Baron v. Allied Artists Pictures Corporation

337 A.2d 653 (Del. Ch. 1975)

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Nature of the Case

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Facts

Kalvex, Inc. owned 52 percent of the outstanding preferred stock while owning only 625 shares of D's 1,500,000 shares of common stock. Preferred shareholders are entitled to receive cash dividends 'as and when declared by the Board of Directors, out of funds legally available for the purpose. . . .' The amended certificate further provides that if at any time six or more quarterly dividends (whether or not consecutive) on the Preferred Stock were in default, in whole or in part, then until all dividends in default on the Preferred Stock shall have been paid or deposited in trust, and the dividend thereon for the current quarterly period shall have been declared and funds for the payment thereof set aside, the holders of the Preferred Stock, voting as a class, shall have the right, at any annual or other meeting for the election of directors, by plurality vote to elect a majority of the Directors of the Corporation. Of course, the preferred dividends were six quarters in arrears and Kalvex, even though owning only 7.5% of stock controlled the board of directors of D. Kalvex controlled D but also refused to pay itself its preferred dividends due and thus perpetuated control. P claims that for one or more years since the preferred shareholders have been in control of D the corporate financial statements show that there was either a net income for the preceding fiscal year or a capital surplus at the end of the preceding fiscal year in an amount larger than the accumulated preferred dividend arrearages, and that consequently the board of directors elected by the preferred shareholders, being only a caretaker board, had a duty to use such funds to pay the dividend arrearage, and also the balance due on the Internal Revenue agreement, if necessary, and to thereupon return control of the corporation to the common stockholders at the next annual election. P claims he is not asking the Court to compel payment of dividend arrearages but only that a new election be held.