Petition for a Writ of Certiorari — Johnson v. Fuller

oy

Supreme Court of the Unit

October Term, 1941. }} i Sr l >.

Coe RAE A |

No. 6 ~~ 5.

NORMAN JOHNSON, Suing on Behalf of Himself and All

Other Stockholders in THE CURTIS PUBLISHING

COMPANY Similarly Situated Who, Being Interested in

the Subject Matter of the Complaint, Shall Become Parties

Hereto,

Petitioner,

against

WALTER D. FULLER, MARY L. C. BOK, FRED A.

HEALY, CARY W. BOK, BENJAMIN ALLEN, PHILIP

S. COLLINS, BRUCE GOULD, PHILIP S. ROSE,

WESLEY W. STOUT, LEWIS W. TRAYSER, JOHN

B. WILLIAMS, and THE CURTIS PUBLISHING COM-

PANY,

Respondents.

Petition for a Writ of Certiorari to the United States

Circuit Court of Appeals for the Third Circuit,

and Brief in Support Thereof.

ARTHUR GARFIELD HAYS,

120 Broadway, New York City,

Solicitor for Petitioner.

JoHN ScHULMAN,

Seymour M. Hemsron,

Auan §S. Hays,

Of Counsel.

International, 236 Chestnut St., Philadelphia

sysname -—_ _— pana SeR Ubi Na Dt ed aw 7

|

|

TABLE OF CONTENTS OF PETITION.

Page

| Summary Statement of the Matter Involved......... 1

| Statement of Jurisdiction ............5+ee cece eens 7

Questions Presented ............e eee eee eee eeeee 7

Reasons for Granting the Writ................005- 11

Verification for the Petition..............eesseeees 16

i

Uy

MTS 7

Z PLEO SEO eM LLP LED DLIL AALS LAA LG IE LN OIE MER

UAE RL RCT Dba HO Rips

RAEN

CASES CITED IN PETITION.

Page

Davison v. Parke, Austin & Lipscomb, Inc., 285 N. Y.

500 (May 29, 1941)......---e sees ee reeceeretes 13

Jones v. Missouri-Edison Electric Co., 144 Fed. 765,

Certiorari Denied 229 U. S. 615......--+++++++> 10

Northern Pacific ~y. Co. v. Boyd, 228 U. 8. 482...... 11, 12

Petry v. Harwood Electric Co., 280 Pa. St. Rep. 142,

OB MD oie ve cad sxe vesecdaeds ne sceee sens 11, 12

Southern Pacific Co. v. Bogert, 250 U. S. eee 10, 11

West Chester & Philadelphia R. R. Co. v. Jackson,

Admx. of Gray, 77 Pa. St. Rep. 321.....-.-++++-. 8, 12

STATUTES CITED IN PETITION.

Page

Article I, Section 10, Constitution of the United

NS Sn i cueky heeeeeareheesa hens 8, 9, 10, 11

Article VIII, Section 2582-801, Business Corporation

Law of the Commonwealth of Pennsylvania... . 2

Fourteenth Amendment, Constitution of the United

oc cay acne dedkns ek aees een Ks 8, 9,10, 11

Rule X-14A-8, Securities and Exchange Commission,

Securities Exchange Act of 1934 .......----- 6

Section 240 (a), Judicial Code, as Amended by Act of

February 13, 1925 (United States Code, Title 28,

Section 347 (a)) .-.-- A ete en re re ey 7

TABLE OF CONTENTS OF BRIEF.

Page

ES Sr I RO a cies vec awe haces iesetesi 17

re eee Teo ee Te EEE Eee 17

Point I. The Circuit Court Erred in Failing to

Enjoin Payments on the New Debentures

and Prior Preferred Stock ............. 18

Point II. The Circuit Court of Appeals Erred

in Holding That the Plan of Reorganiza-

tion and Recapitalization Did Not Unlaw-

fully Impair Petitioner’s Rights; and in

Failing to Hold That the Pennsylvania

Business Corporation Law Is Unconstitu-

tional If Interpreted to Permit Said Plan 20

Point II. The Cireuit Court Erred in Failing

to Follow the Principle of Southern Pacific

Co. v. Bogert, 250 U. S. 483, and Jones v.

Missouri-Edison Electric Co., 144 Fed. 765,

Certiorari Denied 229 U. S. 615 ........ 26

Point IV. The Circuit Court Erred in Failing

to Invalidate the Plan Because of Its Fail-

ure to Recognize and Apply the Rule of

SE REN acne se ckacen keke Keksee neces 27

Se le a oud wieder a avd bod geek 0 45.2 00.04% 30

Appendix: Statutes Involved ..................... 31

CASES CITED IN BRIEF.

Page

Case v. Los Angeles Lumber Products Co., Ltd., 308

a Arn rare: 242 Oe Cad ale ital 29

Chicago, M. St. P. R. R. Co. v. Wisconsin, 238 U.S. 491 25

Consolidated Rock Products Co. v. DuBois, 312 U. S.

SC al Cee nw een ene heny CoN SSE YTS 29

Coombes v. Getz, 285 U. S. 434 ...---eeeeerrrecees 24

Cratty v. Peoria Law Library Association, 219 Til.

GEG, FU. TOF vane soe ree censr ert ens ss erees 23

Godley v. Crandall & Godley Co., 212 N. Y. 121, 105

ee NR aidan e evan ranasikhy se cee eass + 6s 23

Jones v. Missouri-Edison Electric Co., 144 Fed. 765,

Certiorari Denied 229 U.S. 610 ...---- +--+ sees 26

Keller v. Wilson, Del. , 190 Atl. 115......---- 24

Matter of Kinney, 279 N. Y. 423, 18 N. EB. (2d) 645.. 24

Northern Pacific Co. v. Boyd, 228 U. S. 482 .....--- 28

Petry v. Harwood Electric Co., 280 Pa. St. Rep. 142,

ee RU EE i acces vacvnnsrs cere cere tene ss 27, 29

Southern Pacific Co. v. Bogert, 250 U. S. 483 ......- 26

Stokes v. Continental Trust Company, 186 N. Y.285.. 23

West Chester & Philadelphia R. R. Co. v. Jackson,

77 Pa. St. Rep. 321 .....--ceeceecceercceccres 18

STATUTE CITED.

Article VIII, Business Corporation Law of 1933 of

Pennsylvania (15 P. S. Pa. Section 2852-801 (4)) 22

Federal Water Service Corporation et al., Holding

Company Act Release No. 2635, March 24, 1941

(Securities and Exchange Commission) ......-- 29

IN THE

Supreme Court of the United States.

October Term, 1941.

NORMAN JOHNSON, Surnec on Bewarr or HIMSELF AND

Auu Oruer StockHoLpers In THE CURTIS PUBLISH-

ING COMPANY Simmarty Srrvuatep Wao, Berne Iv-

TERESTED IN THE SupsecT MATTER OF THE COMPLAINT,

Sua.tu Become Parties HERETO,

Petitioner,

—agaimst—

WALTER D. FULLER, MARY L. C. BOK, FRED A.

HEALY, CARY W. BOK, BENJAMIN ALLEN,

PHILIP S. COLLINS, BRUCE GOULD, PHILIP 8.

ROSE, WESLEY W. STOUT, LEWIS W. TRAYSER,

JOHN B. WILLIAMS, ann THE CURTIS PUBLISH-

ING COMPANY,

Respondents.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES CIRCUIT COURT OF APPEALS

FOR THE THIRD CIRCUIT.

To the Honorable the Chief Justice and the Associate Jus-

tices of the Supreme Court of the United States:

Your petitioner, Norman Jounson, respectfully repre-

sents:

SUMMARY STATEMENT OF THE MATTER

INVOLVED.

This ease challenges the legality, on both constitutional

and equitable grounds, of a ‘‘Plan of Reorganization and

Recapitalization’’ of the defendant, The Curtis Publishing

Company (hereinafter called the ‘‘Company’’). The plan

was devised at the instance of common stockholders in con-

ct

N

§

3

ee

2 Summary Statement of Matter Involved

trol of the Company’s management for the primary pur-

pose of evading payment of dividend arrearages on the

preferred stock and cutting down the preferences of the

preferred stock in other important respects as shown be-

low (35).* It purported to be effected under Article Vill,

Section 2582-801 of the Business Corporation Law of the

Commonwealth of Pennsylvania where the Company was

incorporated and domiciled. The statute is set forth in the

appendix to the brief annexed hereto.

Petitioner is an owner of the Company’s preferred

stock (19) and brought a representative action to have the

plan of reorganization declared invalid; to enjoin payment

of principal and interest on the Company’s debenture

bonds and of dividends on its prior preferred stock until

payment of the accumulations on his shares; or, alterna-

tively if the Court held the plan otherwise valid, to require

the Company’s directors to pay to the Company the amount

which the Company should have received but did not re-

ceive upon the issuance of new securities under the plan

(3-18).

On April 30, 1940, the Company’s capitalization con-

sisted of 722,420 shares of $7 cumulative preferred and

1,733,041 shares of common stock exclusive of shares held

by the Company (31). There was no funded debt (41; 20).

There were accumulated unpaid dividends of $19.3742 per

share on the preferred stock (35). On the above mentioned

date, a proposal styled ‘‘Plan of Reorganization and Re-

capitalization’’ was submitted by the Board of Directors

to the stockholders, under which:

(A) Consenting preferred stockholders might ex-

change each share of preferred (including accrued divi-

* Numbers refer to page numbers of Appellant’s Ap-

pendix unless otherwise stated.

Summary Statement of Matter Involved 3

dends) for one newly created $10 3% debenture, one share

of newly created prior preferred stock having a dividend

rate of $3 cumulative plus $1 if earned, and 24% shares of

newly created common stock.

(B) The Company’s stated capital would be reduced

by $7,224,200 which sum would be transferred to surplus

against which the new debenture bonds would be charged

when issued (32).

(C) Non-consenting preferred stockholders might con-

tinue to hold their preferred shares, the values behind

which, however, would be vitiated (1) by the creation of

the senior preferences attached to the new debentures and

prior preferred stock above mentioned; (2) by the reduc-

tion of $7,224,200 in stated capital; and (3) by the distri-

bution of surplus at the rate of $10 per share exclusively

to the consenting preferred stockholders.

(D) Common stockholders holding shares of no par

value would receive new common shares of no par value,

share for share.

(30-43)

At the time the plan was promulgated, the preferred

stockholders held a liquidation preference at the rate of

$119.3714%4 per share, consisting of $100 (41) plus the ac-

erued dividends. As against this preferential right, the

Company’s net assets behind each share of preferred stock

were only $52.80 (20). Immediately after the plan was con-

summated and by virtue of its operation the equity of the

dissenting preferred stock which remained outstanding was

wiped out in toto. The equity in all of the Company’s net

assets was diverted to the preferred stockholders who con-

ERLE OTLB SREP SEM AU ARIPO ie LPR L TEM, SPARE IS

NOGA a RTS ERAS nn Dall EOS ined 1S RAADS EIS i Fe Ft EAL GILEAD DMO AE PLES WERE EK LE RAE eA INE EEE ALL ICEL EPO ARE 7

4 Summary Statement of Matter Involved

sented to the plan. These consenting stockholders, to the

exclusion of the dissenters, not only received the above-

mentioned distribution of $10 per share in the form of |

debentures which reduced the surplus by approximately |

$6,700,000 but the entire balance of the Company’s net |

assets became applicable to their newly issued prior pre- |

ferred stock on which the liquidation preference was $65 |

per share (33). |

The preferred stockholders were faced with these alter-

natives; if they accepted the exchange specified in the plan,

they would be required to surrender shares entitled to $100

on liquidation, $120 on redemption and a dividend rate

of ¢7 (26-29). They would receive in place thereof a prior

preferred stock entitled to $65 on liquidation, $75 on re-

demption and a maximum dividend rate of $4 (33); plus

the debenture and common stock above described. Those

accepting the plan would likewise be required to surrender

their claim for accumuleted dividends of $19.374 per share.

The plan expressed confidence that regular dividends on

the prior preferred stock would be paid uninterruptedly

(35). As against this, the plan held out no hope for divi-

dend payments to the dissenting stockholders.* The dis-

senting stockholders could retain their shares together

with the claim for accumulations but they would be sub-

ordinated and deprived irrevocably of their equity since,

as above stated, the assets were insufficient in amount to

cover the preferences of the newly created senior securities.

* This prognostication proved justified. Shortly after

the new stock was delivered to the public, a regular divi-

dend of 75¢ per share on the prior preferred stock was

declared payable January 1, 1941 (25) but no dividend was

declared on the unexchanged preferred stock even though

re was the ‘‘regular’’ date for the payment of dividends

thereon.

FOR REL US EN IES — |

ee ee

.

. =, . 8 INANE EI repr a :

LD LLORES aH Se i Si DL GR Bal al KARR EMS AB ti BIA AE OE tO Ts a Ue IEF

ip eit :

Summary Statement of Matter Involved By)

The right of the dissenters to accumulated dividends,

though not ‘‘waived’’, would be rendered virtually mean-

ingless, there having been a diversion of the funds with

which to pay them and there being no reasonable prospect

currently or in the foreseeable future of earnings sufficient

to pay the accumulations as well as the sinking fund and

interest requirements on the debentures and the dividend

requirements on the prior preferred stock.

The common stockholders on the other hand were faced

with no dilemma. Although there was a surplus of $20,-

000,000, the Company had fixed its stated capital at so low

an amount that the capital together with the ‘‘surplus”’

was only sufficient to cover the preferred stock by less than

half (41). In consequence, the common stockholders had

no equity. Their position was such that according to the

Company’s treasurer there was no hope of an equity ever

being established for them (85, 72) under the Company’s

capitalization prior to the plan. Their proportionate in-

terest in the total common stock was diminished by half

because of the new common stock issued to assenting pre-

ferred stockholders under the plan, but the interest which

they relinquished was one-half of zero (85). In return for

giving up one-half of a non-existent equity their position

was improved substantially, first by reason of the waiver

of accumulated dividends by the assenting preferred stock-

holders, and second by reason of the diminution of prefer-

ential rights in respect of the preferred stockholders who

accepted the plan.

The plan was consummated over the protest of peti-

tioner and other stockholders. The holders of more than

60,000 shares of preferred stock refused to make the ex-

change of securities.

= Oe ei ak ea ee MODES LOLS PP Ie ONAN OTE ETRE i tr Sart

6 Summary Statement of Matter Involved

Without the affirmative vote of the defendant Com-

pany’s officers, directors and associates,” the plan would

not have received the percentage of votes required for ap-

proval (37, 38; 21, 22). These persons (37, 38) held some

preferred, but were interested chiefly in the common stock

(49.3% of the outstanding shares) on which no dividends

could be paid because of arrears on the preferred. Out of

12,131 holders of preferred stock, 5,617 of those who held

preferred stock and who did not also hold common stock

either voted against the plan or did not register their votes

at all (22).

The record shows that the chief beneficiaries of the

plan were the Company’s officers, directors and associates,

and the other common stockholders. According to a de-

fendants’ witness, a purpose of the plan was to divert earn-

ings from the preferred to the common so that the com-

mon-stock-management would not try ‘to make money in

other ways’’ to the disadvantage of those holding preferred

shares (86). The Company itself faced no emergency.

Witnesses for the defendants testified that there was no

financial stringency facing the Company (91) and that on

the contrary the Company’s credit was superlatively good

(87).

The evidence shows also that during the period 1933-

39 while dividends were accumulating on the preferred

stock, the Company spent $5,938,137 for purchases of its

own common and preferred stock (66-78). According to

the Company’s treasurer, the money was not used to pay

dividends because that would have been ‘‘milking the Com-

pany’’ (83). The amount spent for stock purchases, to-

* << Associates’’ as defined by Rule X-14A-8 of the Secu-

rities and Exchange Commission under the Securities Ex-

change Act of 1934.

Jurisdiction—Questions Presented 7

gether with the $6,700,000 which was charged against the

issuance of debentures as above stated, would have been

sufficient to pay practically the entire accumulations on the

preferred shares (35).

The District Court rendered judgment dismissing the

complaint (Opinion printed at 118).

The plaintiff having duly appealed to the United States

Circuit Court of Appeals for the Third Circuit, that Court,

on June 27, 1941, affirmed the judgment. The opinion of

the Honorable John Biggs, Jr., Circuit Judge, is printed in

the record submitted herewith.

STATEMENT OF JURISDICTION

The jurisdiction of this Court is invoked under the pro-

visions of Section 240 (a) of the Judicial Code, as amended

by the Act of February 13, 1925 (United States Code, Title

28, Section 347 (a)).

QUESTIONS PRESENTED.

The following are the questions presented by petitioner:

I.

A. May a corporation organized under the laws of

Pennsylvania amend its articles of incorporation so as to

(a) Create debenture bonds and prior preferred

stock and, without obtaining any cash or property or

any benefit to the corporate entity, issue these newly

created securities to assenting preferred stockholders

upon the condition that such stockholders waive their

-chaim to accumulated dividends and accept diminished

preferences, while

(b) Non-assenting preferred stockholders who re-

tain their shares are subordinated to the new deben-

tures and prior preferred stock, and

8 Questions Presented

(c) The assets of the company which, before the

amendment were insufficient to cover the preferential

claims of the preferred stockholders are shifted in their

entirety, against the will of such stockholders, to sup-

port the preferential claims of the debenture holders

and prior preferred stockholders, thus wiping out the

equity of the non-assenting preferred stockholders,

while at the same time

(d) The common stockholders, who have no equity,

receive new common stock, share for share?

B. If the Business Corporation Law of Pennsylvania

authorizes such an amendment, does not the Law in that

respect violate Article I, Section 10 and the Fourteenth

Amendment of the Constitution of the United States?

Il.

A. Is not the decision in this case refusing to enjoin

payments on the new prior preferred stock and debentures

inconsistent with the decision of the Supreme Court of the

Commonwealth of Pennsylvania in West Chester & Phila-

delphia R. R. Co. v. Jackson, 77 Pa. St. Rep. 321, wherein

it was held that a preferred stockholder who refused to

exchange his shares for new prior preferred stock in a ‘‘vol-

untary’’ recapitalization was entitled to receive all of the

accumulated dividends on his stock before the corporation

could pay any dividends on the new prior preferred stock ;

and did not the Cireuit Court of Appeals err in failing to

apply the principle of that case herein?

B. Did not the Cireuit Court of Appeals err in refus-

ing to hold that the payment of dividends, interest and

sinking fund requirements on the prior preferred stock and

Questions Presented gy

debentures while accumulated dividends remain unpaid on

the unexchanged preferred stock constitutes an unlawful

invasion of petitioner’s vested rights guaranteed by the

Constitution of the United States?

ITI.

A. May a corporation organized under the laws of

Pennsylvania amend its charter so as to distribute a sub-

stantial portion of its surplus through the issuance of deben-

tures where such distribution is restricted to those preferred

stockholders who waive their vested rights to accumulated

dividends and is denied to other preferred stockholders of

the same class who refuse to waive their vested rights?

B. If the Business Corporation Law of Pennsylvania

authorizes a charter amendment having the effect above

described, does not the Law in that respect violate Article

I, Section 10 and the Fourteenth Amendment of the Con-

stitution of the United States?

IV.

A. Were not the assets of the corporation in this case

employed for a purpose not germane to the business of the

corporation inasmuch as they were shifted under a plan for

the purpose of inducing preferred stockholders to give up

rights so that ultimately the common stockholders would

benefit, and may a State properly authorize a corporate

charter to be amended so as to permit such use to be made

of the corporate assets?

B. If the Business Corporation Law of Pennsylvania

authorizes such use of corporate assets, does not the Law in

that respect violate Article I, Section 10 and the Fourteenth

Amendment of the Constitution of the United States?

EEE errr eva

10 Questions Presented

V.

Is not the decision in this case inconsistent with the

decisions of this Court in Southern Pacific Ce, v. Bogert,

950 U. S. 483, and Jones v. Missouri-Edison Electric Co.,

144 Fed. 765, cert. denied, 229 U. S. 615, wherein it was

held that dominant stockholders of a corporation occupy 4

fiduciary relation to minority stockholders and may not use

their power to benefit themselves at the expense of the

minority; and did not the Circuit Court of Appeals err in

failing to apply the principle of such cases?

VI.

A. Prior to the reorganization herein, did not the pre-

| ferred stockholders enjoy a vested right in the defendant

company’s net assets to the extent that, except for distribu-

tion on dissolution or for the payment of dividends the Com-

pany was required to keep such assets intact (subject only

to diminution by losses in business operations) to safe-

guard the preferential rights of the preferred stock; and

did not the charter amendment adopted under the plan of

reorganization unlawfully destroy such vested right of those

preferred stockholders who refused to waive their vested

right to accumulated dividends, since it deprived them of

all of their entire equity in the assets originally behind their

shares without their consent and against their objection?

B. If the Business Corporation Law of Pennsylvania

authorizes a charter amendment having the effect above

described, does not the Law in that respect violate Article

I, Section 10 and the Fourteenth Amendment of the Con-

stitution of the United States?

VII.

A. Did not the Cireuit Court of Appeals err in failing

to hold that the reorganization of the corporate defendant

Reasons for Granting the Writ 11

was invalid inasmuch as the reorganization gave substantial

recognition to the common stockholders who had no equity

in the corporate assets?

B. Is not the decision herein inconsistent

(1) with the principle of the decision of the Su-

preme Court of the Commonwealth of Pennsylvania in

Petry v. Harwood Electric Co., 280 Pa. St. Rep. 142, 124

Atl. 302, wherein the Court expressly recognized that in

a case of merger, common stockholders would not be en-

titled to receive any new securities unless there were

sufficient assets to pay preferred stockholders in full;

and

(2) with the principle of the line of decisions of

this Court commencing with Northern Pacific Co. v.

Boyd, 228 U. S. 482; and did not the Cireuit Court of

Appeals err in failing to apply the principles of such

cases?

REASONS FOR GRANTING THE WRIT.

The writ should be granted because:

(a) This Court has never passed upon the principal

question here involved, namely, to what extent a plan of

recapitalization may be imposed upon non-consenting stock-

holders. This question is one of wide importance.

(b) Substantial constitutional questions are involved.

Article I, Section 10 and the Fourteenth Amend-

ment of the Constitution of the United

States.

(c) On other important aspects of the case, the decision

of the Circuit Court appears to be in conflict with decisions

of this Court and the Supreme Court of Pennsylvania.

Southern Pacific Co. v. Bogert, 250 U. S. 483;

aaa PORES BNE: TYIIIE E LGONE ELE NEL ELOY PERE LEAL YELLE EE ING IOI IER SIE NP LPNS IE A NOT ERR

12 Reasons for Granting the Writ

Northern Pacific Ry. Co. v. Boyd, 228 U. S. 482;

West Chester & Philadelphia R. R. Co. v. Jack-

son, Adma of Gray, 77 Pa. St. Rep. 321;

Petry v. Harwood Electric Co., 280 Pa. St. Rep.

142, 124 Atl. 302.

‘‘Recapitalization’’ is rapidly becoming a mode for

wiping out dividends which have accrued to preferred stock-

holders and for diminishing preferences on liquidation and

redemption.

During the days of the depression many companies

were unable to pay preferred stock dividends out of current

earnings. When, however, business improved so as to show

larger earnings, the managements of these companies have

sought means to get rid of the obligation to preferred stock-

holders in order to enable dividends to be paid on the com-

mon stock in which the management ordinarily is more

interested. A simple scheme, which has arisen to such pro-

portions as to become a public scandal, is to issue a new

prior preferred stock (and perhaps debentures as in this

case) with the intimation that this will pay immediate divi-

dends and that those who hold their old preferred stock

will have their claims both to dividends and on liquidation

deferred indefinitely. The Curtis Publishing Company at

all times had a surplus twice the amount of accumulated

preferred dividends. It was in no financial difficulty. The

management, however, regarded the payment of accrued

dividends as a ‘‘milking’’ of the company and thus proposed

a plan to avoid this situation.

This Court has never considered the legality or fairness

of these ‘‘voluntary”’ reorganization plans, prepared and

forced through by a common stock acknowledgment.

Insofar as they impair the quasi-creditor right of the

preferred shareholders to be paid due and accrued divi-

st

Reasons for Granting the Writ 13

dends, they present a Federal question arising under the

Constitution. In view of the widespread use of this type

of plan and millions of dollars in preferred dividends that

annually are being taken away from innocent and largely

helpless small investors, the subject would seem of such

importance to entitle it to review and examination by this

Court.

The right of preferred shareholders to be paid divi-

dends that have accrued under the cumulative provision of

the stock has been referred to as a vested property right or

interest in many of the decisions. If it be such a property

right, it is entitled to some reasonable degree of protection

and this it is not afforded under these plans.

This Court, in other decisions, has laid down certain

basic principles governing the obligations of majority stock

managements to the powerless minority. The treatment

accorded the small stockholders in these plans of recapital-

ization runs counter to the holdings in these decisions and to

every concept of fair play.

Again, the law on the subject is in a most unsatisfac-

tory state, with conflicting decisions on every side and the

rights of investors left to the unguided judgment of each

particular judge.

In Davison v. Parke, Austin & Lipscomb, Inc., 285

N. Y. 500 (May 29, 1941), the Court of Appeals of the State

of New York held that dissenting preferred stockholders

were entitled to receive accrued dividends before any divi-

dends could be paid on certain new preferred stock issued

under the recapitalization plan involved therein. The

Court said at page 506:

‘‘The issue thus presented is today one of great

importance. It is common knowledge that during the

;

14 Reasons for Granting the Writ

past few years many corporations have been unable

to pay dividends either upon common stock or pre-

ferred stock and that large amounts of unpaid cumu-

lative dividends, constituting as they do a first charge

upon future profits, have a tendency to discourage new

investment. Balanced against the desire to encourage

investment, however, is the sanctity of the rights of

contract. The individual preferred stock investor has

bargained for certainty in his return, and may not be

deprived of his bargain without express statutory au-

thority. Solution of the problem is further compli-

eated by the fact that any device the use of which is

desirable in proper cases for the elimination of bur-

densome preferential rights of preferred stockholders

may be used in other cases, without regard to corpo-

rate needs and for the sole benefit of common stock-

holders.”’

The defendants in this case admit that the plan was

effected to benefit the common stockholders.

It is believed that this case is regarded already as a

leading and chief authority in the field. The fundamental

question today has become one of substantial importance to

investors throughout the nation. Litigation on the question

has arisen in various jurisdictions, but this Court has never

passed upon the issue which by and large is fundamental

in a large number of the past and current plans of reorgan-

ization and recapitalization. In view of its bearing upon

investors generally, the question is one which should be

passed upon by this Court so as to provide future guidance.

+ Wuererors, petitioner prays that a writ of certiorari

may issue out of and under the seal of this Court, directed

to the United States Circuit Court of Appeals for the

Third Circuit, commanding the said Court to certify and

send to this Court for review and determination as pro-

SOP RE OER IPS IES GIRS DI Sys BSS

' axe

Reasons for Granting the Writ 15

vided by law this cause and a complete transcript of the

record and of all proceedings had herein; and that the order

of the United States Circuit Court of Appeals affirming

the judgment in this cause may be reversed and that peti-

tioner may have such other and further relief in the prem-

ises as this Court may deem appropriate.

Dated, New York, September 25, 1941.

NorMAN JOHNSON,

Petitioner.

Artuur GarFieLp Hays,

Solicitor for Petitioner.

EBLE LENT ALLIES SELEY ALES PEN EOE ER TE OY

16 Verification

VERIFICATION FOR THE PETITION.

—_——

UNITED STATES OF AMERICA,

SouTHERN DISTRICT OF New York.

——

Srate or New York,

County or New Yors,

Norman Jounson, being duly sworn, says:

I am the petitioner herein.

I have read the foregoing petition by me subscribed,

and know the contents thereof. The facts therein stated

are true to the best of my knowledge, information and be-

lief.

NorMan JOHNSON.

Sworn to before me this 25th day of September, 1941.

FREDERICK GRIFFIN,

Notary Public, New Y ork County.

Commission expires March 30, 1942.

Srate or New York,

SS.:

County or New York,

I hereby certify that I have examined the foregoing

petition for a writ of certiorari and that in my opinion

it is well founded, and the cause is one in which the peti-

tion should be granted.

Arruur GarrieLD Hays.

Sworn to before me this 25th day of September, 1941.

Freverick GRIFFIN,

Notary Public, New Y ork County.

Commission expires March 30, 1942.

+