A. P. Smith Manufacturing Co. v. BarlowA. P. Smith Manufacturing Co. v. Barlow
The opinion of the court was delivered by
Thе Chancery Division, in a well-reasoned opinion by Judge Stein, determined that a donation by the
The company was incorporated in 1896 and is engaged in the manufacture and sale of valves, fire hydrants and special equipment, mainly for water and gas industries. Its plant is located in East Orange and Bloomfield and it has approximately 300 employees. Over the years the company has contributed regularly to the local community chest and on occasions to Upsala College in East Orange and Newark University, now part of Rutgers, the State University. On July 24, 1951 the board of directors adopted a resolution which set forth that it was in the corporation’s best interests to join with others in the 1951 Annual Giving to Princeton University, and appropriated the sum of $1,500 to be transferred by the corporation’s treasurer to the university as a contribution towards its maintenance. When this action was questioned by stockholders the corporation instituted a declaratory judgment actiоn in the Chancery Division and trial was had in due course.
Mr. Hubert E. O’Brien, the president of the company, testified that he considered the contribution to be a sound investment, that the public expects corporations to aid philanthropic and benevolent institutions, that they obtain good will in the community by so doing, and that their charitable donations create favorable environment for their business operations. In addition, he expressed the thought that in contributing to liberal arts institutions, corporations were furthering their self-interest in assuring the free flow of properly trained personnel for administrative and other corporate employment. Mr. Frank W. Abrams, chairman of the board of the Standard Oil Company of New Jersey, testified that corporations are expected to acknowledge their public responsibilities in support of the essential elements of our free enterprise system. He indicated that it was not “good business” to disappoint “this reasonable and justified
The objecting stockholders have not disputed any of the forеgoing testimony nor the showing of great need by Princeton and other private institutions of higher learning and the important public service being rendered by them for democratic government and industry alike. Similarly, they have acknowledged that for over two decades there has been state legislation on our books which expresses a strong public policy in favor of corporate contributions such as that being by them. Nevertheless, they have taken the position that (1) the plaintiff’s certificate of incorporation does not expressly authorize the contribution and under common-law principles the company does not possess any imp1i.ftd_mn-iacid.-eBta1 power to make it, and (2) the New Jersey statutes which expressly authorize the contribution
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In his discussion of the early history of business corporations Professor Williston refers to a 1702 publication where the author stated flatly that “The general intent and end of all civil incorporations is for better government.” And he points out that the early corporate charters, particularly their recitals, furnish additional support for the notion that the corporate object was the public one of managing and ordering the trade as well as the private one of profit for the members. See 3
Select Essays on Anglo-American Legal History
201 (1909); 1
Fletcher, Corporations (rev. ed.
1931), 6. See also
Currie's Administrators v. The Mutual Assurance
Society, 4
Hen. & M.
315, 347
(Va. Sup. Ct. App.
1809), where Judge Eoane referred to the English corporate charters and expressed the view that acts of incorporation ought never to be passed “but in consideration of services to be rendered to the public.” However, with later economic and social developments and the free availability of the corporate device for all trades, the end of private profit became generally accepted as the controlling one in all businesses other than those classed broadly as public utilities.
Of. Dodd, For Whom Are Corporate Managers Trustees?,
45
Harv. L. Rev.
1145, 1148 (1932). As a concomitant the pYómiKbiPlSÁv^ruIJ developed that those who managed the corporationcoiild not disburse any corporate funds for philanthropic or other worthy public cause unless the expenditure would benefit the corporation.
Hutton v. West Cork Railway Company, 23 Ch. D. 654
(1883);
Dodge v. Ford Motor Co.,
204
Mich.
459, 170
N. W.
668, 3
A. L. R.
413
(Sup. Ct.
1919).
Ballantine, Corporations (rev. ed.
1946), 228; 6A
Fletcher,
supra, 667. During the 19th Century when corporations were relatively few and small and did not dominate the country’s wealth, the common-law rule did not significantly interfere with the public interest. But the 20th Century has presented a different climate.
Berle and Means, The Modern Corporation and Private
Thus, in the leading case of Evans v. Brunner, Mond & Company, Ltd. [1921] 1 Ch. 359, the court held that it was within the incidental power оf a chemical company to grant £100,000 to uniyersities or other scientific institutions selected by the directors “for the furtherance of scientific education and research.” The testimony indicated that the company desired to encourage and assist men who would devote their time and abilities to scientific study and research generally, a class of men' for whom the company was constantly on the lookout. This benefit was not considered by ...the. court to be so remote, as to bring it outside the common-law rule» Similarly,' in Armstrong Cork Co. v. H. A. Meldram Co., 285 F. 58 (D. C. W. D. N. Y. 1922), the court sustained contributions made by the corporation to thе University of Buffalo and Canisius College. In the course of its opinion the court quoted the familiar comment from Steinway v. Steinway & Sons, 17 Misc. 43, 40 N. Y. S. 718 (Sup. Ct. 1896), to the effect that as industrial conditions change business methods must change with them and acts become permissible which theretofore were considered beyond the corporate powers; and on the issue as to whether the corporation had received any corporate benefit it said:
“It was also considered, in making the subscriptions or donations, that the company would receive advertisement of substantial value, including the good will of many influential citizens аnd of its patrons, who were interested in the success of the development of these branches of education, and, on the other hand, suffer a loss of prestige if the contributions were not made, in view of the fact that business competitors had donated and shown a commendable publicspirit in that relation. In the circumstances the rule of law that may fairly be applied is that the action of the officers of the company was not ultra vires, but was in fact within their corporate powers, since it tended to promote the welfare of the business in which the corporation was engaged.”
In Ameriсan Rolling Mill Co. v. Commissioner of Internal Revenue, 41 F. 2d 314 (C. C. A. 6 1930), the corporation had joined with other local industries in the creation of a civic improvement fund to be distributed amongst community enterprises including the Boy Scouts and Girl Scouts, the Y. M. C. A., the Hospital, etc. The court readily sustained the contribution as an ordinary and necessary expense of the business within the Revenue Act. And in Greene County Nat. Farm Loan Ass’n v. Federal Land Bank of Louisville, 57 F. Supp. 783, 789 (D. C. W. D. Ky. 1944), affirmed 152 F. 2d 215 (6th Cir. 1945), cert. denied 328 U. S. 834, 66 S. Ct. 978, 90 L. Ed. 1610 (1946), the court in dealing with a comparable problem said:
“But it is equally well established that corporations are permitted to make substantial contributions which hаve the outward form of gifts where the activity being promoted by the so-called gift tends reasonably to promote the goodwill of the business of the contributing corporation. Courts recognize in such cases that although there is no dollar and cent supporting consideration, yet there is often substantial indirect benefit accruing to the corporation which supports such action. So-called contributions by corporations to churches, schools, hospitals, and civic improvement funds, and the establishment of bonus and pension plans with the payment of large sums flowing therefrom havе been upheld many times as reasonable business expenditures rather than being classified as charitable gifts. American Rolling Mill Co. v. Commissioner of Internal Revenue, 6 Cir., 41 F. 2d 314; Heinz v. National Bank of Commerce, 8 Cir., 237 F. 942; Corning Glass Works v. Lucas, 59 App. D. C. 168, 37 F. 2d 798, 68 A. L. R. 736; Forbes Lithograph Mfg. Co. v. White, D. C. Mass., 42 F. 2d 287; American National Assurance Co. v. Ricketts, 230 Ky. 398, 19 S. W. 2d 1071.”
The foregoing authorities illustrate how courts, while adhering to the terms of the common-law rule, have applied it very broadly to enable worthy corporate donations with indirect benefits to the corporations. In
State ex rel. Sorensen v. Chicago B. & Q. R. Co.,
112
Neb.
248, 199
N. W.
534,
“Next is the question of dues, donations, and philanthropies of the Company. It is a matter for the discretion of corporate management in making donations and paying dues. In that respect a corporation does not occupy a status far different from an individual. An individual determines the propriety of joining organizations, and contributing to their support by paying dues, and all contribution to public charities, etc., according to his means. Hе does not make such contributions above his means with the hope that his employer will increase his compensation accordingly. A corporation likewise should not do so. Its ultimate purpose, from its own standpoint, is to earn and pay dividends. If, as a matter of judgment, it desires to take part of its earnings, just as would an individual, and contribute them to a worthy public cause, it may do so; but we do not feel that it should be allowed to increase its earnings to take care thereof.”
Over 20 years ago Professor Dodd, supra, 45
Harv. L. Rev.,
at 1159, 1160, cited the views of Justice Letton in
State ex rel. Sorensen v. Chicago B. & Q. R. Co., supra,
with seeming approval and suggested the doctrine that corporations may properly support chаrities which are important to the welfare
During the first world war corporations loaned their personnel and contributed sxrbstantial corporate funds in order to insure survival; during* the depression оf the ’30s
In 1930 aStatm|^was enacted in our State which expressly provided thatUmy corporation could cooperate with other
The appellants contend that the foregoing New Jersey statutes may not be applied to corporations created before their passage. Fifty years before the incorporation of The A. P. Smith Manufacturing Company our Legislature provided that every corporate charter thereafter granted “shall be subject to alteration, suspension and repeal,- in the discretion of the legislаture.”
L.
1846,
p.
16;
R. S.
14:2-9. A similar reserved power was placed into our State Constitution in 1875
(Art.
IV,
Sec.
VII,
par.
11), and is found in our present Constitution.
Art.
IV,
Sec.
VII,
par.
9. In the early case
Zabriskie v. Hackensack and New York Railroad Company,
18
N. J. Eq.
178
(Ch.
1867), the court was called upon to determine whether a railroad could extend its line, above objection by a stockholder, under a legislative enactment passed under the reserve power after the incorporation of the railroad. Notwithstanding the breadth of the statutory language and persuasive authority elsewhere
(Durfee v. Old Colony & Fall River Railroad Company,
87
Mass.
230
(Sup. Jud. Ct.
1862)), it was held that the proposed extension of the company's line constituted a vital change of its corporate object which could not be accomplished withоut unanimous consent. See
Lattin, A Primer on Fundamental Corporate Changes, 1 West. Res. L. Rev.
3, 7 (1949). The court announced the now familiar New Jersey doctrine that although the reserved power permits alterations in the public interest of the contract between the state and the corporation, it has no effect on the contractual rights between the corporation and its stockholders and between stockholders
inter se.
Unfortunately, the court did not consider whether it was not contrary to the public interest to permit the single minority stockholder before it to restrain the railroad's normаl corporate growth and development as authorized by the Legislature and approved, reasonably and in good faith, by the corporation’s managing directors and majority stockholders. Although the later cases in New Jersey have not disavowed the doctrine of the
Zabrislcie
case, it is noteworthy
Thus, in the
Berger
case the Court of Errors and Appeals sustained the applicability under the reserved power of provisions relating to corporate borrowing and the purchase of corporate stock, and in considering the doctrine of the
Zabrisltie
case noted that the rights of the stockholders
inter se
may not be impaired “except in so far as impairment may result from an alteration required by the public interest.” And later in its opinion the court, referring to the provision in the Corporation Act of 1896 that the act and all amendments shall be a part of the charter of every corporation formed theretofore or thereafter, said: “It is difficult to perceive how any substantial force can be accorded to it, unless some amendment may be made which may affect the rights of stockholders
inter sese
to some extent.” In the
Murray
case the court sustained a statute substituting a discretionary power to pay dividends for a pre-existing duty; in the course of his opinion Justice Swayze indicated that even apart from stockholders’ consent the statutory alteration could be sustained since it was “a matter of state concern
This court had recent occasion to deal with the problem in
In re Collins-Doan Co., supra.
There it appeared that the board of directors was hopelessly deadlocked and application was duly made under
L.
1938,
c.
303
(N. J. S. A.
14:13-15) by the plaintiffs, representing half the directors and stockholders, for dissolution of the corporation. The defendants representing the other half resisted the application, contending that since the corporation was formed in 1916 it could not be dissolved except with the consent of two-thirds of the stockholders. This court, while recognizing that the later enactment did affect the rights between the corporation and its stockholders and between the stockholders
inter se,
nevertheless held that it was applicable to the pre-existing corporation as a proper exercise of the reserved power. In the course of his opinion for the court Justice Iieher pointed out that “the contractual rights of the stockholders
inter se
are not proof against ‘alteration required by the public interest/ ” It may be noted that the later enactment not only affected the relations between the corporation and stockholders and the stockholders
inter se,
but also enabled complete termination of the original corporate objectives; yet this court found little difficulty in subordinating these considerations to the paramount public interest in avoiding the indefinite continuance of a corporation which could not function with propriety because of the “stalemate in corporate management.” See
In re Evening Journal Association,
1
N. J.
437, 444 (1948). The legislative function recognized here may be considered somewhat akin to that under the police power generally where private interests frequently are called upon to give way to the
“This power extends to all great public needs and the constitutional interdictions as to due process and the protеction of property rights does not prevent a state from exercising such powers as are vested in it for the promotion of the common weal or are necessary for the general gopd of the public even though property or contract rights are affected. Manigualt v. Springs, 199 U. S. 473, 26 S. Ct. 127, 50 L. Ed. 274; Home Building A Loan Ass’n v. Blaisdell, 290 U. S. 398, 54 S. Ct. 231, 78 L. Ed. 413, 88 A. L. R. 1481; Veix v. Sixth Ward B. & L. Ass’n of Newark, N. J., 310 U. S. 32, 60 S. Ct. 792, 84 L. Ed. 1061; Bucsi v. Longworth B. & L. Ass’n, Err. & App. 1937, 119 N. J. L. 120, 123.”
13] State legislation adopted in the public interest and applied to pre-existing corporations under the reserved power has repeatedly been sustained by the United States Supreme Court above the contention that it impairs the rights of stockholders and violates constitutional guarantеes under the Federal Constitution. Thus, in
Looker v. Maynard,
179
U. S.
46, 21
S. Ct.
21, 45
L. Ed.
79 (1900), the court sustained the application to pre-existing corporations of later legislation designed to secure minority representation on boards of directors by permitting cumulative voting by stockholders; in
Polk v. Mutual Reserve Fund Life Association of New York,
207
U. S.
310, 28
S. Ct. 65,
52
L. Ed.
222 (1907), the court sustained state legislation which permitted reorganizations of existing corporations involving changes in their corporate purposes; in
Veix v. Sixth Ward Bldg. & Loan Association of Newark,
310 U.
S.
32, 60
S. Ct.
792, 84
L. Ed.
1061 (1940), a New Jersey statute which altered the withdrawal rights of building and loan shareholders was
It seems clear to us that the public policy supporting the statutory enactments under consideration is far greater and the alteration of pre-existing rights of stockholders much lesser than in the cited cases sustaining various exercises of the reserve power. In encouraging and expressly authorizing reasonable charitable contributions by corporations, our State has not only joined with other states in advancing the national interest but has also specially furthered the interests of its own people who must bear the burdens of taxation resulting from increased state and federal aid upon default in voluntary giving. It is significant that injtsjma^mants the State had not in^lñyMg^óñgllt^WUmñó^e-anv. _compitlBui7^ffiigations^j)X_altexJihe-- corpnraifi__ob j eetives. And since'in"duir view the corporate power to make reasonable charitable contributions exists under modern conditions, even apart from express statutory provision, its enactments simply constitute helpful and confirmatory declarations of such power, accompanied by limiting safeguards.
In the light of all of the foregoing we have no hesitancy in sustaining the validity of the donation by the
^Clearly then, the appellants, as individual stockholders whose private interests rest entirely upon the well-being of the plaintiff corporation, ought not be permitted to close their eyes to present-day realities and thwart the long-visioned corporate action in recognizing and voluntarily discharging its high obligations as a constituent of our modern social , .structure.
The judgment entered in the Chancery Division is in all respects
Affirmed.