Court Opinion

ID: 9885558
Source: CourtListenerOpinion
Date Created: 2023-10-06 13:07:19.966398+00
Date Added: 2024-06-11T07:48:55.095491
License: Public Domain

Fuld, J.
(dissenting). This case presents another instance of the anomalies and contradictions that arise when the corporation laws are used in a manner which the legislature neither sanctioned nor contemplated. (Cf. Eisenberg v. Central Zone Property Corp., 306 N. Y. 58.)
On October 17, 1951, petitioners — the owners of 980 shares of 7% Cumulative Preferred Stock (with dividends in arrears) and 202 shares of Common Stock of respondent Bush Terminal Buildings Company — were notified of a special meeting of respondent to be held on November 26 to vote upon a so-called *216“ Plan of Becapitalization,” involving, among other things, an amendment of the certificate of incorporation and a reduction of the corporation’s capital. The notice “ told ” the stockholders that there was no right of appraisal. However, undeterred by such advice, petitioners sent in their proxies against the proposals and demanded appraisal and payment of their shares.1
At this meeting of November 26, the plan was approved by a large majority — but with the proviso “ that the Board of Directors, in its discretion, be and hereby is authorized to declare the Plan of Becapitalization operative and, in the event that the Plan be declared operative, to take or cause to be taken all such other action as it may deem necessary or advisable to carry the same into effect ”. (Emphasis supplied.) Petitioners promptly sent their stock certificates to the corporation for notation thereon of their demand for payment, but the certificates were returned, unmarked, on the ground that there was no right of appraisal.
The record is silent as to what, if anything, the directors did between November 26, 1951, the date of the meeting, and February 15, 1952, when they sent a letter to the preferred stockholders asking them to consent to exchange their stock for the new securities provided for by the plan. In that letter, the directors stated that they would declare the plan effective, if holders of 80% of the preferred stock agreed to the exchange — but they reserved the right to declare the plan operative with a smaller number of consents. Almost two months later, on April 7, 1952, the directors finally voted to make the plan effective, although, it is to be noted, the specified percentage of consents had not been obtained. Learning of this action within a few days, petitioners again sent their certificates to the corporation for appropriate notation, and again it was refused. Thereupon, on May 1, 1952, pursuant to section 21 *217of the Stock Corporation Law, they filed the present petition for appraisal of their stock in the Supreme Court.
No one reading the record before us can fail to be impressed with petitioners’ diligence in declaring and maintaining their position as dissenting stockholders. Nevertheless, the court is holding that their petition was not timely, because the legislature has prescribed a ‘ ‘ precise time table ’ ’ under which petitioners. were required to file their petition for appraisal by January 15,1952 — almost three months before it could possibly be known whether there was to be a plan or a charter amendment.
In my view, this is, at best, to insist on strictissimum lus with respect to the stockholder, while sanctioning noncompliance with the statute on the part of the corporation.
Section 38 of the Stock Corporation Law provides that objecting stockholders, in order to have a right of appraisal and payment, must object to the action and demand payment “ prior to the vote authorizing such action ” (subd. 11, par. [d]), and section 21 requires that they must file their petition for appraisal “ on the fiftieth day after the last day on which [such] demand * * * might have been made ” (subd. 3).
The crucial question, therefore, is, when was the vote had which authorized the action. Respondent argues that the stockholders’ vote of November 26 was the vote and action specified by the statute. Petitioners argue that where, as here, the stockholders merely authorized the directors to act in their discretion, the vote and authorization were not complete until the directors had exercised their discretion in favor of the action. If, as the court is deciding, petitioners are not permitted, for the purpose of their appraisal proceeding, to split the vote and authorization prescribed by the statute into two parts, it certainly follows that the corporation is likewise without warrant in endeavoring to split the vote. Consequently, the requirements for amendment of the corporate charter were never complied with and no proper corporate action ever voted.
The issue here involved is more basic than the right of these petitioners to the appraisal which they seek. The stockholders ’ vote is the care and concern of the entire statutory scheme for charter amendment and change.
*218Section 27 of the G-eneral Corporation Law provides that the general affairs of a corporation are to be managed by its board of directors. However, when it came to fundamental changes, the legislature reverted to the original source of authority, the stockholders. An amendment of the charter, such as was here contemplated, can only be effected by filing a certificate which, by section 37 of the Stock Corporation Law, must be “ subscribed and acknowledged by the president or a vice-president and the secretary or an assistant secretary ” (subd. 1, par. [c]), who must make and annex an affidavit stating that ‘ ‘ they have been authorized to execute and file such certificate by the votes * * * of the holders of record of a majority [in certain cases; in others, two-thirds] of the outstanding shares entitled to vote at the stockholders’ meeting * * * with relation to the proceedings provided for in the certificate ” (subd. 1, par. [c], cl. [1]).
It is evident that the legislature deliberately excluded the directors, as such, from any voice in the determination of these questions, and that the action of the officers is entirely ministerial. The specified" authority — and it is the only one needed or permitted — is action by the stockholders authorizing the officers to execute and file the certificate. That action may be, as usually it is, taken at a meeting, but it may also be taken without one (§ 37, subd. 1, par. [B]). In .either case, definitive action by the stockholders — without the intervention of the board óf"directors — is the essence of the entire statutory scheme. Unless this requirement is complied with, the assenting stockholder cannot know what he is authorizing; unless there is such compliance, the dissenting stockholder cannot be protected.
The resolution adopted at the stockholders’ meeting of November 26, 1951, did not comply with the statute’s demands. Instead of authorizing the officers named in section 37 to subscribe and acknowledge a certificate of amendment, as the statute required, it authorized the board of directors simply to proceed or not ‘ ‘ in its discretion. ’ ’ Even if the statute were not as clear as it is in directing what must be done, such a resolution would violate the maxim, “ Delegatus non potest delegare.” The statute neither sanctions nor leaves room for blank checks.
*219XThe requirement of definitive stockholder action is emphasized, and the deficiencies of the resolution highlighted, when the provision's designed for the benefit of dissenting stockholders are considered. As the court points out, the legislature has prescribed a time table for action when there are dissenters. That time table is intelligible and appropriate, however/ only when proper stockholder action is taken, and, as this very case demonstrates, it becomes involved in contradictions and absurdities, if a corporation is permitted to do what was here done.
l‘observe, in the first place, that the entire right of appraisal is made dependent on an actual change in the charter. “ If ”, declares section 38, “ the certificate ” effects certain changes, then, the stockholder not in favor of such action may object, in which case either he or the corporation is entitled to have the stock appraised and payment made for it. , It is too farfetched, I suggest, to say that the legislature intended that petitions for appraisal should be filed and prosecuted even before it could possibly be known whether there would ever be a certificate of amendment. It would be just as reasonable, I 'am impelled to interpolate, to require one to commence an / action for breach of contract before the contract is violated or to institute a suit for divorce on the possibility that grounds; therefor will later eventuate.
On the argument before us, counsel for respondent was asked, what would happen if the petition came on for hearing before the directors exercised their discretion, and his answer was that it would have to be adjourned. If that be so, the question arises, where is the authority for refusing to permit the prosecution of “ the right * * * to have such stock appraised and paid for ”? And for how long? In the case before us, it would have been only a period of months, but it might just as well have been years. I know of no other instance, in the entire range of the law, of such an anomalous proceeding, andjb-perceive no basis for attributing~su*ch a design' to the lq^islature.
Indeed, by reason of other requirements of the statute’s time table, such a proceeding is more than an anomaly; it may actually become a potent instrument for oppression. The stockholders’ vote terminates the dissenter’s rights as a stockholder and limits his claim solely to the ultimate award, and he may *220not thereafter resume his status as a stockholder without the consent of'the corporation. Within twenty days after the vote, the -stockholder must send his certificate to the corporation for appropriate notation, so that the rights of innocent third persons may not intervene. This means, not only that his interest becomes, in effect, nonsalable, but that he is deprived of current income that he would otherwise have received in the form of dividends. These may appear to be the necessary or appropriate concomitants of a charter amendment and a vested right to payment.2 But to impose these disabilities exceptúas corollary to a right to payment would appear to be so harsh and purposeless as to require the very plainest language of the legislature.
Such consequences as these, I venture, account for the form of the resolution here adopted. Those in control of the corporation were seeldng a means to force the preferred ’ stockholders to accept the “ voluntary ” plan, while at the same time depriving them of the right to appraisal which the legislature intended them to have as an alternative. (Cf. 1938 Report of Securities Exchange Commission on Protective and Reorganizations Committees, pt. VII, § III, p. 109 et seq.) If that sort of vote and action is permissible, then — as was said, though in an entirely different context (Garner v. Los Angeles Bd., 341 U. S. 716, 728, per Frankfurter, J.) — “ All but the hardiest may well hesitate ” to voice their dissent. In truth” under the circumstances present in this case, the right to appraisal, intended to protect dissenting stockholders, ceases to be a right and becomes a trap. “ All of these corporation statutes ”, we wrote in Small v. Sullivan (245 N. Y. 343, 354), “ have their legitimate purposes, but they cannot be used as a blind ”.
Every legitimate corporate objective could have been accomplished without sanctioning the sort of conditional and qualified resolution here used. Respondent, however, contends that there are practical reasons why such a resolution should be *221permitted. Even if the statute were not clear, these contentions would offer little aid to construction. :
It is urged, for example, that the corporation should know how much money will be required for dissenters before it is committed to proceed. That very argument, however, was the basis and reason for the amendment made in 1934 (L. 1934, ch. 764, amdg. Stock Corporation Law, § 38), whereby the demand for payment by the dissenter must be made “ prior to ” the vote instead of after it is recorded. (See, e.g., 1934 Bulletins on Committee on State Legislation of Assn. of Bar of City of N. Y., pp. 637-640.)
And the federal laws relating to securities and their registration have even less relevance. Contrary to the implication “contained in the court’s opinion (p. 212), there was no require- ' ment of registration of the new securities with the Securities Exchange Commission, or of a proceeding before that body, as a condition precedent to amendment of the charter. The registration was necessary, only to permit the later solicitation of the preferred stockholders to exchange their shares (U. S. Code, tit. 15, § 77e). Consequently, the stockholders were entirely free, were fully privileged, to adopt an unconditional and unqualified resolution authorizing the filing of an amending certificate. However, to have proceeded in that way would have given a dissenting stockholder an indisputable right to appraisal and payment, and would have defeated the very purpose that the conditional resolution was intended to secure.
We are told, also, that the legislature must have contemplated such a conditional resolution, such an in nubibus approval, as the corporation here employed, because subdivision 6 of section 21 provides that the status of the dissenting stockholder as a stockholder in the corporation must be restored, “ if the action to the taking of which objection was made shall be abandoned or rescinded ”. These words, if given their natural and legitimate scope, do not justify the kind of cat-and-mouse game with the stockholders which the corporation has here attempted. Section 21 is applicable to a variety of situations in addition to amendments under section 35. For example, a sale of the corporate assets under section 20 is coupled with a right to appraisal and payment under section *22221. Indeed, it is in connection with sales and consolidations that the right to appraisal originated in this' state (L. 1893, ch. 638). In the case, of either-a sale or a consolidation, it is J evident that the action by the stockholders may fail of its I object. Even if a binding contract has been entered into," the j other contracting party may fail to obtain the requisite author-i ization or may default. It may, accordingly, be necessary to abandon the action, in which event the reason for the appraisal will, of course, have ceased — well illustrated, I believe, by Matter of O’Hara (133 Misc. 184), one of the very cases cited by the court (opinion, p. 212). We need not dwell on the application of the provision concerning rescission, for here no action was taken by the stockholders’ meeting and, therefore, there was nothing to rescind.
The applicable principles stated, I turn to the controversy" raised by petitioners’ demand for appraisal and payment.
Had the “ corporate action ” taken on November 26, 1951, been proper, the filing of the petition would have been, as respondent asserts, too late. But that action was, I have sought to show, without statutory warrant and, accordingly, the proposed plan was de jure defective. However, it has been carried out de facto, and has, so far as appears, been acquiesced in by all the stockholders except petitioners. If the latter had brought an action for an injunction to prevent the consummation of the plan — as they could have done — a court of equity, on a balancing of conveniences, might well have denied relief, upon condition that they be paid the value of their preferred shares. In a mistaken, but not illogical, belief that the corporate action was completed hy the vote of the directors, petitioners have prosecuted their demand for payment and have, in all other respects, scrupulously complied with the requirements of the statute. Under the circumstances, the present appraisal proceeding should continue. And I would reach the same conclusion, even if I were to agree with the view of the majority that the stockholders’ vote may be made contingent upon subsequent approval by the directors. On that assumption, I see no basis for holding that the corporate action is completed, or that the statutory time table becomes operative, prior to the decision of the directors.
*223The order of the Appellate Division should be reversed, with costs in this court and in the Appellate Division, and the matter remitted to Special Term so that it may proceed to direct appraisal and payment of petitioners’ preferred stock.
Lewis, Ch. J., Dye and Van Voorhis, JJ., concur with Desmond, J.; Ftjld, J., dissents in opinion in which Conway and Froessel, JJ., concur. , ,
Order affirmed.

. Since the court does not reach the question, I would merely note that, in my judgment, the proposed plan, by providing for a reduction of capital, effects such “ a material alteration of the preferential rights of the old preferred ” as to entitle dissenting holders of that preferred stock to an appraisal and payment of their shares under paragraph (a) of subdivision 11 of section 38 of the Stock Corporation Law. (Matter of Kinney, 279 N. Y. 423, 431.)

. The legislature has attempted to mitigate them by requiring the corporation to make an offer. Under the resolution adopted in this case, however, the corporation could not make an offer, because it had no authority to proceed until the directors had exercised their discretion.