meritt-chapman & scott corp. vs. new york trust co. 184 f. 2d
TRANSCRIPT
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4/10/2015 184F2d954MerrittChapmanScottCorpv.NewYorkTrustCo|OpenJurist
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MERRITTCHAPMAN&SCOTTCORP.v.NEWYORKTRUSTCO.
No.71.
Docket21781.
UnitedStatesCourtofAppealsSecondCircuit.
ArguedOctober4,1950.
DecidedNovember8,1950.
White&Case,NewYorkCity(JosephM.Hartfield,JesseE.WaidandEdwardJ.Kenn,allofNewYorkCity,ofcounsel),fordefendantappellant.
Booth&Baron,NewYorkCity(GeorgeC.BaronandFrederickDoppelt,NewYorkCity,ofcounsel),forintervenorappellant.
Manning,Harnisch,Hollinger,Quinnan&Shea,NewYorkCity(JohnJ.Manning,WilliamHughesMulliganandEdwinA.Lewis,allofNewYorkCity,ofcounsel),forappellee.
BeforeLEARNEDHAND,ChiefJudge,andSWANandCLARK,CircuitJudges.
SWAN,CircuitJudge.
1
ThislitigationinvolvestherightsofholdersofstockpurchasewarrantsissuedbyMerrittChapman&ScottCorporationpursuanttoatrustdeedmadewithTheNewYorkTrustCompanyastrusteeunderdateofDecember1,1928,withrespecttoastockdividenddeclaredbythecorporationonJuly12,1950.Thecaseis
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4/10/2015 184F2d954MerrittChapmanScottCorpv.NewYorkTrustCo|OpenJurist
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beforeusuponappealfromasummaryjudgmentinadeclaratoryjudgmentaction.1Federaljurisdictionrestsondiversityofcitizenship.Theissuedecidedbelowandnowpresentedonappealturnsontheproperinterpretationtobegiventocertainprovisions,hereaftertobesetforth,ofthetrustdeed.
2
Thereisnodisputeastothefacts.Thewarrantswereissuedin1928inbearerform.Eachwarrantcertifiesthatsubjecttotheprovisionsofthetrustdeed"andsubjecttotheprovisionshereof,forvaluereceived,thebearerhereofisentitledtopurchase***fullpaidandnonassessablesharesofcommonstockoftheCorporation,withoutparvalue,asitmayexistatthetimeofsuchpurchase,atanytimeorfromtimetotimehereafteratthepriceofThirtydollars($30.)pershare,uponsurrenderofthisWarrant,"attheofficeofTheNewYorkTrustCompany,"accompaniedbypaymentofthepurchaseprice."Uponcertaincontingenciesspecifiedinthetrustdeedthesocalled"basicpurchaseprice"of$30persharewassubjecttodownwardrevision.Toinsurethatstockpurchasableunderthewarrantswouldbeavailable,thetrustdeedrequiredthatstockcertificatesforanaggregateamountof40,000sharesbedeliveredtothetrusteeandmadetheTrustCompanytheagentofthecorporationtoreceivethepurchasepriceandtodeliverthestockcertificatesuponexerciseofthewarrants.Thedeedfurtherprovidedthatstockcertificatesdepositedwiththetrustee"shallnotbedeemedlegallyissuedoroutstandinguntilsodeliveredbytheTrustee.TheCorporationwill,however,atalltimesduringthelifeofsuchWarrants,retainanumberofauthorized,butunissued,sharesofthecommonstockoftheCorporationrepresentedbythestockcertificatesandstockscripcertificates(ifany)thenondepositwiththeTrustee,and/orwhichtheCorporationmayberequiredtodepositwiththeTrusteeashereinafterprovided."2Thefinalclauseabovequotedreferstosection7ofArticleIII,whichisquotedinthemargin.3
3
OnJuly12,1950,byresolutionofitsdirectors,thecorporationdeclaredastockdividendintheamountof40%pershareofnoparcommonstock"oneachlegallyissuedandoutstandingshareofsaidcommonstockinthehandsofthepublic,"suchdividend"tobepayableonOctober16,1950fromauthorizedbutunissuedsharestoholdersofsuchcommonstockasofthecloseofbusinessonSeptember15,1950."Theresolutionfixedthepriceforthesharesofstockissuedasadividendat$20.00pershare,anddirectedthetreasurerofthecorporationupontheissuanceofthecertificatesrepresentingsuchdividendsharestotransferfromtheEarnedSurplusAccounttotheCommonCapitalStockAccountthesumof$20.00foreachdividendshare.TheresolutionalsodirectedtheproperofficerstogivetowarrantholdersoutstandingunderthetrustdeedandtoTheNewYorkTrustCompanyastrusteethe60daynoticerequiredbysection10ofArticleIII,incasetheCorporation"shallpayanystockdividendupontheoutstandingcommonstock"ortakeotherspecifiedactionwhichmayaffectthevalueofthestockpurchasewarrants.4
4
Followingthedeclarationofthestockdividendacontroversyarosebetweenthecorporationandthetrusteewithrespecttotherightsofwarrantholders.ThecorporationcontendsthatawarrantholdermustexercisehiswarrantbeforeSeptember15,1950inordertoshareinthedividend.Thetrusteecontendsthatthecorporationmustdepositwiththetrusteestockcertificatesinanamountequalto40%ofthecertificatesnowondepositwiththetrustee,andthatwheneverawarrantholdermayelecttoexercisehiswarrant,hewillbeentitledtoreceive1.4sharesuponpayingthe"basicpurchaseprice"foroneshare.Toresolvethisdisputethepresentactionwas
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4/10/2015 184F2d954MerrittChapmanScottCorpv.NewYorkTrustCo|OpenJurist
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brought,andeachpartymovedforsummaryjudgmentonthecomplaintandanswer.Withoutopinion,thedistrictcourtgavejudgmentfortheplaintiffcorporation.
5
Theappellantscontendthatinsodoingthecourtdisregardedthetermsofsection7ofArticleIII,setforthinnote3,supra.Wethinktheirpositioniswelltaken.Thewarrantsgavetheholdersthereoftheprivilege,unlimitedintime,topurchaseanaggregateof40,000authorizedbutunissuedshares.In1928whenthewarrantswereissued,adefinitenumberofthecompany'scommonshareswerethenoutstanding.Hadthewarrantholdersforthwithexercisedtheiroptiontopurchase,theywouldhaveacquiredadefinitepercentageofthecommonstock.Astockdividenddoesnotchangetheproportionalinterestofeachshareholderinthecorporateenterpriseitchangesonlytheevidencewhichrepresentsthatinterest.Itisamere"watering"ofoutstandingshares.5Ifthecorporationwereatlibertytodeclarestockdividendswithoutmakingprovisionforwarrantholders,thepercentageofinterestinthecommonstockcapitalofthecorporateenterprisewhichthewarrantholderswouldacquire,iftheythereafterpurchasedthesharessubjecttowarrants,couldbereducedpracticallytothepointofextinction.Ofcoursepartoftheinjusticecouldbeavoidedbyreducingthepricetobepaidforeachsharepurchasedunderthewarrants,buttheprivilegethewarrantholdersoriginallyhadofacquiringadefiniteproportionalinterestinthecommonstockcapitalofthecorporateenterprisewouldbelostwithoutrecourseunlesstheircontractwiththecorporationcontainedsomeprovisiontoprotectit.6Thepurposeofsection7wastosupplysuchprotection.Itisacovenantbythecorporation.7
6
Bythiscovenantthecorporationrecognizedthepossibilitythatastockdividendmightbedeclaredandpaidonoutstandingsharesbeforethewarrantshadbeenexercised,andpromisedinthateventtodepositwiththetrusteestockcertificatesrepresentingthatproportionofthedividendshareswhichthesharessubjecttothewarrantsboretoallthecommonshares,andthatthetrusteewoulddeliversuchdividendshares"withoutadditionalconsideration,"togetherwiththepurchasableshares,whenthewarrantholderpaysforthelatter.Thereisnosuggestioninthelanguageofsection7tosetanylimitonthetimewhenthewarrantholdersmustexercisetheirunlimitedoptiontopurchasecommonshares.
7
Theappelleepointstosection10,setforthinnote4,supra,assettingsuchalimit.Thatsectionalsoisacovenant.Byitthecorporationmerelypromisedtogivethewarrantholdersandthetrusteeasixtydaynotice"incasetheCorporationshallpayanystockdividend"ortakeotherspecifiedaction"totheendthat,duringsuchperiodofsixtydays,theholdersofWarrantsoutstandinghereundermaypurchasestockinaccordancewithsuchWarrantsandbeentitledinrespecttosharessopurchasedtoalltherightsofotherholdersofsimilarstockoftheCorporation."Otherholdersofcommonstockwillreceivedistributionofdividendsharesiftheywerestockholdersontherecorddate.Thenoticetellswarrantholdersthatiftheyexercisetheirwarrantsbytherecorddatetheywillhavetherightsofstockholders,i.e.,therighttoreceivethestockdividendsharesonthedatewhenthedividendispayable.Butthewarrantholdersarenotclaimingthatrightwhattheyareinsistinguponaretherightspromisedbysection7.Theappelleemust,anddoes,contendthatthenoticeprovisionisforthepurposeofgivingthewarrantholdersnoticethatunlesstheyexercisetheirwarrantsbytherecorddate,theywillforfeitthosepromisedrights.Certainlythelanguageofsection10isnotaptlychosentoexpresssuchaforfeitureand
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4/10/2015 184F2d954MerrittChapmanScottCorpv.NewYorkTrustCo|OpenJurist
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theargumentthatitwasnotsointendedgainsaddedforcefromthefactthatsections8and9ofArticleIIIexpresslyprovideforforfeitureundercircumstanceswherethatistheintendedresult.Construedasappellantsurge,section10wouldcoverthemontheseoccasionsandsections8and9wouldbecomemeresurplusage.
8
Itissuggestedthatthemeaningtheappellantsascribetosection7isinconsistentwiththefaceofthewarrants,whichlimitstheholdertothestatednumberofsharesofcommonstock"asitmayexistatthetimeofsuchpurchase,"andindicatesanintenttoconferontheholderonlytherighttobuyonan"asis"basis.Butsoconstruedthewarrantprovisioncontradictssection7and8,whichcontemplatechangesresultingfromstockdividends,recapitalization,merger,etc.Itismoreconsistenttoreadthequotedwordsasreferringtosuchpossiblechanges.Thatistosay,onesharemay,byreasonofastockdividend,mean1.4sharesofstock"asitmayexistatthetimeofthepurchase."
9
Finally,itisurgedthatsection6ofArticleIIIprovidesforareductioninthebasicpurchasepriceincaseofastockdividend.8Concededlyitcontainsnoexpressreferencetostockdividends.Theargumentisthatastockdividendiscoveredbyclause(b)whichprovidesforareductioninthebasicpurchasepriceifsharesare"issuedforaconsideration,otherthanmoney,valuedbytheBoardofDirectorsatthetimeoftheacquisitionthereof,atanetamountlessthanthebasicpriceofthecommonstockoftheCorporationatthetimeineffect."Thesewordsarecertainlynotaptlanguagetodenoteatransferonthecompany'sbooksfromtheSurplusAccounttotheCapitalStockAccount.Moreover,toascribesuchameaningtothementirelycontradictsthefinalparagraphofsection7quotedinnote3,supra.
10
Fortheforegoingreasonsweconcludethatthecourterredinnotacceptingtheappellants'interpretationofthewarrantholder'scontract.AttheargumentitwasagreedthatifthecorporationwerenotstayedfromdistributingthedividendsharestostockholdersofrecordonOctober16,1950,itwould,incaseofreversalofthejudgment,depositwiththetrusteecertificatesrepresentingdividendsharesforthewarrantholdersandpermitanywarrantholderwhomayhaveexercisedhiswarrantonorbeforetherecorddate,inrelianceonthejudgmentbelow,torescindthetransaction,ifhesoelectspromptlyafternoticeofreversalofthejudgment,andbereinstatedasawarrantholder.Ourmandatewilldirectthatthisagreementbecarriedout.
11
Judgmentreversedandcaseremandedwithdirectionstoenterjudgmentinaccordancewiththeforegoingopinion.
Notes:
1
28U.S.C.A.2201
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4/10/2015 184F2d954MerrittChapmanScottCorpv.NewYorkTrustCo|OpenJurist
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2
Section3ofArticleIIIofthetrustdeed
3
"Section7.AslongastheWarrantsshallremainvalidandoutstanding,theCorporationwillnotpayanydividendsonitscommonstockpayableinstockofanyclass(suchdividendbeinghereinsometimescalled`stockdividend'),unlesstheCorporationshalldepositintrustwiththeTrusteestockcertificatesofthecharacterabovedescribedinSection3ofthisArticleIIIrepresentinganamountofstock(ofwhateverclass)oftheCorporationequaltotheamountofsuchstockdividend,ifthesamehadbeendeclareduponthecommonstockrepresentedbythestockcertificatesthenheldintrustbytheTrusteehereunder,andtheTrusteeshall,outofsuchadditionalstockcertificatessodepositedintrustwithitonaccountofsuchstockdividend,upontheexerciseofWarrants,deliverinthemannerhereinprovided,withanysharesofcommonstockpurchasedthereunder,butwithoutadditionalconsiderationtherefor,suchnumberofsharesasmaybeequaltosuchstockdividend,ifthesamehadbeendeclareduponthecommonstocksopurchasedandasprovidedinSection5ofthisArticleIII,theCorporationwillfromtimetotimeissueanddelivertotheTrusteesuchstockscripcertificatesasmayberequiredfromtimetotimetoenabletheTrusteeupontheexerciseofWarrantstomakeanyandalldeliveriesinrespectofanysuchstockdividend
"IftheCorporationdepositsstockcertificatesasintheforegoingparagraphofthisSection7provided,thestockissuedbywayofastockdividendshallnotbeconsideredasoutstandingforthepurposeofanyadjustmentsinthepriceatwhichsharesofstockmaybepurchasedundertheWarrantsasprovidedinthisIndenture."
4
"Section10.Incase
"(a)theCorporationshallpayanystockdividenduponanyoutstandingcommonstock,ormakeanydistributionotherthanacashdividendtotheholdersofitscommonstockor
"(b)theCorporationshallofferforsubscriptiontotheholdersofitsstock(ofanyclass)anyadditionalcommonstockoranystock(ofanyclass)oftheCorporationoranyothersecuritiesor
"(c)ofanycapitalreorganizationorreclassificationofthecapitalstockoftheCorporationor
"(d)oftheconsolidationormergeroftheCorporationwithanothercorporationor
"(e)ofthedissolution,liquidationorwindingupoftheCorporationorsaleofallorsubstantiallyallofitsassets(whethervoluntaryorinvoluntary)"theninanyoneormoreofsaidcases,theCorporationshallgivetotheTrusteeandtotheholdersoftheWarrantsoutstandinghereunderatleastsixtydays'priorwrittennoticeofthedateonwhich(aa)thebooksoftheCorporationshallcloseforsuchstockdividend,distributionorsubscriptionrights,or(bb)suchreclassification,reorganization,consolidation,merger,dissolution,liquidation,windinguporsaleshalltakeplace,asthecasemaybe,andsuchnoticeshallalsospecifythedateasofwhichstockholdersofrecordshallbeentitledtoparticipateinsuchdividend,distributionorsubscriptionrights,ortoexchangetheir
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4/10/2015 184F2d954MerrittChapmanScottCorpv.NewYorkTrustCo|OpenJurist
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sharesofstockforotherstockoftheCorporation,pursuanttosuchreclassificationorreorganizationorforstockofthecorporationresultingfromsuchconsolidation,ortoreceivetheirrespectivedistributivesharesintheeventofsuchdissolution,liquidation,windinguporsale,asthecasemaybetotheendthat,duringsuchperiodofsixtydays,theholdersofWarrantsoutstandinghereundermaypurchasestockinaccordancewithsuchWarrantsandbeentitledinrespectofsharessopurchasedtoalloftherightsoftheotherholdersofsimilarstockoftheCorporation.ThenoticehereinrequiredtobegiventotheholdersoftheWarrantsshallbesufficientlygiveniftheCorporationshallpublishsuchnoticeonatleastthreedifferentdays(duringsaidperiodofsixtydays)inadailynewspaperofgeneralcirculationprintedintheEnglishlanguageintheBoroughofManhattan,TheCityandStateofNewYork,andshallalsomailacopyofsuchnoticetotheTrustee."
5
SeeEisnerv.Macomber,252U.S.189,202203,40S.Ct.189,64L.Ed.521
6
SeeBerle,ConvertibleBondsandStockPurchaseWarrants,36YaleL.J.649,6567
7
ArticleIIIopenswiththesentence:"TheCorporationcovenantsandagreesashereinafterinthisArticleIIIsetforth:"
8
"Section6.ThebasicpurchasepriceatwhichtheholdersoftheWarrantsmaypurchasecommonstockoftheCorporationassetforthinSection2ofthisArticleIIIshallbesubjecttoreductionandadjustmentfromtimetotimeinthefollowingmanner:
"(1)IfatanytimeorfromtimetotimeafterDecember1,1928,sharesofcommonstockoftheCorporation,withoutparvalue,beissuedtoanumberinexcessof264,000shares,assuchsharesmayfromtimetotimebeconstituted,and(a)soldbytheCorporationforcashatapricepersharewhichislessthanthebasicpurchasepricethereofatthetimeineffector(b)issuedforaconsideration,otherthanmoney,valuedbytheBoardofDirectorsatthetimeoftheacquisitionthereof,atanetamountlessthanthebasicpurchasepriceofthecommonstockoftheCorporationatthetimeineffect,thesaidbasicpurchasepriceshallbeadjustedasfollows,provided,however,thatinnoeventshalltheadjustedpriceexceedatanytimethebasicpurchaseprice:"
12
CLARK,CircuitJudge(dissenting).
13
Sincethisisacomplicatedagreementwherediversecontentionsarepossibleandsincemyviewsarenottoprevail,Ishallonlyindicatethemwithoutextensivedevelopment.Whatchieflypersuadesmetothecontrary
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4/10/2015 184F2d954MerrittChapmanScottCorpv.NewYorkTrustCo|OpenJurist
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conclusionisthatthedefinitetimeprovisionofsixtydaysforexchangingwarrants,"incasethecorporationshallpayanystockdividend,"ofsec.10,Art.III,isnowleftwithoutrationalpurposeorfunction.Iexpect,however,thatthisisoneofthosecasessufficientlydisputablesothattheapproachoneinitiallymakestotheproblemactuallypointsthewaytothefinalsolution.IfIthoughtastockwarrantshouldbenormallyapproachedasaneternalanduntouchableprivilege,I,too,Iexpect,wouldregardsec.7assodeclaringandhencefindthatsec.10couldnotbegivenforceaccordingtoitswordingwithoutworkinga"forfeiture"ofordeclaring"forfeit"whathadalreadybeengiven.ButsinceIthinkitnotatallunusualforthedraftsmenofsuchanagreementtowishtoputsomelimitationsuponthoserights,tolimittheextenttowhichtheycanallowtheholderstobeover,butnotapartof,thecorporateorganization,Ifindtheotherconstructiontobemorenaturalandtohavetheadvantageofaccordingsomeappropriatefunctiontoeverysectionoftheagreement.
14
Thussecs.8and9applytotheparticularsituationstheyexpresslycoveranddonotapplytothesituationcoveredinsec.10,andthereisnosurplusage.Theprovisionofsec.6forreducingthebasicpurchasepriceofthestockseems,tomymind,ratherclearlyapplicableincaseofastockdividendandbeareasonablyfaircounteradjustmenttothosewarrantholderswhostillwishtostayontheoutsideawaitingdevelopments.Andsec.7carriesitsownstatementofitsapplicationconditioned"ifthesamehadbeendeclareduponthecommonstockrepresentedbythestockcertificatesthenheldintrustbytheTrusteehereunder"orlater"ifthesamehadbeendeclareduponthecommonstocksopurchased."True,thisgivesthecorporationpowertodeterminewhetherthestockdividendbeupononlytheactivestockoralsouponthisblockalreadyfrozeninthehandsoftheTrusteeandimmobileunlesswarrantsareexercisedagainstit.ButandhereIsupposemypointofviewindicatedabovecomesinthisdoesnotseemtomeanunusualpowerforacorporation,butonenaturallytobeexercisedinthelightofthegeneralgoodofallthestockholders,notmerelythoseholdingwarrants,withthereductioninthebasicpurchasepriceservingasapreventiveofunfairnesstoanyoftheparticipants.
15
ElsewhereIhavethoughtwehavetendedtoovervaluetheperpetualeffectofstockwarrants,SecuritiesandExchangeComm.v.Leventritt,2Cir.,179F.2d615,certiorarigranted,U.S.,71S.Ct.62,andhaveagreedmorewiththecontraryviewexpressedinInreCommonwealth&SouthernCorp.,3Cir.,184F.2d81.Butherewehavefurthertheexpressclauseofsec.10providingforthenoticewithadefinitepurpose"totheendthat,duringsuchperiodofsixtydays,"thewarrantholdersmaypurchasestockand"beentitledinrespectofsharessopurchasedtoalloftherightsoftheotherholdersofsimilarstockoftheCorporation."(Italicssupplied.)Ofcoursetheyknowalreadythattheyareentitledtosuchrightsjustassoonastheyexercisetheirwarrantsexcepttotheextentthatthisclausemaybegivensomeoperativeeffect.Sowhyshouldthedraftsmenhavepaintedthelilyfurtherunlessthesixtydayswasintendedasadefiniteperiodforthetakingofsomeaction?Iwouldaffirm.
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