Tuesday, November 15, 2011

Bove v. Community Hotel Corp. of Newport, R.I. case brief

Bove v. Community Hotel Corp. of Newport, R.I.
(105 R.I. 36, 249 A.2d 89 (1969))

-Community was a corporation.  By-law stated: holders of preferred stock had the right to receive any unpaid dividends before the corporation could pay any dividends to common stock holders.
-Community hadn't paid dividends for 24 years.
-Community needed to sell common stock to raise capital, but people didn't want to buy it if they didn't think they'd get a dividend.
-The directors attempted to get the preferred stockholders to agree to give up their claims for 24 years of unpaid dividends.  Some did not want to give up the claim.
-Unless there was 100% buy in for the preferred stockholders, the directors couldn't nullify their claims.
-When it became apparent that Community could not get some of the preferred stockholders to agree to give up their claims, the directors decided to merge Community  with a subsidiary company.
-This move would have circumvented the need to get all of the preferred stockholders' consent, they'd only need a majority (which they had).
-Bove, one of the preferred stockholders, sued to prevent Community from merging.

-The Trial Court found for Community. Bove appealed, and the Appellate Court affirmed.

-The Appellate Court, looking to RI law, found that mergers of corporations required a simple majority of stockholders.
-Nothing in the law talked about any reasons for why a corporation might decide to merge.
-As long as a company meets the statutory requirements for a merger, the courts will not inquire into the reasons the corporation is merging.  This is part of the Business Judgement Rule.

-Contrasted with: Schnell v. Chris-Craft Industries, Inc. (285 A.2d 437 (1971)), in which the Court found that even when a company strictly complies with the law, equity demands when the directors take actions for shady purposes, they should not be allowed to profit.

Course: Corporations.
Topics: Mergers.

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