It should be noted that this letter contains no explanation of he reasons for the failure to include these voting rights in the olan of recapitalization. Furthermore, it appears that Phoenix is willing to accord the prior preferred stockholders the right to elect out one-third of the board of directors instead of the right to elect majority which the preferred stockholders possessed before the consummation of the plan. It is in such manner that the rights of preferred stockholders are prejudiced or neglected when the nanagement which formulates the plan has or will have under the plan a primary interest in the common stock of the company.

E. POSITION OF MINORITIES

The position of minorities in these cases is determined in large measure by the form of charter amendment which is employed to effect the plan. If the amendment authorizes the creation of a new class of prior preferred stock (for which the old preferred stockholders will be asked to exchange their holdings) non-assentors will be bound, of course, in the sense that the vote of the specified

directors is not evenly divisible by three, to elect four directors, and the Common Stockbolders will be entitled to elect the remaining seven directors.

"It is anticipated that by January 1, 1938, the Corporation will be in default in the payment of dividends on the Preference Stock for three quarterly dividend periods. "Phoenix Securities Corporation, which owns the largest single block of Common Stock. 109.360 shares, in addition to 9.496 shares of Preference Stock owned beneficially), has advised the Corporation that it will vote for the adoption of the proposed amendment.' This meeting was postponed until January 21, 1937, due to lack of a quorum. Poor's Cumulative Service-Corporation News (1937, vol. 4), at 167. In the course of a hearing before this Commission on December 18, 1937, the day after the originally scheduled date of the meeting, Mr. Groves testified that the management had been unsuccessful in its efforts to obtain sufficient assents to adopt the proposed amendment. Mr. Groves was not over-optimistic about the possibility of obtaining the requisite assents in the future. He testified as follows:

"Q. As I understand it, there is a change being made in the terms of the preferred stock with reference to its voting power in case of default, is that not so? A. Yes.

Q. I assume that change was effected yesterday?

A. I do not think they could get the requisite consent to do it.

Q. They did not?

A. They did not. That is my understanding. It may be unfortunate. When the stock of Certain-teed was to be listed on the New York Stock Exchange the committee made a suggestion, or a requirement, I do not know which it was, that the preferred stock provision should be changed.

Q. Let me just come to that. I am curious about that.

A. Yes, sir.

Q The present provision which was, as I understand, not changed because you did not get the requisite consent

A. (Interposing) The meeting was postponed. action, yes, sir.

They were trying to get stockholders'

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We

What happened was we had a moral obligation to live up to, and of course we had to do our utmost to live up to that. We have recommended it to the stockholders and we tried to get the brokerage houses to approve it. because the stockholders are going to give up something and people do not like to give up something. are using our best efforts to try to do it. Whether it will be done or not I do not know. Is that clear in your mind now?" Op. cit. supra note 123, at 20312, 20314-20315. Only 56 percent of the outstanding issue of the common stock was represented at the January 21 adjourned special meeting. and action on the amendinent accordingly was deferred. Poor's Financial News-Daily Corporation News, Feb. 4, 1938, at 9336. February 15, 1938, another stockholders meeting called to consider this proposed amendment was adjourned sine die. Id., Feb. 17, 1938. at 9064. Thus Phoenix, which had been sufficiently influential in the affairs of Certain-teed to effect a recapitalization plan for that company eliminating important voting rights of the preferred stockholders, apparently found itself unable to remedy the situation it had created.

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percentage of stockholders will be sufficient validly to authorize the issuance of the new class of stock. On the other hand, non-assentors will be under no legal compulsion to exchange their holdings for the new class of securities. In this sense, therefore, they are not bound to the plan. If, on the other hand, the charter amendment is one adopted under a statute authorizing changes in the rights, terms and conditions of an existing stock, the non-assenting stockholder is bound to the plan by operation of law if the requisite percentage of stockholders approves the amendment. He is given no alternative except in the case of those few states which provide the non-assentor with a statutory right to payment and appraisal for his shares upon the adoption of a charter amendment. As we shall subsequently develop, however, this remedy, even where it does exist at all, is largely inadequate to afford substantial protection to minorities.13

It is worthy of note, however, that in the recent cases of Keller v. Wilson & Co., Inc.138 and Consolidated Film Industries, Inc. v. Johnson 189 decided by the Supreme Court of Delaware under the laws of

137 See discussion in text, infra, and in Appendix B, IV, infra.

138 190 Atl. 115 (Del. 1936), rev'g 180 Atl. 584 (Del. Ch. 1935). The statute under which the amendment was adopted purported to authorize less than all of the stock holders to change "the number, par value, designations, preferences, or relative, partic pating, optional, or other special rights of the shares." Del. Rev. Code (1935) c. 65, § 26 [Italics supplied.] But the statute in force at the time of the incorporation of the company provided only for an alteration of "preferences". Although the Delaware Supreme Court recognized the existence of a reserved power of the state to amend its corporation law. it also stated, as one ground for its decision, that the right to accrued dividends was a "vested right" which could not constitutionally be destroyed by amendment under a statute enacted subsequent to organization of the corporation. Elsewhere in its opinion in construing the existing statute. the court concluded that in authorizing the alteration of "preferences" and "other special rights" the law was not sufficiently broad in its terms to permit the type of amendment attempted. With reference to the Delaware statute, the court stated:

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It authorizes nothing more than it purports to authorize, the amendment of charters. The cancellation of cumulative dividends already accrued through passage of time is not an amendment of a charter. It is the destruction of a right in the nature of a debt, a matter not within the purview of the section. 190 Atl. 115, 125.

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A direct result of Keller v. Wilson & Co., Inc., supra, has been the abandonment of a number of plans which proposed the elimination of accrued dividends in this manner. See, e. g., the case of Federal Water Service Corporation. This plan, dated October 23, 1936, provided, inter alia, for the elimination of arrearages and the changing of the old class A and various preferred stocks of the company into a new class A stock. The com pany's annual report for the year 1936 contained the following statement with respect to the outcome of the readjustment program:

In November 1936, a plan was proposed for a reclassification of the stock and the reduction of the capital of the Corporation, which plan was considered to meet the requirements of the Delaware law as interpreted at the time by the Court of Chancery. Copies of the plan were sent to all stockholders and it was generally favorably received. However, prior to the date of the stockholders' meeting called to vote on that plan, the Supreme Court of Delaware handed down a decision in a case involving the san principles, which reversed the Court of Chancery. Accordingly, it was necessary for this Corporation to cancel the notice of the stockholders' meeting and withdraw its plan."

130 197 Atl. 489 (Del. 1937), aff'g 194 Atl. 844 (Del. Ch. 1937). This case differed from Keller v. Wilson & Co., Inc., supra note 138, in that the corporation was organized subsequent to the adoption of the Delaware statutory amendment authorsing a change in "other special rights of the shares." There accordingly was no constitu tional question of the state's reserved power to enact legislation which in the absence of that power would constitute an impairment of the obligation of contract. The Supre Court based its decision solely upon the interpretation which it previously had given the Delaware law in Keller v. Wilson & Co., Inc., which is set forth in note 138, supra.

that state, amendments of the latter type (which change directly the rights, terms and conditions of an existing issue) have been held invalid insofar as they attempt to eliminate accumulations of accrued but unpaid dividends. Although these decisions will be strong precedents in cases arising under similar statutes, the question of the validity of the direct elimination of dividend accumulations by amendment under the laws of other states may still be open. This general problem is explored at length in Appendix B, I, infra.

The fact that under the first type of plan the stockholders are not legally required to exchange their old stock for the new has certain definite effects upon the practices employed to effectuate the plans. Ordinarily the management, if the plan is to achieve its purpose, not only will have to induce the stockholders to authorize the issuance of the new class of stock, but also will be faced with the task of soliciting the actual exchanges of their shares. Obviously, if a substantial percentage of the old preferred retain their holdings, the company will continue to have large accumulations of unpaid dividends to pay, or otherwise dispose of, before any dividends can be paid on the common stock.

Managements have commonly employed one of two methods in an attempt to bind to the plan those stockholders who sign a proxy in favor of it. The first, as we have stated, is to include in the proxy form an agreement on the part of the stockholder to exchange his stock if the plan is approved. For example, the proxy form solicited in the case of the plan of recapitalization of the National Refining Company, under date of October 8, 1936, contained the following: "The undersigned, if a Preferred Shareholder, further hereby agrees, in consideration of similar agreements on the part of other shareholders and in consideration of their executing a Proxy and Exchange Agreement in the form hereof, that if a plan of recapitalization substantially as outlined in said letter is approved by the Shareholders, he will, when requested, promptly forward the certificate or certificates representing the Preferred Stock then owned by him to the Company, or such depositary as it may designate, to be exchanged (if and when such plan is declared operative by the Board of Directors) for Prior Preferred Stock and Common Stock in accordance with said plan." 140

10 This proxy form should be contrasted with the proxy form used in the case of the plan of reclassification and charter amendment for Revere Copper and Brass, Incorporated. The latter authorization to cast the necessary votes respecting the plan included also an "Assent to Conversion", printed in bold face type, as follows:

"Assent to Conversion. The undersigned hereby assents and agrees in accordance with said Plan to convert into 54% Cumulative Preferred Stock all 7% Cumulative Preferred Stock, with accumulated dividends thereon as stated in said Plan, which the undersigned may hold at the time such conversion privilege is created pursuant to said Plan, but this as ent and agreement shall not be binding until received by the Company in New York nor unless the holders of at least 51% of the 7 Cumulative Preferred Stock (exclusive of stock held in the treasury of the Company) assent and agree so to convert such stock." But at the bottom of the form there was set out, likewise in heavier type, the following

cgreat:

"N. B. PLEASE FILL IN THE DATE ON WHICH YOU SIGN THIS PROXY. This proxy is solicited by and in behalf of the management of the Company for the purposes

The second is to attempt to obtain not only proxies but also the deposit of certificates for the old shares, so that the exchange of stock! may be made by the management if it declares the plan operative. An example is the plan of recapitalization of Radio Corporation of America, submitted to the stockholders under date of February 6, 1936. The management solicited both proxies and deposits. The proxy forms contained the limitation that the proxies could not be voted in favor of the proposed plan unless "the Board of Directors of said Corporation shall have declared that in its judgment an amount of 'B' preferred stock sufficient to make it expedient to carry out said Plan of Recapitalization shall have been deposited or agreed to be deposited for exchange thereunder." In addition to the proxy form, all "B" preferred stockholders were sent letters of transmittal to be used in depositing their shares with a named depositary. Deposit receipts were issued, which were listed on the New York Stock Exchange.141 In a letter to the stockholders, dated April 1, 1936, David Sarnoff, president of the company, portrayed the situation as follows:

"Proxies for the Special Meeting of Stockholders called for April 7, 1936, to approve the Plan of Recapitalization dated January 31, 1936 have been received from stockholders holding more than a majority of the stock of each class This is a sufficient amount to approve the amendments of the Certificate of Incorporation necessary to carry out the Plan.

"These proxies, however, cannot be voted at the meeting on April 7 unless there has been deposited for exchange prior to that date a sufficient amount of the B preferred Stock to justify the Board of Directors in declaring the Plan operative. The amount now on deposit, though substantial, is not yet sufficient to enable the Plan to be declared operative.

"In order, therefore, that the Plan may become effective on April 7, additional stock must be deposited on or before Monday, April 6." [Underlining in original.]

The plan was approved by stockholders on April 7, 1937 and became effective.

This letter also suggests a second point-namely, that in these cases the stockholders are likely to be subjected to a double solicitation campaign. Even after sufficient proxies are obtained to approve the issuance of the new class of stock, there is likely to be a continued drive for exchanges. This possibility was forcibly revealed in the case of The Goodyear Tire & Rubber Company recapitalization.12

above mentioned. If you do not care to assent at this time to the conversion of your 7 Cumulative Preferred Stock, you may delete the paragraph headed 'Assent to Conversion,' In other words, this proxy form, unlike the form commonly used in these situations advised the security holder that he might vote in favor of the plan and still not agree to convert his stock.

141 The plan provided that title to the certificate of stock would remain in the holders of the deposit receipts until exchanged for the new stock.

142 See note 58, supra, for a discussion of this plan.

The Goodyear management obtained sufficient proxies-75 percent of the stock outstanding in the case of the preferred-to approve the plan at a special stockholders meeting held on November 21, 1936, and the plan was then declared operative by the board of directors on November 23, 1936.

The proxy form used in the case of this plan contained an agreement by the stockholders to exchange their stock for the new issue of preferred stock upon the plan being declared effective. The form provided:

"With respect to any and all shares of First Preferred Stock of said corporation now owned or hereafter acquired by the undersigned, the undersigned hereby irrevocably assents to and agrees to be bound by said Plan for the Rearrangement of Capitalization. The undersigned hereby accepts the offer of exchange set forth in said Plan, subject to the conditions specified in said Plan, and agrees forthwith upon said Plan being declared operative by the Board of Directors of said corporation to surrender to said corporation all stock certificates representing such First Preferred Stock owned by the undersigned in exchange for $5 Convertible Preferred Stock (conversion rights expire October 1, 1946) and Common Stock on the basis stated in said Plan. Such assent and agreement shall be binding upon and shall enure to the benefit of the successors, assigns, executors and administrators of the undersigned." 143 Although the plan had been declared operative, the management was put to considerable effort to induce the stockholders to surrender their certificates in exchange for the new issue of prior preferred stock. An intensive solicitation campaign was carried on for several weeks. In this campaign the management was, no doubt, aided considerably by the declaration of a dividend of $4.25 per share on the new preferred stock, payable to the holders of record of such stock as of December 18, 1936. This dividend was declared by the directors promptly after the plan had been declared operative. It, of course, was payable only to those holders of preferred stock who had made the exchange. The directors announced that irrespective of whether or not the holder had sent in a proxy in favor of the plan he might make the exchange at any time up to December 18, 1936. An exchange meant the receipt of an immediate cash dividend. And those stockholders who did not make the exchange saw the funds of the company about to be used to pay dividends to those stockholders who had done so. As of December 18th, approximately 79 percent of the holders of the $7 preferred had deposited their stock for exchange.

In a letter of the company dated December 18, 1936, to holders of the unexchanged stock, preferred stockholders who had assented to the plan were "reminded of their agreement to ex

At the bottom of the proxy, under the heading, "Note Carefully Before Signing," appeared the following statement, among others: "If you do not care to sign this proxy and assent, you may delete portions of the same or make out your own proxy."