a three-fourths vote. In fact, there were only two dissenting stockholders. To ascertain the corporate powers to make the amendments under consideration, sec. 180.07 (1) and sec. 182.13, Stats., must be construed together. The legislature has set no limit upon the power to make amendments other than the required vote of three fourths of the common stock and three fourths of the preferred stock theretofore authorized and outstanding. It is apparent that when the legislature in 1913 changed the required vote from one hundred per cent to seventy-five per cent in order tO' adopt such amendments, it considered the seventy-five per cent vote adequate protection to minority stockholders.

The Koeppler v. Crocker Chair Co. Case, supra, can be distinguished from the instant case in that there, after the plaintiff had acquired his stock which contained a fixed maturity date, the articles of incorporation were amended making the certificates payable only at call. The articles provided that the preferred stock, or any part thereof, might be redeemed by order of the directors. Upon the three certificates issued to the plaintiff, the following was indorsed:

“This certificate shall be redeemed on December 20, 1925.

“Crocker Chair Company,

“W. E. Crocker, Secretary.”

A like indorsement was made upon the other two certificates except the redemption date thereof was on December 20, 1926. The preferred stock had no definite maturity date in the absence of the indorsement. The trial court held that plaintiff was entitled to' recover the face value of his certificates with interest from the maturity date fixed by the indorsement. This court approved the principle, the judgment being reversed on other grounds. The problem in the Crocker Case was quite different from that involved here. The court there was dealing with a contract indorsed upon certain certificates of preferred stock. The effect of this indorsement was to fix a redemption date for the particular certificate upon which the indorsement was placed. This created an apparently hybrid form of security having some of the attributes of preferred stock and also some indications of a debtor-creditor relationship. The court held :

(1) That the character of the security as preferred stock was not impaired by the indorsement.

(2) That a contract establishing a special redemption date for a particular certificate could validly be made between the stockholder and corporation (assuming that the rights of creditors were not affected).

(3) That rights created by this contract could not be modified by an amendment unless consented to by the stockholder involved.

The concurring opinion took the view that “agreements embodied in preferred stock certificates to retire the stock at a given time” were void as against public policy. The effect of the decision is to hold that a special contract with respect to a particular certificate of preferred stock and providing for its redemption at a particular date could validly be made without impairing its standing as preferred stock; that once made it could neither be destroyed nor modified by the process of ordinary amendment over the objection of the stockholder with whom it is made, being open to attack solely by creditors whose rights to the assets of a corporation may not be impaired by an agreement putting stockholders in a position of equality or superiority with respect to them.

In the case at bar, the incidents of the preferred stock changed by amendment were not special contracts with reference to special certificates but the ordinary preferences provided by the articles and authorized by sec. 182.13, Stats.

In the Martin Orchard Co. Case, the proposed amendment conferred additional power upon the corporation to borrow money through mortgaging its assets, for an expansion of the business. This court held that the amendment was proper under the applicable rules of the common law.

In State ex rel. Cleary v. Hopkins Street B. & L. Asso., supra, the building and loan association, which was organized under the laws of Wisconsin, undertook to abandon its charter and reorganize under the federal law. This court held such change could not be made. Clearly, those cases present an entirely different factual situation and are distinguishable from the instant case.

Counsel have cited many cases relating to corporate amendments under general common-law rules; also1 cases where the amendments were made under statutory provisions. In the latter class, the decisions are based upon statutory construction and are not particularly helpful because of the difference in the statutory law of the different jurisdictions. So in the instant case, the question is: To' what amendments did the plaintiff consent at the time he became a stockholder in the defendant company? To' the extent of such consent he is bound and cannot assert an impairment nor a breach of alleged contractual rights. The corporate power to make amendments under the statutes quoted is very broad. If section 77B of the Federal Bankruptcy Act is the only means which permits a modificátion of stockholders’ rights without regard to the wishes of the minority, then corporate control under our statutes is in a hazardous position. In this day and age of corporate activity, it would be a serious matter to hold that one per cent of the stockholders of a corporation could defeat the will of the other qinety-nine per cent. Under sec. 180.07 (1), Stats., a corporation may amend its articles of organization in any respect which might have been originally provided in its articles, subject, of course, to the required statutory vote, and in corporations having preferred stock, no’ change in relation to such preferred stock shall be made except by amendment to the articles, adopted by a three-fourths vote of both the common and preferred stock outstanding. The proposed amendments in the instant case were adopted by the required statutory vote. We must hold the amendments valid and \S binding upon the plaintiff who' consented thereto in advance when he became a member and stockholder of the defendant company.

“It is also the law that the majority, even with respect to operations within the powers of the corporation, cannot fraudulently or dishonestly conspire tO' turn over to themselves corporate property or advantages to the detriment of the corporation itself or a minority of its stockholders. ‘But where the act of either such body, though lawful in itself, is designed to accomplish some illegitimate object,— the mainspring of the transaction is some ulterior motive,— and the result, if permitted to operate, will be injurious to the corporation or members not concerned in the transaction, such a member may successfully invoke equity jurisdiction for protection of the corporation where the proper officers will not do it.’ Theis v. Durr, 125 Wis. 651, 104 N. W. 985. It is also the law, assuming the corporation to have the power, that' the majority, ‘as to authority lodged with them, and the board of directors in the field where that is the governing body, are supreme within the limits of honest administration and of the boundaries of discretion.’ Theis v. Durr, supra.’’ Martin Orchard Co. v. Fruit Growers C. Co., supra, p. 103.

It is elementary law that legal power cannot be used to effectuate a fraudulent purpose. This rule has no application in the instant case since no-fraud is alleged or proved.

Appellant makes the further contention that if the statutes be construed so as to permit the amendments indicated, such changes can be made only -in the interest of the corporation and not in the interest of one class of stockholders as against another class, and that the amendments in question are not in the interest of the corporation. Whether the amendments are m the interest of the corporation would seem to be committed to the judgment of the stockholders. The statute specifies the affirmative vote required tO' adopt an amendment. It appears that a committee of the stockholders, representing all classes of stock, gave long and careful study as to the advisability of adopting such amendments and as to the benefits which would accrue to' the corporation by their adoption. It is obvious that a substantial financial gain would result by eliminating some of the tax burden which now exists because of the requirement that the company maintain at all times net quick assets equal to one hundred twenty per cent of the par value of the outstanding first preferred stock, also in the matter of the reduction as to dividends accruing in the future. It is hardly conceivable that out of a large number of stockholders, the amendments would have been adopted with only two dissents unless they were considered to be in the interest of the corporation.

We have the further question as to the accrued dividends at the time the challenged amendments were made. As of .that time, dividends had accrued on the first preferred stock to the amount of $35 per share. Plaintiff was the owner of eighty-six shares of such stock. It appears that in connection with the amendment to Article Third of the articles of organization, a resolution was adopted, authorizing and directing the board of directors to declare and pay a dividend of $20 on each share of the first preferred stock. It further provided that said dividend be paid in convertible dividend warrants of the company, maturing on December 1, 1946, being convertible at any time until maturity or until called, into common stock of the company in the ratio of one and one-quarter shares of said common stock for each $20 of par value of said warrants, said dividend to be paid to and accepted by the holders of the first preferred stock in full settlement and discharge of all dividends per share, accrued and accumulated, on the first preferred stock, up to and including December 1, 1936. It is true that the acceptance of such dividend warrants was_optional.._ Nevertheless, the dividends had accrued and the board of directors was authorized and directed to declare a dividend of $20 on each share of the first preferred stock. The resolution directed the payment in a maijner other than cash. Plaintiff insists upon a cash payment. The respondents, while insisting that the issue is not before the court in the present action, apparently concede plaintiff’s right to insist upon his dividend being paid in cash. We are of the opinion that the issue was properly before the court. The complaint refers to the ] accumulated dividends and asks that the issuance of conver- I tibie dividend warrants be restrained. Although this action " is one in equity, it is our conclusion that plaintiff should have been granted a money judgment in the sum of $1,720. That is upon the basis of $20 per share on.his eighty-six 11 shares of first preferred stock. The equitable relief prayed for was properly denied. v'

The conclusion reached requires that the judgment be modified so as to give plaintiff a money judgment in the sum stated. The judgment, so far as it denies plaintiff equitable relief, will be affirmed. The respondent will have costs.

By the Court. — Judgment modified in accordance with this opinion and as modified it is affirmed, respondent to have costs.