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184F2d954MerrittChapmanScottCorpv.NewYorkTrustCo|OpenJurist

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184F.2d954MerrittChapmanScottCorpv.NewYorkTrustCo
Home184f2d954merrittchapmanscottcorpv.newyorktrustco
184F2d954MerrittChapmanScottCorpv.NewYorkTrustCo
184F.2d954
MERRITTCHAPMAN&SCOTTCORP.
v.
NEWYORKTRUSTCO.
No.71.
Docket21781.
UnitedStatesCourtofAppealsSecondCircuit.
ArguedOctober4,1950.
DecidedNovember8,1950.
White&Case,NewYorkCity(JosephM.Hartfield,JesseE.WaidandEdwardJ.Kenn,allofNewYorkCity,of
counsel),fordefendantappellant.
Booth&Baron,NewYorkCity(GeorgeC.BaronandFrederickDoppelt,NewYorkCity,ofcounsel),for
intervenorappellant.
Manning,Harnisch,Hollinger,Quinnan&Shea,NewYorkCity(JohnJ.Manning,WilliamHughesMulliganand
EdwinA.Lewis,allofNewYorkCity,ofcounsel),forappellee.
BeforeLEARNEDHAND,ChiefJudge,andSWANandCLARK,CircuitJudges.
SWAN,CircuitJudge.
1
ThislitigationinvolvestherightsofholdersofstockpurchasewarrantsissuedbyMerrittChapman&Scott
CorporationpursuanttoatrustdeedmadewithTheNewYorkTrustCompanyastrusteeunderdateof
December1,1928,withrespecttoastockdividenddeclaredbythecorporationonJuly12,1950.Thecaseis
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beforeusuponappealfromasummaryjudgmentinadeclaratoryjudgmentaction.1Federaljurisdictionrestson
diversityofcitizenship.Theissuedecidedbelowandnowpresentedonappealturnsontheproperinterpretation
tobegiventocertainprovisions,hereaftertobesetforth,ofthetrustdeed.
2
Thereisnodisputeastothefacts.Thewarrantswereissuedin1928inbearerform.Eachwarrantcertifiesthat
subjecttotheprovisionsofthetrustdeed"andsubjecttotheprovisionshereof,forvaluereceived,thebearer
hereofisentitledtopurchase***fullpaidandnonassessablesharesofcommonstockoftheCorporation,
withoutparvalue,asitmayexistatthetimeofsuchpurchase,atanytimeorfromtimetotimehereafteratthe
priceofThirtydollars($30.)pershare,uponsurrenderofthisWarrant,"attheofficeofTheNewYorkTrust
Company,"accompaniedbypaymentofthepurchaseprice."Uponcertaincontingenciesspecifiedinthetrust
deedthesocalled"basicpurchaseprice"of$30persharewassubjecttodownwardrevision.Toinsurethatstock
purchasableunderthewarrantswouldbeavailable,thetrustdeedrequiredthatstockcertificatesforan
aggregateamountof40,000sharesbedeliveredtothetrusteeandmadetheTrustCompanytheagentofthe
corporationtoreceivethepurchasepriceandtodeliverthestockcertificatesuponexerciseofthewarrants.The
deedfurtherprovidedthatstockcertificatesdepositedwiththetrustee"shallnotbedeemedlegallyissuedor
outstandinguntilsodeliveredbytheTrustee.TheCorporationwill,however,atalltimesduringthelifeofsuch
Warrants,retainanumberofauthorized,butunissued,sharesofthecommonstockoftheCorporation
representedbythestockcertificatesandstockscripcertificates(ifany)thenondepositwiththeTrustee,and/or
whichtheCorporationmayberequiredtodepositwiththeTrusteeashereinafterprovided."2Thefinalclause
abovequotedreferstosection7ofArticleIII,whichisquotedinthemargin.3
3
OnJuly12,1950,byresolutionofitsdirectors,thecorporationdeclaredastockdividendintheamountof40%
pershareofnoparcommonstock"oneachlegallyissuedandoutstandingshareofsaidcommonstockinthe
handsofthepublic,"suchdividend"tobepayableonOctober16,1950fromauthorizedbutunissuedsharesto
holdersofsuchcommonstockasofthecloseofbusinessonSeptember15,1950."Theresolutionfixedtheprice
forthesharesofstockissuedasadividendat$20.00pershare,anddirectedthetreasurerofthecorporation
upontheissuanceofthecertificatesrepresentingsuchdividendsharestotransferfromtheEarnedSurplus
AccounttotheCommonCapitalStockAccountthesumof$20.00foreachdividendshare.Theresolutionalso
directedtheproperofficerstogivetowarrantholdersoutstandingunderthetrustdeedandtoTheNewYork
TrustCompanyastrusteethe60daynoticerequiredbysection10ofArticleIII,incasetheCorporation"shall
payanystockdividendupontheoutstandingcommonstock"ortakeotherspecifiedactionwhichmayaffectthe
valueofthestockpurchasewarrants.4
4
Followingthedeclarationofthestockdividendacontroversyarosebetweenthecorporationandthetrusteewith
respecttotherightsofwarrantholders.Thecorporationcontendsthatawarrantholdermustexercisehiswarrant
beforeSeptember15,1950inordertoshareinthedividend.Thetrusteecontendsthatthecorporationmust
depositwiththetrusteestockcertificatesinanamountequalto40%ofthecertificatesnowondepositwiththe
trustee,andthatwheneverawarrantholdermayelecttoexercisehiswarrant,hewillbeentitledtoreceive1.4
sharesuponpayingthe"basicpurchaseprice"foroneshare.Toresolvethisdisputethepresentactionwas
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brought,andeachpartymovedforsummaryjudgmentonthecomplaintandanswer.Withoutopinion,the
districtcourtgavejudgmentfortheplaintiffcorporation.
5
Theappellantscontendthatinsodoingthecourtdisregardedthetermsofsection7ofArticleIII,setforthinnote
3,supra.Wethinktheirpositioniswelltaken.Thewarrantsgavetheholdersthereoftheprivilege,unlimitedin
time,topurchaseanaggregateof40,000authorizedbutunissuedshares.In1928whenthewarrantswere
issued,adefinitenumberofthecompany'scommonshareswerethenoutstanding.Hadthewarrantholders
forthwithexercisedtheiroptiontopurchase,theywouldhaveacquiredadefinitepercentageofthecommon
stock.Astockdividenddoesnotchangetheproportionalinterestofeachshareholderinthecorporateenterprise
itchangesonlytheevidencewhichrepresentsthatinterest.Itisamere"watering"ofoutstandingshares.5Ifthe
corporationwereatlibertytodeclarestockdividendswithoutmakingprovisionforwarrantholders,the
percentageofinterestinthecommonstockcapitalofthecorporateenterprisewhichthewarrantholderswould
acquire,iftheythereafterpurchasedthesharessubjecttowarrants,couldbereducedpracticallytothepointof
extinction.Ofcoursepartoftheinjusticecouldbeavoidedbyreducingthepricetobepaidforeachshare
purchasedunderthewarrants,buttheprivilegethewarrantholdersoriginallyhadofacquiringadefinite
proportionalinterestinthecommonstockcapitalofthecorporateenterprisewouldbelostwithoutrecourse
unlesstheircontractwiththecorporationcontainedsomeprovisiontoprotectit.6Thepurposeofsection7wasto
supplysuchprotection.Itisacovenantbythecorporation.7
6
Bythiscovenantthecorporationrecognizedthepossibilitythatastockdividendmightbedeclaredandpaidon
outstandingsharesbeforethewarrantshadbeenexercised,andpromisedinthateventtodepositwiththe
trusteestockcertificatesrepresentingthatproportionofthedividendshareswhichthesharessubjecttothe
warrantsboretoallthecommonshares,andthatthetrusteewoulddeliversuchdividendshares"without
additionalconsideration,"togetherwiththepurchasableshares,whenthewarrantholderpaysforthelatter.
Thereisnosuggestioninthelanguageofsection7tosetanylimitonthetimewhenthewarrantholdersmust
exercisetheirunlimitedoptiontopurchasecommonshares.
7
Theappelleepointstosection10,setforthinnote4,supra,assettingsuchalimit.Thatsectionalsoisacovenant.
Byitthecorporationmerelypromisedtogivethewarrantholdersandthetrusteeasixtydaynotice"incasethe
Corporationshallpayanystockdividend"ortakeotherspecifiedaction"totheendthat,duringsuchperiod
ofsixtydays,theholdersofWarrantsoutstandinghereundermaypurchasestockinaccordancewithsuch
Warrantsandbeentitledinrespecttosharessopurchasedtoalltherightsofotherholdersofsimilarstockofthe
Corporation."Otherholdersofcommonstockwillreceivedistributionofdividendsharesiftheywere
stockholdersontherecorddate.Thenoticetellswarrantholdersthatiftheyexercisetheirwarrantsbytherecord
datetheywillhavetherightsofstockholders,i.e.,therighttoreceivethestockdividendsharesonthedatewhen
thedividendispayable.Butthewarrantholdersarenotclaimingthatrightwhattheyareinsistinguponarethe
rightspromisedbysection7.Theappelleemust,anddoes,contendthatthenoticeprovisionisforthepurposeof
givingthewarrantholdersnoticethatunlesstheyexercisetheirwarrantsbytherecorddate,theywillforfeit
thosepromisedrights.Certainlythelanguageofsection10isnotaptlychosentoexpresssuchaforfeitureand
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theargumentthatitwasnotsointendedgainsaddedforcefromthefactthatsections8and9ofArticleIII
expresslyprovideforforfeitureundercircumstanceswherethatistheintendedresult.Construedasappellants
urge,section10wouldcoverthemontheseoccasionsandsections8and9wouldbecomemeresurplusage.
8
Itissuggestedthatthemeaningtheappellantsascribetosection7isinconsistentwiththefaceofthewarrants,
whichlimitstheholdertothestatednumberofsharesofcommonstock"asitmayexistatthetimeofsuch
purchase,"andindicatesanintenttoconferontheholderonlytherighttobuyonan"asis"basis.Butso
construedthewarrantprovisioncontradictssection7and8,whichcontemplatechangesresultingfromstock
dividends,recapitalization,merger,etc.Itismoreconsistenttoreadthequotedwordsasreferringtosuch
possiblechanges.Thatistosay,onesharemay,byreasonofastockdividend,mean1.4sharesofstock"asitmay
existatthetimeofthepurchase."
9
Finally,itisurgedthatsection6ofArticleIIIprovidesforareductioninthebasicpurchasepriceincaseofa
stockdividend.8Concededlyitcontainsnoexpressreferencetostockdividends.Theargumentisthatastock
dividendiscoveredbyclause(b)whichprovidesforareductioninthebasicpurchasepriceifsharesare"issued
foraconsideration,otherthanmoney,valuedbytheBoardofDirectorsatthetimeoftheacquisitionthereof,ata
netamountlessthanthebasicpriceofthecommonstockoftheCorporationatthetimeineffect."Thesewords
arecertainlynotaptlanguagetodenoteatransferonthecompany'sbooksfromtheSurplusAccounttothe
CapitalStockAccount.Moreover,toascribesuchameaningtothementirelycontradictsthefinalparagraphof
section7quotedinnote3,supra.
10
Fortheforegoingreasonsweconcludethatthecourterredinnotacceptingtheappellants'interpretationofthe
warrantholder'scontract.Attheargumentitwasagreedthatifthecorporationwerenotstayedfromdistributing
thedividendsharestostockholdersofrecordonOctober16,1950,itwould,incaseofreversalofthejudgment,
depositwiththetrusteecertificatesrepresentingdividendsharesforthewarrantholdersandpermitany
warrantholderwhomayhaveexercisedhiswarrantonorbeforetherecorddate,inrelianceonthejudgment
below,torescindthetransaction,ifhesoelectspromptlyafternoticeofreversalofthejudgment,andbe
reinstatedasawarrantholder.Ourmandatewilldirectthatthisagreementbecarriedout.
11
Judgmentreversedandcaseremandedwithdirectionstoenterjudgmentinaccordancewiththeforegoing
opinion.
Notes:
1
28U.S.C.A.2201
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2
Section3ofArticleIIIofthetrustdeed
3
"Section7.AslongastheWarrantsshallremainvalidandoutstanding,theCorporationwillnotpayany
dividendsonitscommonstockpayableinstockofanyclass(suchdividendbeinghereinsometimescalled`stock
dividend'),unlesstheCorporationshalldepositintrustwiththeTrusteestockcertificatesofthecharacterabove
describedinSection3ofthisArticleIIIrepresentinganamountofstock(ofwhateverclass)oftheCorporation
equaltotheamountofsuchstockdividend,ifthesamehadbeendeclareduponthecommonstockrepresented
bythestockcertificatesthenheldintrustbytheTrusteehereunder,andtheTrusteeshall,outofsuchadditional
stockcertificatessodepositedintrustwithitonaccountofsuchstockdividend,upontheexerciseofWarrants,
deliverinthemannerhereinprovided,withanysharesofcommonstockpurchasedthereunder,butwithout
additionalconsiderationtherefor,suchnumberofsharesasmaybeequaltosuchstockdividend,ifthesamehad
beendeclareduponthecommonstocksopurchasedandasprovidedinSection5ofthisArticleIII,the
CorporationwillfromtimetotimeissueanddelivertotheTrusteesuchstockscripcertificatesasmaybe
requiredfromtimetotimetoenabletheTrusteeupontheexerciseofWarrantstomakeanyandalldeliveriesin
respectofanysuchstockdividend
"IftheCorporationdepositsstockcertificatesasintheforegoingparagraphofthisSection7provided,thestock
issuedbywayofastockdividendshallnotbeconsideredasoutstandingforthepurposeofanyadjustmentsin
thepriceatwhichsharesofstockmaybepurchasedundertheWarrantsasprovidedinthisIndenture."
4
"Section10.Incase
"(a)theCorporationshallpayanystockdividenduponanyoutstandingcommonstock,ormakeanydistribution
otherthanacashdividendtotheholdersofitscommonstockor
"(b)theCorporationshallofferforsubscriptiontotheholdersofitsstock(ofanyclass)anyadditionalcommon
stockoranystock(ofanyclass)oftheCorporationoranyothersecuritiesor
"(c)ofanycapitalreorganizationorreclassificationofthecapitalstockoftheCorporationor
"(d)oftheconsolidationormergeroftheCorporationwithanothercorporationor
"(e)ofthedissolution,liquidationorwindingupoftheCorporationorsaleofallorsubstantiallyallofitsassets
(whethervoluntaryorinvoluntary)"theninanyoneormoreofsaidcases,theCorporationshallgivetothe
TrusteeandtotheholdersoftheWarrantsoutstandinghereunderatleastsixtydays'priorwrittennoticeofthe
dateonwhich(aa)thebooksoftheCorporationshallcloseforsuchstockdividend,distributionorsubscription
rights,or(bb)suchreclassification,reorganization,consolidation,merger,dissolution,liquidation,windingupor
saleshalltakeplace,asthecasemaybe,andsuchnoticeshallalsospecifythedateasofwhichstockholdersof
recordshallbeentitledtoparticipateinsuchdividend,distributionorsubscriptionrights,ortoexchangetheir
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sharesofstockforotherstockoftheCorporation,pursuanttosuchreclassificationorreorganizationorforstockof
thecorporationresultingfromsuchconsolidation,ortoreceivetheirrespectivedistributivesharesintheeventof
suchdissolution,liquidation,windinguporsale,asthecasemaybetotheendthat,duringsuchperiodofsixty
days,theholdersofWarrantsoutstandinghereundermaypurchasestockinaccordancewithsuchWarrantsand
beentitledinrespectofsharessopurchasedtoalloftherightsoftheotherholdersofsimilarstockofthe
Corporation.ThenoticehereinrequiredtobegiventotheholdersoftheWarrantsshallbesufficientlygivenif
theCorporationshallpublishsuchnoticeonatleastthreedifferentdays(duringsaidperiodofsixtydays)ina
dailynewspaperofgeneralcirculationprintedintheEnglishlanguageintheBoroughofManhattan,TheCity
andStateofNewYork,andshallalsomailacopyofsuchnoticetotheTrustee."
5
SeeEisnerv.Macomber,252U.S.189,202203,40S.Ct.189,64L.Ed.521
6
SeeBerle,ConvertibleBondsandStockPurchaseWarrants,36YaleL.J.649,6567
7
ArticleIIIopenswiththesentence:"TheCorporationcovenantsandagreesashereinafterinthisArticleIIIset
forth:"
8
"Section6.ThebasicpurchasepriceatwhichtheholdersoftheWarrantsmaypurchasecommonstockofthe
CorporationassetforthinSection2ofthisArticleIIIshallbesubjecttoreductionandadjustmentfromtimeto
timeinthefollowingmanner:
"(1)IfatanytimeorfromtimetotimeafterDecember1,1928,sharesofcommonstockoftheCorporation,
withoutparvalue,beissuedtoanumberinexcessof264,000shares,assuchsharesmayfromtimetotimebe
constituted,and(a)soldbytheCorporationforcashatapricepersharewhichislessthanthebasicpurchase
pricethereofatthetimeineffector(b)issuedforaconsideration,otherthanmoney,valuedbytheBoardof
Directorsatthetimeoftheacquisitionthereof,atanetamountlessthanthebasicpurchasepriceofthecommon
stockoftheCorporationatthetimeineffect,thesaidbasicpurchasepriceshallbeadjustedasfollows,provided,
however,thatinnoeventshalltheadjustedpriceexceedatanytimethebasicpurchaseprice:"
12
CLARK,CircuitJudge(dissenting).
13
Sincethisisacomplicatedagreementwherediversecontentionsarepossibleandsincemyviewsarenotto
prevail,Ishallonlyindicatethemwithoutextensivedevelopment.Whatchieflypersuadesmetothecontrary
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conclusionisthatthedefinitetimeprovisionofsixtydaysforexchangingwarrants,"incasethecorporationshall
payanystockdividend,"ofsec.10,Art.III,isnowleftwithoutrationalpurposeorfunction.Iexpect,however,
thatthisisoneofthosecasessufficientlydisputablesothattheapproachoneinitiallymakestotheproblem
actuallypointsthewaytothefinalsolution.IfIthoughtastockwarrantshouldbenormallyapproachedasan
eternalanduntouchableprivilege,I,too,Iexpect,wouldregardsec.7assodeclaringandhencefindthatsec.10
couldnotbegivenforceaccordingtoitswordingwithoutworkinga"forfeiture"ofordeclaring"forfeit"whathad
alreadybeengiven.ButsinceIthinkitnotatallunusualforthedraftsmenofsuchanagreementtowishtoput
somelimitationsuponthoserights,tolimittheextenttowhichtheycanallowtheholderstobeover,butnota
partof,thecorporateorganization,Ifindtheotherconstructiontobemorenaturalandtohavetheadvantageof
accordingsomeappropriatefunctiontoeverysectionoftheagreement.
14
Thussecs.8and9applytotheparticularsituationstheyexpresslycoveranddonotapplytothesituationcovered
insec.10,andthereisnosurplusage.Theprovisionofsec.6forreducingthebasicpurchasepriceofthestock
seems,tomymind,ratherclearlyapplicableincaseofastockdividendandbeareasonablyfaircounterad
justmenttothosewarrantholderswhostillwishtostayontheoutsideawaitingdevelopments.Andsec.7carries
itsownstatementofitsapplicationconditioned"ifthesamehadbeendeclareduponthecommonstock
representedbythestockcertificatesthenheldintrustbytheTrusteehereunder"orlater"ifthesamehadbeen
declareduponthecommonstocksopurchased."True,thisgivesthecorporationpowertodeterminewhetherthe
stockdividendbeupononlytheactivestockoralsouponthisblockalreadyfrozeninthehandsoftheTrusteeand
immobileunlesswarrantsareexercisedagainstit.ButandhereIsupposemypointofviewindicatedabove
comesinthisdoesnotseemtomeanunusualpowerforacorporation,butonenaturallytobeexercisedinthe
lightofthegeneralgoodofallthestockholders,notmerelythoseholdingwarrants,withthereductioninthebasic
purchasepriceservingasapreventiveofunfairnesstoanyoftheparticipants.
15
ElsewhereIhavethoughtwehavetendedtoovervaluetheperpetualeffectofstockwarrants,Securitiesand
ExchangeComm.v.Leventritt,2Cir.,179F.2d615,certiorarigranted,U.S.,71S.Ct.62,andhaveagreedmore
withthecontraryviewexpressedinInreCommonwealth&SouthernCorp.,3Cir.,184F.2d81.Butherewe
havefurthertheexpressclauseofsec.10providingforthenoticewithadefinitepurpose"totheendthat,during
suchperiodofsixtydays,"thewarrantholdersmaypurchasestockand"beentitledinrespectofsharesso
purchasedtoalloftherightsoftheotherholdersofsimilarstockoftheCorporation."(Italicssupplied.)Ofcourse
theyknowalreadythattheyareentitledtosuchrightsjustassoonastheyexercisetheirwarrantsexcepttothe
extentthatthisclausemaybegivensomeoperativeeffect.Sowhyshouldthedraftsmenhavepaintedthelily
furtherunlessthesixtydayswasintendedasadefiniteperiodforthetakingofsomeaction?Iwouldaffirm.
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