Weinberg v. Baltimore Brick Co.

Baltimore Brick Company (BB) (defendant) was incorporated in Delaware in 1902 as successor to a New Jersey corporation. BB had more than 10,000 preferred shares and more than 8,000 common shares. BB’s Delaware and New Jersey charters provided that preferred shareholders were entitled to receive fixed yearly dividends from net earnings and that unpaid preferred dividends were cumulative. The preferred shareholders were entitled to elect six of BB’s nine directors. The preferred shares derived from the conversion of the New Jersey corporation’s debt to equity. BB accrued significant preferred-dividend arrears, but it declared several preferred dividends starting in 1950. Harry Weinberg (plaintiff), who owned most of BB’s common stock, sued to enjoin a preferred dividend that BB declared in June 1954. The parties agreed that BB had net earnings for the current and prior year and that its preferred capital was not impaired, but they disputed whether BB’s common capital was impaired. The chancery court ruled that the preferred dividend was lawful even if the common capital was impaired. Weinberg appealed, arguing that as of BB’s New Jersey formation and its 1902 Delaware reincorporation, the term “net earnings” meant earnings over BB’s entire life (i.e., earned surplus) and that BB did not have an earned surplus. Weinberg further argued that it was irrelevant that Delaware subsequently permitted the payment of preferred dividends from net profits from the current and/or preceding fiscal year because the revised law was subject to any charter restrictions. Per Weinberg, BB’s charter specification that net earnings were the exclusive source for preferred dividends was such a restriction due to the definition of “net earnings” in 1902 and before.