Court Opinion

ID: 9418764
Source: CourtListenerOpinion
Date Created: 2023-08-02 22:38:41.847841+00
Date Added: 2024-06-11T17:22:09.882267
License: Public Domain

Mr. Justice Butler
delivered the opinion of the Court.
Petitioner, plaintiff below, owns 200 shares of the common stock of The American Tobacco Company which he acquired prior to the passage of c. 175, New Jersey Laws, 1920, that is here involved." He also owns 400 shares of common stock B. He brought two suits in the supreme court of New York: one against the tobacco company and some of its directors, the other against the trust company, Junius Parker and others. On application of defendants both were removed to the federal court for the southern district of that State. The first was discontinued as. to some defendants and the cases were consolidated. The defendants before the court are the two companies, Parker, and five of the 17 directors of the tobacco company including its president, one of its. vice presidents and its secretary.
The tobacco company was organized under the laws of New Jersey, and in that State maintains its “ principal *125and registered office ” as designated in its charter, holds the stockholders’ meetings and does a substantial amount of business. • It is authorized by the laws of New York to do business there and has in New York City its principal place of business where its directors usually meet, its executives have their offices and most of its records are kept. It carries on business in that and many other States and also in a number of foreign countries.
The grievances alleged by pláihtiff concern the issue, allotment and sale of Stock of the tobacco company. June 25, 1930, the board of directors adopted a resolution recommending the reduction by one-half of the par value and the doubling of the number of -shares of its common stock and common stock B. . It had outstanding 526,997 shares of preférréd stock, and, as a result of action in accordance with that recommendation, 1,609,696. shares of common and 3,077,320 shares of common B. Aftd by another resolution the board advised approval by the stockholders of a plan for the issue and sale of common stock B to employees pursuant to c. 175, New-Jersey Laws, 1920.1 The plan submitted accords to such em*126ployees and others actively engaged in the conduct of the business as may be selected an opportunity'to purchase stock “ by way of additional compensation for services to be rendered,” and allots for subscription shares of unissued stock. The board may offer stock to such persons in the service at prices not less than par and upon other terms and conditions determined by the president' pursuant to authority granted him for that purpose by the board. No employee or person actively engaged in .the conduct of the business of the corporation or its subsidiaries shall be deemed ineligible to its benefits' by reason of being also a director of the .corporation or of any of its subsidiaries or of holding any office therein.
On July 28, 1930, the stockholders adopted the plan. And January 28, • 1931, the board authorized a sale of . 56,712 shares of common stock B at par value of $25 per share. It directed that there be furnished to the president, to be considered in determining to whom the stock should be allotted for purchase, a list showing the services rendered and, having regard to the value of the same, the rating on a percentage basis given to each together with the total amount of his cómpensation for 1930. It recommended that the basis of distribütion should be the number of shares having par value equal to one-third of that year’s compensation to each allottée rated at 100 per . cent, and correspondingly less to those having lower ratings. And there was accorded to each of 535 employees, including directors and others active in the business, the fight to subscribe for the new stock on that basis. All *127the shares allotted were sold at $25 for cash to the trust company. The trust company allowed each allottée to subscribe at the same price. At that time it was worth $112. The agreement stated that this was by way of additional compensation for service to be rendered between January 31 and December 31, 1931, that until the end of the year no allottee could take up his stock, that he was entitled to have dividends applied on the purchase price and that if he should terminate his employment be-. fore the end of the year the trustees were to decide whether he should have his allotment.
• The complaint attacked the transaction upon the following groúnds: The directors being disqüalified by reason of their interest as allottees, the plan was not passed by a valid vote or adopted as required by c. 175. The subsequent vote of thestockholders required by the statute to be predicated upon action by the board, was likewise invalid. .The plan was ultra vires in that the allotment “by way of additional compensation for services to be rendered ” violated c. 195, New Jersey Laws, 1917. Under the company’s .charter and the statutes of New Jersey— § 224, General Corporation Law as added by § 16 of c.. 318, Laws 1926—every stockholder had the right according to the number of his shares to have pro rata distribution of the stock in question. And the complaint Sprayed decree that the defendants be enjoined from carrying out the plain, that the stock be declared void and canceled, and .that the defendants,- other than the tobacco company, be held for costs and damages sustained by that company.
Four defenses were set up: Plaintiff failed to comply with Equity Rule 27. The stockholders including plaintiff ratified the allotments to the directors. The suit is an attempt to regulate-the internal affairs of a corporation foreign to New York, and the United States district court sitting therein should decline to take jurisdiction. The *128allotments were fair and reasonable and were made in accordance with the company’s by-laws and the statutes of New Jersey. Plaintiff moved for an order striking out the defenses as insufficient and for a decree in accordance with the prayer of the complaint, or, in- the alternative, for an injunction pendente lite preventing the carrying out of the plan.
• The district.court filed an opinion [60 F. (2d) 106] in which it said:
. . “ In the present case, the validity of the shares sought to be cancelled depends primarily upon the interpretation and effect of the-act of 1920. The directors cited this statute as their authority for the plan when they formulated it and have all along insisted that the plan is in conformity with the statute. The plaintiff takes the position that the statute is not applicable and has been used by the directors merely as a cover for a raid upon the corporate treasury for their own profit. In addition, plaintiff submits that two other statutes, • that of 1917 and that of 1926, must be taken as limiting the operation of the 1920 act. It is obvious that the case presents not merely questions of fact but questions of some complexity under the New Jersey laws. There seem to be no- decisions of the New Jersey courts to serve as a guide in the proper construction and possible interrelation of these statutes. The legality of the corporate proceedings which resulted in the issuance of this stock is peculiarly a matter for determination in the first instance by the New Jersey courts-. It may be noted that the American Tobacco Company is hot. a local enterprise. While its chief office is .said to be here and it unquestionably carries on business here, its activities are known to be world-wide. It has a New Jersey charter; it refers to the New Jersey office as its principal office; it holds its stockholders’ meetings there. It is not a resident corporation in any sense of the word.’’ *129And it entered judgment denying the motion and that “ in the exercise of this Court’s discretion, each of the bills' of complaint herein be and the same are hereby dismissed, without prejudice to the enforcement of the rights of plaintiff, if any, in the courts of New Jersey.”
The Circuit Court of Appeals, 60 F. (2d) 114, dealing with plaintiff’s contentions before it, held that the plan' was authorized, that the stock was, lawfully issued under-New Jersey statutes, and -that for the reasons given in the opinion the bill was properly dismissed. A dissenting opinion suggests that the plan was not sufficiently in detail to comply with the New Jersey statute. The court affirmed the judgment appealed from, and upon its mandate'the district court entered a decree that the bills of complaint be dismissed'with costs.
Among the points and contentions raised and pressed by plaintiff in his petition for certiorari and argument here are the following: The plan is not definite and formulated as required by c. 175. That chapter as construed below is repugnant to the contract clause of the federal Constitution. The decision that the plaintiff failed to comply with Equity Rule 27 is contrary to c„ 175. Chapter 195, New Jersey Laws 1917, does not permit the issue of' stock to employees for services to be rendered. The decree of the district court declining to exercise jurisdiction is contrary to decisions of this court and in conflict with the decision of the Circuit Court of Appeals for the Seventh Circuit in Williamson v. Missouri-Kansas Pipe Line Co., 56 F. (2d) 503.
The authorization, allotment and sale of the shares in question involved the proportionate ownership of stockholders and their rights inter sese. Unquestionably the steps taken and proposed to formulate and carry out the plan constitute the conduct and..management of the internal affairs of the.tobacco company. The controversy is solely between the plaintiff and other stockholders not *130participating in the distribution on one side and the purchasers of the new stock, the corporation, its directors and officers on the other. When, by acquisition of his stock, plaintiff became a member of the corporation, he, like every other shareholder, impliedly .agreed that in respect of its internal affairs the company was to be governed by the laws of the State in which it was organized. His rights, whatever the tribunal chosen for their vindi- ' cation, are to be determined upon the ascertainment and proper application of .New Jersey law.
It has long been settled doctrine that a court—state or federal—sitting in one State will as a general rule decline . to interfere with or control by injunction or otherwise the management of the internal affairs of a corporation organized under the laws of another State but will leave controversies as to such matters to the courts of the State of the domicile. Wallace v. Motor Products Corp., 25 F (2d) 655, 658. Chicago Title & Trust Co. v. Newman, 187 Fed. 573, 576. Eberhard v. Northwestern Mutual Life Ins. Co., 210 Fed. 520, 522. Powell v. United Association, 240 N. Y. 616; 148 N. E. 728. Sauerbrunn v. Hartford Life Ins. Co., 220 N. Y. 363, 371; 115 N. E. 1001. Jackson v. Hooper, 76 N. J. Eq. 592, 604; 75 Atl. 568. Guilford v. Western Union Telegraph Co., 59 Minn. 332, 340; 61 N. W. 324. Kimball v. St. Louis & S. F. Ry. Co., 157 Mass. 7; 31 N. E. 697. Hogue v. American Steel Foundries, 247 Pa. 12, 15; 92 Atl. 1073. Babcock v. Farwell, 245 Ill. 14, 33, et seq.; 91 N. E. 683. Clark v. Life Association, 14 App. D. C. 154, 179-180. North State Copper & Gold Mining Co. v. Field, 64 Md. 151; 20 Atl. 1039. Cf. Burnrite Coal Co. v. Riggs, 274 U. S. 208, 212-213. While the district court had jurisdiction to adjudge the rights of the parties, it does not follow that it was bound to exert that power. Canada Malting Co. v. Paterson Co., 285 U. S. 413, 422 and authorities cited. It was free in the *131exercise of a sound discretion to decline to pass upon the merits of the controversy and to relegate plaintiff to an appropriate forum. Langnes v. Green, 282 U. S. 531, 535, 541. Heine v. New York Life Ins. Co., 50 F. (2d) 382. Obviously no definite rule of general application can be formulated by which it may be determined under what, circumstances a court will assume jurisdiction of stockholders’ suits relating to the conduct of. internal affairs, of foreign corporations. But it safely may be said that jurisdiction will be declined whenever considerations of convenience, efficiency- and justice point to the courts of the State of the domicile as appropriate tribunals for the determination of the particular case. Cohn v. Mishkoff Costello Co., 256 N. Y. 102, 105; 175 N. E. 529. Travis v. Knox Terpezone Co., 215 N. Y. 259, 263; 109 N. E. 250. Kimball v. St. Louis & S. F. Ry. Co., supra.
The complaint shows, that as of its date seven directors of the tobacco company were not residents of New York. Only six allottees are before the. court. The others, over 525, are not mentioned in the complaint. It appears-from the answer that many of them are outside New York, and it may be inferred that a large number of them reside in the other States and countries in which the company does business. At the time, February 23,1932, of the dismissal of the bill the services of the employees, for which the allotments constitute part compensation, had been fully ■ performed and they were entitled to have and presumably they, or at least some of them, had secured the delivery oí the shares so allotted to them. As the tobacco company, in' addition to its registered office, has property, operates directly or through subsidiaries branch factories in New Jersey and carries on business there and in other States and countries, it may not be deemed to have been organized in that State as a mere matter of convenience for the purpose of carrying on all its business in another State *132or be deemed in New York to be a local concern. This, case is wholly unlike Williamson v. Missouri-Kansas Pipe Line Co., supra, relied on by plaintiff.
The determination of plaintiff’s contentions requires not only the ascertainment of the.true meaning and intent of c. 175 of New Jersey Laws, 1920, but also its constitutional validity.' Its provisions have never been construed by the New Jersey courts and they or their like are not familiar in' the.statute law governing corporations organized in other States. And other New Jersey statutes among which are c. 195, Laws of 1917, and c. 318, § 16, Laws of 1926, are claimed by plaintiff to havé an important bearing upon this case. But the courts of that State have had no occasion to consider the interrelation, if any, between them and c. 175 pursuant to which the stock in question purports to have been issued to employees. A mere inspection of the New Jersey statutes directly involved suggests grave doubts as to. their proper application to the facts in this case and the difference of opinion expressed below confirms that impression.
So far as concerns the cancellation of the allotted shares, and other relief sought by plaintiff, the situs of the stock is in New Jersey and all questions relating to the validity of the plan, authorization, issue, allotment and sale of the same may be conveniently and effectively determined in New Jersey courts, the authoritative and final inter- . preters of the statutes of that State. ■ A proceeding in rem is authorized, process therein may be served by publication and a decree, final and. binding upon all, canceling or sustaining the stock may readily be enforced. New Jersey Practice Act of 1903, § 84. Jellenik v. Huron Copper Co., 177 U. S. 1, 13. Andrews v. Guayaquil & Quito Ry. Co., 69 N. J. Eq. 211; 60 Atl. 568. Holmes v. Camp, 219 N. Y. 359; 114 N. E. 841. The facts and circumstances disclosed by the record clearly bring this case within the. general rule and abundantly justify the -exer*133cise of discretion on the part of the district court in dismissing the bills of complaint without prejudice. As the Circuit C<i>urt of Appeals considered and decided the merits of the case, its judgment is reversed, the judgment of the district court entered upon its mandate is vacated and the case will be remanded to the district court with directions to reinstate the earlier judgment dismissing the bills of complaint without prejudice.

Reversed.

Mr. Justice Roberts took no part in the consideration or decision of this case.

 Section 1 of that Act provides for the participation of employees in purchase of stock, profits, welfare work and management of any corporation organized under the laws of the State; and declares: “Any stock corporation ... . may, upon such terms and conditions as may • be determined in the manner, hereinafter designated, provide and carry out a plan or plans for any or all of the following purposes: (a) The issue or the purchase and sals' of its capital stock to any or all of its employees and those actively engaged in the'conduct of its business or to trustees on their behalf, and the payment for such stock in installments or at one time with or without the right to vote thereon pending payment thdrefor in full, and for aiding any such employees and said other persons in paying for such stock by contributions, compensation for services, or otherwise.” And § 2 (b) provides: “. . . the board of directors shall first formulate such plan or plans and pass a resolution declaring that in its opinion the adoption thereof is advisable, and shall call a meeting of the stockholders to take *126action tbereon. . . . If two-thirds in interest of each' class of stockholders present at said meeting and voting shall vote in favor of any suqh plan or any modification thereof, the said plan shall thereupon become operative. ’ ’ And that section gives to any dissenting stockholder the fight upon surrender to receive from the- company the appraised value of any stock that- was acquired before the passage of •the Act,