Court Opinion

ID: 5483951
Source: CourtListenerOpinion
Date Created: 2022-01-10 02:03:52.301852+00
Date Added: 2024-06-11T08:33:39.160098
License: Public Domain

Desmond, J.
(concurring). We granted leave to appeal in an effort to pass, and in the expectation of passing, on this question, highly important in modern-day corporation law: is it lawful for a corporation, on consent of a majority of its stockholders, to pay, out of its funds, the expenses of a “ proxy fight ”, incurred by competing candidates for election as directors? Now that the appeal has been argued, I doubt that the question is presented by this record. The defendants served' were Allis who was on the old board but was re-elected to the new board, McOomas and Wilson, defeated members of the old board, and Fairchild, leader of the victorious group and largest, stockholder in the corporation. The expenses of the old board, or management group, in the proxy fight, were about $134,000,. and those of the victorious Fairchild group amounted to about $127,500. In the end, the corporation paid both those sums, and it is for the reimbursement thereof, to the corporation, that this stockholder’s derivative action is brought. Of the proxy fight expenses of the management slate, about $106,000 was paid out on authorization of the old board while the old directors were still in office. The balance of those charges, as well as the whole of the expenses of the new, and successful, Fairchild group, was paid by the corporation after the new directors had taken over and after a majority of stockholders had approved such expenditures. The election had been fought out on a number of issues, chief of which concerned a contract which Ward (a defendant' not served), who was a director and the principal executive officer of the company, had obtained from the corporation, covering compensation for, and other conditions of, his own services. . Each side, in the campaign for proxies, charged the other with seeking to perpetuate, or grasp, control of the corporation. The *175Fairchild group won the election by a stock vote of about two-to-one, and obtained, at the next annual stockholders’ meeting and by a much larger vote, authorization to make the payments above described.
Plaintiff asserts that it was illegal for the directors (unless, by unanimous consent of stockholders) to expend corporate moneys in the proxy contest beyond the amounts necessary to give to stockholders bare notice of the meeting and of the matters to be voted on thereat. Defendants say that the proxy contest revolved around disputes over corporate policies and that it was, accordingly, proper not only to assess against the corporation the expense of serving formal notices and of routine proxy solicitation, but to go further and spend corporate moneys, on behalf of each group, thoroughly to inform the stockholders. The reason why that important question is, perhaps, not directly before us in this lawsuit is because, as the Appellate Division properly held, plaintiff failed “ to urge liability as to specific expenditures ”. The cost of giving routinely necessary notice is, of course, chargeable to the corporation. It is just as clear, we think, that payment by a corporation of the expense of “ proceedings by one faction in its contest with another for the control of the corporation ” is ultra vires, and unlawful (Lawyers’ Adv. Co. v. Consolidated Ry. Lighting & Refrig. Co., 187 N. Y. 395, 399). Approval by directors or by a majority stock vote could not' validate such gratuitous expenditures (Continental Securities Co. v. Belmont, 206 N. Y. 7). Some of the payments attacked in this suit were, on their face, for lawful purposes and apparently reasonable in amount but, as to others, the record simply does not contain evidentiary bases for a determination as to either lawfulness or reasonableness. Surely, the burden was on plaintiff to go forward to some extent with such particularization and proof. It failed to do so, and so failed to make out a prima facie case.
We are, therefore, reaching the same result as did the Appellate Division but on one only of the grounds listed by that court, that is, failure of proof. We think it not inappropriate, however, to state our general views on the question of law.principally argued by the parties, that is, as to the validity of corporate payments for proxy solicitations and similar activities in addition to giving notice of the meeting, and of the questions to *176be voted on. For an answer to that problem we could not do better than quote from this court’s opinion in the Lawyers’ Adv. Co. case (187 N. Y. 395, 399, supra): “ The remaining notices' were not legally authorized and were not legitimately incidental' to the meeting or necessary for the protection of the stockholders. They rather were proceedings by one faction in its contest with another for the control of the corporation, and the" expense thereof as such is not properly chargeable to the latter. This is so apparent as to the last two notices that nothing need be said in reference to them but a few words may. be said in regard to the first one calling for proxies. It is to be noted that this is not the case of an ordinary circular letter sent out with and requesting the execution of proxies. The custom has become common upon the part of corporations to mail proxies to their respective stockholders often accompanied by a brief circular of directions, and such custom when accompanied by no unreasonable expenditure is not without merit in so far as it encourages voting by stockholders through making it convenient and' ready at hand. The notice in question, however, was not published until after proxies had been sent out. It simply amounted to an urgent solicitation that these proxies should be executed' and returned for use by one faction in its contest, and we think there is no authority for imposing the expense of its publication upon the company. * * * it would be altogether too dangerous a rule to permit directors in control of a corporation and engaged in a contest for the perpetuation of their offices and control, to impose upon the corporation the unusual expense of publishing advertisements or, by analogy, of dispatching special messengers for the purpose of procuring proxies in their behalf.”
A final comment: since expenditures which do not meet that test of propriety are intrinsically unlawful, it could not be any answer to such a claim as plaintiff makes here that the stockholder vote which purported to authorize them was heavy or that the change in management turned out to be beneficial to the corporation.
The judgment should be affirmed, without costs.