Brown v. Mclanahan

148 F.2d 703 (4th Cir. 1945)

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Nature of the Case

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Facts

Mrs. Brown (P) held voting trust certificates representing 500 shares of preferred stock of the Baltimore Transit Co. A reorganization plan had provided for issuance of three types of securities: debentures, preferred stock, and common stock. Under the plan, voting rights were exclusive to common and preferred stockholders. The preferred stock held the exclusive right to vote for the election of all but one director. Three shares of common stock entitled the holder to one vote. The plan also established a voting trust for all stock for 10 years and issued certificates to eight voting trustees (also a majority of the directors of the company). In June 1944, the directors passed, and the voting trustees approved, an amendment to the voting trust agreement without notice to all of the certificate holders. The amendment affected several changes in voting rights. It eliminated the arrearage clause which had provided for exclusive voting rights in the preferred stock. It also granted voting rights to the holders of debentures, one vote for each $100 principal amount of the debentures, thus creating approximately 221,000 new votes eligible to be cast in all corporate matters. And, further, as of the date of termination of the voting trust agreement on July 1, 1945, the common stockholders would be deprived of their exclusive right to elect one director. P sued with the support of 45,000 shares of preferred stock, seeking to set aside the amendment. P contends that the action of the voting trustees in adopting the amendment was a breach of the fiduciary duty owed to the certificate holders. P contends that the trustees, faced with the fact that the voting trust would shortly expire and that they would no longer be able to control the corporation, proceeded to amend its charter so that they would be able to hold onto the control by giving voting rights to the debentures, which were largely owned or controlled by them or by corporations in which they were interested and to take away from the preferred stock the power of control which resided in it when dividends were in arrears. P alleges that the actions were beyond the powers vested in the trustees to diminish the voting power, that it was an abuse of trust to use the voting power for the benefit of preferred stockholders as well as of the debenture holders and that it was an abuse of trust to use the voting power for their own benefit and the benefit of corporations in which they were interested and to the detriment of preferred stockholders who were beneficiaries of the trust. The complaint was dismissed, and this appeal resulted.