202 Misc. 988 | N.Y. Sup. Ct. | 1952
Plaintiffs, minority stockholders and voting trust certificate holders, sue for a permanent injunction restraining defendant corporation, which operates the Roosevelt Hotel in New York City, from selling its business, property and assets
It will only be necessary to discuss defendant’s motion to dismiss the complaint for legal insufficiency.
The complaint in substance alleges that the Conrad Hilton interests dominate the ownership and management of defendant through control of a majority of its stock and occupancy of its officership and directorate; that they also dominate, control and manage the Hilton Hotels Corporation, and therefore, the newly created subsidiary which has agreed to purchase the business of defendant; that the agreement Avas not made at “ arm’s length ” but by these majority interests dealing with themselves; that the business is a prosperous one; that the future course of the business will be increasingly better; that the price is not adequate; that the proposed sale is not in the best interests of the corporation or of its stockholders, but rather in the interests of those who control both defendant and the prospective purchaser; and that the purpose is to eliminate or “ freeze out ” the scattered minority stockholders. Bad faith is charged generally to defendant’s management; but otherAvise the classic elements of fraud are not spelled out. The action is a representative one, and not a derivative one on behalf of the corporation, and the gravamen of the suit is the alleged purpose to' eliminate the minority stockholders' and the methods by which this purpose is sought to be accomplished. Plaintiffs conceded on argument and in their briefs that mere inadequacy of price would not ground an action, but consider inadequacy of price as an element of proof in showing bad faith.
The question is whether minority stockholders and certificate holders, situated as these plaintiffs are, are limited in remedy to an appraisal of their stock under sections 20 and 21 of the Stock Corporation Law or may they avail themselves of remedies in equity attacking the sale as illegal and fraudulent.
Plaintiffs rely on Kavanaugh v. Kavanaugh Knitting Co. (226 N. Y. 185). In that case the court said (pp. 195-196): “ When a number of stockholders constitute themselves, or are by the law constituted, the managers of corporate affairs or interests they stand in much the same attitude towards the other minority stockholders that the directors sustain, generally, towards all stockholders, and the law requires of them the utmost good
The court, in sustaining the complaint in the Kavanaugh case (supra, p. 198), stressed that the action of the majority was “ in bad faith and for the sole purpose of permitting the individual defendants Kavanaugh to dissolve the corporation for the purpose of depreciating the value of the corporate property and the plaintiff’s proportionate interest therein.”
Involved in the Kavanaugh case (supra) was a closed corporation, a scheme and plan to squeeze out the plaintiff, effecting the proposed dissolution of the corporation under the statute, thus throwing the business into a forced sale and for the alleged purpose of depreciating the value of the corporate property and of the plaintiff’s proportional interest in it. As a consequence, if plaintiff proved his allegations, he would have shown that the value of his stock would have been irretrievably reduced in value or destroyed. The statutory procedure chosen by defendants in that case to effect their purpose was one under which there was no right in dissenting stockholders to procure an appraisal of their, stock. Unless the remedy in equity was provided, plaintiff’s property would inevitably be adversely affected.
The principles stated in the Kavanaugh case (supra) are sound principles of law and equity, but the situation that we have in the instant case is not the same as that involved in the Kavanaugh matter.
Plaintiffs contend that the doctrine of the Kavanaugh case (supra) makes an exception to the exclusive remedy principle for which the Anderson and Beloff cases (supra) stand. They argue that where the bad faith affects the invocation of the statutory procedure, the statutory procedure itself is affected with illegality and as a result will not have the effect of limiting the dissenting stockholder to the appraisal procedure as an exclusive remedy. This would be true if plaintiffs had alleged and could show that the statutory procedure was being deliberately used as one of the instruments of defrauding the plaintiffs by, and with that intention, reducing or destroying the value of their stock. The crux is whether the depreciation of plaintiffs’ stock is without remedy. That was the situation in the Kavanaugh case. That is not the situation where the appraisal procedure is available to the dissenting stockholder. The difference is due to the fact that in an appraisal proceeding the stockholder is entitled to the full value of the stock prior to the action against which he dissents and including every item of value that can be established. Thus, in the Beloff case, at pages 19-20, the court said: “ Plaintiffs argue that an appraisal (of which they did not avail themselves) would not have brought them fair return for their shares, since, as they say, the appraisers
A reading of authorities, such as the Anderson and Beloff cases (supra) compels the conclusion that if the Kavanaugh case (supra) were now to be decided and if with respect to a dissolution proceeding under the statutes a minority stockholder would have a right to have his stock appraised pursuant to the provisions of sections 20 and 21 of the Stock Corporation Law, that complaint would have to be dismissed. The reason would be that no longer could it be said that the plaintiff had no remedy available at law, under which he could receive the full value of his stock.
There is a more profound principle explicit in the Beloff case (supra). The court said, at page 19: “In short, the merged corporation’s shareholder has only one real right; to have the value of his holding protected, and that protection is given him by his right to an appraisal (see Voeller v. Neilston Warehouse Co., 311 U. S. 531, 535). He has no right to stay in the picture, to go along into the merger, or to share in its future benefits * * * In none of this do we see any deprivation of due process, or of contract rights.” In effect, therefore, a stockholder has no constitutionally protected right to continue as a stockholder so long as the value of his interest is compensable.
It should be noted too that in the Beloff case (supra) the defendant corporation was, as it must have been under the
One other matter remains to be considered on this motion. The issue has been raised as to whether the right of appraisal exists in behalf of voting trust certificate holders. Matter of Bacon (Susquehanna Silk Mills) (287 N. Y. 1) is determinative of the question. A reading of that opinion indicates that a certificate holder has a right of appraisal. He may have lost the right of appraisal by conferring a consent to the action out of which he now seeks an appraisal by having granted that consent to the trustee in the original voting trust agreement. Or he may consent to it later at a meeting of certificate holders. If he did consent, earlier or later, he has waived the remedy otherwise available to him. If he did not consent, under the ruling in the Bacon case (supra), he still has the right of appraisal, provided, of course, he follows the procedure laid down in section 21 of the Stock Corporation Law. A question may be raised as to
Accordingly, the motion to dismiss the complaint is granted. The motions for a temporary injunction and for intervention by certain certificate holders as parties plaintiff in the action are denied, any discussion of these motions being rendered unnecessary by virtue of the decision on the motion to dismiss the complaint.