## Facts

- Kraeuter & Co., Inc., a New Jersey corporation, issued approximately 1,392 shares of preferred stock with cumulative 7% dividends “when and as declared” by directors.
- The certificate of incorporation provided that preferred shares could be redeemed after three years at $110 per share by board vote and “shall be redeemed” at that price at the expiration of 15 years from issuance.
- At the 15-year date, dividends had been unpaid for several years; the claimed redemption amount was $110 plus $77 in accumulated unpaid dividends, totaling $187 per share.
- Plaintiffs, holders of 120 preferred shares, demanded redemption; the corporation refused, asserting redemption was not required until sufficient funds existed to do so without harming the corporation.
- The corporation asserted that redeeming all preferred shares would require roughly $250,000.
- Kraeuter owned about 70% of the stock of a subsidiary, Kroydon Company, and had power to control its operations and dividend policy.
- Kraeuter and Kroydon together had earned profits exceeding $400,000 in the five years before December 31, 1940.
- Plaintiffs filed an equity suit to compel redemption under the charter provision.

## Issues

1. Whether a charter provision stating preferred shares “shall be redeemed” at a fixed price at the expiration of 15 years creates an enforceable corporate obligation to redeem at maturity.
2. Whether enforcement of that obligation is subject to an implied limitation prohibiting redemption when the corporation is insolvent or when redemption would render it insolvent, and how insolvency is measured.
3. Whether, given creditor-protection concerns, a court of equity may order staged or installment redemption and require equal treatment of all holders of the same preferred class.

## Decision

- The court held the 15-year “shall be redeemed” clause was statutorily authorized, part of the corporate contract with preferred shareholders, and created a present obligation to redeem at maturity.
- The court held the obligation is subject to an implied limitation: redemption cannot be compelled when the corporation is insolvent or when redemption would cause insolvency; this limitation protects creditors.
- In assessing insolvency, common stock is not treated as a corporate liability; potential injury to common shareholders does not excuse performance.
- Because Kraeuter controlled Kroydon through 70% ownership, the court required consideration of the assets and liabilities of both entities in evaluating the corporation’s ability to redeem.
- The court concluded equity could structure relief to protect creditors while enforcing the obligation, including partial immediate payment with the balance payable in installments.
- The court required that any redemption plan offer equal treatment to all stockholders of the same preferred class.
- Decree entered in accordance with the opinion.

## Legal Principles

- A charter provision requiring preferred shares to be redeemed at a specified time and price is enforceable as a contractual obligation of the corporation to the preferred shareholders.
- Enforcement of a contractual redemption duty is implicitly limited by creditor protection: redemption may not be compelled during insolvency or if it would create insolvency.
- For the insolvency limitation, common stock is not a liability; harm to common shareholders is not a defense to enforcing preferred shareholders’ contractual rights.
- Where a parent corporation controls a subsidiary’s business and dividend policy through majority ownership, the assets and liabilities of both may be considered in determining ability to perform redemption obligations.
- A court of equity may tailor remedies to the circumstances and may order a structured redemption program (including installments) rather than immediate full payment when immediate payment would threaten creditors.
- All shareholders within the same class must receive equal treatment in any court-ordered or court-supervised redemption program.

## Conclusion

The court enforced a charter-mandated preferred stock redemption at maturity as a contractual obligation, but limited enforcement by an implied insolvency constraint protecting creditors; it directed equitable, structured redemption—potentially using resources available through a controlled subsidiary—while requiring equal treatment of all preferred shareholders.


Mueller v. Kraeuter & Co., 131 N.J. Eq. 475, 25 A.2d 874 (N.J. Ch. 1942)