TASK
1.International Distributing Export Company (I.D.E.) was organized as a corporation on September 7, 2010, under the laws of New York and commenced business on November 1, 2010. I.D.E. formerly had been in existence as a sole proprietorship. On October 31, 2010, the newly organized corporation had liabilities of $64,084. Its only assets, in the sum of $33,042, were those of the former sole proprietorship. The corporation, however, set up an asset on its balance sheet in the amount of $32,000 for goodwill. As a result of this entry, I.D.E. had a surplus at the end of each of its fiscal years from 2011 until 2016. Cano, a shareholder, received $7,144 in dividends from I.D.E. during the period from 2012 to 2017. May Fried, the trustee in bankruptcy of I.D.E., recover the amount of these dividends from Cano on the basis that they had been paid when I.D.E. was insolvent or when its capital was impaired? Explain.
2. GM Sub Corporation (GM Sub), a subsidiary of Grand Metropolitan Limited, acquired all outstanding shares of Liggett Group, Inc., a Delaware corporation. Rothschild International Corporation (Rothschild) was the ownerof 650 shares of the 7 percent cumulative preferred stock of Liggett Group, Inc. According to Liggett’s certificate of incorporation, the holders of the 7 percent preferred were to receive $100 per share “in the event of any liquidation of the assets of the Corporation.” GM Sub had offered $70 per share for the 7 percent preferred, $158.63 for another class of preferred stock, and $69 for each common stock share. Liggett’s board of directors approved the offer as fair and recommended acceptance by Liggett’s shareholders. As a result, 39.8 percent of the 7 percent preferred shares was sold to GM Sub. In addition, GM Sub acquired 75.9 percent of the other pre- ferred stock and 87.4 percent of the common stock. The acquisition of the overwhelming majority of these classes of stock—coupled with the fact that the 7 percent preferred shareholders could not vote as a class on the merger proposal—gave GM Sub sufficient voting power to approve a follow-up merger. As a result, all remaining shareholders other than GM Sub were eliminated in return for payment of cash for their shares. These shareholders received the same consideration ($70 per share) offered in the tender offer. Rothschild brought suit against Liggett and Grand Metropolitan, charging each with a breach of its duty of fair dealing owed to the 7 percent preferred shareholders. Rothschild based both claims on the contention that the merger was a liquidation of Liggett insofar as the rights of the 7 percent preferred stockholders were concerned and that those preferred shareholders therefore were entitled to the liquidation preference of $100 per share, not $70 per share. Are the preferred shareholders entitled to a liquidation preference? Why or why not?
3. Smith’s Food & Drug Centers, Inc. (SFD), is a Delaware corporation that owns and operates a chain of super- markets in the southwestern United States. Jeffrey P. Smith, SFD’s chief executive officer, and his family hold common and preferred stock constituting 62.1 percent voting control of SFD. On January 29, SFD entered into a merger agreement with the Yucaipa Companies that would involve a recapitalization of SFD and the repurchase by SFD of up to 50 percent of its common stock. SFD was also to repurchase 3 million shares of preferred stock from Jeffrey Smith and his family. In an April 25 proxy statement, the SFD board released a pro forma balance sheet showing that the merger and self-tender offer would result in a deficit to surplus on SFD’s books of more than $100 million. SFD hired the investment firm of Houlihan Lokey Howard & Zukin (Houlihan) to examine the transactions, and it rendered a favorable solvency opinion based on a revaluation of corporate assets. On May 17, in reliance on the Houlihan opinion, SFD’s board of directors determined that there existed sufficient surplus to consummate the transactions. On May 23, SFD’s stockholders voted to approve the transactions, which closed on that day. The self-tender offer was oversubscribed, so SFD repurchased fully 50 percent of its shares at the offering price of $36 per share. A group of shareholders challenged the transaction alleging that the corporation’s repurchase of shares violated the statutory prohibition against the impairment of capital. They argued that (a) the negative net worth that appeared on SFD’s books following the repurchase constitutes conclusive evidence of capital impairment and (b) the SFD board was not entitled to rely on a solvency opinion based on a revaluation of corporate assets. Explain who should prevail.
4. In addition to a class of common stock, Peabody Coal Company had outstanding a class of cumulative 5 percent preferred shares with a par value of $25 with the following contractual rights as stated in the corporation’s articles of incorporation:
Preferences on Liquidation In the event of any liquidation, dissolution or winding up of the Company (whether voluntary or involuntary), the holders of the 5% Preferred Shares then outstanding shall, to the extent of the full par value of their shares and unpaid cumulative dividends accrued thereon be entitled to priority of payment out of the Companys assets over the holders of the Common Shares then outstanding. After such payment to the holders of the 5% Preferred Shares, the remaining assets shall be distributed pro rata to the holders of the Common Shares then outstanding. Redemption The Company, upon the sole authority of its Board of Directors, may at any time redeem and retire all or any part of the 5% Preferred Shares at any time outstanding by paying or setting aside for payment for each share so called for redemption the sum of $26.00 plus a sum equal to the amount of all dividends accrued or in arrears thereon at the redemption date. Peabody entered into negotiations for its sale to the Kennecott Copper Company. In order to complete the transaction, Peabody submitted to its shareholders a resolution for the approval of the sale to Kennecott and the adoption of a plan of complete liquidation. The proposed dissolution plan would (a) entitle the preferred shareholders to a preferential liquidating dividend of $25 par value per share plus any unpaid cumulative dividends accrued and (b) pay the remainder of the assets on a pro rata basis to the holders of the common stock of Peabody. The resolution was approved by the common and preferred shares voting as a single class. Preferred shareholders have challenged the plan of liquidation, claiming that the corporation should have redeemed the preferred stock and then liquidated the corporation, thus entitling each preferred share to a $26 redemption payment along with accrued dividends. Explain whether the preferred shareholders should succeed.
