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Augusta Trust Co. v.

Augusta, Hallowell & Gardiner It is within the power of the legislature, by charter or
Railroad Co., et al statute, to prescribe that corporations may issue
Supreme Judicial Court of Maine | 134 Me. 314 | J. certificates in the form of certificates of preferred stock,
Sturgis so-called, making the holders creditors of the corporation
as well as stockholders, and giving them a lien upon the
SUMMARY property of the corporation with a priority over other
The defendant railroad company had outstanding bonds creditors. Cook on Corp. It is held, however, that a
secured by mortgage. These bonds gave the holders the statute conferring this extraordinary power upon
right to convert into preferred stock of the company. This corporations must be clear and definite in its terms. And
action was brought to foreclose the mortgage and the of such preferred stock it is said that it is not ordinary
question was raised as to the right of the holders of preferred stock, nor technically is it preferred stock at all.
these preferred shares to share in the proceeds on the It is sui generis, not governed by the ordinary rules, but
sale of the mortgaged property. by the provisions of the statutes by which it is authorized.
Suffice it to say that the preferences given the
The Court held the act of surrendering their bonds and holders of the preferred stock in the conversion
taking in lieu of it, preferred stock, the bondholders agreements here in controversy were not authorized
ceased to be creditors and became mere stockholders. by statute when made. The stock was not statutory
On the other hand, those who have not made the preferred stock of the kind just described.
exchange and held their bonds are entitled to the
security of the mortgages. The preferred stockholders The argument is advanced that the certificates of
are not entitled to share in the assets of the companies preferred stock issued in exchange for bonds were in
until all creditors have been paid in full. fact certificates of indebtedness and not stock. We
cannot concur in this view. It is true that preferred stock,
FACTS so-called, may be issued in such a way and under such
The Augusta Trust Company, a banking corporation, is terms as to make the certificates thereof merely
the Trustee named in the General Convertible Mortgage evidence of indebtedness and the holders creditors of
which the Augusta, Hallowell Gardiner Railroad Co., a the corporation and not stockholders. Here, all facts
street railway corporation formerly furnishing and circumstances convincingly characterize the
transportation service in and between the cities preferred stock issued by the street railway
represented in its name, gave on to secure its issue of companies as preferred stock. In each instance, the
serial coupon bonds together with preferred stock which stockholders voted increases in the capital stock by the
was issued in exchange for the bonds in accordance creation of preferred stock. The certificates delivered to
with the terms of the mortgage, which gave to the the holders of the bonds exchanged therefor designated
holders of the bonds the right and privilege of the stock as preferred stock and certified that the holders
converting the same into preferred stock of the were entitled to the number of shares therein
Company secured under the mortgage both as to enumerated in the "full paid preferred capital stock" of
principal and dividends equally and ratably with the the companies. The holders of this stock had a right to
bonds. All the franchises, lands, incomes, revenues and vote in the election of directors and were entitled to
other property of every kind then owned or thereafter receive fixed yearly dividends payable semi-annually at
acquired by the Company were included in the the times therein specified. The certificates contain every
conveyance to the Trustee and subjected to the lien of essential feature of a certificate of preferred stock and
the mortgage. none of a contract creating the relation of a creditor of
the corporation.
The action is brought primarily to foreclose the several
mortgages. By surrendering their bonds and taking in lieu thereof
preferred stock, the bondholders of these street railway
ISSUE + HELD companies ceased to be creditors and became mere
W/N the holders of the preferred shares have the right to stockholders. Those who have not made the exchange
share in the proceeds of the sale of the mortgaged and hold their bonds are entitled to the security of the
property NO. mortgages shorn of the illegal conversion agreements.
The preferred stockholders are not entitled to share in
RATIO the assets of the companies until all creditors have been
paid in full.