Court Opinion

ID: 9650431
Source: CourtListenerOpinion
Date Created: 2023-08-23 15:36:45.884139+00
Date Added: 2024-06-11T18:12:21.454498
License: Public Domain

SWAN, Circuit Judge
(dissenting).
On the ground that.the suits involved the internal affairs of a foreign corporation, the court below declined to assume jurisdiction and dismissed the complaints “without prejudice to the enforcement of the rights of the plaintiff, if any, in the courts of New Jersey.” The decision of this court has affirmed that decree, but has also, if I correctly understand it, undertaken to construe the New Jersey statute and to decide upon the merits that the stock in controversy was validly issued. From this conclusion I dissent.
The New Jersey statute (chapter 175, p. 354, Laws 1920 [Comp. St. Supp. N. J. § 47 — 183 et seq.]), pursuant to which the stock distribution in question purports to have been made, reads in part as follows:
“1. Any stock corporation formed under any law of this State 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 sale 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 therefor in full, and for aiding any such employees and said other persons in paying for such stock by contributions, compensation for services, or otherwise.” Comp. St. Supp. N. J. § 47 — 183(a).
“2. Any of the privileges and powers hereinbefore granted may be exercised in the manner following:
“(a) By including appropriate clauses therefor in the original articles of incorporation or by-laws at the time of organizing the corporation.
“(b) Where the corporation has been formed without the said charier or by-law provisions 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 action thereon. The stockholders’ meeting shall be held upon such notice as the by-laws provide, and in the absence of such provision upon ten days’ notice given personally or by mail. If two-thirds in interest of each class of stockholders present at said meeting and voting shall vote in favor of any such plan or any modification thereof, the said plan shall thereupon become operative.” Comp. St. Supp. N. J. § 47 — 184(a, b).
The statute also provides that a dissenting stockholder may have his stock appraised, “without regard to any depreciation or appreciation thereof in consequence of the adoption of such plan,” and receive payment from the corporation, or be permitted to sub-*121seribo for bis proportionate share of the new stock issued under section 1.
It will be observed that the statute requires that the hoard of directors shall “first formulate such plan,” declare it “advisable,” and call a meeting of the stockholders to take action thereon. On June 25, 1930, the directors approved what was called an “Employees’ Stock Subscription Plan.” It provided as follows:
'‘The Board of Directors may, at such time or times as it may determine, by way of additional compensation for services to be rendered, offer and allot such stock for subscription, to employees of the Corporation, and/or its subsidiaries, and to those actively engaged in the conduct of its or their business, in such amounts and proportions, to such persons, at such prices not less than the par value of the shares allotted, payable in full or in such installments, and upon such other terms and conditions, all as shall he determined with respect to each offering of stock to each individual pursuant to authority to be granted by the Board of Directors to the President for such purpose.”
On July 28, 1939, a meeting of stockholders was held and the so-called plan was approved by more than the required two-thirds vote.
It is apparent that the so-called plan submitted by the directors was in substance no more than a proposal that stock bo issued to such employees, at such times, and on such hums (but at a price not less than par) as the directors and president might thereafter determine. This was not, in my opinion, “a formulated plan” such as the statute contemplated. It was a. proposal that ihe stockholders abrogate the discretion which the statute vested in them to approve or disapprove a formulated plan declared by the directors to be advisable, and confer upon the ■directors and president complete discretion to determine and execute in the future, without further reference to the stockholders, any sort of allotment then thought desirable, provided only that the price to employees who were selected to share in. it be not less than the par of the stock. The purpose of the statute was to let the stockholders know with some definiteness — “a formulated plan”— what the directors thought advisable, aud to allow the stockholders to approve it, if at least two-thirds of them also deemed it advisable. This purpose is completely frustrated if it be sufficient to submit a plan which merely proposes that the directors shall be empowered to allot stock to employees on such terms as they may thereafter please. And the undesirability of transferring to the directors complete discretion as to what plan shall be formulated in the future is particularly apparent where, as here, they are entitled to benefit under the plan. It is aptly illustrated by what in fact happened. When the directors did formulate a definite plan, in January, 1931, it resulted in an allotment to themselves of nearly 33,000 shares of the total 56,712 shares to be issued to employees, and at a price of $25 per share when the market price was $112 per share. The president, who was also a director, received 13,440 shares. The size of his allotment was determined as follows: His fixed salary was $168,000 a year. He received a bonus of 2% per cent, of the annual net profits. For the year 1930 these two amounts gave him $1,008,000. This was assumed to represent the comparative value of his services to the company. His allotment was then fixed so that the shares distributed to him would have a total par value equal to one-third of this sum. Allotments to the other director-employees were determined in a similar manner. Whether the board would have had the temerity to submit to the stockholders in advance a plan which on its face so largely benefited themselves, and whether the stockholders, however blindly they are accustomed to follow their leaders, would have approved such a plan had it been submitted in advance, can only he matter of speculation. It is true that the directors were re-eleeted after publicity had been given to the allotments, but that is a very different thing from approving such a plan in advance, when the issue could have been considered on its merits and unineumbered by any question of: ousting a successful management. This is what the statute demanded. Since its provisions were not complied with, the corporation acquired no power to issue stock to employees in derogation of the pre-emptive rights of shareholders. The statute provided a method of adopting what in effect was an amendment to the corporate charter. Unless the prescribed method was followed, no legal amendment was effected. Consequently I believe the purported issuance by the directors of the stock in controversy was ultra vires and void.
The bills of complaint seek to have canceled this ultra vires issue of shares. They state a cause of action which the plaintiff may enforce without first appealing to the stockholders because the stockholders have *122no power to ratify an issuance of stock contrary to the corporate charter; and, until the charter was legally amended, that is, -until the directors had procured prior approval by the stockholders of a formulated plan, there was no power to issue the stock in question. Assuming, as have my brothers, that the court should consider the merits of the controversy, I think the bills were improperly dismissed.
Whether the court below abused its discretion in declining to exercise an admitted jurisdiction based on diversity of citizenship is a matter not free from doubt. Ample authority may be found for either view. Citations in favor of the District Court’s position are giv.en in its opinion; among eases pointing to an opposite conclusion the following may be cited: See American Creosote Works, Inc., v. Powell, 298 F. 417 (C. C. A. 5); Williamson v. Missouri-Kansas Pipe Line Co., 56 F.(2d) 503 (C. C. A. 7); Kraft v. Griffon Co., 82 App. Div. 29, 81 N. Y. S. 438; Cuppy v. Ward, 187 App. Div. 625, 176 N. Y. S. 233, 239, affirmed 227 N. Y. 603, 125 N. E. 915; Edwards v. Schillinger, 245 Ill. 231, 241, 91 N. E. 1048, 33 L. R. A. (N. S.) 895, 137 Am. St. Rep. 308; Busch v. Mary A. Riddle Co., 92 N. J. Eq. 265, 114 A. 348. Cf. also, Loan Society of Phila. v. Eavenson, 241 Pa. 65, 88 A. 295; Sprague v. Universal Voting Machine Co., 134 Ill. App. 379, 383; Babcock v. Farwell, 245 Ill. 14, 33, et seq., 91 N. E. 683, 137 Am. St. Rep. 284, 19 Ann. Cas. 74; and see 44 Harv. L. Rev. 437, 439. Admittedly it is a matter solely of convenience and expediency. Lack of power to render an effective decree is the reason most frequently assigned for refusal to take jurisdiction. No such obstacle is present in the ease at bar. The plaintiff and a majority of the defendants, including the putative holder of the stock sought to be canceled, are citizens of New York. It is not likely that the domiciliary courts would fare so well in obtaining 'jurisdiction over the necessary parties. See Berendt v. Bethlehem Steel Corp., 108 N. J. Eq. 148, 154 A. 321, 322. The consideration which- seemed most persuasive to the court below was that the determination of the merits would require it to construe the applicable New Jersey statute without an authoritative guide from the courts of that state. But this is a duty which courts are -frequently called upon to perform. Where the question presented is no more complicated than in the case at bar, this affords no ground in itself for refusal to exercise jurisdiction.
For the reasons stated, I am of the opinion that the decree should be reversed.