Kistler v. Caldwell Cotton Mills Co.

CLARKSON, J., dissenting. This is an action for the dissolution of the defendant corporation, and for the distribution of its net assets among its stockholders, in accordance with their respective rights and equities.

The action was begun in the Superior Court of Caldwell County on 1 June, 1933. It was heard by the judge holding the courts of the judicial district in which Caldwell County is situate, at chambers, (1) on the demurrer of the defendant to the complaint; and (2) on the motion of the plaintiffs for an order requiring the defendant to file inventories as provided by C. S., 1186.

The demurrer of the defendant was overruled, and the motion of the plaintiff was allowed. The defendant appealed to the Supreme Court. This action was instituted under the provisions of C. S., 1186, which is as follows:

"C. S., 1186. When stockholders owning one-fifth or more in amount of the paid-up stock of any corporation organized under the laws of and doing business in this State, except corporations organized for religious, charitable, fraternal, and educational purposes, and except banking and public-service corporations, apply in term or vacation to the judge of the Superior Court holding the courts for the county in which the principal place of business of the corporation is situated, by petition containing a statement that for three years next preceding the filing of the petition, which time shall begin to run from three years after it has begun business, the net earnings of the corporation have not been sufficient to pay in good faith an annual dividend of four per cent upon the paid stock of the corporation, over and above the salaries and expenses authorized by its by-laws and regulations, or that the corporation has paid no dividend for six years preceding said application; or whenever stockholders owning one-tenth or more in amount of the paid-up common stock of any such corporation apply to the judge of the Superior Court as aforesaid by petition containing a statement that the corporation has paid no dividend on the common stock for ten years preceding said application, and that they desire a dissolution of the corporation, the judge shall make an order requiring the officers of the corporation to file in court, within a reasonable time, inventories showing all the real and personal estate of the corporation, a true account of its capital stock, the names of the stockholders, their residences, the number of shares belonging to each, the amount paid in upon said shares and the amount still due thereon, and a statement of all encumbrances on the property of the corporation, and all its contracts which have not been fully satisfied and canceled, specifying the place and residence of each creditor, the sum owing to each, the nature of the debt or demand, and the consideration therefor, and the books and papers of the corporation. Upon the filing of the inventories, accounts and statements, the court shall enter an order requiring all persons interested in the corporation to appear before a referee to be appointed by the court, at a time and place named in the order, service of which may be made by publication for such time as may be deemed proper by the court, and show cause why the corporation should not be dissolved. If it appears to the court that the statements contained in the petition are true, the court may adjudge a dissolution of the corporation and shall appoint one or more receivers, who shall have all powers of receivers conferred by this chapter for the winding up the affairs and distribution of the assets of the corporation. If it appears to the court that the corporation is insolvent or in imminent danger of insolvency, the court may appoint a temporary receiver of the corporation pending dissolution. No suit shall be brought for the dissolution of a corporation under the provisions of this section until each and all of the petitioners have owned their stock for the term of two years prior to the institution of the action; nor shall any suit be brought for the period of three years after a final judgment upon a prior petition as herein provided."

The defendant in this action, the Caldwell Cotton Mills Company, is a corporation organized under the laws of this State. The said corporation is now, and has been continuously since its organization in 1923, engaged in the business of operating a cotton mill, and of manufacturing cotton goods, in the town of Lenoir, Caldwell County, North Carolina. It has a paid-up capital stock of $349,500, divided into 2,495 shares of common stock, and 1,000 shares of preferred stock, each of the par value of $100.00. The holders of its preferred stock are entitled to receive, when and as the same are declared from the surplus or net profits of said corporation, dividends at the rate of seven per cent per annum, payable quarterly on the first days of February, May, August and November of each and every year. The dividends on its preferred stock are cumulative, and are payable before any dividends are payable on its common stock. Upon the dissolution of said corporation, whether voluntary or involuntary, and the liquidation of its assets, the holders of its preferred stock are entitled to be paid in full the par value of their stock, together with amounts due as dividends, before any amount shall be paid out of the assets of the corporation to the holders of its common stock. The holders of preferred stock of said corporation are not entitled to voting powers or privileges.

The plaintiffs are now and have been for more than two years prior to the commencement of this action owners and holders of 200 shares of the common, and of 690 shares of the preferred stock of said corporation. For a period of three years next preceding the commencement of this action, the net earnings of the defendant corporation have not been sufficient to pay in good faith an annual dividend of four per cent upon its paid-up capital stock. No action has heretofore been brought under the provisions of C. S., 1186, for the dissolution of said corporation. Dividends have been paid regularly on the preferred stock of said corporation from the date of its organization until 1 February, 1932. No dividend has been paid on said stock since said date.

The plaintiffs are now and have been for more than two years prior to the commencement of this action, the owners and holders of more than one-fifth of the paid-up capital stock of the defendant corporation. They own 200 shares of the common, and 690 shares of the preferred stock of said corporation. The total number of shares of said capital stock, both common and preferred, is 3,495. The contention of the defendant that plaintiffs cannot maintain this action under the provisions of C. S., 1186, because they do not own as much as one-fifth of the common stock of the defendant cannot be sustained. No distinction is made in the statute between holders of the common and holders of the preferred stock of a corporation, when its dissolution is sought under the provisions of the statute, on the ground that the net earnings of the corporation for a period of three years next preceding the commencement of the action for that purpose have not been sufficient to pay in good faith an annual dividend of four per cent upon the paid-up capital stock of the corporation. In such case, it is immaterial that the net earnings of the corporation for the said period have been sufficient to pay dividends on its preferred stock, and that such dividends have been paid, unless the total amount of such dividends equal four per cent per annum of the total capital stock, both common and preferred, of the corporation. It is also immaterial that the holders of the preferred stock have no voting powers or privileges, as in the instant case. The statute cannot and ought not to be so construed as to deprive preferred stockholders of a corporation organized under the laws of and doing business in this State, of its protection, when such corporation for any reason, under the management of officers and directors, who were elected or appointed by the holders of its common stock, for a period of three successive years, has failed to earn a profit sufficient for the payment of a dividend of at least four per cent per annum on its total paid-up capital stock. The language of the statute does not justify such construction. The holders of preferred stock of a corporation are not creditors and have no rights as such. Power Co. v. Mill Co., 154 N.C. 76,69 S.E. 747. They are, however, stockholders of the corporation, and subject to the terms and conditions on which their stock was issued, have all the rights of stockholders, 14 C. J., 416. The preferred stock forms a part of the capital stock of the corporation. C. S., 1156.

The further contention of the defendant that C. S., 1186, is void because its enactment by the General Assembly was in violation of provisions of the Constitution of the United States and of the State of North Carolina, is likewise untenable. The validity of the statute has been recognized by this Court in Lasley v. Mercantile Co., 179 N.C. 575,103 S.E. 213, and in Winstead v. Hearne, 173 N.C. 606, 92 S.E. 613. The statute was enacted by the General Assembly of this State in 1913, and was amended in 1915. It was in force at the date of the organization of the defendant corporation, and of the creation of its capital stock.

There was no error in the refusal of the judge to sustain the defendant's demurrer to the complaint.

Nor is there error in the order requiring the defendant to file inventories as provided by C. S., 1186. When the inventories have been filed and the referee, to be appointed by the court, has filed his report, the judge may in his sound judicial discretion, order a dissolution of the defendant corporation, and the distribution of its net assets among its stockholders, in accordance with their respective rights and equities, as provided by the statute. If it shall appear to the judge from all the facts shown by the record at the final hearing that the failure of the defendant corporation to earn a sufficient profit for the payment of an annual dividend on its paid-up capital stock of four per cent, during the past three years, was due to temporary business conditions, and not to the management of its affairs by its officers and directors, and that such failure does not justify a reasonable apprehension that the corporation is in danger of becoming insolvent, the judge may, in the exercise of his discretion, and doubtless will, decline to adjudge the dissolution of the corporation.

The orders overruling the defendant's demurrer to the complaint and requiring the defendant to file the inventories as provided by C. S., 1186, are

Affirmed.