Baker v. Standard Lime & Stone Co.

Henderson, J., delivered the opinion of the Court. This appeal is from a decree dismissing a bill of complaint filed by David B. Baker and his wife and children, dissenting common stockholders of The Standard Lime and Stone Company, a Maryland corporation, challenging the validity of certain amendments to the corporate charter made in 1950, authorizing the issue and sale of its preferred stock, the purchase and retirement of shares of its common stock, and a split up of the outstanding common stock. The relief prayed is either payment to them of the fair value of their respective shares or, in the alternative, injunctive relief against the amendments and the cancellation thereof, the cancellation of the preferred stock issued pursuant to the amendments, and the recovery of the moneys paid for the common stock purchased by the corporation and retired. The financing' out of which the controversy arises involves a sale by the corporation to the Massachusetts Mutual Life Insurance Company of 7600 shares of preferred stock at par ($100 per share) and accrued dividends, a total consideration of $760,000 and the application of the proceeds thereof to the purchase of 7992 shares of common stock of the company at $95 a share, a total consideration of $759,240, from the beneficiaries under the will of Joseph D. Baker, deceased, including the estate of his son Holmes D. Baker, his daughter Charlotte Baker King, the trustee under the will of the decedent for his daughter for life and the Bucking ²⁷⁵ ham School of Frederick County, Maryland, an eleemosynary institution, a total of 7000 shares, together with 892 shares theretofore owned by Holmes D. Baker and purchased from his estate and 100 shares theretofore owned by Charlotte Baker King individually.

Neither the insurance company nor any of the vendors of the common stock are parties to this proceeding. The common stock bought at $95 a share and retired is of the same issue as the stock which the appellants demand that the company acquire from them at $150.95 a share. The appellees filed a combined demurrer and answer and a motion to dismiss. By stipulation it was agreed that the whole cause be heard finally on the record as made to the date of the hearing on December 15, 1952.

Standard Lime is a Maryland corporation organized in 1927 to carry on a business established, owned and directed by the Baker family, of which the appellants and the individual appellees are all members. During the entire period of the corporate existence, until the resignation of David B. Baker in 1949, the individual appellees and David B. Baker were officers and directors of the company. David B. Baker held the position of vice president, and received the same salary as the others. The authorized capitalization of the company consisted originally of 200,000 shares of common stock without par value, of which 120,000 shares were issued to the organizers, all members of the Baker family.

During the period from the time of organization to 1946 the business of the company flourished and the value of its stock greatly increased. In 1946 certain stockholders desired to dispose of some of their stock, because, at its enhanced value, it constituted such a large part of their property that it was deemed advisable to reduce their relative investment for diversification and to provide funds for estate taxes. Accordingly a plan was adopted whereby the company sold 25,000 shares of redeemable preferred stock, of the par value of $100 a share, to the Massachusetts Mutual for $100 a share, or a total considera ²⁷⁶ tion of $2,500,000. With these funds the company purchased from the stockholders who desired to sell, and retired, a total of 41,666 shares at $60 per share, or an aggregate price of $2,499,960.

Other stockholders, the appellant, David B. Baker and the individual appellees, purchased from the same vendors an aggregate of 14,270 shares at the same price. The record shows that this plan of financing and the charter amendments required to make it effective were unanimously approved by the directors and stockholders, including the appellant, David B. Baker, who then owned all the shares held by the appellants and who subsequently gave to the other appellants, his wife and children, the shares owned by them. Moreover, the appellant, David B. Baker, along with all the other holders of common stock, surrendered the certificates they then held in exchange for new certificates upon which were printed all of the 1946 amendments defining the terms of the stock and the rights of and restrictions upon the holders thereof, including the following: “The corporation reserves the right to make, from time to time, any amendments of its charter which may now or hereafter be authorized by law, including, without limitation, any amendments changing the terms as expressed in the charter, or any amendment thereof, of any class of its outstanding stock by classification, reclassification or otherwise; and the affirmative vote of stockholders required to make each such amendment valid and effective shall be two-thirds of the common stock and two-thirds of the preferred stock outstanding at the time of such vote; provided, however, that no such amendment shall be effective to reduce the dividend rate or the redemption price of the preferred stock without the consent of all the holders thereof.” On the face of each certificate there appeared the following notice: “A statement of the rights, privileges, appurtenances and voting powers and of the restrictions and qualifications of the Preferred and Common stocks of the Corporation are printed on the back hereof to ²⁷⁷ all of which the holder by acceptance hereof assents.” In 1950 the corporation had continued to prosper and another financial plan was brought forward along the lines of the 1946 plan. The preferred stock held by the insurance company had been reduced by retirement from 25,000 to 20,750 shares.

There were 78,334 shares of common stock outstanding. Following the death of Holmes Baker, his executors approached the company to buy the shares held by him individually and as trustee under his father’s will, and the shares of his sister. The company agreed to buy 7,992 shares at $95 a share. To provide funds, 7,600 shares of preferred were to be issued and sold to the insurance company.

The common stock purchased was to be retired; the remaining shares of common outstanding after such retirement were to be reclassified into four shares without par value for each share without par value. An amendment to the charter to authorize these changes in capitalization was approved by the directors and stockholders. 55,755 shares of the common stock out of 78,334 shares, or 71% of the common, were voted in favor of the proposal. The proxy for the 11,153 shares held by appellants voted against the amendment. 10,996 shares were not voted. On the question as to the right of the dissenting stockholders to demand payment of the appraised value of their shares, we think the appellants’ claim is without merit.

There is nothing in the charter of the appellee corporation giving dissenting stockholders the right to receive payment of the appraised value of their shares in the event of an amendment changing the terms of their stock. Under the Maryland statutes in effect when the company was organized in 1927, no appraisal right was recognized in the event of a charter amendment, although a right of appraisal was conferred in the event of a consolidation, or a sale of substantially all of its assets by a corporation. See 1924 Code, Article 23, Sections 33, 35 and 36. The reason is clear.

The statute, Chapter 309, Section 24, Acts of 1922 (1924 Code, Article ²⁷⁸ 23, Section 28), provided that “No amendment of the charter of a corporation shall be valid which changes the terms of any of the outstanding stock by classification, reclassification or otherwise, in the absence of a reservation in the charter of a right to make such amendment, unless such change in the terms thereof shall have been authorized by the holders of all of such stock at the time outstanding, by vote at a meeting or in writing with or without a meeting; and in the case of any such change of terms of outstanding stock, the articles of amendment shall, in addition to other matters required by law, affirmatively set forth that the holders of such stock have duly authorized such change of terms. The word ‘terms’ as used in this section in reference to stock is intended to mean only the contract rights of the holders thereof as expressed in the charter and shall be so construed.” Since unanimous consent was required, there could be no occasion for any appraisal right. Dissent would simply defeat the proposal. See Brune, Maryland Corporation Law and Practice, Sections 115, 120 and 122.

This situation was changed by the enactment of Chapter 451, Acts of 1949 (amending Section 28, Article 23 of the 1939 Code) which was in effect when the 1950 financing was completed. The purpose and effect of this enactment is thus described in the explanatory notes by the Reporter to the Commission to Revise the Corporation Laws appointed in 1948, printed in pamphlet of the State Tax Commission, June 1, 1951, p. 98: “Prior to 1949, any corporation, wishing to amend its charter in any way which altered the ‘contract rights’ of outstanding stock,' had to obtain the concurrence of every stockholder affected, if the charter did not reserve the right to make such amendment. This proved, an unduly restrictive and, in some cases, a clearly inequitable, provision, and as a result there was enacted, by Chapter 451 of the Acts of 1949, an amendment to Section 28, allowing the corporation to make such an amendment by a two-thirds vote of stockholders, if the corporation is subject to the jurisdiction of the ²⁷⁹ Public Service Commission or if the stock affected was issued on or after June 1, 1949, but giving appraisal rights to dissenting stockholders whose contract rights as expressly set forth in the charter were altered. This provision, along with the other broad powers of amendment now in the statute, has been carried forward into proposed Section 10 [1951 Code, Article 23, Section 10]; however, the power to alter contract rights by amendment and the right of appraisal in such cases have been broadened to include not only stock issued on or after June 1, 1949, but also stock outstanding on that date.” It is clear that the enactment of Chapter 451, Acts of 1949 left the law unchanged as to “outstanding stock issued prior to June 1, 1949.” See Brune, Maryland Corporation Law and Practice, Section 122.

It is conceded that some of the shares held by the appellants in 1950 had been transferred on the books after June 1, 1949, as gifts from David B. Baker to his family, and it is contended that as to these shares, at least, a right of appraisal exists. But we think the Act of 1949, conferring the right of appraisal, cannot be construed to include shares of previously issued stock transferred after its effective date. Not only is the language plain, but the contract rights of the holders became fixed upon the date of issue, not upon the date of transfer. A certificate of stock is not the stock itself, but a mere evidence of ownership and the holder’s rights as a stockholder.

McCormick v. Frisch, 199 Md. 181, 185 , 85 A. 2d 793, 794 . Cf. Lake Superior Dist. Pow.

Co. v. Public