Baron v. Allied Artists Pictures Corporation
Delaware Court of Chancery
337 A.2d 653 (Del. Ch. 1975)
With the invention of television, Allied Artists Pictures Corporation (Allied) (defendant) began to struggle financially. In 1954, Allied amended its certificate of incorporation to provide that preferred shareholders were entitled to cash dividends “as and when declared by the Board of Directors, out of funds legally available for the purpose.” The amended certificate also stated that if dividends were six or more quarters in arrearages, the preferred shareholders would have the right to elect a majority of the board. In 1963, Allied was forced to stop paying dividends. The next year, after the sixth quarter of nonpayment, the preferred shareholders began electing a majority of the board. In conjunction with its financial woes, Allied was assessed a tax deficiency in 1964. Because of Allied’s poor financial state, the Internal Revenue Service (IRS) agreed to allow Allied to repay its tax debt in installments over several years, so long as Allied would not pay any dividends without IRS consent. Subsequently, Allied had some successful years (e.g., in 1970 a preferred capital surplus of $1,300,000 with a preferred dividend arrearage of only $146,500) mixed in with some unsuccessful years (e.g., the following year, 1971, a net loss of over $3,000,000). Baron (plaintiff), a shareholder, brought suit in the Delaware Court of Chancery, arguing that in at least one year since Allied was behind on its dividend payments, there were sufficient funds for Allied to pay those dividends. Baron argued that by not doing so, the Allied board of directors incorrectly permitted the preferred shareholders to continue electing a majority of the board. Baron did not seek repayment of the dividends arrearages, but sought a mandated new election for the 1974 board of directors, under which common shareholders would be permitted to elect the board. Allied filed a motion for summary judgment.
Rule of Law
Holding and Reasoning (Brown, J.)
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