Bove v. Community Hotel Co.

Supreme Court of Rhode Island · 1969 · Corporations

CorporationsMergersPreferred stockDissenters' rightsparent-subsidiary mergerwholly owned subsidiaryrecapitalization by mergerpreferred shareholders

Facts

Community Hotel, incorporated in 1924, had outstanding preferred and common stock, and approximately 24 years of accrued but undeclared dividends had accumulated on its preferred shares. Its directors caused Newport to be organized solely to effect a merger under which each Community Hotel preferred share, together with all accrued dividends, would be converted into five shares of Newport common stock, and each Community Hotel common share into one share of Newport common stock. Plaintiffs were preferred shareholders who argued that the merger's only purpose was to eliminate preferred priorities and dividend arrearages without the unanimous preferred-stockholder vote that would be required for a charter amendment. The merger had not yet been voted on, but under the statute it would require approval by at least two-thirds of each class of stock.

Issue

Whether Rhode Island's merger statute permits a parent corporation to merge into a wholly owned subsidiary created solely to recapitalize the parent by cancelling preferred stock priorities and accrued cumulative dividends with less than unanimous preferred-shareholder consent. Also, whether subsequent merger legislation enacted under the state's reserved power is unconstitutional as applied to stock issued before the legislation, and whether equity should enjoin the merger as unfair despite the statutory appraisal remedy.

Rule

Where the merger statute broadly authorizes any two or more corporations to merge and to prescribe the manner of converting shares, a merger may validly be used to eliminate preferred stock rights and accrued cumulative dividends even if the sole purpose is recapitalization and avoidance of the unanimity required for a charter amendment. Legislation enacted pursuant to the state's reserved power to amend or repeal corporate charters is not invalid merely because it is subsequent to incorporation and stock issuance, so long as it is a proper exercise of that power. In deciding whether to grant equitable relief against a merger as unfair, a court may consider the availability of statutory appraisal as an important circumstance.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Bayfront Lodging, Inc., a Rhode Island corporation based in Newport, has outstanding cumulative preferred shares with large unpaid dividend arrearages. Its board forms Harbor Reorganization Corp., a wholly owned subsidiary in Providence, solely to merge Bayfront into Harbor and convert each preferred share and its arrearages into shares of Harbor common stock; the plan can pass with two-thirds of each class, but a charter amendment cutting those rights would require unanimous preferred consent.

If dissenting preferred shareholders argue the merger is invalid because it is being used only to do indirectly what a charter amendment could not do directly without unanimity, how should a Rhode Island court rule under the majority approach?

Explanation. The majority held that the key question is whether the legislature authorized the merger, not whether the merger route is a subterfuge. A broad merger statute allowing eligible corporations to merge and specify the manner of converting shares permits use of a parent-subsidiary merger solely to eliminate preferred priorities and dividend arrearages, even though a charter amendment would require unanimous preferred consent.