CORPORATION LAW | B2015

CASE DIGESTS

Hottenstein et al. v. York Ice

Machinery Corporation
1943
Circuit Court of Appeals of the United States
Biggs, Jones and Goodrich, Circuit Judges

SUMMARY: Plaintiff brought a suit against defendant York Ice

Machinery Corp. to prevent its merger with York Corporation. The
issue in this case was whether or not the plaintiff, as a preferred
stockholder, is entitled to receive payment of his unpaid dividends in
preference and priority to the payment of any dividend on the
common stock. The Circuit Court of Appeals, in surveying the cases
decided by the Supreme Court of Delaware, ruled that the plaintiff had
no vested right to the unpaid dividends. Furthermore, the law allowed
the cancellation of old preferred stock and the rights of holders
thereof to unpaid accumulated dividends via merger or consolidation.
DOCTRINE: A parent corporation may merge with a wholly owned
inactive subsidiary, cancelling old preferred stock and the rights of
the holders thereof to unpaid accumulated dividends, substituting in
lieu thereof stock of the surviving corporation.
FACTS: The intervening plaintiff is the owner of 50 shares of 7%
cumulative preferred stock issued by York Ice Machinery Corp.
York Ice Machinery Corp., defendant herein, is a Delaware Corporation
incorporated on March 22, 1927.
1. On Jan. 25, 1941, it had an outstanding capital stock consisting
of 56,371 shares of cumulative preferred stock and 161,481
shares of common stock.
a. On that date, it had unpaid accumulated dividends on
each share of the preferred stock amounting to $88.25.
2. It had bonds due Oct. 1, 1947 worth $5,808,500 and 10-year
6% sinking fund gold debentures worth $612k which initially
had a due date of Dec. 1, 1937 but extended to 1943.
3. It also owed certain unsecured 3% notes worth $118,500 due
Dec. 1, 1944.

a.

4.

On the same date, it had a liabilities amounting to

$1,150,000.
As of Sep. 30, 1940, it had assets worth more than $1M in cash,
notes and accounts receivables worth $3.5M and inventories
worth $3.8M. It also had miscellaneous assets worth $900k,
aside from owning a plant worth $7M.

On Jan. 24, 1941, the asset position of the defendant was good.
1. It was solvent and its current assets exceeded its obligations,
though refinancing was required.
By way of merger, a plan of recapitalization was proposed.
1. Each share of the preferred stock of the defendant with
accumulated dividends should be converted into 15 shares of
common stock of York Corporation as the surviving
corporation.
2. Each share of the common stock of the defendant should be
converted into one share of common stock of York
Corporation.
3. Upon consummation of the merger and the issuance of the new
stock, the holders of the preferred stock of the defendant will
own 83.2% of all stock of York Corp.
4. The voting power of the present holders of the preferred stock
of defendant corporation will be increased from 24.*% to
83.2%.
ISSUE: WON plaintiff, as a preferred stockholder, is entitled to receive
payment of his unpaid dividends in preference and priority to the
payment of any dividend on the common stock.
RULING: NO. The plaintiff has no vested property right to the unpaid
dividends.
RATIO: From the facts, it is clear that the defendant invoked Sec. 59of
the General Corporation Law of Delaware in order to avoid the effects
of Keller v. Willson & Co. and Consolidated Firm Industries v. Johnson.
1. These decisions state the principle that regardless of whether a
class of cumulative preferred stock was created before or after
the 1927 amendments to Sec. 26 of the General Corporation

CORPORATION LAW | B2015

CASE DIGESTS

Law, accrued accumulated unpaid dividends could not be

divested by a reclassification under the said section even when
a majority of the stockholders consented thereto over the
objections of the dissident stockholders.
a. Keller: The right of the preferred stockholder to the
unpaid dividends which had accrued through the
passage of time on his cumulative preferred stock was
to be regarded as a vested right of property.
i. Sec. 26 of the General Corporation Law
authorizes the amendment of corporate
charters. The cancellation of cumulative
dividends already accrued through the
passage of time is not an amendment but a
destruction of a right in the nature of a debt.
Such is not within the purview of the section.
ii. The rights
of cumulative preferred
shareholders to the stipulated dividends
accrue to them by virtue of contract.
iii. When the necessary corporate action, under
the amended statute conferring the power is
taken, the status of the shares may be changed
and the right thereafter to claim the dividends
as originally stipulated may be cancelled, but
the amended statute under the general rule of
construction, ought not to have a retroactive
effect.
b. Johnson v. Consolidated Film Industries: [Following the
decision in Keller] the right of a preferred stockholder
to unpaid accumulated dividends could not be affected
or adjusted without his consent.
Following the doctrines laid down in Keller and Consolidated Film, the
cancellation of dividends is not considered an amendment to a charter
and the right of the holders of cumulative preferred stock to unpaid
dividends accrued through the passage of time is a vested right of
property protected by the Federal and State Constitution from
destruction.

1.
2.

3.

IF that was the case, then the holder cannot be deprived via
merger or consolidation under Sec. 59 or reclassification under
Sec. 26.
IF the terms of the contract between the preferred stockholder
and his corporation cannot be changed by any charter
amendment, then the former is entitled to protection of the
contract clause.
IF the complainant in Cab was being deprived of a vested right
in property, then the 14th amendment was being violated.

HOWEVER, SUCH WAS NOT THE CASE IN THE CASE AT BAR. Havender
v. Federal United Corporation a later case decided Supreme Court of
Delaware, basically repudiated Keller and Consolidated Film Industries.
1. In this case, a parent corporation merged with its wholly
owned subsidiary.
a. The only difference between this case and the CAB is
that the wholly owned subsidiary was not created for
the purpose of merging with the parent.
2. The unpaid accumulated dividend [which amounted to $29 per
share in Havender] of preferred stock could be cancelled by
merger conducted in the form prescribed by Sec. 59 of the
General Corporation Law.
3. While Havender relied in Sec. 59 and Keller and Consolidated
Film relied on Sec. 26, the court concluded that Havender
repudiated the latter two cases.
In Havender, the Supreme Court of Delaware applied Sec. 59 literally.
1. As the terms were clear, then there was no room for
interpretation.
2. Following the phrasing of Sec. 59, a parent corporation may
merge with a wholly owned inactive subsidiary, cancelling old
preferred stock and the rights of the holders thereof to unpaid
accumulated dividends, substituting in lieu thereof stock of the
surviving corporation.
As regards the issue of fairness of the reclassification, such an issue was
not considered by Havender.
1. Keller did not even touch upon this issue.

CORPORATION LAW | B2015

CASE DIGESTS

2.

The recent case of Porges v. Vadsco Sales Corp., in discussing

the fairness of a merger or consolidation, emphasized Sec. 61,
which provides that a stockholder objecting to such may
withdraw from the enterprise and obtain payment in money
for the value of his stock.
a. The court in Porges also stated that the stockholder
may enlist the aid of a court of equity to restrain the
consummation of the merger under exceptional
circumstances.
i. These circumstances involve actual fraud,
which
amounts
to
misrepresentation,
concealment, or deception.

In the CAB, however, there was no actual fraud. The reclassification is

fair.
1. The balance sheet shows that, as of Sept. 30, 1940, the equity
above par value of the cumulative preferred stock amounted to
$4,384,000, whereas, as of that day the arrearage of the
dividends on the preferred stock amounted to $4,616,000.
a. This arrearage was accumulating at the rate of 7% per
annum.
2. It should also be noted that when the plan of reclassification by
merger became public, the preferred stock nearly doubled in
price.
a. The increased earnings should create an equity for the
common stockholders of the defendant.
As regards the purpose for the creation of York Corporation, there is
overwhelming evidence that it was crated for the purpose of effecting a
reclassification, cancelling the accumulated preferred dividends on the
preferred stock by merger with it.
1. It was characterized as a paper merger.
Final note: Keller remains a landmark decision only to signify that what
cannot be done directly under Sec. 26 may be done by subterfuge under
Sec. 59. I
1. A court is powerless to afford aid to the stockholder until the
reclassification reaches that degree of unfairness where it
amounts to a cancellation of the preferred stockholders

accumulated
unpaid
compensation.

dividends

without

adequate

DISPOSITIVE: Judgment affirmed. Plaintiff was not entitled to

injunctive relief prayed for.