§ 4861. - Agreement in regard to reorganization as contained in mortgage. It is not unusual for a corporate mortgage to contain provisions for a reorganization by the bondholders in case of foreclosure.34 And the power to reorganize may be granted to a majority of the bondholders by the terms of the mortgage.35 A reorganization § 4862. Substitution of stock for bonds. whereby the old bondholders become the stockholders of the new company is not unusual,36 and indeed it has been stated by the Supreme Court of the United States that often the best way of effecting a reorganization is to substitute stock of the new company for bonds of the old, and raise the money which is required by a new mortgage with a lien superior to the old mortgage.37 § 4863. Voluntary transfer of property to new corporation-In general. A reorganization is sometimes effected, without any judicial or execution sale, by transferring all the property of the corporation, either directly or indirectly, to a new corporation organized or to be organized by part or all of the stockholders, or stockholders and creditors, of the old corporation, for the purpose of taking over such property.38 In such cases two questions arise. First, as to the legality of the transfer and reorganization. Second, as to its effect as against creditors of the corporation. In regard to the legality, it is to be considered first according to whether all of the stockholders consent thereto or whether a part of them object. If part of them dissent, then the validity may depend upon whether the transfer is for an adequate consideration and in good faith, or whether it is actually a fraud as against the nonassenting stockholders. Leaving the reorganization part entirely out, the question whether a corporation, or its majority stockholders, may transfer all of its property, either with or without the consent of the minority stockholders, has already been answered in preceding volumes,39 and it has been noted that there is a difference between transfers by quasi public corporations 40 34 See Child v. New York & N. E. R. Co., 129 Mass. 170. Construction of provisions in mortgage as to reorganization, see Child v. New York & N. E. R. Co., 129 Mass. 170. 35 See Sage v. Central R. Co., 99 U. S. 334, 344, 25 L. Ed. 394. 36 Ginty v. Ocean Shore R. Co., 172 Cal. 31, 155 Pac. 77. 37 Shaw v. Little Rock & Ft. S. Ry. Co., 100 U. S. 605, 612, 25 L. Ed. 757. 38 See Seymour v. Boise R. Co., 24 Idaho 7, 132 Pac. 427. 39 See §§ 1203-1229, supra, and see chapter on Stockholders. 40 See $1216-1222, supra. 41 and other corporations, and that most of the decisions draw a distinction between transfers by strictly private corporations according to whether the transfer is required by the exigencies of the business.42 A somewhat different question arises, however, where the transfer is connected with, and for the purpose of, a reorganization, as will be noted in following sections.43 The voluntary transfer of all the property of a corporation to another existing and entirely separate corporation, the effect of which is noted in a preceding chapter, is not considered herein, since in such a case there is a combination of corporations-or, under some circumstances, it is generally held, a consolidation of corporations.45 What is treated of herein is where the new or transferee corporation is formed for the express purpose of taking over the property of the old corporation and thereby effects a reorganization without any judicial or execution sale.46 In the former class of cases, the property of two corporations is combined and owned by one of them. In the latter class of cases, the new corporation has no property except that which it receives from the old corporation. In the one case, the stockholders of the transferee company are its former stockholders, or such stockholders plus all or part of the stockholders of the transferrer company; in the other case the stockholders ordinarily are merely all or part of the stockholders of the old transferrer company, or such persons and all or part of the bondholders or other creditors. In this class of reorganizations, the act is generally entirely the work of the stockholders, without taking any notice of bondholders or other creditors, and a new corporation is created by the stockholders to take over the property of the old corporation and issue stock in the new corporation for the stock of the old company, but in such a case the rights of the bondholders and other creditors ordinarily, unless they consent thereto and agree to substitute their claims, are not cut off, and they may hold the new company liable.48 The legal effect of such a transfer is that the new company steps 41 See §§ 1203-1214, supra. 42 See $$ 1207, 1208, supra. 43 See SS 4864-4867, infra. 44 Chapter on Consolidation, supra. 45 See § 4836, supra. 46 A reorganization may be effected by a private contract between bondholders and stockholders whereby the corporate property is transferred to a new company with the same stock holders. Northern Pac. R. Co. v. Boyd, 228 U. S. 482, 502, 57 L. Ed. 931. Stockholders may transfer all their stock to another company for the purpose of reorganization. State v. New Orleans Water Supply Co., 111 La. 1049, 36 So. 117. 47 See § 4952, infra. into the shoes of the old company, with a change of name and perhaps greater or different charter powers.19 Conditions may be such that the transfer of the assets to the new company may not operate to pass title until payment is made in some way.50 Where majority stockholders reorganize, the new company, of course, is chargeable with knowledge of the rights of dissenting stockholders.51 Where reissued stock was issued without authority and is void, the holder thereof, although it is a majority of the stock, cannot vote for or authorize a reorganization.52 An ordinary proxy, it seems, does not enable the holder to vote to sell the entire business and property of the corporation to majority stockholders.53 § 4864. Where all of stockholders assent. If all the stockholders join therein, and the new company is created and organized pursuant to and in conformity with a valid statute, there is no one left to object but the creditors of the old company, and their only rights are to follow the property as a fund for the payment of their debts or to hold the new company liable for the debts regardless of the value of the property turned over to it by the old company, i. e.. whether the total value of such property is equal to or exceeds the total indebtedness of the old company.54 As an exception to this rule, however, it was held in New York that a domestic corporation cannot sell all its property to a foreign corporation organized through its procurement, with a majority of nonresident trustees, for the express purpose of stepping into its shoes, taking all the assets and carrying on its business, since a "practical destruction of the corporation by its own act, which the law will not tolerate."' 55 § 4865. Where part of stockholders dissent but there is no fraud. The rights of a minority who object to a reorganization depend upon a number of different things. Among the important matters to be considered are (1) whether the majority have acted 49 Otis v. Ohio Mines Co., 15 Ariz. 264, 138 Pac. 777. 50 First Nat. Bank of Webster City v. Acme Co-op. Brick & Tile Co., 171 Iowa 474, 149 N. W. 607. 51 Marsh v. Breen Iron Co., 181 Mich. 204, 148 N. W. 493. 52 First Nat. Bank of Sulphur Springs v. Stribling, 16 Okla. 41, 85 Pac. 512. 53 Farish v. Cieneguita Copper Co., 12 Ariz. 235, 100 Pac. 781; Rossing v. State Bank of Bode, Iowa -, 165 N. W. 254. See, generally, § 1692, notes 17-20, supra. 54 See $$ 4984-4987, infra. 55 People v. Ballard, 134 N. Y. 269, 294, 17 L. R. A. 737, 32 N. E. 54. in good faith or fraudulently, (2) whether the reorganization takes the form of a sale for cash or a mere transfer of the corporate property for stock in the new company, (3) whether the minority are offered cash or stock, (4) whether, if the minority are offered cash, it is an arbitrary sum fixed by the majority or is an offer to pay the real value of the stock, etc. First, it is advisable to consider the proposition on the theory that the majority have acted entirely in good faith. In preceding volumes, it has been noticed that (a) a public service company cannot sell all its property unless authorized so to do by statute; 56 (b) a corporation other than a quasi public company may sell all its property, with the approval of a majority of the stockholders, even though some of the stockholders dissent, if the sale is required by the exigencies of the business,57 although ordinarily a dissenting stockholder cannot be compelled to take as payment shares of stock in the transferee company; 58 (c) a corporation, even where not a quasi public company, cannot sell all its property, with the approval of a majority of the stockholders, if it is a going and prosperous corporation (although there is some authority to the contrary),59 unless such a sale is authorized by statute on a vote of the majority or a certain per cent of the stock.60 These rules are applicable, it would seem, to transfers for reorganization purposes. 61 And it generally is held that a majority of the stockholders may reorganize, where they act in good faith, by purchasing the property at its fair value, even though some of the stockholders object,62 at least where the sale is required by the 50 See § 1216, supra. 57 See § 1207, supra. 58 See § 1211, supra. 59 See § 1208, supra. 60 See §§ 1210, 1219, supra. 61 Compare Post v. Beacon Vacuum Pump & Electrical Co., 84 Fed. 371, 375, the language of which tends to mislead unless confined to the particular facts. In England and Canada where there is no constitutional prohibition against laws impairing the obligation of contracts, a majority of the stockholders may be authorized by statute to force a reorganization upon minority stockholders. See Canada Southern R. Co. v. Gebhard, 109 U. S. 527, 27 L. Ed. exigencies of the business; 63 that minority stockholders may object it was bought in in behalf of a combination of stockholders who had united to protect themselves if it appeared that the property probably could not be sold except at a great sacrifice, and the price was adequate, it was held that the sale would not be set aside at the suit of minority stockholders. Hayden v. Official Hotel Red-Book & Directory Co., 42 Fed. 875. But it would seem that an ordinary stock corporation cannot have its entire form and corporate existence changed to a corporation sole by the will of the majority stockholder. Woodruff v. Shimer, 174 Fed. 584. Moreover, in case of a reorganization, the purchaser or transferee is either the majority stockholders of the old corporation or some one acting in their behalf, so as to make the transaction, according to some of the decisions, subject to the rule that the majority stockholders cannot be both sellers and purchasers. And it has been held that minority stockholders who object thereto may set aside a transfer of the corporate property by the majority stockholders to one for their benefit, in order to form a new corporation, in consideration of stock in the new company, even though done in good faith, since the majority stockholders in such a case are both sellers and purchasers. Banks v. Judah, 8 Conn. 145, 157. To same effect, Reilly v. Oglebay, 25 W. Va. 36. For instance, perhaps the earliest reorganization case coming before an appellate court in this country was presented for decision to the Supreme Court of Connecticut in 1830, wherein a sale by the majority stockholders to one who bought for them was held invalid on the theory that the majority stockholders were both seller and buyer. Banks v. Judah, 8 Conn. 145, in which case, however, relief was refused a minority stockholder because of his laches in suing. If directors of a company sell the corporate property to themselves and organize a new company, the sale is not void, but if attacked. by minority stockholders it will be closely scrutinized to see that it was fair and in good faith. See Rossing v. State Bank of Bode, Iowa, 165 N. W. 254, and see § 2365, supra. 63 A single stockholder, all the others and the bondholders consenting, cannot have a reorganization set aside where there is no fraud or unfairness, and a reorganization was necessary in order to continue in business. Ecker v. Kentucky Refining Co., 144 Ky. 264, 138 S. W. 264. Where a corporation is insolvent, minority stockholders who refuse to co-operate to furnish additional capital cannot complain of a sale of all the assets of the company to a new corporation created by the majority stockholders for an amount sufficient to pay all the creditors, where the minority stockholders fail to accept the opportunity to become stockholders in the new company on the same basis as the majority stockholders. Marks v. Merrill Paper Mfg. Co., 188 Fed. 850. So where a plan of reorganization, without a forced sale, was entered into by all the creditors and all but one of the stockholders (who held a small part of the preferred stock), and the reorganization was necessary to save the corporation from ruin, it was held that the lone stockholder not assenting, where there was no fraud or unfairness, could not have the reorganization set aside. Ecker v. Kentucky Refining Co., 144 Ky. 264, 138 S. W. 264. |