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Merritt-Chapman & Scott Corp.

v. New York Trust Co.
Swan, Circuit Judge
Raeses, Roberto Miguel O.

SUMMARY: Merritt-Chapman & Scott Corp. issued stock purchase

warrants, which allowed the bearers to purchase full-paid and nonassessable shares of common stock. The board of the corporation
declared a stock dividend which, among other things, directed that
the dividend be payable on Oct. 15, 1950 to holders of the stock as of
the close of the business on Sept. 15, 1950. The warrant holders
opposed this, saying that, contrary to the corporations contention,
their right to be entitled to share in the stock dividend cannot be
limited by the abovementioned time. The court ruled infavor of the
warrant holders.
DOCTRINE: A stock dividend does not change the proportional
interest of each shareholder in the corporate enterprise. It changes
only the evidence which represents the interest.
FACTS: Stock purchase warrants were issued by Merritt-Chapman &
Scott Corp. in bearer form.
1. Each certify that the bearer is entitled to purchase full-paid and
non-assessable shares of common stock of the corporation, at
the price of $30 upon surrender of the warrant at the office of
the New York Trust Co.
a. The basic purchase price of $30 was subject to
downward revision, subject to certain contingencies in
the trusts deed.
To insure availability of stocks purchasable under the warrants:
1. Trust deed required that stock certificates with aggregate
amount of 40K shares shall be delivered to the trustee.
2. It also constituted the Trust Co. as the corporation agent for
the purpose of receiving the purchase price and to deliver
stock certificates upon exercise of the warrants.

The trust deed provided that:

1. Stock certificates deposited with the trustee shall not be
deemed legally issued or outstanding until delivered by the
2. The corporation. will, at all times during the life of the
warrants, retain a number of authorized but unissued shares of
the common stocks of the corporation represented by the stock
certificates and stock scrip certificates then on deposit with the
trustee, and/or which the corporation may be required to
deposit with the trustee (Sec. 7, Art. III).
On July 12, 1950, the corporation declared a stock dividend of 40% per
share of no par common stock on each legally issued and outstanding
share of common stock.
1. The dividend was payable on Oct. 16, 1950 from authorized
but unissued shares to holders of the stock as of the close of
the business on Sept. 15, 1950
2. Price was fixed at $20 per share.
3. Directed the treasurer to transfer from the Earned Surplus
Account to the Common Capital Stock Account $20 for each
dividend share.
4. Directed the officers to give warrant holders outstanding
under the trust deed and to The New York Trust Co. the 60 day
notice required by Sec. 10, Art. III.
a. In case the Corporation shall pay any stock dividend
upon the outstanding common stock; or
b. Take other specified actions which may affect the
value of the stock purchase warrants.
ISSUE: WON the warrants had to be exercised before the specified
period (in this case, Sept. 15, 1950) in order for the warrant holders to
share in the stock dividend.
RULING: No, there is no need for warrant holders to exercise the
warrants before the time specified.
RATIO: The warrants gave the holders the privilege, unlimited in time,
to purchase an aggregate of 40k authorized but unissued shares.




In 1928, there was a definite number of outstanding common

shares at the time the warrants were issued.
a. If the holders exercised option to purchase, they
would have acquired a definite percentage of the
common stock.

A stock dividend does not change the proportional interest of each

shareholder in the corporate enterprise.
1. It changes only the evidence which represents the interest.
2. If the corporation were at liberty to declare stock dividends
without any provision for warrant holders, the percentage of
interest in the common stock capital they could acquire could
be reduced to nil.
a. While injustice could be avoided by reducing the price
paid for each share purchased under the warrants, the
privilege of the warrant holders to acquire a definite
proportional interest in the common capital stock
would be lost if there was no provision protecting
i. This is where Sec. 7, Art. III comes in.
1. It recognized the possibility that a
stock dividend may be declared and
paid on outstanding shares before the
warrants had been exercised.
a. In
certificates representing that
proportion of the dividend
shares which the shares
subject to the warrants bore
to all the common shares
would be deposited with the
b. The trustee would then
deliver the shares without
additional consideration.
ii. There is nothing in Sec. 7 which sets a time
limit on the warrant holders unlimited option
to purchase common shares.

Appellee points to Sec. 10, Art. III as providing such a limit.

1. HOWEVER, the corporation here merely promised to give
warrant holders and the trustee a sixty day notice in case the
corporation pays any stock dividend or take other specified
action that would allow the warrant holders to purchase stock
and receive, in effect, stock dividends on the date when the
dividend is payable.
a. The warrant holders are not asking for such. What
they ask for are the rights under Sec. 7.
2. The language of Sec. 10 does not show that the purpose of the
notice is to remind warrant holders that failure to exercise
such warrants will result in forfeiture.
a. Sec. 8 and 9 specifically deal with forfeiture anyway.
It is contended that Sec. 7 is inconsistent with the warrants, as it
supposedly limits the holder to the stated number of shares of common
stock as it may exist at the time of such purchase, and that the right to
buy conferred to the warrant holder is on an as is basis.
1. This interpretation would contradict Sec. 7 and 8, which
contemplate changes resulting from stock dividends,
recapitalization, merger, etc.
2. It is more consistent to read the quoted words as referring to
those changes.
a. One share may, because of stock dividends, mean 1.4
shares of stock as it may exist at the time of the
Sec. 6, Art. III is said to provide a reduction in the basic purchase price
in case of a stock dividend.
1. HOWEVER, the language cannot be said to denote na transfer
on the companys books from the Surplus Account to the
Capitlal Stock Account.
2. It would also be contradictory to Sec. 7
DISPOSITIVE: Judgment reversed.
DISSENTING OPINION (Clark, Circuit Judge): Secs. 8 and 9 apply to
the particular situations they expressly cover and do not apply to the
situation covered in sec. 10, and there is no surplusage. The provision



of sec. 6 for reducing the basic purchase price of the stock seems, to my
mind, rather clearly applicable in case of a stock dividend and be a
reasonably fair counterad-justment to those warrant holders who still
wish to stay on the outside awaiting developments. And sec. 7 carries
its own statement of its application conditioned "if the same had been
declared upon the common stock represented by the stock certificates
then held in trust by the Trustee hereunder" or later "if the same had
been declared upon the common stock so purchased."