APPEAL by the defendants, The Wabash Railroad Company and others, from an interlocutory judgment of the Supreme Court in favor of the plaintiff, entered in the office of the clerk of the county of New York on the 24th day of January, 1912, upon the decision of the court rendered after a trial at the New York Special Term, sustaining the plaintiff's demurrers to separate defenses set forth in the respective answers of the appellants.
Rush Taggart, for the appellants.
J. Aspinwall Hodge, for the respondent.
Judgment affirmed, with costs, with leave to defendants to answer on payment of costs, on opinion of BISCHOFF, J., at Special Term.
Present--INGRAHAM, P. J., MCLAUGHLIN, LAUGHLIN, MILLER and DOWLING, JJ.
The following is the opinion delivered at Special Term:
The plaintiff, a stockholder of the defendant, the Wabash Railroad Company, attacks the validity of a plan for the issue of bonds and stock of the corporation in exchange for $30,000,000 of its debenture bonds outstanding. This plan, as alleged, provides for the exchange of $795 of new bonds, $580 preferred stock and $580 common stock for each $1,000 par value of debenture bonds, classed as series A, and for the exchange of $720 of new bonds, $520 preferred stock and $520 common stock for each $1,000 par value of debenture bonds series B. The ground of attack, as indicated by the complaint, is that the proposed exchange of securities was ultra vires the corporation and actually illegal in that the Constitution of the State of Missouri, one of the States under whose laws the corporation was organized, prohibits the issue of preferred stock except upon the consent of all the stockholders, whereas the plan in question, which provides for the issue of preferred stock, was not so approved; further, it is alleged that the proposed issue of bonds and stock is fictitious and contrary to the statutes of the several States applicable to the conduct of business by the defendant corporation, in that the new securities were not to be exchanged for property equal in value to their par value, the debenture bonds to be taken in exchange being worth less than par; the complaint also contains averments indicating that directors voting for the plan were the holders of debenture bonds and so personally interested, in hostility to the interests of the corporation.
Four affirmative defenses are interposed, and the issue of law before me is presented by demurrer to each defense for insufficiency of substance.
By the first defense ratification of the plan by a majority of the stockholders is asserted. Whether or not the facts alleged in this defense as to the history of the transaction may be deemed to afford a sufficient basis for an effective ratification of the acts of directors who were personally interested, there can be no doubt that the illegality of the plan, so far as it provides for the issue of preferred stock without the consent of all the stockholders, is not affected by anything which the defense
contains. Admittedly, preferred stock is planned to be issued without the unanimous consent which the Constitution of Missouri requires, and as the pleadings stand the words of the Constitution, taken as correctly stated in the complaint, are that 'no corporation shall issue preferred stock without the consent of all of the stockholders.' Here appears to be an absolute prohibition of an act which is integral to the plan now attacked, and ratification by a majority of the stockholders could not make that act valid since the very law itself defines the extent of the ratification required. An illegal corporate act cannot be ratified by majorities of stockholders. ( Taylor v. Earle, 8 Hun, 1.) I find no force in the contention that this explicit provision of the Constitution of Missouri may be limited to an original issue of preferred stock as distinguished from an issue of increased preferred stock. Thus the statutes of Missouri, as alleged, provide: 'Any corporation may increase its capital stock or its bonded indebtedness with the consent of the persons holding the larger amount in value of the stock,' but this enactment does not serve in any way to suggest a limited meaning of the constitutional provision. If there were an inconsistency, the statute would, of course, give way in view of the clarity of expression employed in the Constitution, but there is no inconsistency. The statutory provision relates to an increase of capitalization generally, while the Constitution calls for unanimous consent of the stockholders where a distinction is to be made between classes of stock to represent the adopted or increased capitalization. It is unnecessary to differentiate between the laws of Ohio and Missouri upon the question of the legality of the issue of preferred stock. From the admitted allegations of the complaint, this corporation was bound by the laws of Missouri as well as the laws of Ohio, and the mere fact, as alleged ...