0. Wood, the receiver of Stanton Oil Company, sued Stan- ton's shareholders to recover dividends paid to them for three years, claiming that at the time these dividends were declared, Stanton was in fact insolvent. Wood did not allege that the present creditors were also creditors when the dividends were paid. Were the dividends wrongfully paid? Explain. 11. International Distributing Export Company (IDE) was organized as a corporation on September 7, 2009, under the laws of New York and commenced business on November 1, 2009. IDE formerly had existed as a sole proprietorship. On October 31, 2009, the newly organized corporation had liabilities of $64,084. Its only assets, in the sum of $33,042, were those of the former sole proprie- torship. The corporation, however, set up an asset on its balance sheet in the amount of $32,000 for goodwill. As a result of this entry, IDE had a surplus at the end of each of its fiscal years from 2010 until 2015. Cano, a share- holder, received $7,144 in dividends from IDE during the period from 2011 to 2016. May Fried, the trustee in bankruptcy of IDE, recover the amount of these dividends from Cano on the basis that they had been paid when IDE was insolvent or when its capital was impaired? 12. Smith's Food & Drug Centers, Inc. (SFD) is a Delaware corporation that owns and operates a chain of supermar- kets in the Southwestern United States. Jeffrey P. Smith, SFD's chief executive officer, and his family hold common and preferred stock constituting 62.1 percent voting con- trol of SFD. On January 29, SFD entered into a merger agreement with the Yucaipa Companies that would involve a recapitalization of SFD and the repurchase by SFD of up to 50 percent of its common stock. SFD was also to repurchase 3 million shares of preferred stock from Jeffrey Smith and his family. In an April 25 proxy state- ment, the SFD board released a pro forma balance sheet showing that the merger and self-tender offer would result in a deficit to surplus on SFD's books of more than $100 million. SFD hired the investment firm of Houlihan Lokey Howard & Zukin (Houlihan) to examine the transactions, and it rendered a favorable solvency opinion based on a revaluation of corporate assets. On May 17, in reliance on the Houlihan opinion, SFD's board of directors deter- mined that there existed sufficient surplus to consummate the transactions. On May 23, SFD's stockholders voted to approve the transactions, which closed on that day. The self-tender offer was oversubscribed, so SFD repurchased fully 50 percent of its shares at the offering price of $36.00 per share. A group of shareholders challenged the transaction alleging that the corporation's repurchase of shares violated the statutory prohibition against the impairment of capital. They argued that a. the negative net worth that appeared on SFD's books following the repurchase constitutes conclusive evi- dence of capital impairment and b. the SFD board was not entitled to rely on a solvency opinion based on a revaluation of corporate assets. Explain who should prevail. 13. In addition to a class of common stock, Peabody Coal Company had outstanding a class of cumulative 5% pre- ferred shares with a par value of $25.00 with the follow- ing contractual rights as stated in the corporation's articles of incorporation: Preferences on Liquidation In the event of any liquidation, dissolution or winding up of the Com- pany (whether voluntary or involuntary), the hold- ers of the 5% Preferred Shares then outstanding shall, to the extent of the full par value of their shares and unpaid cumulative dividends accrued thereon be entitled to priority of payment out of the Company's assets over the holders of the Com- mon Shares then outstanding. After such payment to the holders of the 5% Preferred Shares, the remaining assets shall be distributed pro rata to the holders of the Common Shares then outstanding. Redemption The Company, upon the sole author- ity of its Board of Directors, may at any time redeem and retire all or any part of the 5% Pre- ferred Shares at any time outstanding by paying or setting aside for payment for each share so called for redemption the sum of $26.00 plus a sum equal to the amount of all dividends accrued or in arrears thereon at the redemption date. Peabody entered into negotiations for its sale to the Kennecott Copper Company. In order to complete the CASE PROBLEMS Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Chapter 34 Financial Structure of Corporations transaction, Peabody submitted to its shareholders a reso- lution for the approval of the sale to Kennecott and the adoption of a plan of complete liquidation. The proposed dissolution plan would (1) entitle the preferred sharehold- ers to a preferential liquidating dividend of $25 par value per share plus any unpaid cumulative dividends accrued and (2) pay the remainder of the assets on a pro rata basis to the holders of the common stock of Peabody. 773 The resolution was approved by the common and pre- ferred shares voting as a single class. Preferred sharehold- ers have challenged the plan of liquidation claiming that the corporation should have redeemed the preferred stock and then liquidated the corporation, thus entitling each preferred share to a $26 redemption payment along with accrued dividends. Explain whether the preferred share- holders should succeed