Bove v. Community Hotel Corp. of Newport, RI
105 R.I. 36, 1969 R.I. LEXIS 716, 249 A.2d 89 (1969)
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Rule of Law:
A corporation may legally use a statutory merger with a wholly-owned subsidiary for the sole purpose of eliminating the rights of preferred stockholders, including accrued dividends, as the broad authority granted by the merger statute is not limited by the more restrictive requirements of other corporate law provisions, such as those for charter amendments.
Facts:
- The Community Hotel Corporation of Newport, Rhode Island (Community Hotel), incorporated in 1924, had two classes of stock: preferred and common.
- Plaintiffs were owners of cumulative preferred stock, which entitled them to receive dividend payments before common stockholders.
- For approximately 24 years, Community Hotel had not paid dividends to its preferred stockholders, resulting in arrears of about $645,000, or $148.75 per share.
- To address its capital structure, the board of directors of Community Hotel created Newport Hotel Corp. (Newport) as a wholly-owned subsidiary.
- Community Hotel's board proposed a plan to merge Community Hotel into Newport.
- Under the merger plan, each share of preferred stock and all its accrued dividends would be converted into five shares of Newport's new common stock.
- Each share of Community Hotel's existing common stock would be converted into one share of Newport's new common stock, effectively eliminating the preferred stock class and the dividend arrears.
Procedural Posture:
- The plaintiffs, preferred stockholders in Community Hotel, filed a civil action in the superior court (trial court) to obtain an injunction preventing a proposed merger.
- A trial justice, sitting without a jury, denied the plaintiffs' request for an injunction and dismissed the action.
- The plaintiffs (appellants) appealed the trial court's judgment to the Supreme Court of Rhode Island, the highest court in the state.
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Issue:
Does a statutory merger of a parent corporation into its wholly-owned subsidiary, created solely for the purpose of recapitalization, legally permit the elimination of the parent's cumulative preferred stock and its accrued dividends with a two-thirds stockholder vote, even though a direct charter amendment to achieve the same result would require a unanimous vote?
Opinions:
Majority - Joslin, J.
Yes, a statutory merger can legally be used to eliminate preferred stock and accrued dividends, even if it is a 'subterfuge' to avoid stricter voting requirements. The court's reasoning is that the merger statute is 'clear, all-embracing and unqualified,' providing a corporation with a legal path independent of other, more restrictive statutes governing charter amendments. The court explicitly rejected the older 'vested rights' doctrine, which treated accrued dividends as an untouchable property right, in favor of the modern view that corporate action is permissible if authorized by statute. Furthermore, the court held that the state's reserved power to amend its corporate laws is an implicit part of every shareholder's contract, meaning subsequent legislation allowing for such a merger does not unconstitutionally impair the obligation of contracts. The existence of a statutory appraisal remedy for dissenting shareholders also weighs heavily against a court using its equitable power to enjoin the merger on grounds of unfairness.
Analysis:
This decision solidifies the doctrine of 'independent legal significance,' affirming that corporate management can choose the most favorable statutory procedure to achieve a desired result, even if another statute would prohibit it or require a higher shareholder vote. It marks a definitive shift from the 'vested rights' theory to a 'statutory authority' framework, granting corporations greater flexibility in recapitalizing and eliminating burdensome financial obligations like preferred stock arrearages. The case empowers majority shareholders and management to effect fundamental corporate changes through mergers, while channeling dissenting minority shareholders toward the statutory remedy of appraisal rather than equitable injunctions.
