American General Corp. v. Camp

Parke, J., delivered the opinion of the Court. The appeals in these two cases were argued together and will be so decided on account of the similarity of the questions involved. The controversies grow out of the consolidation of eight separate but allied or subsidiary corporations into one corporation, known as the ⁶³² American General Corporation, a body corporate of the State of Delaware. Seven of these corporations were created under the laws of the State of Maryland, and the eighth was incorporated in the State of Delaware.

The consolidation became effective on November 23rd, 1935, and the questions are with reference .to the value of the stock of those preferred stockholders of the International Securities Corporation of America and of the American Founders Corporation, two of the Maryland corporations, who diss.ented from the consolidation. There was a separate valuation and decree with respect to the dissenting stockholders of each of these two corporations, and cross-appeals were taken. The appeals of the stockholders of the International Securities Corporation of America, which will be called “International” and of the American General Corporation, which will be called “defendant,” are Nos. 73 and 74 on the docket of the October Term, 1936, of this court, and those of the stockholders of the American Founders Corporation, which will be called “Founders,” and of the defendant, are Nos. 75 and 76 on the same docket. The eight corporations were interrelated before the consolidation.

The relation of the .group as a whole was so complicated that a consolidation of the members into one corporation presented advantages in the simplification of financial structure, management, and accounting. These considerations prompted the formation of a plan of corporate union, and, after a lengthy period of negotiation, an agreement of consolidation was prepared; presented to the various stockholders ; and, at a meeting for that purpose, adopted on November 4th, 1935. The vote was not unanimous, but the dissentients were the owners of much less than one-third of the stock entitled to vote, and, so, could not prevent the consolidation. The International stock embraced 44,736 shares, of six per cent, preferred stock of $100 par value a share; 14,714 shares of six and one-half per cent, preferred stock of $100 par value a share; 591,156 shares of Class A common stock of one dollar par value a share; 600,000 ⁶³³ shares of Class B common stock of ten cents par value a share.

The six per cent, preferred stock was subject to call and retirement at $105 a share and the six and one-half per cent, stock at $107.50. The dividends on these two classes of preferred stock were cumulative and none had been paid since December 1st, 1931. The owners of 3,834 shares of the six per cent, preferred stock and of 482 shares of the six and one-half per cent, preferred stock opposed the agreement of consolidation. The Founders stock outstanding consisted of 156,577 shares of preferred stock of the par value of $50 a share. 42,379 was of the seven per cent, series of preferred stock, and 114,198 of the six per cent, series of preferred stock.

The seven per cent, series was redeemable at a premium of five dollars a share, with accrued dividends, and the six per cent, series at a premium of $2.50 a share with accrued dividends. The owners of 360 shares of the six per cent, series of preferred stock and 649 shares of the seven per cent, series of preferred stock rejected the agreement of consolidation. The accrued dividends on every share of the six per cent, series amounted to $12.19 and to $14.22 on the seven per cent, series. The dissenting stockholders of the International and of the Founders demanded payment for their stock, but were unable to agree upon the fair value of their stock, and separately filed petitions in the Circuit Court of Baltimore City for the appointment of three disinterested commissioners to appraise the fair value of their stock, without regard to any depreciation or appreciation of the same in consequence of the consolidation.

The Chancellor selected three commissioners, who were disinterested and possessed expert qualifications for the valuation. Although separate orders were signed, the commissioners were the same in each, as were their commissions. The respective parties appeared before the commissioners and offered testimony and the parties were heard. After weighing the matters the commissioners made ⁶³⁴ separate valuations and returned them in two distinct reports.

In the report which was made with reference to the International, the fair value of both the six per cent, and the six and one-half per cent, preferred stock of International owned by the dissenting stockholders is, without regard to any depreciation or appreciation by reason of the consolidation, $91.47 per share as of November 22nd, 1935. In the valuation of the Founders stock, every share of the preferred stock was valued at $50 per share with the accrued dividends of $14.22 per share to be added on every share of the seven per cent, series and of $12.19 per share to be added on every share of the six per cent, series. Each report made a further award of six per cent, interest on the amount to which every stockholder was entitled. The interest to be computed from November 22nd, 1935.

The defendant excepted to the award, as did the dissenting stockholders, in each case. The defendant, also, filed in each case exceptions to certain testimony offered in evidence before the commissioners, and moved the Chancellor to strike out the testimony. The Chancellor in both cases overruled all the exceptions and, after full and elaborate argument and careful consideration, as is shown by his opinions, confirmed the award® of the commissioners. The dissenting stockholders believe the awards too low and the defendant corporation finds them too high, and their reasons are that, in arriving at their respective findings, the commissioner® erred in the inclusion or exclusion of elements, testimony, and theories of value which should have been rejected or considered accordingly as they made for the contentions and material interests of the respective parties.

It will not be ■ necessary to treat the questions raised separately, since they will be covered by the discussion to follow. The power of a dissenting stockholder to prevent the sale of all the assets of a corporation or the consolidation or merger of its corporate existence with another corporation frequently proved in the past a disadvantage to the other stockholders. To overcome this difficulty ^ ⁶³⁵ and to meet a general demand, and, at the same time, to protect the dissentient in his property rights to their full extent, the General Assembly of Maryland passed appropriate legislation. So, by compliance with prescribed conditions and procedure, any one or more corporations of this state may be consolidated with another such corporation of this or another state to form a new corporation, or be merged into another such corporation, provided, inter alia, that the consolidation or merger shall be approved by the requisite vote of two-thirds of all the shares entitled to vote.

Code (1935 Supp.) art. 23, secs. 33-36. If a dissenting stockholder voted or, in the case of á stockholder who was not entitled to vote, registered a protest against the agreement submitted, he may, within a specified time, make demand of the consolidated corporation or the corporation which survived the merger, as the case may be, for the payment of the fair value of his stock; and, in the event of a disagreement, the dissenting stockholder may apply by petition for such relief as the Chancellor below accorded and is found on the records now at bar. The remaining portion of section 35 should be quoted for an understanding of the effect of the appraisal of the fair value of the stockholder’s stock “without regard to any depreciation or appreciation thereof in consequence of the said consolidation or merger.” Section 35 concludes in these words: “and the award of said commissioners (or that of a majority of them) when confirmed by said court, shall be final and conclusive on all parties; unless any stockholder or the corporation consolidating or merging as aforesaid, feeling aggrieved at the said action of the said court, shall appeal to the Court of Appeals of Maryland, which right of appeal from such action of the court is hereby given, and said consolidated corporation or the corporation surviving the merger, as the case may be, shall pay such stockholder the value of his: stock ascertained as aforesaid, and on receiving such payment or on a tender thereof, said stockholder shall transfer his stock to the ⁶³⁶ said corporation, which stock shall then have the status of authorized but unissued stock; and in case the award • is not so paid within thirty days from the filing of said award and confirmation by said court, or in case of an appeal, within thirty days from the confirmation of said award by the Court of Appeals, and notice thereof given in the manner aforesaid to said stockholder and the said corporation, the 'amount of the award shall be a decree against the said corporation, which decree shall be a prior lien to any mortgage or other lien placed on its property or franchises by the consolidated corporation or, in the case of a merger, by the surviving corporation after such merger has become effective, and may be collected 'as other decrees in said court are by law collectible.” In Homer v. Crown Cork & Seal Co., 155 Md. 66, 84-86 , 141 A. 425, 434 , it was said: “Unless acting ultra vires, illegally, or in bad faith, the directors of a corporation of the prescribed class have a statutory right to approve of a sale of all its assets as an entirety at. a given price, and the stockholders owning two-thirds of all the stock outstanding and entitled to vote may approve of such sale, and it will then be made. This is a property right of which the shareholders, while acting in good faith, may not be deprived, no matter the motives nor the folly and consequences of their action.

Supra, France on Corporations (2nd. Ed.) p. 59, sec. 38; p. 62. A sale so authorized is, however, subject to the right of the dissentient minority to be paid, notwithstanding the sale price, the fair value of his stock.” And, as a stockholder holds his stock in a Maryland corporation subject to the statutory power of the stated majority of stockholders to consolidate or merge with another corporation, so does the dissenting stockholder possess his reciprocal statutory right to be paid the fair value of his stock without regard to any depreciation or appreciation thereof in consequence of the combination or merger. Consequently, the dissenting stockholders may claim to be paid this fair value and no more.

The problem of finding the fair value of stock is a ⁶³⁷ special problem in every particular instance. Since the dissentient will not unite with the majority, the value of his stock should not be affected by a corporate change in which he refused to participate, whether the result be appreciation or depreciation, and this the statute recognizes and eliminates, but otherwise affords no express criterion of fair value. The implication that every owner of stock is aware that the corporation may have its corporate existence ended by consolidation or merger affects the owner with the natural and reasonable consequence that, so far as he is concerned, his refusal to accept the terms of consolidation or merger by electing to take the fair value of his stock in cash leaves him in the position of holding stock in a corporation whose legal existence is terminated. The owner of shares of stock in a corporation