4/10/2015 184F2d954MerrittChapmanScottCorpv.NewYorkTrustCo|OpenJurist

http://openjurist.org/184/f2d/954/merrittchapmanscottcorpvnewyorktrustco 1/8

OpenJurist

BrowseOpenJuristLearntheLawFindaLawyerOpenJuristBlog184F.2d954MerrittChapmanScottCorpv.NewYorkTrustCoHome184f2d954merrittchapmanscottcorpv.newyorktrustco184F2d954MerrittChapmanScottCorpv.NewYorkTrustCo184F.2d954

MERRITTCHAPMAN&SCOTTCORP.v.NEWYORKTRUSTCO.

No.71.

Docket21781.

UnitedStatesCourtofAppealsSecondCircuit.

ArguedOctober4,1950.

DecidedNovember8,1950.

White&Case,NewYorkCity(JosephM.Hartfield,JesseE.WaidandEdwardJ.Kenn,allofNewYorkCity,ofcounsel),fordefendantappellant.

Booth&Baron,NewYorkCity(GeorgeC.BaronandFrederickDoppelt,NewYorkCity,ofcounsel),forintervenorappellant.

Manning,Harnisch,Hollinger,Quinnan&Shea,NewYorkCity(JohnJ.Manning,WilliamHughesMulliganandEdwinA.Lewis,allofNewYorkCity,ofcounsel),forappellee.

BeforeLEARNEDHAND,ChiefJudge,andSWANandCLARK,CircuitJudges.

SWAN,CircuitJudge.

1

ThislitigationinvolvestherightsofholdersofstockpurchasewarrantsissuedbyMerrittChapman&ScottCorporationpursuanttoatrustdeedmadewithTheNewYorkTrustCompanyastrusteeunderdateofDecember1,1928,withrespecttoastockdividenddeclaredbythecorporationonJuly12,1950.Thecaseis

Facebook Account Sign UpThe World's #1 Online Community. Join for Free & Enjoy the Benefits!

4/10/2015 184F2d954MerrittChapmanScottCorpv.NewYorkTrustCo|OpenJurist

http://openjurist.org/184/f2d/954/merrittchapmanscottcorpvnewyorktrustco 2/8

beforeusuponappealfromasummaryjudgmentinadeclaratoryjudgmentaction.1Federaljurisdictionrestsondiversityofcitizenship.Theissuedecidedbelowandnowpresentedonappealturnsontheproperinterpretationtobegiventocertainprovisions,hereaftertobesetforth,ofthetrustdeed.

2

Thereisnodisputeastothefacts.Thewarrantswereissuedin1928inbearerform.Eachwarrantcertifiesthatsubjecttotheprovisionsofthetrustdeed"andsubjecttotheprovisionshereof,forvaluereceived,thebearerhereofisentitledtopurchase***fullpaidandnonassessablesharesofcommonstockoftheCorporation,withoutparvalue,asitmayexistatthetimeofsuchpurchase,atanytimeorfromtimetotimehereafteratthepriceofThirtydollars($30.)pershare,uponsurrenderofthisWarrant,"attheofficeofTheNewYorkTrustCompany,"accompaniedbypaymentofthepurchaseprice."Uponcertaincontingenciesspecifiedinthetrustdeedthesocalled"basicpurchaseprice"of$30persharewassubjecttodownwardrevision.Toinsurethatstockpurchasableunderthewarrantswouldbeavailable,thetrustdeedrequiredthatstockcertificatesforanaggregateamountof40,000sharesbedeliveredtothetrusteeandmadetheTrustCompanytheagentofthecorporationtoreceivethepurchasepriceandtodeliverthestockcertificatesuponexerciseofthewarrants.Thedeedfurtherprovidedthatstockcertificatesdepositedwiththetrustee"shallnotbedeemedlegallyissuedoroutstandinguntilsodeliveredbytheTrustee.TheCorporationwill,however,atalltimesduringthelifeofsuchWarrants,retainanumberofauthorized,butunissued,sharesofthecommonstockoftheCorporationrepresentedbythestockcertificatesandstockscripcertificates(ifany)thenondepositwiththeTrustee,and/orwhichtheCorporationmayberequiredtodepositwiththeTrusteeashereinafterprovided."2Thefinalclauseabovequotedreferstosection7ofArticleIII,whichisquotedinthemargin.3

3

OnJuly12,1950,byresolutionofitsdirectors,thecorporationdeclaredastockdividendintheamountof40%pershareofnoparcommonstock"oneachlegallyissuedandoutstandingshareofsaidcommonstockinthehandsofthepublic,"suchdividend"tobepayableonOctober16,1950fromauthorizedbutunissuedsharestoholdersofsuchcommonstockasofthecloseofbusinessonSeptember15,1950."Theresolutionfixedthepriceforthesharesofstockissuedasadividendat$20.00pershare,anddirectedthetreasurerofthecorporationupontheissuanceofthecertificatesrepresentingsuchdividendsharestotransferfromtheEarnedSurplusAccounttotheCommonCapitalStockAccountthesumof$20.00foreachdividendshare.TheresolutionalsodirectedtheproperofficerstogivetowarrantholdersoutstandingunderthetrustdeedandtoTheNewYorkTrustCompanyastrusteethe60daynoticerequiredbysection10ofArticleIII,incasetheCorporation"shallpayanystockdividendupontheoutstandingcommonstock"ortakeotherspecifiedactionwhichmayaffectthevalueofthestockpurchasewarrants.4

4

Followingthedeclarationofthestockdividendacontroversyarosebetweenthecorporationandthetrusteewithrespecttotherightsofwarrantholders.ThecorporationcontendsthatawarrantholdermustexercisehiswarrantbeforeSeptember15,1950inordertoshareinthedividend.Thetrusteecontendsthatthecorporationmustdepositwiththetrusteestockcertificatesinanamountequalto40%ofthecertificatesnowondepositwiththetrustee,andthatwheneverawarrantholdermayelecttoexercisehiswarrant,hewillbeentitledtoreceive1.4sharesuponpayingthe"basicpurchaseprice"foroneshare.Toresolvethisdisputethepresentactionwas

4/10/2015 184F2d954MerrittChapmanScottCorpv.NewYorkTrustCo|OpenJurist

http://openjurist.org/184/f2d/954/merrittchapmanscottcorpvnewyorktrustco 3/8

brought,andeachpartymovedforsummaryjudgmentonthecomplaintandanswer.Withoutopinion,thedistrictcourtgavejudgmentfortheplaintiffcorporation.

5

Theappellantscontendthatinsodoingthecourtdisregardedthetermsofsection7ofArticleIII,setforthinnote3,supra.Wethinktheirpositioniswelltaken.Thewarrantsgavetheholdersthereoftheprivilege,unlimitedintime,topurchaseanaggregateof40,000authorizedbutunissuedshares.In1928whenthewarrantswereissued,adefinitenumberofthecompany'scommonshareswerethenoutstanding.Hadthewarrantholdersforthwithexercisedtheiroptiontopurchase,theywouldhaveacquiredadefinitepercentageofthecommonstock.Astockdividenddoesnotchangetheproportionalinterestofeachshareholderinthecorporateenterpriseitchangesonlytheevidencewhichrepresentsthatinterest.Itisamere"watering"ofoutstandingshares.5Ifthecorporationwereatlibertytodeclarestockdividendswithoutmakingprovisionforwarrantholders,thepercentageofinterestinthecommonstockcapitalofthecorporateenterprisewhichthewarrantholderswouldacquire,iftheythereafterpurchasedthesharessubjecttowarrants,couldbereducedpracticallytothepointofextinction.Ofcoursepartoftheinjusticecouldbeavoidedbyreducingthepricetobepaidforeachsharepurchasedunderthewarrants,buttheprivilegethewarrantholdersoriginallyhadofacquiringadefiniteproportionalinterestinthecommonstockcapitalofthecorporateenterprisewouldbelostwithoutrecourseunlesstheircontractwiththecorporationcontainedsomeprovisiontoprotectit.6Thepurposeofsection7wastosupplysuchprotection.Itisacovenantbythecorporation.7

6

Bythiscovenantthecorporationrecognizedthepossibilitythatastockdividendmightbedeclaredandpaidonoutstandingsharesbeforethewarrantshadbeenexercised,andpromisedinthateventtodepositwiththetrusteestockcertificatesrepresentingthatproportionofthedividendshareswhichthesharessubjecttothewarrantsboretoallthecommonshares,andthatthetrusteewoulddeliversuchdividendshares"withoutadditionalconsideration,"togetherwiththepurchasableshares,whenthewarrantholderpaysforthelatter.Thereisnosuggestioninthelanguageofsection7tosetanylimitonthetimewhenthewarrantholdersmustexercisetheirunlimitedoptiontopurchasecommonshares.

7

Theappelleepointstosection10,setforthinnote4,supra,assettingsuchalimit.Thatsectionalsoisacovenant.Byitthecorporationmerelypromisedtogivethewarrantholdersandthetrusteeasixtydaynotice"incasetheCorporationshallpayanystockdividend"ortakeotherspecifiedaction"totheendthat,duringsuchperiodofsixtydays,theholdersofWarrantsoutstandinghereundermaypurchasestockinaccordancewithsuchWarrantsandbeentitledinrespecttosharessopurchasedtoalltherightsofotherholdersofsimilarstockoftheCorporation."Otherholdersofcommonstockwillreceivedistributionofdividendsharesiftheywerestockholdersontherecorddate.Thenoticetellswarrantholdersthatiftheyexercisetheirwarrantsbytherecorddatetheywillhavetherightsofstockholders,i.e.,therighttoreceivethestockdividendsharesonthedatewhenthedividendispayable.Butthewarrantholdersarenotclaimingthatrightwhattheyareinsistinguponaretherightspromisedbysection7.Theappelleemust,anddoes,contendthatthenoticeprovisionisforthepurposeofgivingthewarrantholdersnoticethatunlesstheyexercisetheirwarrantsbytherecorddate,theywillforfeitthosepromisedrights.Certainlythelanguageofsection10isnotaptlychosentoexpresssuchaforfeitureand

4/10/2015 184F2d954MerrittChapmanScottCorpv.NewYorkTrustCo|OpenJurist

http://openjurist.org/184/f2d/954/merrittchapmanscottcorpvnewyorktrustco 4/8

theargumentthatitwasnotsointendedgainsaddedforcefromthefactthatsections8and9ofArticleIIIexpresslyprovideforforfeitureundercircumstanceswherethatistheintendedresult.Construedasappellantsurge,section10wouldcoverthemontheseoccasionsandsections8and9wouldbecomemeresurplusage.

8

Itissuggestedthatthemeaningtheappellantsascribetosection7isinconsistentwiththefaceofthewarrants,whichlimitstheholdertothestatednumberofsharesofcommonstock"asitmayexistatthetimeofsuchpurchase,"andindicatesanintenttoconferontheholderonlytherighttobuyonan"asis"basis.Butsoconstruedthewarrantprovisioncontradictssection7and8,whichcontemplatechangesresultingfromstockdividends,recapitalization,merger,etc.Itismoreconsistenttoreadthequotedwordsasreferringtosuchpossiblechanges.Thatistosay,onesharemay,byreasonofastockdividend,mean1.4sharesofstock"asitmayexistatthetimeofthepurchase."

9

Finally,itisurgedthatsection6ofArticleIIIprovidesforareductioninthebasicpurchasepriceincaseofastockdividend.8Concededlyitcontainsnoexpressreferencetostockdividends.Theargumentisthatastockdividendiscoveredbyclause(b)whichprovidesforareductioninthebasicpurchasepriceifsharesare"issuedforaconsideration,otherthanmoney,valuedbytheBoardofDirectorsatthetimeoftheacquisitionthereof,atanetamountlessthanthebasicpriceofthecommonstockoftheCorporationatthetimeineffect."Thesewordsarecertainlynotaptlanguagetodenoteatransferonthecompany'sbooksfromtheSurplusAccounttotheCapitalStockAccount.Moreover,toascribesuchameaningtothementirelycontradictsthefinalparagraphofsection7quotedinnote3,supra.

10

Fortheforegoingreasonsweconcludethatthecourterredinnotacceptingtheappellants'interpretationofthewarrantholder'scontract.AttheargumentitwasagreedthatifthecorporationwerenotstayedfromdistributingthedividendsharestostockholdersofrecordonOctober16,1950,itwould,incaseofreversalofthejudgment,depositwiththetrusteecertificatesrepresentingdividendsharesforthewarrantholdersandpermitanywarrantholderwhomayhaveexercisedhiswarrantonorbeforetherecorddate,inrelianceonthejudgmentbelow,torescindthetransaction,ifhesoelectspromptlyafternoticeofreversalofthejudgment,andbereinstatedasawarrantholder.Ourmandatewilldirectthatthisagreementbecarriedout.

11

Judgmentreversedandcaseremandedwithdirectionstoenterjudgmentinaccordancewiththeforegoingopinion.

Notes:

1

28U.S.C.A.2201

4/10/2015 184F2d954MerrittChapmanScottCorpv.NewYorkTrustCo|OpenJurist

http://openjurist.org/184/f2d/954/merrittchapmanscottcorpvnewyorktrustco 5/8

2

Section3ofArticleIIIofthetrustdeed

3

"Section7.AslongastheWarrantsshallremainvalidandoutstanding,theCorporationwillnotpayanydividendsonitscommonstockpayableinstockofanyclass(suchdividendbeinghereinsometimescalled`stockdividend'),unlesstheCorporationshalldepositintrustwiththeTrusteestockcertificatesofthecharacterabovedescribedinSection3ofthisArticleIIIrepresentinganamountofstock(ofwhateverclass)oftheCorporationequaltotheamountofsuchstockdividend,ifthesamehadbeendeclareduponthecommonstockrepresentedbythestockcertificatesthenheldintrustbytheTrusteehereunder,andtheTrusteeshall,outofsuchadditionalstockcertificatessodepositedintrustwithitonaccountofsuchstockdividend,upontheexerciseofWarrants,deliverinthemannerhereinprovided,withanysharesofcommonstockpurchasedthereunder,butwithoutadditionalconsiderationtherefor,suchnumberofsharesasmaybeequaltosuchstockdividend,ifthesamehadbeendeclareduponthecommonstocksopurchasedandasprovidedinSection5ofthisArticleIII,theCorporationwillfromtimetotimeissueanddelivertotheTrusteesuchstockscripcertificatesasmayberequiredfromtimetotimetoenabletheTrusteeupontheexerciseofWarrantstomakeanyandalldeliveriesinrespectofanysuchstockdividend

"IftheCorporationdepositsstockcertificatesasintheforegoingparagraphofthisSection7provided,thestockissuedbywayofastockdividendshallnotbeconsideredasoutstandingforthepurposeofanyadjustmentsinthepriceatwhichsharesofstockmaybepurchasedundertheWarrantsasprovidedinthisIndenture."

4

"Section10.Incase

"(a)theCorporationshallpayanystockdividenduponanyoutstandingcommonstock,ormakeanydistributionotherthanacashdividendtotheholdersofitscommonstockor

"(b)theCorporationshallofferforsubscriptiontotheholdersofitsstock(ofanyclass)anyadditionalcommonstockoranystock(ofanyclass)oftheCorporationoranyothersecuritiesor

"(c)ofanycapitalreorganizationorreclassificationofthecapitalstockoftheCorporationor

"(d)oftheconsolidationormergeroftheCorporationwithanothercorporationor

"(e)ofthedissolution,liquidationorwindingupoftheCorporationorsaleofallorsubstantiallyallofitsassets(whethervoluntaryorinvoluntary)"theninanyoneormoreofsaidcases,theCorporationshallgivetotheTrusteeandtotheholdersoftheWarrantsoutstandinghereunderatleastsixtydays'priorwrittennoticeofthedateonwhich(aa)thebooksoftheCorporationshallcloseforsuchstockdividend,distributionorsubscriptionrights,or(bb)suchreclassification,reorganization,consolidation,merger,dissolution,liquidation,windinguporsaleshalltakeplace,asthecasemaybe,andsuchnoticeshallalsospecifythedateasofwhichstockholdersofrecordshallbeentitledtoparticipateinsuchdividend,distributionorsubscriptionrights,ortoexchangetheir

4/10/2015 184F2d954MerrittChapmanScottCorpv.NewYorkTrustCo|OpenJurist

http://openjurist.org/184/f2d/954/merrittchapmanscottcorpvnewyorktrustco 6/8

sharesofstockforotherstockoftheCorporation,pursuanttosuchreclassificationorreorganizationorforstockofthecorporationresultingfromsuchconsolidation,ortoreceivetheirrespectivedistributivesharesintheeventofsuchdissolution,liquidation,windinguporsale,asthecasemaybetotheendthat,duringsuchperiodofsixtydays,theholdersofWarrantsoutstandinghereundermaypurchasestockinaccordancewithsuchWarrantsandbeentitledinrespectofsharessopurchasedtoalloftherightsoftheotherholdersofsimilarstockoftheCorporation.ThenoticehereinrequiredtobegiventotheholdersoftheWarrantsshallbesufficientlygiveniftheCorporationshallpublishsuchnoticeonatleastthreedifferentdays(duringsaidperiodofsixtydays)inadailynewspaperofgeneralcirculationprintedintheEnglishlanguageintheBoroughofManhattan,TheCityandStateofNewYork,andshallalsomailacopyofsuchnoticetotheTrustee."

5

SeeEisnerv.Macomber,252U.S.189,202203,40S.Ct.189,64L.Ed.521

6

SeeBerle,ConvertibleBondsandStockPurchaseWarrants,36YaleL.J.649,6567

7

ArticleIIIopenswiththesentence:"TheCorporationcovenantsandagreesashereinafterinthisArticleIIIsetforth:"

8

"Section6.ThebasicpurchasepriceatwhichtheholdersoftheWarrantsmaypurchasecommonstockoftheCorporationassetforthinSection2ofthisArticleIIIshallbesubjecttoreductionandadjustmentfromtimetotimeinthefollowingmanner:

"(1)IfatanytimeorfromtimetotimeafterDecember1,1928,sharesofcommonstockoftheCorporation,withoutparvalue,beissuedtoanumberinexcessof264,000shares,assuchsharesmayfromtimetotimebeconstituted,and(a)soldbytheCorporationforcashatapricepersharewhichislessthanthebasicpurchasepricethereofatthetimeineffector(b)issuedforaconsideration,otherthanmoney,valuedbytheBoardofDirectorsatthetimeoftheacquisitionthereof,atanetamountlessthanthebasicpurchasepriceofthecommonstockoftheCorporationatthetimeineffect,thesaidbasicpurchasepriceshallbeadjustedasfollows,provided,however,thatinnoeventshalltheadjustedpriceexceedatanytimethebasicpurchaseprice:"

12

CLARK,CircuitJudge(dissenting).

13

Sincethisisacomplicatedagreementwherediversecontentionsarepossibleandsincemyviewsarenottoprevail,Ishallonlyindicatethemwithoutextensivedevelopment.Whatchieflypersuadesmetothecontrary

4/10/2015 184F2d954MerrittChapmanScottCorpv.NewYorkTrustCo|OpenJurist

http://openjurist.org/184/f2d/954/merrittchapmanscottcorpvnewyorktrustco 7/8

conclusionisthatthedefinitetimeprovisionofsixtydaysforexchangingwarrants,"incasethecorporationshallpayanystockdividend,"ofsec.10,Art.III,isnowleftwithoutrationalpurposeorfunction.Iexpect,however,thatthisisoneofthosecasessufficientlydisputablesothattheapproachoneinitiallymakestotheproblemactuallypointsthewaytothefinalsolution.IfIthoughtastockwarrantshouldbenormallyapproachedasaneternalanduntouchableprivilege,I,too,Iexpect,wouldregardsec.7assodeclaringandhencefindthatsec.10couldnotbegivenforceaccordingtoitswordingwithoutworkinga"forfeiture"ofordeclaring"forfeit"whathadalreadybeengiven.ButsinceIthinkitnotatallunusualforthedraftsmenofsuchanagreementtowishtoputsomelimitationsuponthoserights,tolimittheextenttowhichtheycanallowtheholderstobeover,butnotapartof,thecorporateorganization,Ifindtheotherconstructiontobemorenaturalandtohavetheadvantageofaccordingsomeappropriatefunctiontoeverysectionoftheagreement.

14

Thussecs.8and9applytotheparticularsituationstheyexpresslycoveranddonotapplytothesituationcoveredinsec.10,andthereisnosurplusage.Theprovisionofsec.6forreducingthebasicpurchasepriceofthestockseems,tomymind,ratherclearlyapplicableincaseofastockdividendandbeareasonablyfaircounteradjustmenttothosewarrantholderswhostillwishtostayontheoutsideawaitingdevelopments.Andsec.7carriesitsownstatementofitsapplicationconditioned"ifthesamehadbeendeclareduponthecommonstockrepresentedbythestockcertificatesthenheldintrustbytheTrusteehereunder"orlater"ifthesamehadbeendeclareduponthecommonstocksopurchased."True,thisgivesthecorporationpowertodeterminewhetherthestockdividendbeupononlytheactivestockoralsouponthisblockalreadyfrozeninthehandsoftheTrusteeandimmobileunlesswarrantsareexercisedagainstit.ButandhereIsupposemypointofviewindicatedabovecomesinthisdoesnotseemtomeanunusualpowerforacorporation,butonenaturallytobeexercisedinthelightofthegeneralgoodofallthestockholders,notmerelythoseholdingwarrants,withthereductioninthebasicpurchasepriceservingasapreventiveofunfairnesstoanyoftheparticipants.

15

ElsewhereIhavethoughtwehavetendedtoovervaluetheperpetualeffectofstockwarrants,SecuritiesandExchangeComm.v.Leventritt,2Cir.,179F.2d615,certiorarigranted,U.S.,71S.Ct.62,andhaveagreedmorewiththecontraryviewexpressedinInreCommonwealth&SouthernCorp.,3Cir.,184F.2d81.Butherewehavefurthertheexpressclauseofsec.10providingforthenoticewithadefinitepurpose"totheendthat,duringsuchperiodofsixtydays,"thewarrantholdersmaypurchasestockand"beentitledinrespectofsharessopurchasedtoalloftherightsoftheotherholdersofsimilarstockoftheCorporation."(Italicssupplied.)Ofcoursetheyknowalreadythattheyareentitledtosuchrightsjustassoonastheyexercisetheirwarrantsexcepttotheextentthatthisclausemaybegivensomeoperativeeffect.Sowhyshouldthedraftsmenhavepaintedthelilyfurtherunlessthesixtydayswasintendedasadefiniteperiodforthetakingofsomeaction?Iwouldaffirm.

PrintEmail

ShortURL:

4/10/2015 184F2d954MerrittChapmanScottCorpv.NewYorkTrustCo|OpenJurist

http://openjurist.org/184/f2d/954/merrittchapmanscottcorpvnewyorktrustco 8/8

LearnmoreaboutLawyer.comMembership

TopLocalLawyers

ThomasCollinsDivorce&FamilyLaw

Honolulu,HI seeprofile

1,421peoplelikethis.Bethefirstofyourfriends.

Like Share

AreasofLawin,PRACTICEAREAS

Accidents&Injuries Employment

Bankruptcy&Debt Family&Estates

Business Government

ConsumerProtection Litigation

CriminalLaw RealEstate

BROWSEOPENJURISTHome184f2d954merrittchapmanscottcorpv.newyorktrustco

Home

BrowseOpenJurist

LearntheLaw

TermsofUse