Berger v. United States Steel Corp.

1. The Corporation act (act of 1896) in force when defendant was organized, authorized (section 29) the reduction of capital stock (1) by retiring or reducing any class of the stock, (2) by drawing the necessary number of shares by lot for retirement, (3) by the surrender by every stockholder of his shares and the issue to him in lieu thereof of a decreased number of shares, (4) by the purchase at not above par of certain shares for retirement, (5) by retiring shares owned by the corporation, or (6) by reducing the par value of shares. Defendants’ capital stock consisted of eleven million shares ($100 par value) equally divided between preferred and common stock, and a resolution was passed by the directors -and stockholders “that to the extent that holders consent thereto, two million shares of the preferred stock of the corporation now outstanding áhall be redeemed and retired out of bonds or of the proceeds of bonds of the company, which bonds shall be of the character described,” &c. By the plan, set out in other resolutions adopted at the same time, an opportunity to subscribe pro rata for the bonds was to be made to the stockholders on behalf of the company, by J. P. Morgan & Co., bankers, pursuant to a contract called the bankers’ contract, the subscription to be payable in preferred stock at par. The bankers, by the contract, had the option to take within a certain time all or any of the bonds not sub- I scribed for, and to pay for them in preferred stock. They guaranteed' that at least $80,000,000 of these bonds would be subscribed for. For the guaranty and their services, compensation at four per cent, of the-amount subscribed was to be allowed.—Held, (1) that the plan of converting stock into bonds was, in substance, as well as in form, a general reduction of the capital of the company, and a division of the assets made available by the general reduction among the stockholders. It was therefore a reduction made by reducing a class of the stock, the first method designated in section 29, and was not a “purchase at not above par of certain shares for retirement,” the fourth method ; (2) the purchase of shares for retirement may effect a preference to the stockholder whose shares-are purchased, and as this affects the relations of the stockholders inter sese, the construction of the clause should be strict, in order to preserve-these rights. The clause shoulfl be construed to apply to the purchase of specified or designated shares, and not to a general reduction of an entire class of stock; (3) the division of assets on a general reduction of stock, - under the first method, must be equal among all the stockholders of the class, and it is compulsory. The right of each stockholder in the assets on such distribution is a vested property right, and his share, either in the bonds or proceeds, must be given to or held for him by the company, and his refusal or failure to accept the offer to subscribe for the bonds-does not authorize the company to give any other stockholder the right or option to take his share. The giving of such option created a preferential distribution of the assets, and the plan is therefore illegal. 2. An act passed March 28th, 1902 (P. L. of 1902 p. 217), authorized-corporations having certain characteristics (which the company was admitted to have) with “the consent of the holder of any of its preferred stock, to redeem and retire the preferred stock of such holder, out of the bonds or out of the proceeds of bonds of the company.—Held, (4) this act authorized a preferential selection of stock for redemption, such as the plan, in question contemplated, but as the right of selection impaired the right to equal distribution on a general reduction of stock, existing under the charter of the company, it was unconstitutional as against a dissenting stockholder of the company.

On bill for injunction and application for preliminary injunction. Heard on bill and affidavits, and answer and affidavits. Complainant is the holder of one hundred and sixteen shares ■••of the preferred stock of the United States Steel Corporation, ■of which she became the owner in November, 1901, and for which she paid $10,759. The stock was transferred to her and ■.stands in her name on the company’s books, and she has since ■received the regular quarterly dividends declared thereon. The 'United States Steel Corporation was organized February 25th, 1901, under the General Corporation act, and by its original certificate, filed on that day, and its amended certificate, filed April 1st, 1901, had an authorized capital stock of $1,100,000,000, •divided into eleven million shares of $100 each, equally divided, .as to number and amount, between preferred and common stock. By the amended certificate (article 4) it was provided that ■“the holders of the preferred stock shall be entitled to receive, when and as declared, from the surplus or net profits of the corporation, yearly dividends at the rate of seven per cent, per annum and no more, payable -quarterly on dates to be fixed by the by-laws. The dividends on the preferred stock shall be cumulative, and shall be payable before any dividend -on the common stock shall be paid or set apart, so that if any year, dividends amounting to seven per cent, shall not have been paid thereon, the deficiency shall be payable before any dividends shall be paid upon • or set apart for the common stock.” And as to the rights on winding up, it was also, by the same •article 4, provided: “In the event of any liquidation or dissolution or winding up (whether voluntary or involuntary) of the corporation, the holders of the preferred stock shall be entitled to be paid in full both the par amount of their •shares and the unpaid dividends accrued thereon, before any amount shall be paid to the holders of the common stock.” On March 28th, 1902, an act amending the General Corpora•tiftn act of 1896 was approved (P. L. of 1902 p. 217 ch. 58), the second section of which provided for the conversion of preferred stock into bonds, as follows: “2. With the consent of two-thirds in interest of each class of stockholders present in person or by proxy at a meeting called in the manner-provided in section 27, every corporation organized under this act that shall have issued preferred stock, entitling the holders thereof to receive dividends at a rate exceeding five per centum per annum, and that shall, have continuously declared and paid dividends' at such rate, on such preferred stock, for the period of at least one year next preceding the meeting, and whose floating or unfunded debt at the time of the stockholders’ meeting shall, in the certificate thereof filed with the secretary of state,. be certified not to exceed ten per centum of the par amount of the preferred stock then outstanding, and whose assets at such time, after deducting-the amount of its indebtedness, shall be certified in the judgment of the officers making such certificate to be at least equal to the amount of preferred stock issued and outstanding, may, with the consent of the - holder of any such preferred stock, redeem and retire the preferred stock of such holder, out of the bonds or out of the proceeds of bonds of the • corporation, bearing interest at a rate not exceeding five per centum per annum, the principal of such bonds being made payable at a date not less • than ten years from the date thereof, every corporation organized under this act may, from time to time, in the manner above provided, issue • bonds, which, if therein so declared, shall be convertible at par at the ■ option of the holder, into fully-paid common stock of the corporation, at par, within any period therein prescribed, not less than two years from the issue thereof, and in such case the board of directors may authorize • the issue of the common stock into which such bonds, by their terms, shall', be convertible.” The bill charges. (paragraph 4) that the directors and man- ■ agers of the United States Steel Corporation procured this law to be passed in order to enable some of them to make an enormous commission in a scheme to convert a large block of the-preferred stock of the company into bonds. The answer (para- • graph 1) admits the allegation as to procuring the act to be-passed, but denies the object and purpose charged. On April 1st, 1902, the board of directors adopted a series of resolutions, five in number, by the first of which it was “Resolved, That the United States Steel Corporation hereby accepts-- and approves the provisions of the act approved March 28th, 1902 [describing it by'its title], 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.” The second resolution of the series declared that the boardt deemed it, and thereby declared it to be, advisable “that to the extent that holders thereof shall consent thereto, 2,000,000 shares of the preferred stock of the corporation now outstanding shall be redeemed and be retired out of bonds or out of the proceeds of bonds •of the United States Steel Corporation, which .bonds shall be of the character set forth in the next. resolution.” The third resolution provided that the bonds bear interest at live per cent., payable semi-annually, payable in- sixty years and redeemable at $100, after ten years, out of a sinking fund to be provided, or ány other funds of'the corporation. The bonds to be issued for retiring, stock were to be part of a total issue •of $250,000,000, and secured by mortgage, lien and pledge on .all of the present and future property of the corporation and shares it held in other corporations (except directors qualifying shapes), the lien and pledge to be similar to the first mortgage lien of $304,000,000. Reasonable opportunity was to be given to the preferred stockholders of record on a .date to be fixed in the offer to subscribe for their ratable share of $200,000,000 of the bonds, payable in the preferred stock at par, and being forty per cent, of their several -holdings, and to subscribe ratably for $50,000,000 of the bonds, being ten per cent, of their holdings and payable in cash. By the fourth resolution it was provided bonds not exceeding $50,000,000 of this character and so secured should be sold for cash, for the corporate purposes of the corporation, whether the stockholders approved the resolution for the retirement of the preferred stock or not. The fifth resolution, closing the series (excepting a resolution calling a special meeting of the stockholders), provided, so far as yet disclosed, the practical plan for carrying into effect the resolution of the directors advising the retirement of preferred stock out of bonds or the proceeds of bonds. This resolution directed and authorized the president and secretary of the corporation to entér into a contract, dated April 1st, 1.902, with .the bankers,. Messrs:.-J. P.-Morgan & Company, substantially • in' the form ánhexed to the resolution. The contract was to be executed' forthwith, but not finally to become or be operative until after approval thereof by the stockholders in special meeting .assembled. This contract, which may be called, the “bankers’ contract,” was a contract between the company and the bankers, .and, after reciting at length the resolutions of the. directors aboYe referred to, declared that, in anticipation of the stockholders’ approval and ratification of .the resolutions, and depending such approval and ratification, the parties had therefore “entered into arrangements substantially such as are hereinafter set.forth in the contract,.for the accomplishment of the purposes of said resolutions.” The contract contains two articles— article first, relating to the .issue of $200,000,000 .for stock, in connection with the $50,000,000 for cash; article second, relating to the $50,000,000 for cash issue alone. Article first contains five sections, and is the plan which, as the contract recites, is for the accomplishment of the resolutions of the directors, the declared purpose, it will be observed, being to redeem the stock out of bonds or out of the proceeds of bonds. The first section of article first contains the offer which the bankers, “for account of and on behalf of the steel company,” is to make to the preferred stockholders of the company. This offer is twofold—(1) .the preferential right to subscribe to the bonds, to the extent*of forty per cent, of their holdings, pajrable in preferred stock at par, and the bankers may, at their discretion, allow a subscription for more than forty per cent, of the holdings, thus giving them or their appointees that preference in subscription; and (2) the right to make an additional subscription for bonds at par, to the extent of ten per cent, of the stock. The offer is to be open for thirty days after a date fixed, and, to the extent that it is accepted, the steel company is to deliver bonds to the bankers to enable them to fulfill the terms and conditions of their offer. The delivery of bonds by the company to the bankers is, however (section 2, article 1), to be made “upon the terms and. conditions of such offer and in fulfilment thereof,” and the delivery is declared to be made to the bankers to enable them to fulfil the terms of their offer as so accepted. The terms and conditions of this offer-by the bankers, the agents acting on behalf of the company,' have not been disclosed, nor has the circular .been submitted. Nor does it appear whether the terms and conditions upon which the offer is to be made by the company (through, the bankers, as its eigents fpr that purpose) to its stockholders is- known to the directors, and officers of-the company, acting in its behalf in the formal execution of the contract, but it must be presumed that it was,, and is, known, for the contract between the company and the bankers, when operative, seems, by article 2, to commit the further terms and conditions of the offer to the bankers themselves, and to agree, in advance, that bonds shall be delivered to those-who accept the terms and conditions of the offer. The third section of article First is the portion of the bankers’’ contract which is the central feature of the plan, the feature which effectually restricts the operation of the directors’ resolutions to-one of the two plans of redeeming stock, viz., the redemption out of bonds, and is the feature of the plan which, at the same-time, impairs, or is claimed to impair, a dissenting stockholder’s-property right. This section provides that if the offer to subscribe for bonds is not accepted to the full extent of $250,000,000, then the bankers are to have the option, until October 1st, 1903,. of taking all or any of the bonds offered to stockholders and not subscribed for by them up to $200,000,000 for preferred stock and $50,000,000 for cash. The bankers’ exclusive option,, by this clause, extends over more than a year, and it extends to-the whole amount the directors thought advisable to retire, either - out of bonds or the proceeds of bonds. This option, if exercised-to its full extent, may therefore result in placing ahead of the-non-assenting stockholders’ stock $200,000,000 bonds, secured by-mortgage. The next section—Fourth—fixes the minimum limit of the conversion, so far at least as it can be fixed by a guaranty. The bankers’ guaranty that offers of subscriptions shall be made- and performed, “upon the terms and conditions thereof” (that is, as I read the contract, the terms and conditions which they themselves are' apt to make thereafter by their circular), to at least $100,000,000 of bonds at par, $80,000,000 payable in preferred stock at par and $20,000,000 in cash. The time when* the bankers’ contract is to become operative and enforceable, as-to the $200,000,000 to be issued for stock, is fixed, by the last-clause of article Fifth, and is declared to be “as soon as, and not before, the proposed retirement of 2,000,000 shares= ' of preferred stock, by the issue of bonds, shall have received the assent of stockholders and shall have been finally authorized in the manner provided by law.” Article Second of the contract relates to the subscriptions for bonds that are to be issued for cash. As to these bonds, which are issued for the corporate purposes of the company, the putting in of more money, on either stock or bonds, being clearly a matter of consent, the stockholder’s right can only be preferential, and, not having been exercised, terminates, and no objection has been made to this article, which takes effect on the approval of the stockholders; the further qualification added to the first article, “and shall have been finally authorized in the manner provided by law,” being omitted. Article Third of the contract fixes the bankers’ compensation for the risk, guaranty and obligation under the first two articles at a commission equal to four per cent, upon all bonds sold and delivered to the stockholders or to the bankers and their associates. Article Fourth provides for fixing the compensation of the bankers on the bonds issued for cash, in case the stockholders declined to authorize the offer for bonds. The Fifth article relates to the approval by the bankers of the form of the bonds and mortgage, and the Sixth article provides for the formation of a syndicate by the bankers to assist in carrying out the agreement, and article Seventh provides for the amendment of the agreement and the extension of time under it by the bankers and by the steel corporation, through its board of directors or finance committee. Notice of a special meeting of the stockholders was duly given for May 19th, 1902, to take action upon each of four resolutions of the directors, relating to the redemption and retirement of the stock, the issuing of bonds and approving the bankers’ contract, which, in the notice, was described as providing “for the public offer by them (J. P. Morgan & Co.) to tbe preferred stockholders of such bonds and for the acquisition by them of such bonds, as preferred stockholders, all as set forth in said contract,” and copies of the resolution and contract were declared to be obtainable at the company’s office, and the notice contained copies of the directors’ resolutions. At the special meeting of the stockholders held May 19th, 1902, the stockholders, by a vote of three million seven hundred and forty-five thousand seven hundred and thirty-one shares of preferred stock and three million nine hundred and fifty-eight thousand five hundred and fifty-seven shares of common stock in favor of the resolutions, and four thousand eight hundred and sixty-five shares of preferred stock and seven thousand six hundred and seventy-five shares of common stock against each and every of the resolutions, adopted resolutions as follows: (1) They approved and ratified the action of the directors, as set forth in their resolutions; (2) they consented that, to the extent holders consented, two million shares of the preferred stock should be retired out of bonds or the proceeds of bonds; (3) authorized the issue of bonds for $250,000,000—$200,000,000 payable in preferred stock and $50,000,000 payable in cash; (4) authorized the issue and sale, for cash, of $50,000,000 bonds for the corporate purposes of the corporation; (5) authorized and confirmed the bankers’ contract for the acquisition of bonds not taken by stockholders and the terms and compensation fixed by the contract. Complainant’s proxy attended the meeting and voted against the resolutions, and protested specially against the third resolution, authorizing the issue of $200,000,000 bonds for preferred stock. Complainant seeks to enjoin the issue of these bonds to retire the preferred stock in the manner proposed, upon the special grounds (1) that, if carried out, it impairs her vested right as a stockholder; (2) that the plan or scheme for conversion of stock into bonds is unconstitutional, ultra vires and void, as against complainant and dissenting stockholders; (3) that the execution of the plan will imperil complainant’s stock, be ruim ous and disastrous to the company, and (4) that at least four members of the bankers are directors of the corporation, and that the compensation of $8,000,000, which may be received by the bankers, is without compensation and illegal, and that the scheme is devised to secure exorbitant commissions by its firm. An injunction against both the corporation and the bankers, preventing the execution of the plan, is prayed, and also general relief. The answer of the defendant corporation denies that the vested and contractual rights of the complainant are correctly set out in her bill, admits complainant’s opposition to the execution of the plan for conversion of the stock and the execution of the bankers’ contract. As to complainant’s objection to this contract, based on the fact that members of the bankers’ firm were also directors of the company, the corporation sets up (answer, paragraph 3, section 5) a by-law of the company—section 9-,— duly adopted under the Corporation act in force since April 1st, 1901, with the consent of every stockholder, expressly permitting contracts to be made by th,e board of directors, where any director is personally interested, provided the contract be approved by an affirmative vote of at least ten directors not so interested, the entire board at the time -of the making of the contract being present. The same by-law also provides that any such contract may be submitted to the stockholders at its annual or a special meeting called for the purpose, and if then approved by a majority of the stockholders present, shall be as binding as if approved by all. The contract in question has been so approved and ratified, on this vote of the stockholders about seven-tenths of the entire stock, exclusive of the stock held by the bankers or the sjmdieate, voted in favor of the contract. As to the unreasonableness of the amount of compensation to the bankers, the answer and affidavits set up circumstances showing its reasonableness, and that the payment of the entire compensation on the bonds issued for conversion may, under certain conditions, be lost. The answer further sets up that the syndicate formed under the contract have deposited with the bankers preferred stock for conversion to the amount of $80,000,000 par value, in order to be able to carry out the contract. The answer (paragraph 8) further declares that this bankers’ contract is subject to modification. As to the effect upon the value of complainant’s stock of carrying the plan for conversion into effect, the answer, with the accompanying affidavits and exhibits, sets up the proceeding and reports of its different committees and officers to whom the investigation of the matter, in its business aspects, was committed, and (paragraph 11) that the entire action and proceedings of the board were taken and are intended to be consummated in. good faitb and in tbe exercise of their best and unanimous judgment as to the best interests of the corporation, and that it has been approved by the holders of more than three-fourths in interest of the entire capital stock. As to the main question at issue, the effect upon the complainant’s vested and contractual rights of carrying out the proposed plan of conversion against her consent, the defendant denies that these rights of complainant’s are as set out in the bill, and insists (paragraph 10) that the action now questioned was duly and constitutionally authorized by the laws of New Jersey, by the certificate of incorporation and by-laws of the company and by the contract between all the shareholders of the corporation. The powers in the certificate and by-laws, which are relied on to sustain the action, are, as set out in paragraph 9 of the answer, the power (1) to retire the whole or any part of its stock, (2) to issue bonds, (3) to dissolve and, in connection therewith, provide for payment of debts, and then pay off preferred stock to the exclusion of common, and (4) to alter and amend its certificate in any manner and to any extent deemed advisable by the directors and assented to by the holders of two-thirds of the capital stock of both classes present at a meeting. These provisions of the certificate and by-laws, together with such other provisions of either as were relied on in the arguments or briefs, are as follows, as referring to the subject in hand: Amended Certificate, Article 3.-—-“Without in any particular limiting any of the objects and powers of the corporation, it is hereby expressly declared and provided that the corporation shall have power to issue-bonds and other obligations in payment for the property purchased or acquired by it, or for any other object in or about its business; to-mortgage or pledge any stocks, bonds or other obligations or any property which may be acquired by it, to secure any bonds or other obligations by it issued or incurred; to guarantee any dividends or bonds or contracts or other obligations; to make and perform contracts of any kind' and description, and in carrying on its business, or for the purpose of attaining or furthering any of its objects, to do any and all other acts and things, and to exercise any and all other powers which a copartnership or natural person could do and exercise, and which now or hereafter' may be authorized by law.” Ibid., Article 7 (the article relating to directors).—“Unless authorized by votes given in person or by proxy, by stockholders holding at least" two-thirds of the capital stock of the corporation which is represented and voted upon in person or by proxy at a meeting specially called for that purpose, or an annual meeting, the board of directors shall not mortgage or pledge any of its real property, or any shares of the capital stock of any other corporation.” Ibid., same Article 7.—“The board of directors may determine and vary the amount of the .working capital and direct the use of surplus or net profits above capital stock paid in, and in its discretion the board of directors may use and apply any such surplus or accumulated profits in purchasing or acquiring its bonds or other obligations, or shares of its own capital stock, to such extent and in such manner and upon such terms as the board of directors shall deem expedient, but shares of such capital stock so purchased or acquired may be resold, unless such shares shall have been retired for the purpose of decreasing the company’s capital stock, as provided by law.” By-laws, section 1 and section 9, relating to contracts in which directors are personally interested, are set out in the answer, paragraph 3, section 5. The provisions 'of the constitution and the laws of the state in force previous to the act of 1903, referred to in the arguments as bearing upon the question, are constitution, article 4, section 7, paragraph 11, prohibiting special acts conferring corporate powers, directing general laws for organizing corporations and obtaining corporate power, “subject, nevertheless, to repeal or alteration at the will of the legislature.” Corporation act, section 1, paragraph 4, declaring powers of every corporation, including power to mortgage real or personal estate with its franchises, and to make by-laws “providing for the management of its property, the regulation and government of its affairs,” &c. Ibid., section 3, declaring that every corporation, their officers and stockholders, in addition to the powers enumerated in the first 'section and the powers specified in their charter or certificate of incorporation, should possess and exercise all the powers and privileges contained in the act, so far as necessary or convenient to attain the objects set forth in the charter or certificate, and being governed by the provisions and subject to the restrictions and liabilities in the act contained, so far as appropriate and not inconsistent with the charter or act of incorporation, and that no corporation should possess or exercise any other corporate powers, except such incidental powers as should be necessary to the exercise of the powers so given. Ibid., Section fy.—“That the charter of every corporation, or any supplement or amendment, shall be subject to alteration, suspension and repeal, in the discretion of the legislature.” Ibid., Section 5.—’“That this act may be amended or repealed, at the pleasure of the legislature, and every corporation created under this act shall be bound by such amendment, but such amendment or repeal shall not take away or impair any remedy against such corporation or its officers, for any liability which shall have been previously incurred; this act, and all amendments thereof, shall be a part of the charter of every corporation heretofore or hereafter formed hereunder, except so far as the same are inapplicable to the objects of such corporation.” The above provisions, except section 5, are general provisions applicable to all corporations, whether organized under the act or otherwise, and the provisions of the Corporation act relating to corporations organized under it, applicable or claimed to be applicable, are as follows: Ibid., section 8, paragraph 7, authorizing the certificate to contain any provisions which the incorporators choose to insert for regulating its business and conducting its affairs, “and any provision creating, defining, limiting and regulating the powers of the corporation, the directors and the stockholders, or any class or classes of stockholders; provided, such provision be not inconsistent with this act.” Section 11, declaring the power to make by-laws to be in the stockholders, by authorizing the corporation, in its certificate, to confer that power upon the directors, and that by-laws made by directors, under this power, might be altered or repealed by the stockholders. Section 12, directing that the business of the corporation should be managed by the directors. Section 18, authorizing the creation of common and preferred stock. Section 27, authorizing decrease of capital stock. Section 29, as to methods of decreasing capital stock. Section 30, as to withdrawing any part of the capital stock or reducing it, except from surplus or net profits. Section 29, relating to the methods of decreasing capital stock, is as follows: “The decrease of capital stock may be affected by retiring or reducing any class of the stock, or by drawing the necessary numbers of shares by lot for retirement, or by the surrender of every shareholder of his shares and the issue to him in lieu thereof, of a decreased number of shares, or by the purchase, at not above par, of certain shares for retirement, or by retiring shares owned by the corporation or by reducing the par yalue of shares.”