Opinion
No. 30609
Decided October 9, 1946.
Corporations — Preferred shareholders — Preferential rights protected by constitutional safeguards — Prohibiting retroactive legislation and impairment of obligation of contracts — Reservation of state power over general laws authorizing formation of corporations — Limited by provisions relating to retroactive laws, impairment of contracts and inviolability of private property — Section 2, Article XIII, Section 28, Article II, and Section 19, Article I, Constitution — Statutory authorization to change express provisions of shares — Section 8623-14 (3) (i), General Code — Not applied retroactively to permit change in shareholder's contract, when — Preferred shareholders entitled to five-per-cent cumulative dividends under contracts — Plan of corporate recapitalization, adopted under subsequently enacted statute, invalid — Class action maintainable, when.
1. A provision giving preferential rights to the holders of preferred shares in a private corporation, incorporated in their stock certificates and in the articles of incorporation, constitutes a definite contractual undertaking between such shareholders and the corporation, and such rights are protected by the constitutional safeguards prohibiting retroactive legislation or legislation impairing the obligation of contracts.
2. The reservation of power of the state to alter or repeal general laws authorizing the formation of corporations, as set forth in Section 2, Article XIII of the Constitution of Ohio, is limited by the provision of Section 28, Article II that "The General Assembly shall have no power to pass retroactive laws, or laws impairing the obligation of contracts" and by the provision of Section 19, Article I, precluding the taking of private property even for public purposes except as therein provided.
3. The provisions of Section 8623-14 (3) (i), General Code, authorizing a corporation to "change any or all of the express terms and provisions or designations of issued or unissued shares of any class or series; which change, if desired, may include the discharge, adjustment or elimination of rights to accrued undeclared cumulative dividends on any such class," may not be applied retroactively to permit an alteration of the terms of a contract made by a private corporation with its shareholders prior to the date of the enactment of such statute.
4. A corporation entered into contracts with its preferred shareholders whereby the preferred shares were entitled to dividends at the rate of five per cent per annum, which dividends were cumulative. By authority of statutes thereafter enacted, the corporation by a plan of recapitalization required such shareholders to surrender their shares upon which unpaid dividends had accumulated in the sum of $50 per share, and accept in exchange therefor an equal number of other preferred shares which were noncumulative, an equal number of shares of common stock redeemable at $40 per share and also $10 in cash per share. Held: The plan of recapitalization adopted impairs vested contractual rights of shareholders protected by the Constitution of Ohio, which rights are thereby violated by the retroactive application of Section 8623-14 (3) (i), General Code.
5. Where a number of persons have separate and individual claims and rights of action against the same party, but all such claims arise from a common source and represent a like interest, the whole matter may be litigated in a single action brought by all of the claimants as coplaintiffs, or, in case the parties are numerous making it impracticable to bring them all before the court, by one or more of them suing for himself or themselves and on behalf of the other claimants. (Paragraph two of the syllabus in Haggerty v. Squire, Supt. of Banks, 137 Ohio St. 207, approved and followed.)
APPEAL from the Court of Appeals for Medina county.
This cause originated in the Court of Common Pleas of Medina county as an action to enjoin the defendants from carrying out a proposed plan of recapitalization. The plaintiffs are Mary Wheatley, trustee under the will of Flavius J. Wheatley, deceased, Kate Wheatley and Cora E. Kennan. The defendants are The A. I. Root Company and all the members of the board of directors of the corporation. The plaintiffs are the owners of preferred shares in varying amounts in the defendant corporation. Mary Wheatley as trustee owns 20 shares of preferred stock issued by the company August 16, 1916, Kate Wheatley owns 10 shares of preferred stock issued originally January 4, 1911, and transferred to her August 29, 1933, and Cora E. Kennan owns five shares of preferred stock issued October 13, 1916, and five shares issued April 13, 1926.
The certificates of preferred shares held by the plaintiffs contain in substance the following provision set forth in the articles of incorporation of the defendant The A. I. Root Company at the time the shares were issued to the plaintiffs.
"* * * the holders of such preferred stock be entitled to receive a dividend on said preferred stock, of five per cent. per annum payable annually out of the surplus profits of the company for each year, in preference to all other stockholders, and such dividends shall be cumulative. Said preferred stock shall be redeemable, at the option of The A. I. Root Company, at any time after the first day of January, A.D. 1917, at par and accumulative dividend. In the event of the dissolution of the corporation, the holders of the preferred stock shall be entitled to receive the par value thereof out of the surplus funds of the corporation before anything shall be paid therefrom to the holders of the common stock. The preferred stock shall have no vote in the election of directors or at stockholders meetings."
Upon these cumulative preferred shares dividends had accrued in the amount of $50 per share which were unpaid on December 17, 1943, the date the recapitalization plan was adopted.
The plaintiffs allege that during recent years there has been an increase in the earnings of the corporation and that the company's cash position has so improved that it is now able to declare and pay to the plaintiffs the cumulated unpaid dividends; that it has a surplus available as of July 31, 1943, in the sum of $146,515.52; and that since that date the corporation has operated profitably. Plaintiff's contend that these dividends could be paid without the use of either borrowed money or increased capital.
Plaintiffs complain that instead of declaring dividends to pay the cumulated sums on their preferred shares, the members of the board of directors of the corporation, who have a predominant interest in the common shares of the corporate defendant, devised a scheme which they have designated as a "plan of recapitalization," which plan will result in placing the common shares in a position where dividends may be paid on the common shares from existing and future surplus of the corporate defendant by scaling down the rights of the owners of the five-per-cent cumulative preferred shares; and that the proposed plan of recapitalization contemplates that the articles of incorporation of The A. I. Root Company be amended so as to:
"(1) Cancel and discharge the rights of the owners and holders of the existing five-per-cent cumulative preferred stock to receive the accrued and unpaid dividends on their stock, now amounting to $50 per share, before any dividends are paid on the common stock and
"(2) Compel the owners and holders of the existing preferred stock to accept for and in lieu of each share thereof a share of proposed non-voting five-per-cent preferred stock without cumulative dividend rights, one share of a so-called class A common stock redeemable at $40 per share but actually subject to purchase and redemption by the corporate defendant at such prices as it may bargain for as hereinafter set forth and $10 in cash,
"(3) Effect an exchange of the existing 4,250 shares of outstanding common stock, having a par value of $100 per share, for 8,500 shares of so-called class B common stock without par value on a basis of 2 shares of the new stock for each share of existing common stock,
"(4) Create a so-called 'sinking fund,' hereinafter described,
"(5) Provide that the holders of the preferred shares shall not be entitled to vote at shareholders' meetings or otherwise unless such a vote is required by the laws of Ohio, and provide that the articles of incorporation (including the provisions thereof for the protection of the preferred shareholders) may be further amended, changed or added to by the vote of the holders of shares entitling them to exercise a majority of the voting power of the corporation."
As alleged by the plaintiffs, the plan of recapitalization "contemplates the adoption of a resolution reducing the stated capital of the corporate defendant from $700,000 to $555,000 and that the excess assets created by such reduction, to wit, $145,000, be passed to the surplus of the corporate defendant and be subject to distribution and use by the board of directors in all respects as paid-in surplus.
"With respect to the 'sinking fund' hereinabove referred to, said plan of recapitalization provides that there shall be set aside in said 'sinking fund' by the corporate defendant, whenever its board of directors shall declare a cash dividend on the class A and class B common shares, an amount equal to the aggregate amount of such dividend, and further that whenever there shall be $5,000 or more in said 'sinking fund' the board of directors shall within thirty days thereafter cause a notice to be sent to all holders of class A common shares requesting them to tender their class A common shares for sale to the corporate defendant, and to the extent practicable the funds in the 'sinking fund' on each such occasion shall be used to purchase class A common shares at the lowest prices at which such class A common shares may be tendered, and provided further that after all class A common shares have been purchased or redeemed the board of directors may continue the so-called 'sinking fund' for the purchase or redemption of the proposed new preferred shares in like manner."
The plaintiffs claim that such a plan of recapitalization, under the presumed authority of statutory provisions enacted subsequent to the dates of issuance of the five-per-cent cumulative preferred shares, would violate and impair their rights and the rights of others similarly situated under their contracts as expressed in the stock certificates, in the articles of incorporation as they existed on the date of issue of the stock and in the corporation laws of Ohio as they existed at such dates aforesaid; and that their rights and the rights of others similarly situated are protected by Section 10, Article I of the Constitution of the United States, by the Fourteenth Amendment to the Constitution of the United States and by Section 28, Article II of the Constitution of Ohio.
Plaintiffs state that this action is brought on behalf of themselves and all other owners of five-per-cent cumulative preferred shares of stock of the corporate defendant, similarly situated, who have not consented to the proposed plan of recapitalization, and that such persons are very numerous and it is impractical to bring them all before the court. Plaintiffs pray for an injunction enjoining the defendants from carrying out the plan of recapitalization and from declaring any dividends on the common stock until all accrued and unpaid dividends on the five-per-cent cumulative preferred stock are fully paid.
The answer of the defendants, after restating the proposed plan of recapitalization substantially as set forth by the plaintiffs, but in greater detail, states that the amended articles of incorporation were adopted at a shareholders meeting by the affirmative vote of more than two-thirds of the outstanding shares of both preferred and common stock and further that the resolution reducing the stated capital and changing the classes of the outstanding shares was adopted at the same meeting by more than two-thirds of the outstanding shares, both preferred and common.
Defendants allege that "the holders of 2,493 shares of the old preferred stock and the holders of 3,937 shares of the old common stock of the defendant corporation have effected an exchange of said shares for the new shares and the cash payment provided for in said amended articles of incorporation, having thereby ratified and confirmed the action of the shareholders at said special meeting and taken the benefits provided by said amended articles; that of the 222 shares of old preferred stock not yet exchanged 14 shares voted for said amended articles and resolution reducing stated capital, and 59 shares were issued to the holders thereof after July 24, 1939.
"Defendants further say that none of the share holders of the defendant corporation within twenty days after said vote objected in writing filed with the defendant corporation to the action of the shareholders, both preferred and common, in adopting said amended articles of incorporation or in adopting said resolution relative to reduction of stated capital at said shareholders meeting on December 17, 1943, and that none of said shareholders within twenty days after said vote demanded the fair cash value of their shares, in writing, filed with the defendant corporation." Further the defendants allege that by reason of the filing of the amended articles and the resolution with the Secretary of State of the state of Ohio the recapitalization plan has become, effective as to all shareholders of the defendant corporation, including the plaintiffs.
Plaintiffs put in issue the defendants' answer by a reply, and the case came on for trial.
During the trial, by stipulations of fact the parties agreed that the owners of the cumulative preferred shares might be divided into six classes, these classes being determined on the bases of acquiescence or nonacquiescence in the proposed plan of recapitalization and upon the owners' surrender or refusal to surrender their shares. These stipulations were dependent upon the court finding that this action was a class suit.
The Court of Common Pleas found in favor of the defendants, holding they were not guilty of any fraud, illegality or unfairness in the reorganization and recapitalization of The A. I. Root Company and that Sections 8623-14, 8623-15 and 8623-72, General Code, and other sections of the General Corporation Act, under which the articles of incorporation were amended to effect the reorganization and recapitalization, are not in conflict with the Constitution of the state of Ohio or the Constitution of the United States. That court found that the plaintiffs as dissenting shareholders had an adequate remedy at law under Section 8623-72, General Code, which is exclusive, and dismissed the petition at plaintiffs' cost.
An appeal was perfected to the Court of Appeals which found the facts to be substantially as set forth in the petition and held, as stated in its journal entry:
"10. That said plan of recapitalization, insofar as it contemplates an adjustment, elimination, or discharge of, or attempts to adjust, eliminate, cancel or discharge, the rights of plaintiffs to receive the cumulative undeclared dividends that accrued prior to July 24, 1939, on the five-per-cent cumulative preferred stock now held by them, is illegal as impairing the obligations of plaintiffs' contracts of stock ownership, expressed in the articles of incorporation and in the certificates of stock representing their shares.
"11. That the provisions of Section 8623-14 (3) (i), General Code, as amended July 24, 1939, are prospective only in their operation, not retrospective or retroactive, and, therefore, do not apply to, nor operate in respect of, undeclared cumulative dividends that accrued prior to July 24, 1939, on the shares of stock now owned by the plaintiffs herein.
"12. That the plan of recapitalization being illegal in the respects hereinabove stated, the remedy afforded by Section 8623-72, General Code, to dissenting shareholders was not exclusive.
"13. That in all other respects said plan of recapitalization is fully authorized by law and is legal and valid, and that there was no fraud or unfairness in the presentation or adoption thereof.
"14. That this action cannot be maintained as a class suit, and that the plaintiffs alone are entitled to the relief granted hereunder."
The Court of Appeals thereupon ordered that the defendants be enjoined from paying any dividends on class B common stock, on class A common stock or on the noncumulative preferred stock of The A. I. Root Company until the company has paid to the plaintiffs the accumulated dividends, in the amount of $41.25 a share, that accrued prior to July 24, 1939; that the plaintiffs were entitled to 20 days after the date of the decree to avail themselves of the remedy provided by Section 8623-72, General Code, and to have the fair cash value of their shares of five-per-cent cumulative preferred stock determined as of the date before December 17, 1943, the date of the amendment of the articles of incorporation; and "that in the event the plaintiffs shall elect to change their stock under the recapitalization plan, they shall receive (a) the sum of $41.25 a share in cash, being the cumulative dividends which accrued prior to July 24, 1939, on each share of five-per-cent cumulative preferred stock now held by them and (b) new noncumulative preferred shares for the old cumulative preferred stock (the unpaid dividends that accrued thereon between July 24, 1939, and December 17, 1943, in the amount of $8.75 a share) shall furnish the basis for a pro rata settlement with the plaintiff's in class A common stock in respect of each share of five-per-cent cumulative preferred stock and $7.22 in cash.
"In the event the plaintiffs shall elect to exchange their stock as above provided they shall also receive, and The A. I. Root Company shall immediately pay to them, on account of each share of the noncumulative preferred stock so distributed to them, an amount equal to the aggregate of dividends theretofore declared and paid on the noncumulative preferred stock."
The cause is before this court upon allowance of motions to certify the record of the Court of Appeals submitted by both the plaintiffs and defendants.
Mr. Silas J. Blair and Mr. W.J. O'Neill, for appellants.
Mr. John A. Weber and Mr. H.L. Williams, for appellees.
The parties to this action agree that the purpose and object of the proposed "plan of recapitalization," among others, was the alteration of the original agreement made by the corporation with the preferred shareholders, which agreement, incorporated in both the articles of incorporation and the certificates of shares, provided that the holders of such preferred shares were entitled to receive dividends on such shares of five per cent per annum annually out of the surplus profits of the company for each year, in preference to all other shareholders, and that such dividends should be cumulative.
The record in this case shows that as of July 31, 1943, which date was prior to the recapitalization, the financial statement of the corporation stated the earned surplus account as follows:
"Balance at August 1, 1942, .......................$ 42,584.43 "Balance transferred from profit and loss 52,480.96 ------------ $ 95,065.39
"Dividends paid cash: "First preferred — $6.25 per share ..........$ 17,062.50 ------------- "Balance at July 31, 1943, ....................$ 78,002.89"
The record shows also that as of July 31, 1944, after the recapitalization had been carried out, the first preferred five-per-cent cumulative shares having been canceled, and the 2,750 shares of five-per-cent noncumulative preferred shares and the 2,750 shares of class A common stock issued in place thereof, the earned surplus account stood as follows:
"Balance at August 1, 1943, ........................$ 78,002.89 "Balance for the year transferred from profit and loss ................................ 31,260.65 ----------- $109,263.54
"Cash distribution and dividends: "On first preferred — 5% cumulative stock (changed under plan of recapitalization) — $11.25 per share (includes $10 special distribution under plan) .......................$30,543.75
"On preferred 5% noncumulative stock — $2.50 per share 6,787.50 $ 37,331.25 ------------ ----------- "Balance at July 31, 1944 $71,932.29"
A comparison of these financial statements clearly discloses the effect of the plan of recapitalization. As of July 31, 1943, there was in the earned surplus account the sum of $78,002.89 to which the holders of preferred shares had a preference in that their unpaid cumulative dividends were to be paid from such funds before any dividends could be declared and paid to the holders of the common shares. As of July 31, 1944, there remained in the earned-surplus account the sum of $71,932.29, but the holders of the first preferred shares no longer had a claim thereto for their cumulative unpaid dividends, for the reason that such sum became available for distribution to the holders of the common shares subject only to the requirement of payment of current dividends upon preferred shares.
To succinctly state the proposition presented: The preferred shareholders were required to accept additional shares of stock, and the common shareholders were accorded the right to the accumulated earnings.
The plan of recapitalization is alleged to have been evolved pursuant to and in conformity with the provisions of Sections 8623-14, 8623-15 and 8623-72, General Code. Counsel for the defendants concede that the effect of the proposed plan is "to adjust and eliminate undeclared cumulated dividends of $50 per share on the preferred shares and to recapitalize the company."
The general corporation laws of Ohio were revised, consolidated and codified in 1927 (112 Ohio Laws, 9); in 1929 (113 Ohio Laws, 413) extensive amendments were made; and again in 1939 (118 Ohio Laws, 177).
These statutory provisions expressly conferred upon corporations the power to make substantial amendments to their articles of incorporation, which amendments were not theretofore authorized, particularly by changes in the classes of outstanding and issued shares of stock, and provided a specific remedy by way of appraisal and ascertainment of the fair cash value of shares held by any dissenting shareholder and payment therefor upon demand. The amendment of 1939 expressly authorizes a corporation to "change any or all of the express terms and provisions or designations of issued or unissued shares of any class or series; which change, if desired, may include the discharge, adjustment or elimination of rights to accrued undeclared cumulative dividends on any such class." Section 8623-14 (3) (i), General Code.
The plan of recapitalization involved in this proceeding was proposed and effectuated after the 1939 amendment, and neither party complains of any failure to fully comply with the requirements of the statutes. The issue here presented arises out of the claim of the plaintiffs that these statutes, as amended in 1939, can have no application to their shares; that the plan of recapitalization requires a retroactive application of the terms of these statutory provisions; that no plan is valid which affects their rights under their contract to earnings accumulated either before or subsequent to the effective date of the 1939 amendment; and that, therefore, the action of the Court of Appeals in holding that these statutes affected such rights of the plaintiff to dividends accruing after 1939 is erroneous.
On the other hand the defendants claim that the plan of recapitalization was fully authorized and that all cumulative dividends were thereby legally canceled. They further claim that the Court of Appeals erred in holding that only the cancellation of dividends accruing subsequent to 1939 is valid and lawful.
The authority granted by Section 8623-14 (3) (i), General Code, is clear and unambiguous and is sufficiently broad to authorize the cancellation of dividends accruing either previous or subsequent to the effective date of that section.
It is clear that the particular effect of the consummation of the plan is to cancel the obligation of the corporation to pay to the preferred shareholders the unpaid cumulative dividends and to abolish the preferential rights of such shareholders, specified not only in their respective certificates of stock but also in the articles of incorporation under which the stock was issued. Therefore, the question of law presented is whether the provisions of the statute referred to may be applied retroactively to authorize a plan, the effect of which will be to revoke the contractual rights of preferred shareholders whose shares were subscribed for prior to the enactment of those statutes.
It is pointed out that the protective provisions of the contract involved herein are limited to cumulative dividend rights in earnings with priority over the common shares, priority rights in distribution of assets over the common shares in event of dissolution, and the right to par plus accrued dividends upon redemption. Such preferred shares are excluded from participation in the selection of the directors, and further there is no provision for a sinking fund for the redemption of the preferred shares, no restriction upon debts or incumbrances and no limitation upon the relative amounts of preferred and common shares. From these facts it is logically argued that the elimination of the cumulative-dividend provision would result in a serious impairment of the value of the shares and possibly even make them less desirable than the common. The conclusion is irresistible that the compulsory provision of the proposed plan would deprive the preferred shareholders of accrued dividends and require a sacrifice of the benefits secured to them by their contract.
If such retroactive legislation may be justified under the Constitution of Ohio, such justification must result from the application of the so-called "reserved power" provision as found in Section 2, Article XIII. This section provides as follows: "Corporations may be formed under general laws; but all such laws may, from time to time, be altered or repealed. * * *"
It is difficult to see how this specific grant of authority to alter or repeal corporation laws exceeds or differs from the power conferred upon the General Assembly by provisions of Section 1, Article II of the Constitution. Under the authority thereby conferred, the General Assembly unquestionably has the power to alter or repeal any statute theretofore enacted by it. The power and the authority of the legislative body, however, has specific and absolute limitations under the Ohio Constitution. It is specifically provided by Section 28, Article II of the Ohio Constitution that "The General Assembly shall have no power to pass retroactive laws, or laws impairing the obligation of contracts * * *."
The provision of Section 19, Article I of the Ohio. Constitution preclude the taking of private property even for public purposes except as therein provided.
The preferential rights of the plaintiffs to the accrued unpaid dividends under their contract were vested and absolute as between the parties and enforceable in a court of law until the corporation, a party to the contract, undertook to abolish and eliminate such rights of the preferred shareholders to the gain and profit of the common shareholders.
The constitutional limitations upon the power of the General Assembly to pass retroactive laws or laws impairing the obligations of contracts apply most aptly and with particular force to the present situation. If Section 8623-14 (3) (i), General Code, were applied to the contract of these preferred shareholders the result would be to completely abrogate their contract, deprive them of the benefits thereof and presumably secured thereby, and enrich the holders of the common shares by transferring to them the outright ownership of the accumulated earnings in which, under the terms of their contract, the preferred shareholders had vested rights.
The meaning and extent of the "reserved power," as that term is used in the state Constitution, are well stated in 13 American Jurisprudence, 473, Section 421, as follows:
"Alteration of rights. — The ultimate test of the validity of statutes passed after issuance of the stock affected, which authorize a change in the obligations of a corporation to the stockholders, is whether the change under consideration can be said to come within the reserved power of the Legislature to alter or amend the corporate charter or articles or certificate of incorporation. Some courts have adopted the view that whether a power to amend corporate charters reserved to the state by statute or Constitution protects a proposed change in the obligations of a corporation to its stockholders, authorized under enabling legislation enacted subsequent to the issuance of the corporate stock affected, depends upon whether the proposed change is directed toward those features of the contract embraced in the corporate charter in which the state has an interest or relates to those features dealing with the private rights between the stockholders and the corporation or between the stockholders inter se, such courts feeling that the reservation of power to amend corporate charters is applicable only to those features of the contract affected with a public interest and that the private rights of the stockholder as against the corporation or his fellow stockholders are protected from alteration by the inhibition against the impairment of contracts. It has been held, too, that whether a proposed change in the obligations of a corporation to its stockholders is sanctioned by the reserved power to amend or alter the corporate charter depends on whether the change affects vested rights of the stockholders as distinguished from preferential rights."
Very pertinent also is the following statement in 13 Fletcher Cyclopedia Corporations (Perm. Ed.), 86, Section 5776:
"* * * The true view is that the power to alter, amend or repeal charters is reserved by the state 'solely' for the purpose of avoiding the effect of the decision in the Dartmouth College case [17 U.S. (4 Wheat.), 518, 4 L. Ed., 629]; that the charter of a corporation is a contract between the state and the corporation within the constitutional prohibition against laws impairing the obligation of contracts, and that the purpose of the reservation is to enable the state to impose such restraints upon corporations as the Legislature may deem advisable for protection of the public. Such power is not reserved in any sense for the benefit of the corporation, or of a majority of the stockholders, upon any idea that the Legislature can alter the contract between the corporation and its stockholders, nor for the purpose of enabling it to do so."
We quote also the following from the same authority, Volume 7, 835, Section 3681:
"Constitutional limitations and restrictions. The reserved right of amendment, alteration or repeal, whether contained in a statute or constitutional provision, must be exercised in subjection to the various other constitutional commands and restrictions. Due process of law must be observed, and there must be no denial of the equal protection of the laws, nor impairment of the obligation of contract."
Many cases may be cited supporting the text, among which are: Yoakam v. Providence Biltmore Hotel Co., 34 F.2d 533; Morris v. American Public Utilities Co., 14 Del. Ch. 136, 122 A. 696; Keller v. Wilson Co., Inc., 21 Del. Ch. 391, 190 A. 115; Consolidated Film Industries, Inc., v. Johnson, 22 Del. Ch. 407, 197 A. 489; Johnson v. Consolidated Film Industries, Inc., 22 Del. Ch. 262, 194 A. 844; Pronick v. Spirits Distributing Co., 58 N.J. Eq. 97, 42 A. 586; Lonsdale Securities Corp. v. International Mercantile Marine Co., 101 N.J. Eq. 554, 139 A. 50; Sutton v. Globe Knitting Works, 276 Mich. 200, 267 N.W. 815, 105 A. L. R., 1447; Coombes v. Getz, 285 U.S. 434, 76 L.Ed., 866, 52 S.Ct., 435; Phillips Petroleum Co. v. Jenkins, 297 U.S. 629, 80 L.Ed., 943, 56 S.Ct., 611; Shields v. Ohio, 95 U.S. 319, 24 L.Ed., 357; Johnson v. Bradley Knitting Co., 228 Wis. 566, 280 N.W. 688; Allen v. White, 103 Neb. 256, 171 N.W. 52; Hueftle v. Farmers Elevator, 145 Neb. 424, 16 N.W.2d 855; Romer v. Porcelain Products, Inc., 23 Del. Ch. 52, 2 A.2d 75; Garey v. St. Joe Mining Co., 32 Utah 497, 91 P. 369, 12 L.R.A. (N.S.), 554.
Comparatively recent decisions of this court, which have some pertinency to the issue presented in this case, are Geiger v. American Seeding Machine Co., 124 Ohio St. 222, 177 N.E. 594, 79 A. L. R., 614; Johnson v. Lamprecht, 133 Ohio St. 567, 15 N.E.2d 127; and Wildermuth v. Lorain Coal Dock Co., 138 Ohio St. 1, 32 N.E.2d 413.
Under the decision in the Geiger case the certificates of shares of these several plaintiffs constituted contracts between them and the corporation which the latter is powerless to impair.
Under the holding of this court in paragraph three of the syllabus in the Lamprecht case, the plaintiffs herein are not relegated to the remedy provided by Section 8623-72, General Code, since the amendment of the articles of incorporation in the respect indicated is illegal and the statutory remedy is therefore not exclusive. However, as held in the Wildermuth case, such shareholders may, if they desire, avail themselves of the statutory remedy.
It is to be observed that the Lamprecht case involved an optional plan of recapitalization. As stated by Judge Gorman in the opinion:
"In all of the cases cited, where equitable relief was obtained, a compulsory plan was proposed. In this case the plan is optional.
"The plaintiffs in this case are not compelled to exchange their stock. They are at liberty to retain their present preferred stock upon the same terms and conditions as they now hold it."
Following the citation of decisions supporting the proposition that "attempts by the majority to effect a compulsory exchange of stock that will eliminate either a sinking fund established for the benefit of the preferred holders, or to cancel unpaid accumulative dividends have been enjoined," Judge Gorman made the further statement that "these decisions proceed upon the theory that a shareholder who holds preferred stock upon which there are past due and accumulative dividends has a vested right in the surplus and earnings of the corporation until the dividends are paid. These unpaid dividends are treated as if they were in the nature of a debt."
We direct attention also to the following very pertinent statement in the opinion of Judge Turner in the Wildermuth case:
"* * * Of course, the dissenting shareholder may not prejudice the rights of creditors, but it never was the intention of the Legislature that corporate management might secure capital upon the representation that the investment was to be safeguarded by provisions acceptable to the investor and then, after the investment had been made, that the corporate management or a majority of its shareholders might repudiate any part of the contract through which it had secured a part of its capital."
There could be no basis for the contention in this case that the statutory provisions involved herein were enacted for or in fact served any public purpose. The provisions of the proposed plan, insofar as they undertake a retroactive application of these statutory provisions and thus impair the contract of the preferred shareholders and thereby deprive them of the rights stipulated therein, are invalid.
It should be observed that no question relative to the prospective application of these statutes is presented, and, therefore, is not considered or decided.
This being a class suit as defined by Section 11257, General Code, it was properly brought by plaintiffs for themselves and on behalf of those similarly situated. See Haggerty v. Squire, Supt. of Banks, 137 Ohio St. 207, 28 N.E.2d 554, where it was held in paragraph two of the syllabus:
"Where a number of persons have separate and individual claims and rights of action against the same party, but all such claims arise from a common source and represent a like interest, the whole matter may be litigated in a single action brought by all of the claimants as coplaintiffs, or, in case the parties are numerous making it impracticable to bring them all before the court, by one or more of them suing for himself or themselves and on behalf of the other claimants."
The Court of Appeals held that the factual situation attending the acquisition of the preferred shares differed in each case as to the time of purchase, and that as to the various shareholders, different claims and defenses would be involved, and, therefore, the shareholders did not properly constitute a class for which a suit may be brought. However, the record shows that the parties, themselves, by stipulation in the Court of Common Pleas divided the preferred shareholders into classes in accordance with the attitude of each as to consent, acquiescence or opposition in connection with the recapitalization. The Court of Common Pleas, by reason of its dismissal of the petition of the applicants, did not consider the respective rights of these classes.
The determination of the question as to who constituted the class of shareholders "similarly situated" with the plaintiffs being undetermined, the case is remanded to the Court of Appeals for further proceedings in accordance with this opinion. In the respects indicated, the decree of the Court of Appeals is reversed and the cause remanded to that court.
Decree affirmed in part and reversed in part.
WEYGANDT, C.J., ZIMMERMAN, BELL, WILLIAMS, TURNER and HART, JJ., concur.