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

  • Community was a corporation that had a by-law saying that 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, which added up to a lot of unpaid money!
  • 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. So, the directors attempted to get the preferred stockholders to agree to give up their claims for 24 years of unpaid dividends.
    • Some of the preferred stockholders did not want to give up this claim.
    • Unless there was 100% buy in fro 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 together with a subsidiary company.
    • The merger rules are complicated, but in the end this move would have gotten around 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.
  • The Appellate Court affirmed.
    • The Appellate Court looked to Rhode Island law, and found that mergers of corporations required a simple majority of stockholders.
    • The Court noted that nothing in the law talked about any reasons for why a corporation might decide to merge.
      • The Court found that nothing in the law prevented a corporation from merging solely for the purpose of getting around other requirements.
  • Basically, as long as a company meets the statutory requirements for a merger, the courts will not inquire into the reasons the corporation is merging.
    • That’s part of the business judgment rule.
  • Contrast this case with Schnell v. Chris-Craft Industries, Inc. (285 A.2d 437 (1971)), in which the Court found that even when a company was strictly complying with the law, equity demands that when the directors take actions for shady purposes, they should not be allowed to profit.