Ellingwood v.

WOLF’S HEAD OIL REFINING COMPANY (1944)

1) before 1942- C did not declare dividends on the Preferred stocks for 2
years.
2) 1942- C declared and paid a full 6% dividend on the Preferred Stock

3) 1943 (Annual SH’s Meeting)- Preferred SHs participated in the election of

the BOD.

4) C’s AOI:
a) guarantees to the holders of PS “cumulative dividends at the rate of
6% for each and every fiscal year of the company”

b) gives exclusive voting power to holders of CS

c) holders of PS have no voting power

d) “that if at any time the C shall be in default in respect to the

declaration and payment of dividends in the amount of 2 years’
dividends on the PS, then the holders of a majority of the PS shall
have an election to exercise the sole right to vote for the election of
Ds and for all other purposes, until the C shall have declared and
paid for a period of a full year at 6% dividend on the PS”

HELD: Holders of PS were entitled to vote for the BOD and for all other
purposes at the annual SH’s meeting in 1943.

Hay v. Hay (1951)

1) C AOI:

“In the event of any liquidation, dissolution or winding up of the C the

holders of the PS shall be entitled to be paid in full the par value thereof, and all
accrued unpaid dividends thereon before any sum shall be paid to any assets
distributed among the holders of the Certificate of Stocks.”

2) Holders of the PS received the par value from the liquidating trustee.

3) No surplus profits are available w/ w/c to pay the accumulated dividends.

Hence, no dividends on the cumulative PS have ever been declared or paid.

4) There is substantial amount of assets on hand, but they would all be

absorbed if they should be applied in payment of accrued dividends on the
preferred stock.

5) There are no C creditors.

ISSUE: WON the holders of Preferred Shares upon liquidation of the C are
entitled to be paid accrued dividends from the C assets before the Common
Stockholders become entitled to participation in the distribution thereof (C having
no earned surplus or net profits)?

HELD: Holders of PS are entitled to both the par value of their stock, and
to the dividends w/c have not been declared or paid but w/c would have been
declared and paid if there had been surplus or net profits of the C wisely
applicable to such dividends during the periods when no dividends have been
paid. This appears to be the sense obvious to the common understanding for the
words used.

AUGUSTA TRUST CO. v. AUGUSTA, HALLOWELL & GARDINER RAILROAD

CO et al. (1938)
1) RAILROAD C had outstanding bonds secured by a mortgage.
2) These bonds gave the holders the right to convert into PS of the C.
3) These bondholders surrendered their bonds and converted to
Preferred Stocks.
4) Action was brought to foreclose the mortgage.

ISSUE: WON the holders of these Preferred Stocks have the right to share
in the proceeds on the sale of the mortgaged property?

HELD: By surrendering their bonds and taking in lieu thereof Preferred

Stockholders, the bondholders of these street railway companies ceased to be
creditors and became mere SHs. The P SHs are not entitled to share in the
assets of the companies until all the creditors have been paid in full.
Garcia v. Lim Chu Sing (1934)
1) Lim Chu Sing executed and delivered a PN to a Bank in the amount of
P19, 605 secured by a chattel mortage.

2) Lim Chu Sing is a SH of the Bank (in the amount of P10, 000).

3) Bank is now under liquidation.

4) The proceeds from the sale of the mortgaged chattel and the payment left
were applied to Lim Chu Sing’s debt to the Bank.

5) Lim Chu Sing had a remaining debt of P9, 105 to the Bank.

6) Lim Chu Sing wants to compensate his P9, 105 debt to the Bank w/ the
P10, 000 amount of his Stocks.

ISSUE: WON it is proper to compensate the Defendant’s indebtedness of

P9,105 with the Bank, with the P10,000 value of his shares of stock
with the Bank?

HELD: Lim Chu Sing is not a creditor of the Bank, hence there is no
ground to justify a compensation.

A share of stock or the certificate thereof is not an indebtedness to the

owner nor evidence of indebtedness and therefore, it is not a credit. SHs are not
creditors of the C.
Wallace v. ECLIPSE POCAHONTAS COAL.CO. et al. (1919)
1) Wallace owned and controlled an option for a lease on 600 acres of
coal.

2) Wallace entered into a contract w/ the C’s promoters (Perkins, Griffith,

Weller and O’Keefe) wherein Wallace will transfer his lease first to
Griffith (trustee) for himself and associates, and by him to the C when
formed, in exchange for 1/5 interest fully paid up in C.

3) Wallace only received 5 shares out of the 50 shares ($25,000:

authorized capital stock) of the established C.

4) Wallace files a complaint for specific performance.

ISSUE: Who is liable?

HELD: C as well as the promoters is LB to Wallace.

Not only did the C have notice of Wallace’s right through its
incorporators and agents, but all of the SHs of the C participating in the 1st
meeting of SHs, including Stover (SH who intervened and questioned the
binding effect of the contract on the C), had notice that Wallace had at least
some interest, or claim, and Perkins and Griffith knew the extent of it, and if
not, on inquiry of him all would have easily have discovered the full extent
thereof.

HELD 2: Wallace was a subscriber to the capital stock of the C.

Bayla et al. v. SILANG TRAFFIC CO. (1942)
1) Petitioners Bayla et al. paid severally to the C (already incorporated
and organized) on account of shares they individually agreed to take
and pay for under certain conditions, such as:

“the subscriber further agrees that if he fails to pay any of said

installments when due…then the said shares are to revert to the seller
and the payments already made are to be forfeited in favor of said
seller, and the latter may then take possession , without resorting to
court proceedings”

2) BOD passed a resolution releasing the Petitioners from its obligation to

pay for their shares and authorizing the refund of the installments
already paid by the Petitioners.
3) Since the C was not able to refund, Petitioners sued C.

HELD 1: contract was one of purchase of stock (BAD LAW already. No need
to distinguish)

HELD 2: C cannot automatically forfeit the paid installments of Petitioners.

The contract did not expressly provide that the failure of the purchaser to
pay any installments would give rise to forfeiture and cancellation w/o necessity
of any demand from the seller.

Benito v. SEC (1983)

1) C had an authorized capital stock of P200,000 divided into 20,000
shares at par value of P10.

2) 8,058 shares worth P80,580 were subscribed and fully paid for.

3) Benito subscribed to 460 shares worth P4,600.

4) C subsequently filed a certificate of increase of its capital stock from

P200,000 to P1M. (it was shown that P191,560 worth of shares were
represented in the SH’s meeting)

5) Thus, P110,980 worth of shares were subsequently issued by the C

from the unissued portion of the authorized capital stock of P200,000.

6) Benito filed a petition w the SEC contending that:

 The additional issue (worth P110,980) of previously subscribed shares
of the C was made in violation of his pre-emptive right to said
additional issue.

The increase in the authorized capital stock of the C was illegal

considering that the stockholders of record were not notified of the
meeting wherein the proposed increase was in the agenda.

Campos Note: THIS IS ALREADY BAD LAW! See Sec. 39

HELD 1: The P110,980 is not subject to Benito’s Pre-emptive Right.

The GR is that pre-emptive right is recognized only w/ respect to new issue of

shares and not with respect to additional issues of originally authorized shares.
This is based on the theory that when a C at its inception offers its first shares, it
is presumed to have offered all of those w/c it is authorized to issue. An original
subscriber is deemed to have taken his shares knowing that they form a definite
proportionate part of the whole number of authorized shares.

Stokes v. CONTINENTAL TRUST (1906)

1) C (a NY Bank) was organized w/ a capital stock of $500,000 consisting
of 5,000 shares of the par value of $100 each.
2) Plaintiff was 1 of the original SHs and had 221 shares in all.
3) 1902-C had a surplus such that the book value of its shares was $309
per share.
4) An influential firm of private bankers (BLAIR & COMPANY) proposed to
the C that:

The C increase its capital stock from $500,000 to $1M, so that the
additional stocks will be delivered to the firm and its associates at $450
per share ($100 par value), it being understood that the firm may
nominate 10 out of 21 trustees to be elected.

5) SH authorized the increase and accept the offer to purchase..

6) Plaintiff demanded from the C the right to subscribe for 221 shares of
the new stock at par, and offered to pay immediately the same.
7) He was refused by the C.

ISSUE: WON Plaintiff had the legal right to subscribe for and take the same
number of the new stock that he held of the old?

HELD 1: YES, Plaintiff had a right. By selling to strangers w/o offering

to sell to Plaintiff, the C wrongfully deprived him of his property and is LB for
damages as he actually sustained.
HELD 2: The Plaintiff is not entitled to the diff between the par value of the
new stock and the market value thereof, for the SHs had the right to fix the price
at w/c the stock should be sold. They fixed the price at $450 per share, and for
failure of the C to offer the plaintiff his share at that price, we hold it LB in
damages. His actual loss therefore is $100 per share, or the diff between $450,
the price that he would have been obliged to pay had he been permitted to
purchase, and the market value on the day of the sale (w/c was $550).

Thom v. BALTIMORE TRUST CO. (1930)

1) more than 2/3 of the SH of the C (BALITIMORE TRUST CO.) approved a
plan:

TRUST C would issue 15,000 shares of its stock ($112/ share) for the
purpose of acquiring the 10,000 shares of another bank (National Union
Bank of Maryland).

2) AOI was amended in such a way that the pre-emptive right was denied to
such extent as the BOD may deem, to additional stock for the purpose of
accomplishing the merger with or acquiring any other bank or trust
company
3) Plaintiff (as owner of 6,416 out of 70,000 shares) voted and protested
against the merger agreement.

ISSUE: WON the SHs of the C were entitled to exercise the right to
purchase a due proportion of a supplemental issue of its capital stock?

HELD: NO. Amendment and plan valid.

In the present case, every SH of the Trust C, for each of his shares of the
stock of that institution, was to receive 1 ½ shares of the other Bank. It would not
be feasible to consummate a transfer based upon such consideration if the pre-
emptive right asserted in this suit were to be held enforceable with respect to
every new issue of stock regardless of the object of its disposition.

In transactions involving the acquisition of property by Cs in exchange for

shares of their stock, the determining consideration to the owners of the property
may be the advantage of sharing as SHs in the profits of the C w/ w/c they are
contracting.

ROSS TRANSPORT v. Crothers (1946)

1) The C authorized stock was 5,000 shares of no par value.

2) At the organization meeting, a resolution was passed authorizing the

sale of the stock at $20 a share and providing that stock to the value of
 $30,00 be offered for sale. This limited the stock to be issued to 1500
shares.

3) 1035 shares were sold to the incorporators.

4) Charles Crothers (who bought the share of a dead incorporator) had

250 shares, while his brother had 100 shares.

5) 365 shares of stock were issued to the wife and the daughter of the
Director/President (Williams) and to another Director (William Ross).

6) Due to issuance, 1400 shares are now subscribed.

7) Pres/Director Williams testified that all the stock were sold by him
personally under the Ds’ resolution.
8) Pres/Director Williams admitted that he never called any other meeting
to authorize any of the sales made after the original subscriptions and
none of the other SHs were given an opportunity to buy.

9) Plaintiffs Charles Crothers brought a derivative suit to set aside the

issuance of the 40 shares of stock to the wife and to the directors
contending that:

By selling to themselves and their nominees, Williams and Ross have

abused their trust as officers and directors.

HELD: The sale must be set aside as a constructive fraud upon the other
SHs.

No evidence was shown that the C needed the money so badly and was
in such a financial condition that the sale of the additional stock to themselves
was the only way the money could be obtained. On the contrary, the C appears
to have been in a very good condition. Nor is there corroboration of Ross’
statement that it was all arranged in the beginning who was to get this additional
stock.

Where the stocks are issued in favor of Ds, the burden is on them to
prove not only good faith, but also the equity of the transaction.

MERRIT-CHAPMAN & SCOTT CORP. v. NEW YORK TRUST CO. (1950)

1) 1928- MERRIT-CHAPMAN & SCOTT CORP. (C) issued stock
purchase warrants.
2) Each stock purchase warrants certifies that:
 the bearer is entitled to purchase full paid and non-assessable shares of
common stock of the C, w/o par value, as it may exist at the time of such
purchase, at any time or from time to time hereafter at the price of $30 per
share, upon surrender of this warrant at the of office of the Trustee (NEW
YORK TRUST CO.)

3) To insure that the stock purchasable under the warrants would be

available, the Trust Deed required that stock certificates for an
aggregate amount of 40,000 shares be delivered to the Trustee and
made the Trust Company the agent of the C to receive purchase price
and to deliver the stock certificates upon exercise of the warrant.

4) The deed further provided that stock certificates deposited w/ the

Trustee “shall not be deemed legally issued or outstanding until so
delivered by the Trustee”. The C will, however, at all times during
the life of such warrants, retain a number of authorized, but
unissued, shares of common stocks of the C represented by the
stock certificates then on deposit w/ the Trust Company and w/c
the C may be required to deposit as provided.
5) July 1950- by resolution of the BOD, the C declared a stock
dividend in the amount of 40% per share of no par common stock “on
each legally issued and outstanding share of said common stock in the
hands of the public,” such dividend to be payable on October 16, 1950
from authorized but unissued shares to holders of such common stock
as of the close of business on September 15, 1950

6) The Resolution also directed the proper officers to give to warrant

holders outstanding under the trust deed and to the Trust
Company as trustee the 60 day notice required by the trust deed
in case the C “shall pay any stock dividend upon the outstanding
common stock” or take other specified action w/c may affect the
value of the stock purchase warrants.

7) Following the declaration of the stock dividend a controversy arose

between the C and the Trustee w/ respect to the rights of the warrant
holders.

8) C contends: a warrant holder must exercise his warrant before

September 15, 1950, in order to share in the dividend.

9) Trustee contends: the C must deposit w/ the Trustee stock

certificates in the amount equal to 40% of the certificates now on
deposit w/ the Trustee, and that whatever holder may elect to exercise
his warrant, he will be entitled to receive 1.4 share upon paying the
“basic purchase price” for one share.
 HELD: For Trust C. The provision in number 4 above was meant to protect
the warrant holders.

JORDAN CO. v. Allen (1949)

1)

ISSUE: WON the payments made to the holders of “Debenture Stocks”

of the JORDAN CO. in 1940, 1941, 1942, 1943, and 1944 were in fact
payments of interest on outstanding obligations (as contended by the
Taxpayer) OR dividends paid on invested capital (as determined by the
Commissioner)?

HELD:Cumulative Preferred Stock.

Holders of the Debenture Stock, by the provisions of the Debenture

Certificates, ranked ahead of the other SHs but inferior to general
creditors…..While not itself decisive, this is one factor strongly indicating that
the holders were sharing in the risk of the venture in the manner more
compatible w/ the status of SH than creditors.

This position is further fortified by the provisions for the payment of

interest at a prescribed rate to be paid only out of the profits. It is true that
the unpaid interest was cumulative and, in accordance with the charter, by-
laws, and certificate provisions, was to be considered a subsisting obligation.
This fact, however, loses much of its significance when considered in
connection w/ the provision that holders of DS should rank inferior to general
creditors. These provisions w/ respect to the payment of interest, when so
considered, are those usually included in preferred stock certificates and are
rarely incidents of true obligations.

Finally, and of utmost significance, is the question of maturity date and the
right to enforce payment of the principal sum by some appropriate legal
remedy. In this case, the obligation set forth in the DSC clearly had no
maturity date. There was no time set forth in the Certificate or prescribed in
the charter of by-laws at w/c the holders could demand payment of the
principal sum. Nor was there any method provided by w/c such payment
could be enforced.

CONCLUSION: The absence of maturity date, and the right to enforce

payment of the principal sum by legal action, when considered in connection
with the other factors above outlined, leads the court to the conclusion that th
securities here involved were stocks and not obligations.

ALADDIN HOTEL CO. v. Bloom (1953)

1) This is a class suit where Bloom as plaintiff sought for herself and
other minority bondholders of the ALADDIN HOTEL CO similarly
situated.
2) She alleged that the class whom she purported to represent consisted
of approximately 130 members who were the owners of a minority in
value of certain bonds issued by the C.
3) Sept 1938- C issued 647 bonds payable on Sep 1948.
4) The salient provisions:

Empowering the bondholders of not less than 2/3 principal amount of the
bonds, by agreement with the C to modify and extend the payment of
said bonds provided such extension affected all bonds alike

5) She alleged that the majority owner of the C’s stock and controlling
members of its BOD (Jones family) were also the owners and holder
of the more than 2/3 of the principal amount of said bonds, and:

Entered into an agreement w/ C to extend the maturity date of said

bonds from 1 Sept 1948 to 1 Sept 1958.

6) Bloom contention: the modifications were invalid because not

made in good faith and were not for the equal benefit of all
bondholders but were made corruptly for the benefit of the defendants
and such deprived them of their property rights

HELD:Modifications VALID! The modification was made in strict

compliance with the provisions contained in the trust deed and by reference
embodied in the bonds. The rights of the bondholders are to be determined
by their contract and courts will not make or remake a contract merely
because one of the parties thereto may become dissatisfied with its
provisions, but if legal will interpret and enforce it.

Notice was not also required in the provision of the bond agreement.

NO bad faith in the Jones family.

The changes were also made before the plaintiff acquired her bonds.