Penington v. Commonwealth Hotel Construction Corp.

The Commonwealth Hotel Construction Corporation (Commonwealth) (defendant) was a Delaware corporation. Commonwealth had common and preferred stockholders. The preferred stockholders were entitled to an annual income of 7 percent in the form of a dividend. Both Delaware law and Paragraph A of Article Fourth of Commonwealth’s articles of incorporation (charter) prohibited Commonwealth, while a going concern, from paying preferred dividends from its capital (i.e., unless the company had a surplus or net profit). Paragraph E of Article Fourth of Commonwealth’s charter provided that in a dissolution, the preferred shareholders were entitled to payment of the par value of their stock plus unpaid dividends accrued thereon. Paragraph E did not expressly bar the payment of accrued but unpaid dividends from capital. A receiver was appointed to oversee Commonwealth’s dissolution via liquidation. During the liquidation, Robert Penington and other common stockholders (collectively, common stockholders) (plaintiffs) objected to the preferred stockholders receiving payment for accrued but unpaid dividends before the common stockholders were paid for their shares because Commonwealth’s assets did not include any management-generated profits. The Chancery Court ruled that the preferred stockholders were not due accrued but unpaid dividends because Commonwealth had no profits or surplus. The preferred stockholders appealed, arguing that Paragraph E entitled them to payment of accrued but unpaid dividends in Commonwealth’s liquidation. The common stockholders responded that the term “dividend” should be interpreted identically in Paragraphs A and E to bar dividend payments from capital and that, absent a contrary statute or agreement, all stockholders should be treated equally in the liquidation. The preferred stockholders countered that (1) Paragraphs A and E addressed different scenarios (a going concern vs. a dissolution), justifying different dividend rules; (2) Paragraph E should be interpreted in accordance with Paragraph F of Article Fourth of Commonwealth’s charter, which effectively barred Commonwealth from redeeming preferred stock without paying accrued but unpaid dividends; and (3) Paragraph E reflected the requisite agreement among the shareholders to treat preferred shareholders differently in a dissolution.