Bove v. Community Hotel Corp. of Newport

Supreme Court of Rhode Island · Corporations

CorporationsMergerPreferred stockAppraisal rightsstatutory mergerpreferred stockaccrued dividendscumulative preferred

Facts

Community Hotel, organized under Rhode Island's general corporation law, operated the Viking Hotel and had outstanding preferred and common stock; its preferred dividends had accrued but not been declared for about 24 years, totaling about $645,000. Community Hotel's directors caused Newport to be organized solely to effect a merger in which Community Hotel would merge into Newport, with each preferred share plus accrued dividends converted into five shares of Newport common and each Community Hotel common share converted into one Newport common share. Under the merger statute, the plan would require approval by two-thirds of each class, while an amendment diminishing preferred dividend or liquidation rights would require unanimity of the preferred class. Before the shareholder meeting occurred, preferred shareholders sued to enjoin the merger, arguing it improperly eliminated their priorities and accrued dividends and was unfair and inequitable.

Issue

Whether Rhode Island's merger statute permits a parent corporation to merge into a wholly owned subsidiary created solely to eliminate preferred stock priorities and accrued dividend rights by less than unanimous preferred shareholder consent, and whether equity should enjoin the merger as unconstitutional, unfair, or inequitable despite the statutory appraisal remedy.

Rule

Where the merger statute broadly authorizes any two or more eligible corporations to merge and to prescribe the manner of converting shares, a merger may lawfully cancel cumulative preferred stock priorities and accrued dividend rights even if the merger is undertaken solely to achieve a recapitalization that could not be accomplished by charter amendment without unanimous preferred shareholder consent. Legislation enacted under the state's reserved power to amend or repeal corporate charters is not invalid merely because enacted after incorporation or stock issuance, so long as the corporate action is legislatively authorized; and in considering equitable relief against a merger, courts should weigh the availability of statutory appraisal for dissenting shareholders.

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Lakefront Lodging, Inc., a Rhode Island corporation based in Providence, has cumulative preferred shares with 18 years of unpaid dividends. Its board forms Harbor Square Holdings, Inc., a wholly owned subsidiary in Rhode Island solely to carry out a merger in which each preferred share and all dividend arrearages will be converted into common shares of the surviving corporation. Under Rhode Island law, a charter amendment reducing those preferred rights would require unanimous preferred-shareholder approval, but a merger requires approval by two-thirds of each class.

If dissenting preferred shareholders sue to block the transaction solely because management is using the merger route to avoid the unanimity requirement for charter amendments, how should a court likely rule?

Explanation. The majority held that a broadly worded merger statute authorizing any eligible corporations to merge and to prescribe the manner of converting shares permits a parent-subsidiary merger used solely to cancel preferred priorities and accrued cumulative dividend rights, even though a charter amendment accomplishing the same result would require unanimity. The court rejected the argument that the merger was invalid simply because it did indirectly what amendment law would not allow directly, emphasizing that separate statutory provisions have independent legal significance and that underlying purpose is not a statutory limit unless the statute says so.