78 N.J. Eq. 471 | New York Court of Chancery | 1911
The bill in this case was originally filed by Leon E. Blanchard for himself and other stockholders of the Prudential Insurance Company of America, who were similarly situated with him, to enjoin the company from carrying out a scheme whereby certain benefits were given to the holders of certain of its non-participating industrial policies, and to compel the company to pay to its stockholders such dividend out of its surplus as would be sanctioned by a judicial inquiry into the affairs and assets of the company. There are other forms of relief sought touching the payment of. salaries and the expenditure of moneys in building operations, but the two grounds above mentioned are the only ones which were seriously litigated. The facts are voluminous and intricate and largely of a technical character, but as to those which are material to the decision of the points litigated there is but little variance.
After the cause was at issue, other stockholders were admitted, so that now the complainants are eighteen in number, holding somewhat more than twenty per cent, of the total share capital of the company. These additional complainants join in the prayer of the bill.
The company was organized under the name of. “The Widows and Orphans Friendly Society,” by a special act of the legislature of this state approved April 3d, 1873. Its name was changed to “The Prudential Friendly Society,” by another special act in 1875, and again by a. certificate pursuant to a statute then in force on March 30th, 1877, to “The Prudential Insurance Company of America.”. It began business with a very small capital, which has been increased from time to time by the declaration of stock dividends from its accumulated surplus until at the time of the filing of the bill it had a capital of $2,000,000, divided into forty thousand shares of the par value of $50 each. It has paid to its stockholders a dividend at the rate of ten per cent, per annum for many years. At the beginning, and until 1886, it issued what is known as non-participating industrial policies only. These were policies issued for a definite and specified amount upon payment of definite and specified premiums, and the policyholders were not entitled by the terms of their contracts
In November, 1896, at a meeting of the executive committee, the president of the company explained and outlined a scheme for granting concessions, as they were called, to the holders of industrial policies by giving to them a post-mortem dividend after five years, a cash dividend after fifteen years, and establishing a surrender value for the policies after twenty years; whereupon a resolution was passed directing the officers to perfect and modify the plan in their discretion; and they were authorized to extend it to old policies as far as they considered it wise to do so. This committee appears to have made a report at a meeting of the board of directors on January 6th, 1897, and while the record (page 738) does not state that it was adopted, it appears to have been acted upon in such a manner as to make all the industrial policies outstanding at that time participants in the profits of the company. This action then put nearly all the policies of the company on a participating basis, and they remained so for a period of ten years. By section 12 of chapter 72 of the laws of 1907 (P. L. 1907 p. 133) every domestic stock life insurance company was put to its election whether it would carry on its business in the form of participating or non-participating business. This election was required to be made by a resolution of the board of directors to be filed with the commissioner of banking and insurance on or before September 1st, 1907, and it was provided that after December 31st, 1907, such companies should conduct only the kind of life insurance which they severally had so elected to
During the life of the company it has in several instances granted to its policyholders what it has denominated increased benefits under their policies, which are not called for by the terms of the contracts. These increased benefits consisted in enlarging the amount , payable to the policyholder at maturity. The result was reached by an addition to the face of the policy rather than a reduction of the premiums, for the reason that a reduction of the premiums would run into fractions of a cent, which would be inconvenient, if not impossible, to handle and calculate in practice. Such concessions, as they have likewise been called, were made in 1880, 1885, 1891, 1897, 1899, 1906 and 1907. The officers of the company declare that the giving of such concessions or benefits is now and always has been the policy of the company; that when the company started business it was without accurate life tables as to industrial lives; that it fixed upon a table of rates which eventually turned out to be too high, and that inasmuch as the policyholder’s money had created a fund that was larger than was deemed necessary to protect the company’s obligations, they should be entitled to the benefit thereof by an increase in the face value of their policies: With this series of acts in mind, the board of directors, on June 14th, 1909, passed a resolution, the result of which was another concession or benefit to the industrial
“That methods and policies are devised by said directors and enforced by them, instituted and continued for the purpose of keeping down so far as possible additions to the profits of said corporation distributable to the stockholders thereof, and that such distributable profits have been distributed, and it is the avowed intention of the said directors to hereafter make further distribution thereof, to policyholders of said corporation not entitled thereto by their policy contracts, in large amounts, at the direct expense and to the direct injury of the stockholders of said corporation.”
The reply of the answer to this charge is (page 13) :
“Defendants also admit that the directors expect to make further distributions from the earnings on the non-participating policies that were issued prior to 1897 to the holders of such policies and say that this course is not only just and fair to the policyholders concerned and the stockholders as well but is essential to the continued prosperity of the company.”
The complainants urge that the action of the company in conferring the benefit proposed by the resolution of 1909 is wholly void, for the reason that it contravenes the legislation of 1907, already referred to, under whose authority the company elected to do only a non-participating business, and that the granting of the benefit proposed is in effect permitting the future policyholders to participate in the profits contrary to the statute. It is obvious that there are two classes of policyholders dealt with; the one class comprise all the industrial policies which the company might issue after July 5th, 1909. The other class consists of those policies issued between January 1st, 1907, and July 1st, 1909, to which a retroactive benefit of the same character is given.
But as to the policies which receive the retroactive benefit the situation is different. A portion of these policies, that is to say, those issued between January 1st, 1907, and August 1st, 1907, are participating policies, all issued before the company elected to carry on a non-participating business only. There is another class, viz., those issued between August 1st, 1907, and July 1st, 1909, which were issued after the company’s election, and are therefore non-participating policies. The question is then whether this class of policies can be granted the benefits proposed to be given to them. The argument is that no such benefit can lawfully be conferred upon them, for the reason that it gives them a benefit which they did not contract for and to the extent of such benefit makes them participate in the profits of the company’s business, in the face of the fact that it was not lawful for the company to conduct a participating business.
Whether the complainants are in a position to succeed on this point or not is difficult of solution. It was argued on behalf of the defendants that concessions of this sort had been so frequent and so much money had been paid away in pursuance of them (about $12,000,000 in all), without any complaint on the part of the stockholders, that the directors might assume that the stockholders would be estopped from objecting in the present case. The stockholders filed their bill on June 23d, 1909, before
That the business in which the defendants are engaged is affected with a public interest, and that the attorney-general may move the court in his official capacity to enjoin ultra vires acts is plainly decided by the case of McCarter v. Firemen's Insurance Co., 74 N. J. Eq. (4 Buch.) 372; and it is quite as clear that he may proceed on his own mere motion without a relator. Attorney-General v. Delaware, &c., Railroad Co., 27 N. J. Eq. (12 C. E. Gr.) 631. An injunction may likewise be awarded to shareholders to prevent a company from engaging in ultra vires acts when the pleadings are so framed as to raise the issue properly. In this case, however, there is no allegation in the bill of the precise fact relied upon nor any issue touching the same made up by the 'answer. In this state of the pleadings a court ought not by its decree to affect or disturb a series of insurance contracts extending over a period of nearly two years and aggregating possibly many hundreds of thousands of dollars.
“To the policyholders 90 per cent., amounting to the sum of $7,215,-044.87, and to the stockholders 10 per cent., amounting to the sum of $801,671.65; and the board does hereby ascertain and apportion to such deferred dividend policies as a class the said sum of $7,215,044.87, to which sum the said policies as a class are in the opinion of the hoard now entitled, said sum to be carried to the credit of said policies as a class as provided by law.”
*479 ‘‘And he it further resolved, That the said sum of $801,671.65 hereby apportioned and assigned to the stockholders be held and added to the contingency surplus of the company and be not paid out to the stockholders in the form of dividends or otherwise except by the future action of the board.”
I may say that the division of the surplus derived from the deferred dividend policies into the three amounts above mentioned is wholly arbitrary. The actuary of the company stated that the first division whereby $7,600,000 was retained as a “contingency surplus” was recommended by him on what he considered to be an equitable basis, and the division of the remainder between the deferred dividend policyholders and the stockholders was fixed at ninety per cent, and ten per cent, respectively because a company which dealt in industrial insurance in London had with apparent success adopted those proportions for the same or similar purposes. Eesolutions in like form, but with differing amounts, were passed with relation to this subject covering the business of the company for 1908 and 1909, so that out of the earnings of the deferred dividend policies for the three years mentioned there was assigned to what was called “contingency surplus” $10,512,065.23; to deferred dividend policies the sum of $21,866,879.82, from which should be deducted a difference between interest on the fund and payments out of it, leaving the sum of $20,605,119.08, and to the stockholders the sum of $2,429,655.95, which was increased by interest on the investments of the fund to $2,536,722.69; this last ■amount being the aggregate amount assigned to the stockholders during those three years, but concerning which it was resolved that the same be added to the contingency surplus and not paid to the stockholders except by- future action of the board.
In my view the decision of the point now under consideration depends upon the effect which shall be given to that portion of the three annual resolutions which assign specific and certain sums to the stockholders. In one paragraph of the resolution there is a complete and perfect transfer, “to the stockholders ten per cent., amounting to the sum of,” &c. If the resolution had stopped there 1 have no doubt but that those words would be sufficient to justify the officers of the company, without further .action of the board, in dividing that sum as a dividend
There does not appear to be any statutory provision either in the charter or in any general statute which controls the question of the declaration of dividends by this company. The forty-seventh section of our General Corporation act does not apply. As it stood at the time of the organization of the company (P. L. 1866 p. 1034) it applied only to manufacturing corporations, and in its present form it applies only to corporations organized under the General Corporation law. We are therefore remitted to the general principles which underlie corporate action in this regard, having in mind all the circum
I am of the opinion that the case made by the complainants therefore puts it upon the defendants to satisfy the court that after having made this assignment to the stockholders it was still necessary that the fund so assigned should be taken from them and added to the general surplus. If the money was needed there, why go through the operation of assigning it to stockholders at all? Why give with one hand and take away with the other ? Why not make a single division of the fund earned by the deferred dividend policies between them and the general surplus, leaving the stockholders out of the calculation entirely? The assignment to them cannot be a mere idle motion; it must have been done for some purpose which the theory of the defendants’ case does not explain. If they were to have no part or lot in the fund, why should they have been mentioned? No reason or excuse is given for placing this fund in the contingency surplus and withholding it from the stockholders except that the money may be needed at some time in the future to meet a line of contingencies which never yet has happened and which appear as contingencies to be very remote. Such action on the part of the company seems to amount to an arbitrary and improper withholding of profits from the stockholders, not for any illegal or immoral purpose, because I think the case exonerates the management from any charge of dishonesty or personal aggrandizement, but in order to retain possession of the fund and quiet a groundless fear that the money may some day be needed.
I do not see why the surplus cannot be divided among the stockholders to the extent of $2,500,000. A distribution of this amount would not, in my opinion, injuriously affect the company’s actual assets or its credit as a sound financial institution, nor its current business.
The result is that the injunction prayed for will be denied and that the.company will be ordered io divide the said sum of $2,500,000 among its stockholders.