Bove v. Community Hotel Corp. of Newport, R.I.
105 R.I. 36, 249 A.2d 89 (1969)
Community was a corporation
that had a by-law saying that holders of preferred stock had the right to
receive any unpaid dividends before the corporation could pay any dividends
to common stock holders.
Community hadn't paid
dividends for 24 years, which added up to a lot of unpaid money!
Community needed to sell
common stock to raise capital, but people didn't want to buy it if they
didn't think they'd get a dividend. So, the directors attempted to get
the preferred stockholders to agree to give up their claims for 24 years
of unpaid dividends.
Some of the preferred
stockholders did not want to give up this claim.
Unless there was 100% buy in
fro the preferred stockholders, the directors couldn't nullify their
When it became apparent that
Community could not get some of the preferred stockholders to agree to
give up their claims, the directors decided to merge Community together
with a subsidiary company.
The merger rules are
complicated, but in the end this move would have gotten around the need
to get all of the preferred stockholders' consent, they'd only need a
majority (which they had).
Bove, one of the preferred
stockholders, sued to prevent Community from merging.
The Trial Court found for
Community. Bove appealed.
The Appellate Court affirmed.
The Appellate Court looked
to Rhode Island law, and found that mergers of corporations required a
simple majority of stockholders.
The Court noted that nothing
in the law talked about any reasons for why a corporation might decide to
The Court found that
nothing in the law prevented a corporation from merging solely for the
purpose of getting around other requirements.
Basically, as long as a
company meets the statutory requirements for a merger, the courts will not
inquire into the reasons the corporation is merging.
That's part of the business
Contrast this case with Schnell
v. Chris-Craft Industries, Inc. (285
A.2d 437 (1971)), in which the Court found that even when a company was
strictly complying with the law, equity demands that when the directors
take actions for shady purposes, they should not be allowed to profit.