#### Bainbridge Colby, Respondent, *v.*The Equitable Trust Company of New York and The Mercantile Trust Company, Appellants.

First Department,

February 14, 1908.

Corporation — merger of trust companies having special charters — rights of minority stockholders — when merger agreement not inequitable —' temporary injunction of merger denied.

By virtue of section 163 of the Banking Law, providing that trust companies incorporated under special laws shall possess the powers of trust companies incorporated under-the Banking Law and shall he subject to the provisions of that law so far as they arc hot inconsistent with the special charter, the Equitable Trust Company of New York and the Mercantile Trust Company, respectively incorporated under various special acts and possessing similar powers, are entitled to merge pursuant to the provisions of sections 84 and 38 of the Banking Law.

The Legislature, under the power to repeal or amend corporate Charters reserved by the Constitution, may authorize the merger of corporations if there be no confiscation of their property.

A merger which results in the extinction of the merged corporation, and the transfer of its assets to the other corporation, does not confiscate its property or deprive it of vested -property rights, for under the statute a stockholder unwilling to assent to the terms of the merger agreement may obtain the value of his stock in cash.

A stockholder is charged-with knowledge that the statute gives majority stockholders the right to elect the officers of the corporation, to dictate its policy, and to control its -management, and if the acts of the majority do not meet

■ with his approval he has, no. legal ground of complaint, unless he can show acts which in effect amount to a fraud against him or to bad faith on the part of the majority. A court of equity will interfere in the management of a corporation-at the solicitation of a minority stockholder only when his com. plaint is based upon some illegal or unauthorized act of the majority to his prejudice. ’

When it appears that a large number of the directors and officers of a trust com•pany who signed an agreement to merge -with another company are also directors and officers in the latter, there is such an intermingling of interest that the court will scrutinize the proposed agreement with care in order to ascertain whether it be fair to minority stockholders; hut the mere intermingling of interest does not oh itself make the agreement void or so manifestly unjust as to warrant a court-of equity-in interfering.

A merger agreement providing for an exchange of two shares of stock in a com pany which although earning twenty-five per cent -on each sitare, has much uncertainty as to its future earning power, for one share of stock in the other *263company which can reasonably be expected, to earn forty-eight per cent on each share, cannot be said to be so unconscionable as to justify a court of equity in interfering at the suit of a minority stockholder, especially when the agreement has been approved by a large majority of stockholders and by the ■ State Superintendent of Banks.

On such merger it is not necessaiy to make allowance for the good will of the company which transfers its assets, if, in case of dissolution, forced or voluntary, it would add nothing to the assets of the corporation.

A stockholder holds his stock subject to the execution of all-the powers conferred by law upon the corporation, and he must abide by the decision of the directors or stockholders, as the case may be, upon all matters which the law commits to their determination and control.

A court of equity will not interfere with a proposed merger of corporations authorized by a large majority of.the stockholders in good faith and in accordance with the statute, simply because some of the minority think the proposed agreement is unsatisfactory or unfair.

When there is no material dispute as to the result of such proposed merger and the legal questions involved can be passed upon as well on a motion for an injunction *•pendente lite*as at the close of the trial, the determination of the questions need not be deferred.

Appeal by the defendants, The Equitable Trust Company of New York and another, from an order of the Supreme Court, made at the New York Special Term and entered in the office of the clerk of the county of New York on the 3d day of July, 1907, granting an injunction *pendente Lite.*

*Charles F.*Brown, for the appellants,

*William M.*Ivins, for the respondent.

McLaughlin, J.:

The plaintiff, a stockholder of the Equitable Trust Company of New York, brings this action in equity on his own behalf and on behalf of all other stockholders of that corporation to enjoin its proposed merger Avith the defendant, The Mercantile Trust Company, mainly upon the ground that such merger is illegal and unfair to the plaintiff.

After the commencement of the action, upon notice, he applied for and obtained an order restraining the defendants and their officers and agents, during the pendency of the action, from taking any further steps towards* carrying out the proposed merger. The defendants appeal from this order.

*264The proposed merger is attempted under sections 34 to 38 of the Banking Law (Laws of 1892, chap. 689, added .by Laws of 1895, chap. 382, and amd. by Laws óf 1900, chap. 199). Section 34 provides that “Any two or more corporations, other than savings banks, organized under any one article of this chapter, or organized under the laws of this State for the purposes, or either of them, mentioned in any one article of this chapter, are hereby authorized to 'merge one or more of said corporations into another in the manner following * * *.’.’ The contention that the proposed merger is illegal is based substantially upon two propositions: *First,*(a) That neither the Equitable Trust Company nor the Mercantile Trust Company was “ organized under any one article of this chapter; ” (b) that neither of them was “ organized under the laws of this State for the purposes, of either of them, mentioned in any one article of, this chapter.” The Equitable Trust-Company was incorporated under chapter 604 of. the Laws of 1871, under the name of the “ Traders’ Deposit Company,” ■ with powers, among other things, to receive upon deposit money, ' certificates and evidences of debt or value and contracts, and to take the management, custody and charge of the same and to advance . moneys, securities and credits upon the same at .such rates of interest, not exceeding the legal rate, and upon such terms and conditions as may be agreed upon by the parties. In 1896 (Chap. 839 of that year) the Legislature further authorized it “ to have all the rights, .powers and privileges conferred upon trust companies by section one hundred and fifty-six of an act entitled ‘An act in relation to hanking corporations,’ and known as the Banking Law.” The name of the corporation was changed in 1895 (Laws of 1895, cl,lap. 557), and again, by special act of the Legislature, was changed in 1902 (Chap. 290) to the Equitable Trust Company of- Mew York. The Mercantile Trust Company was incorporated by special act of the Legislature in 1868 (Chap. 806) under the name of “ Fife Proof ■ Warehousing Company.” It's powers were thereafter increased by special acts,* and in 1873 its name was changed (Chap. 845) to “ The Mercantile Trust- Company,” and it was empowered “ to accept and *265execute all such trusts of every description as may be committed to it by any person or persons whatsoever, or by any corporations.” Neither of the defendants was organized under any one'article of the Banking Law — each having been organized by special act of the Legislature — but that they come fairly within, the provisions of that act and are subject thereto cannot be seriously doubted when section 163 (Laws of 1892, chap. 689) is read in connection with the other sections. This section provides that: *“*Every trust company incorporated by a special law shall possess the powers of trust companies incorporated under this chapter and shall be subject to such provisions of this chapter as .are not inconsistent with the special laws relating to such specially chartered company.” In *Venner*v. *Farmers' Loan & Trust Co.*(54 App. Div. 271; affd., 176 N. Y. 549) it was held that under this section a company incorporated by special act in 1822 with no banking privileges, but which has subsequently acquired power to execute trusts, was subject to the provisions of the Banking Law and might receive deposits, though such power was expressly withheld in its original charter.

*Second.*That the Legislature had no power to sanction the merger of corporations against the protest of minority stockholders unless such merger were lawful when the corporations were formed. But the Legislature has the right at any time it sees fit to alter, suspend and repeal the charters of corporations. (1 R. S. 600 [R. S. pt. 1, chap. 18, tit. 3], § 8; rep. by Gen. Corp. Law [Laws of 1890, chap. 563], §§ 23, 26, as amd. by Laws of 1892,' chap. 687, § 34. See Gen. Corp. Law [Laws of 1892, chap. 687], § 40, added by Laws of 1895, chap. 672.) The right is reserved to the Legislature by the Constitution. (Art. 8, § 1.) The Legislature, of course, cannot confiscate property, but it is under its fiat that the corporation comes into existence and the power which creates may thereafter change or destroy. *(People ex rel. Cooper Union*v. *Gass,*190 N. Y. 323; *Mayor, etc.,*v. *Twenty-third St. R. Co.,*113 id. 311; *Lord*v. *Equitable Life Assur. Soc.,*109 App. Div. 252.) The extent and effect of the legislative reservation of the right to alter or repeal corporate charters was discussed in *Hinckley*v. *Schwarzschild & S. Co.*(107 App. Div. 470). There the plaintiff sought to restrain the defendant corporation from issuing preferred stock and subordinating the *266existing stock to the payment of capital and dividends thereon. At the time the defendant was organized, unless provided for in the certificates of indorporation, preferred stock could be issued only with, the unanimous consent of the stockholders. Under chapter 354 of the Laws of 1901 (amdg. Stock Corp. Law [Laws of 1892, chap. 688], § 47) ¡lower was given a corporation to issue preferred stock upon consent of the holders of two-thirds of the stock and defendant sought to issue preferred stock in accordance with this statute. The court held' that the act was a valid exercise of legislative power, applied to corporations existing at the time of its passage, and that a minority stockholder could not prevent the issue of such stock. In so far as the right of a corporation to exist is concerned, as "well as over the exercise of such powers as can only be exercised by it as an existing corporation, the State has absolute control under its reserve power. *(People*v. *O'Brien,*111 N. Y. 1.) It cannot, however, confiscate the property of the corporation or deprive it of its vested property rights. *(Rochester*& *C. Turnpike Road Co.*v. *Joel,*41 App. Div. 43.)

Here, the merger of the Equitable Trust Company — if the merger be permitted to take place — will result, in the extinction of that corporation and the transfer of its assets to the new corporation but its property is not confiscated, nor is the corporation deprived of vested property rights. The property is sold to the merged corporation upon the terms provided in the merger agreement and ample provision is made under the statute authorizing the merger by which, any stockholder who is unwilling to assent to the terms can obtain the value of his stock in cash. The act provides that any stockholder who does not agree to the terms of the merger agreement may object to it and demand payment for his stock and, if not paid, he may apply to the Supreme Court for the appointment of three appraisers to fix and determine the-value of his stock and the expenses of such determination liaxie to be borne.by the corporation itself. When the plaintiff became interested in the Equitable Trust Company he did so with full knowledge of the fact that the statute commits to the majority stockholders the right to select its officers, dictate its policy, and control its management. If the acts of the majority do not meet with his approval he has no legal ground of complaint unless he can show facts which, in effect, *267amount to a fraud against him, or bad faith on the part of the majority. A court of equity will interfere in the management of a corporation at the solicitation of a minority stockholder only when his complaint is based upon some illegal or unauthorized act of the majority to his prejudice. This question is quite fully discussed in *Gamble*v. *Queens County Water*Co. (123 N. Y. 91). Judge Peck-ham, delivering the opinion of the court, said: “ It is not, however, every question of mere administration or of policy in which there is a difference of opinion among the shareholders that enables the minority to claim that the action of the majority is oppressive, and which justifies the minority in coming to a court of equity to obtain relief. Generally, the rule must be that in such cases the will of the majority shall govern. The court would not be justified in interfering even in doubtful cases, where the action of the majority might be susceptible of different constructions. To warrant the interposition of the court in favor of the minority shareholders in a corporation or joint-stock association, as against the contemplated action of the majority, where such action is within the corporate powers, a case must be .made out which plainly shows that such action is so far opposed to the true interests of the corporation itself as to lead to the clear inference that no one thus acting could have been influenced by any honest desire to. secure such interests, but that he must have acted with an intent to subserve some outside purpose, regardless of the consequences to the company and in a manner inconsistent with, its interests. Otherwise the court might be called upon to balance probabilities of profitable results to arise from the carrying out of the one or the other of different plans proposed by or on behalf of different shareholders in a corporation, and to decree the. adoption of that line of policy which seemed to it to promise the best results, or at least to enjoin the carrying out of the opposite policy. This is no business for any court to follow.”

But in any view can it be fairly said that the proposed merger is a fraud upon or oppressive to the minority stockholders of the Equitable Company ? The learned jnstice at Special Term refused to find, as appears from his opinion, that the act of the majority was fraudulent or in bad faith, but he did find that it was *“*unfair to the interests of the plaintiff.” (55 Misc. Rep. 355.) I have been unable to reach the conclusion that it is unfair to the plaintiff. Certainly it is not *268so clear that it is unfair that a court of equity would be justified, in interfering with the proposed action of a large majority of the stockholders of that company. The material facts are undisputed, the only dispute between the parties being inferences to be drawn therefrom. It appears that about sixty-five per cent of the stock of the Mercantile Company and about forty-nine per cent of the stock of the Equitable Company is held by the Equitable Life Assurance Society of the United States; that of .the twenty directors who signed the merger agi-eement on behalf of the Equitable Company nine are also directors of the' Mercantile Company and that several of the officers and directors of the Equitable Society are also directors of the Mercantile Company. With such an intermingling of interests it is not only proper but necessary to scrutinize the proposed merger agreement with care for the purpose of ’ ascertaining whether it is fair to the plaintiff or not, but in doing so it must be borne in mind that it does not necessarily follow because there is such an intermingling of interests that the proposed agreement is void or so manifestly unjust as would justify a court of equity-in interfering. *(Continental Ins. Co.*v. N. *Y. & H. R. R. Co.,*187 N. Y. 225; *Burden*v. Burden, 150 id. 287.) The proposed agreement is tentative only. The corporations are not bound ill any way Until it is adopted and ratified by the holders of tVo-tlnrds of the stock. It is at most a plan to be submitted to' the stockholders for their action and for this ieason many of the.au thorities cited‘on the respondent’s brief, in which directors have made contracts in which they have a personal interest, have no application.

The capital stock of the Mercantile Company is $2,000,000 ; its surplus about $7,000,000, making the book' value of each share approximately $452. The capital stock of the Equitable Comjiany is $3-,Ó00,000'; its surplus about $10,000,000, making the book value of its shares approximately $440. • In estimating the value for the merger, the .directors deducted $5 per share as the' estimated cost of liquidation, making the book value of the Equitable Company’s stock $435 per share/ Under the terms of the merger ■ agreement, the capital stock of the Mercantile Company is to be increased to $3,000,000, its stockholders retaining their present holdings. The stockholders of the Equitable Company, upon surrendering their stock,, are to receive, at their option, either $435 in *269cash for each share, or one share of the Mercantile stock for each * two shares of the Equitable stock, provision having been made to insure the retirement for cash of sufficient stock so that the new stock issued shall not exceed $1,000,000. It will require $4,350,000 to retire the old stock, so that the Equitable Company will contribute to the merged company about $9,000,000, substantially the same amount which the Mercantile Company now has. The book value of the new company’s shares will then be approximately $600.

A superficial examination of the proposed merger would seem to indicate it was unfair, to the Equitable stockholders. ■ The two companies contribute substantially the same amount of capital, and yet the Equitable stockholders will get in return for each two shares of their stock — whose book value is about $870—one share .of stock of the new company — whose book value will be about $600 — while the Mercantile stockholders will get two-tliirds of the stock of the new company, and the shares they now hold will be increased in book value from $452 to $600. This apparent unfairness, how- *■ ever, disappears when the condition and earning capacity of the two companies are critically examined. The Mercantile Company earns annually about twelve per cent on the book value of its shares'—• that is about fifty-one per cent on each share—while the Equitable Company earns less than six per cent on its book value or about twenty-five per cent on each share. A further fact which is not disputed, and which in determining the value of the shares is a very pertinent subject of inquiry, is that the Equitable Company has suffered quite seriously from recent business conditions. Its relations with the Equitable Life Assurance Society are not now and, it is not difficult to see, will not in the future be nearly so profitable as formerly, and its earning capacity thereby is and will be largely diminished. The directors estimate the annual earnings of the new company — taking the annual earnings of the Mercantile Company and adding thereto the estimated earnings at four per cent on the $9,000,000 to be obtained from the Equitable Com-*270earning power, for one. share in a company which can reasonably be expected to earn forty-eight per cent on each share, cannot be said to be such an unconscionable proposition as to justify a court of equity in interfering and especially when the plan is approved . by a very large majority of the stockholders of the Equitable Company. It is true, as pointed out by the learned justice sitting at Special Term, that the foregoing estimate figures the earnings upon the Equitable contribution at only four ppr cent, whereas that corporation is now earning nearly six per cent, but for reasons already suggested it is extremely doubtful whether the earnings of the Equitable Company will — if the merger does not take place be more than four per cent, but .if that fact be assumed, then the shares in the new company will be more valuable than as now estimated. If the nevv company' can earn upon its capital anything like the per cent which the Mercantile Company is now earning, the net earnings per share of the new company will be more than twice as 'much as the present earnings of the Equitable Company. It inay be assumed that the proposed merger will be of benefit to the stockholders of the Mercantile Company. Indeed, the main conten-. tion of respondent’s counsel seems to be the great advantage which will accrue to the Mercantile stockholders rather than the injustice which the-.stockholders of the Equitable will suffer.

It is argued that no allowance is made for the good will of the Equitable Company and that this is an asset taken from the Equitable stockholders without compensation. Good will is unquestionably an asset, but its value is a variable and uncertain quantity. It may exist .to-day and disappear to-morrow. In case of a dissolution — either forced or voluntary — it adds but little, if anything, to the assets of the dissolved corporation. In this connection it may not be out of place to .call attention to the fact that it does not seem to be seriously claimed that if the Equitable Company were to be dissolved, and its property distributed among its stockholders, they would realize more, than $435 a share. If a large majority of the stockholders of the Equitable Company deemed it foT their respecinterests to liquidate the company and proceedings in good faith about to be taken in accordance with the statute for that purno one, I take it, would seriously contend that a court of equity to interfere and prevent such liquidation. (Windmuller *v*. *271*Standard Distilling & Distributing Co.,*114 Fed. Rep. 491; Thomp. Corp. § 4443.)

After a careful consideration of the record, I do not think it can be said the proposed agreement is unfair to the plaintiff. It has been approved, as the statute requires, by the State Superintendent of Banks, and the fact is not disputed that the holders of over 27,000 shares of the Equitable Company’s stock out of a total of 30,000 shares have signified their assent and approval of the merger. The Equitable Life Assurance Society holds some 15,000 of these shares, but it appears that other holders of 12,914 shares have signified their intention to vote for the' merger, while only the plaintiff, who holds 300 shares, and one other stockholder, who holds 6 shares, have signified their disapproval. Ho director of the Equitable has opposed the merger. It is resisted by the holders of barely one per cent of the stock, while the holders of over ninety per cent have signified their approval. Every stockholder of a corporation holds his stock subject to the execution of all the .powers conferred by law upon the corporation and he must abide by the decision of the directors or stockholders, as the case may be, upon all matters which the law commits to their determination and control. (Morawetz- Corp. [2d ed.] §§ 413-417; Cook Corp. [5th ed.] § 684.) The Legislature has seen fit, in the exercise of the powers conferred upon it, to provide the conditions upon which existing trust companies may merge. I know of no principle'which justifies a court of equity in interfering with a large majority of the stockholders proceeding strictly in ‘accordance with the statute siihply because some of the minority stockholders think the proposed agreement is unsatisfactory or unfair. That question must necessarily under the statute be determined by the stockholders themselves, and once their decision has been made, in the absence of fraud or bad faith or of facts clearly showing that the proposed acts will' be oppressive or unfair to the corporation, the court cannot and ought not to interfere. If it did so,- it would in effect repeal the statute and subject the control of the majority to the will of the minority.

Finally it is urged that the order should be affirmed so as to preserve the *status quo*until after the trial of the action; that if it is reversed, any relief to which the trial might determine the plaintiff entitled would be unavailing. There would be force in this sug*272gestión if there were any material dispute as to the facts, but there is not! This is recognized in the brief presented by the respondent’s ■ counsel, in which he states: *“*Both- defendants admit in their answers and affidavits all the mat'erial facts alleged, by plaintiff in support of the injunction. * * ‘ * They differ with plaintiff only in his conclusion that the plan is iniquitous and unconscionable, and contend that it is fair and just. But that is obviously a question of construction for the court. * * * ” It is not even suggested that .there was any deception or concealment in arranging for the merger ; on the contrary, it appears that the directors of the Equitable Company acted openly and full information was given to its stockholders. The only question presented is whether the merger agreement by its terms and from tlie interrelation of the parties in interest is so unfair and unconscionable as regards the plaintiff and other minority stockholders _that a court .of equity should interfere and prevent its. consummation. The facts are fully set out in the record" and there being no dispute as. to such facts, the legal questions involved can be as well passed upon now as at the close of the trial. These facts, in my opinion, do not show that the proposed merger is illegal, unfair, or unjust to the plaintiff, or that there is any ground whatever to .justify a court of equity in exercising its equitable powers to prevent a large majority of the ' stockholders of a corporation doing precisely ,what the statute .in express terms says they may do.

' If I am right in this conclusion,, then it follows that the order e appealed from must be reversed, with ten dollars costs and disbursements, and the motion to Continue the injunction denied, with ten dollars costs.

Patterson, P. J., Laug-hlin, Clarke and Scott, JJ., concurred.

Order reversed, with ten dollars costs and disbursements, and motion denied, with ten dollars costs.

*

 See Laws of 1869, chap. 185; Laws of 1870, chap. 121, and Laws of 1880, chap. 425.— [Rep.