Court Opinion

ID: 9663641
Source: CourtListenerOpinion
Date Created: 2023-08-23 23:46:03.047585+00
Date Added: 2024-06-11T18:14:53.782916
License: Public Domain

Thomas Gallagher, Justice
(dissenting).
In my opinion the actions of the majority stockholders of defendant corporation in transferring less than 11 percent of the corporation’s assets to a subsidiary corporation in return for the controlling stock of the latter were not unlawful. Defendant’s articles empower it—
“* * * to lease * * * or sell piers, wharves, boathouses, loading platforms and other landing places necessary in * * * the operation of such business.
“To * * * convey, sell, assign, transfer, lease, mortgage, pledge, exchange, or otherwise dispose of any such property.
“To acquire by purchase, subscription or otherwise, * * * stocks, bonds or any other obligations or securities of any person or corporation, to aid in any manner any corporation whose stocks, bonds or other obligations are held or in any manner guaranteed by this corporation, or in which this corporation is in any way interested, and to do any other acts or things for the preservation, protection, improvement or enhancement of the value of any such stocks * * * owned by this corporation.”
Minn. St. 301.09 empowers Minnesota business corporations to acquire, hold, lease, encumber, convey, or otherwise dispose of real and personal property and to enter into obligations or contracts or perform any acts incidental to the transaction of its business or expedient for the attainment of its purposes. Minn. St. 301.10 specifies that when so provided in the articles such corporations may acquire, hold, or dispose *47of shares of domestic or foreign corporations when reasonably necessary or incidental to accomplish their purposes. Under the charter powers of defendant corporation as above described and under the statutory powers above referred to, the defendant corporation was fully empowered to transfer to its subsidiary its shipyard division and $5,000 in working capital (the total book value of which was less than 11 percent of the book value of the corporation’s assets) and in return therefor to receive all outstanding stock of the subsidiary, amounting to 4,000 shares. The power of a corporation to so act has frequently been recognized by this and other courts. Dworsky v. The Buzza Co. 215 Minn. 282, 9 N. W. (2d) 767; Hill v. Page & Hill Co. 198 Minn. 30, 268 N. W. 705, 927; Bacich v. Northland Transp. Co. 185 Minn. 544, 242 N. W. 379; Calnan v. Guaranty Security Corp. 271 Mass. 533, 171 N. E. 830; Metcalf v. American School Furniture Co. (W. D. N. Y.) 122 F. 115; Logie v. Mother Lode Copper Mines Co. 106 Wash. 208, 179 P. 835. As stated in the Dworsky case (215 Minn. 287, 9 N. W. [2d] 769):
“* * * That a corporation has the power to transfer its assets to, and accept the stock of, a new corporation is clear. Hill v. Page & Hill Co. 198 Minn. 30, 268 N. W. 705, 927.”
The majority opinion concludes that such transfer was violative of plaintiffs legal rights, presumably as expressed in Minn. St. 301.36 and Minn. St. 1961, § 301.37, subd. 3(2). Section 301.36 provides that a corporation may sell or otherwise dispose of “all or substantially all” of its property and assets when authorized to do so by the vote of holders of shares equal to two-thirds of the corporation’s voting shares; while § 301.37, subd. 3(2), specifies that the articles of a business corporation may be amended by the affirmative vote of two-thirds of its voting stock. I cannot see where the transfer of less than 11 percent of a corporation’s assets accomplished by the majority vote of its stockholders and directors would constitute a violation of § 301.36, which as indicated provides that a two-thirds vote of the corporation’s shares is required Only when “all or substantially all” of its assets are to be transferred. (Italics supplied.) See, Hendren v. Neeper, 279 Mo. 125, 213 S. W. 839, 5 A. L. R. 927; Shaw v. Hollister Land and Improvement Co. 166 Cal. 257, 135 P. 965; Sewell v. East Cape May Beach Co. 50 N. J. Eq. 717, 25 A. 929; *48McCloskey v. New Orleans Brg. Co. 128 La. 197, 54 So. 738; Wattley v. National Drug Stores Corp. 122 Misc. 533, 204 N. Y. S. 254.
Likewise, the transfer can scarcely be held to constitute an amendment to defendant’s articles in violation of § 301.37, subd. 3(2), which requires a two-thirds vote of stockholders for amendments. The transfer resolutions did not seek to amend the articles which, as presently expressed, authorize the transfer without the need of an amendment. Rather, the acts of the directors and stockholders which plaintiff challenges as unlawful are nothing more nor less than acts which, in the exercise of their business judgment, they felt were essential for the best interests of the corporation in the proper conduct of its business. Accordingly, plaintiff as a minority stockholder, suing on behalf of the corporation, would have no valid cause for complaint as to such actions, particularly where his own obstructive efforts have compelled them. As stated in Warner v. E. C. Warner Co. 226 Minn. 565, 573, 33 N. W. (2d) 721, 726:
“In a derivative suit * * * plaintiff must allege facts which show that the action attacked is so far opposed to the true interests of the corporation as to lead to the clear inference that no officer thus acting could have been influenced by any honest desire to secure such interests, but that he must have acted with intent to subserve some ulterior purpose, regardless of the consequences to his corporation and in a manner inconsistent with its interests. * * *
“The law does not justify recovery in representative suits for mere errors of judgment in handling corporate affairs.
* * * * *
“ * * The individual shareholders have no authority to dictate to the company’s agents what policy they shall pursue, or to impair that discretion which was conferred upon them by the charter.’ 1 Morawetz, Private Corporations (2 ed.) § 243.
“ * * In actions by stockholders, which assail the acts of their directors or trustees, courts will not interfere unless the powers have been illegally or unconscientiously executed, or unless it be made to appear that the acts were fraudulent or collusive and destructive of the rights of the stockholders. Mere errors of judgment are not sufficient as *49grounds for equity interference; for the powers of those entrusted with corporate management are largely discretionary.’ Leslie v. Lorillard, 110 N. Y. 519, 532, 18 N. E. 363, 365, 1 L. R. A. 465.
“In Flynn v. Brooklyn City R. Co. 158 N. Y. 493, 507, 53 N. E. 520, 524, the court said:
“ ‘As a general rule courts have nothing to do with the internal management of business corporations. Whatever may lawfully be done by the directors or stockholders, acting through majorities prescribed by law, must of necessity be submitted to by the minority, for corporations can be conducted upon no other basis. All questions within the scope of the corporate powers which relate to the policy of administration, to the expediency of proposed measures, or to the consideration of contracts, provided it is not so grossly inadequate as to be evidence of fraud, are beyond the province of the courts. The minority directors or stockholders cannot come into court upon allegations of a want of judgment or lack of efficiency on the part of the majority and change the course of administration. Corporate elections furnish the only remedy for internal dissensions, as the majority must rule so long as it keeps within the powers conferred by the charter.’ ”
The majority opinion in effect holds that the transfer of a part of the assets of defendant corporation to a subsidiary for the purpose of obtaining needed financing to attain corporate objectives cannot be regarded as within the ordinary course of the corporation’s business. The only reason for this must be because the actions taken appear to frustrate the disruptive efforts of a minority stockholder to prevent corporate financing and expansion because of his interest in a rival corporation. In my judgment the conduct of corporate business through corporate subsidiaries formed by the personnel of the parent corporation for various reasons, including tax avoidance as well as local financing, cannot be regarded as other than a common or ordinary manner of doing business.
Finally, it cannot be said that the actions taken by the majority directors and stockholders which are challenged here have in any way affected plaintiff’s proportionate rights in defendant corporation. Obviously, he will continue to have the same proportionate vote and to *50exercise the same proportionate voice in the operation of the shipyard division through the subsidiary which defendant corporation controls as he originally had when the shipyard division was part of the corporation’s assets.