## Facts

- The Community Hotel Corporation of Newport, Rhode Island operated the Viking Hotel and had two classes of stock: 6% cumulative prior-preference preferred stock ($100 par) and no-par common stock.
- Plaintiffs were holders of preferred shares, many acquired decades earlier; dividends on 4,335 preferred shares had accrued but not been declared for about 24 years, totaling about $645,000 (about $148.75 per share).
- The preferred stock’s terms gave preferred shareholders priority to receive unpaid cumulative dividends before any dividends could be paid on common stock, making new common-stock financing difficult.
- Management attempted to obtain preferred shareholders’ consent to relinquish accumulated dividend claims, but unanimous consent was required to amend those preference rights and unanimity could not be obtained.
- The board formed Newport Hotel Corp., a new corporation created solely to effectuate a merger; it was authorized to issue common stock and initially issued a nominal amount.
- A merger plan provided that Community Hotel would merge into Newport (Newport surviving), with Community Hotel’s assets transferred to Newport.
- Under the plan, each preferred share (including accumulated but undeclared dividends) would be converted into a specified number of Newport common shares, while each Community Hotel common share would be converted into one Newport common share.
- The merger statute required approval by two-thirds of each class, not unanimous consent of the preferred class.
- Plaintiffs sought an injunction to block the merger, arguing its purpose was to eliminate the preferred class’s accumulated dividend priority by bypassing the unanimity requirement.
- The Superior Court, deciding on exhibits and stipulated facts without live testimony, denied injunctive relief and dismissed the action; plaintiffs appealed.

## Issues

1. Whether a corporation may use a statutory merger (requiring a two-thirds class vote) to effect changes to preferred stock dividend priorities that could not be made by charter amendment without unanimous preferred consent.
2. Whether eliminating preferred shareholders’ priority to accumulated, undeclared dividends through a duly approved merger unconstitutionally impairs contractual rights under the federal and state contract clauses.
3. Whether the merger’s terms were so unfair or inequitable to dissenting preferred shareholders that equity should enjoin the transaction despite statutory compliance.

## Decision

- The Rhode Island Supreme Court affirmed the judgment denying an injunction and dismissing the action.
- The court held the merger was valid under the merger statute even if a principal purpose was to eliminate preferred priorities without unanimous consent.
- The court rejected the contract-impairment claim, relying on the state’s reserved power over corporate charters and shareholder rights.
- The court found no basis in equity to enjoin the merger, emphasizing statutory protections for dissenters, including appraisal rights, and finding no showing warranting extraordinary equitable relief.

## Legal Principles

- Statutory merger provisions have independent legal effect; compliance with a merger statute can validate a transaction even when similar results could not be achieved via a different statutory mechanism requiring greater consent.
- Shareholders’ contract-based expectations in corporate preference rights are limited by a state’s reserved power to amend, alter, or repeal corporate charters and related statutory rights.
- Absent fraud or comparable misconduct, courts generally will not enjoin a merger that meets statutory requirements; appraisal rights are a principal remedy for dissenting shareholders disputing value or exchange fairness.

## Conclusion

The court upheld a merger that converted preferred shares (and their accumulated dividend priority) into common shares of a newly formed surviving corporation, ruling that the merger statute could be used notwithstanding stricter consent rules for charter amendments, that no unconstitutional impairment of contract occurred due to the state’s reserved power, and that statutory appraisal remedies defeated the claim for injunctive relief.


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