64 N.J. Eq. 537 | New York Court of Chancery | 1903
In this ease an original hill was filed August 17th, 1900; an amendment to the bill on March 6th, 1902, and on the argument, at the close of the proofs, an application for a further amendment to the bill was made. This application to amend is opposed. The issues raised upon the pleadings and proofs are substantially as follows: Complainants are owners and holders of preferred stock of the Kentucky Distilleries and Warehouse Company, organized under the laws of this state on February 3d, 1899. On July 11th, 1899, the Distilling Company, of America was organized, also under the laws of this state. Among the designated objects for which this latter company was formed was (Article Third (i)) the purchase and holding of the shares of stock or property of other corporations of this state or elsewhere, and the operation of such properties, exercising the rights of owners of the stock, including the right to vote thereon. Although one of the objects for which it was organized was to manufacture, sell and distribute whiskey and spirits, the distilling company has not, in fact, engaged in such manufacture or sale, but is altogether a company holding the stocks of several constituent companies, thus managing or controlling the business of all the companies. These constituent companies are five in number, all engaged in the manufacture, sale or distribution of whiskies or spirits. They are the Kentucky Distilleries and Warehouse Company, the Spirits Distributing Company, the Standard Distilling and Distributing Company, three companies organized under the laws of New Jersey; the American Spirits Manufacturing Company, organized under the laws of New York, and the Hannis Distilleries Company, organized under the laws of Maryland. All of these companies are parties-defendant to this suit, except the Hannis Distilleries Company. The distilling company is the owner of over ninety per cent, of the capital stock of each of these companies and of substantially all of the stock of the Hannis company. It became such owner by issuing its own shares for the purchase from the individual holders of the stock of the constituent companies, the relative values of the stock of the several companies and the amount of distilling company stock issued therefor being fixed by an agreement dated June 21st,
The grounds for relief set up in the original and amended bill which were relied on at the argument on final hearing may be classified as follows:
First. That the distilling company is not authorized, under its certificate of organization or rmder the laws of the State of Few Jersey, to purchase and hold the stock of the Kentucky company or the other constituent companies for the purpose of controlling their operation-
Second. That one of the objects of the organization of the distilling company and of the transfer to it of the controlling interest in the stock of the constituent companies was the creation of a monopoly in the manufacture and sale of spirits, alcohol and whiskies; that .such monopoly has been, in fact, created; that such monopoly is unlawful and renders the Kentucky company liable to the pains and penalties of the laws in restraint of monopoly and endangers its property.
Third. That the assets of the Kentucky coinpany have been unlawfully and improperly diverted for the benefit of the distilling company.
Fourth. That the directors of the Kentucky company have unlawfully diverted its assets and property, by the organization and management of subsidiary companies, to which the Kentucky company has conveyed portions of its assets in consideration of stock in the subsidiary companies.
In reference to the first question, the authority of the distilling company to hold the stock of the Kentucky company and of the other constituent companies, and to act merely as a holding or operating company, the status of our legislation and decisions is as follows: Previous to 1893, corporations organized
The ownership of stock and control of corporations by means of such ownership by either an individual or partnership is in general a lawful act, and the organization of a partnership for the purpose of such ownership and control, either alone or in connection with other objects, is unquestionably a lawful object or purpose of association of individuals. The only theory upon which the formation of corporations for the purpose of holding stock of other corporations can be held not to be a “lawful purpose,” within the meaning of the act, is that an authority to own the stock and control the management of other corporations must be given expressly and in terms in the section authorizing the formation of companies in order to be lawful. This power to own and control stock of other corporations is expressly given, by a subsequent section, to all corporations when organized, and to the same extent as individuals; such ownership of stock is therefore a lawful act. This legislative declaration as to the lawfulness of the ownership of stock by corporations precludes the courts, as it seems to me, from declaring that such ownership cannot be included within the “lawful purposes” for which a corporation may be formed merely for the reason that it is not expressly and specially authorized in the section of the act defining the purposes of incorporation. What purposes are “lawful” within the meaning of this section must be ascertained by reference to the scope of the laws in force declaring the lawful character of acts, and taking the whole scope of the act it would seem that the ownership of stock in other corporations, either alone or in connection with other objects as the purpose of the corporation, is a purpose of incorporation authorized by the act.
I have considered this question as one which the complainants had the right to raise, on the assumption that, as owners of the Kentucky company stock, they might have the right to question the control of the Kentucky company by another corporation which had no right to hold or vote upon its stock. The status of the complainants may be different from that of the complain
But there are undoubtedly very grave difficulties as to the trial or settlement of this question in a suit like the present, or as to giving herein the appropriate relief, if the holding of the stock and control of the Kentucky company by the distilling company had been found to be illegal, and in this decision I do not intend to pass upon this question.
The second claim for relief is that one of the objects of the organization of the distilling company and of the transfer to it of the controlling interest in the stock of the constituent companies was the creation of a monopoly in the manufacture and sale of spirits, alcohol and whiskies, and that such monopoly has been created. This claim is not well founded, and for two reasons—first, the proofs fail to establish the monopoly charged, and second, the monopoly, if any exists, arises from the exercise of powers given by the charter or certificate of organization. Where no right of property in complainant is at stake, a court of equity has no power to declare unlawful the exercise by a corporation of the powers conferred by its charter, even though the purpose of the organization may have been unlawful. The right of the attorney-general, on behalf of the state, to question, in a court of equity, the exercise by a corporation of its powers under its charter for the purpose of creating a monopoly was expressly denied by Vice-Chancellor Reed, in Attorney-General v. American Tobacco Co., 10 Dick. Ch. Rep. 352, 369, &c. (1897), and his opinion was adopted on appeal. S. C., 11 Dick. Ch. Rep. 847 (1898). In this suit also the right of an individual to equitable relief was denied. S. C., 10 Dick. Ch. Rep. 378.
The reason upon which this decision, as to want of equitable jurisdiction, is based is that any order or decree of a court of equity restraining a corporation exercising private, and not public or quasi public, franchises from acts which are within the powers conferred by its charter or certificate of incorporation is, pro tanto, an annulment of its charter. It is therefore, to that extent, an ouster from its franchises, and such ouster is rightful and legal only when made by judgment upon quo warranto, a proceeding brought to test the very question on behalf of the
If, however, it should be considered that this question is now properly before the court for determination, the decision of the court of errors and appeals in Trenton Potteries Co. v. Oliphant, 13 Dick. Ch. Rep. 507 (1899), would seem to be fatal to the complainants’ contention. It was expressly decided in that case (see pp. 524, 525) that where a monopoly results, or may result, from the exercise of the powers of making contracts expressly granted by the legislature to corporations, such exercise of .powers cannot be enjoined. This is upon the ground that the legislature granting the powers must be taken to have made a final and authoritative decision upon the question of public policy as to the creation of the monopoly thus resulting.
The third claim for relief is the unlawful and improper diversion of the assets of the Kentucky company for the benefit of the distilling company. The only specific charge of such diversion of assets made in the bill was in paragraph 12, which charged that the directors of the Kentucky company, acting under the control of the. distilling company, on or about January 1st, 1900, caused a mortgage or trust deed of $5,000,000 to be executed'by the Kentucky company upon all its property and assets, present and future, to secure bonds of that amount, and that, contrary to the usual course of business and contrary to the interests of the Kentucky company, considerable portions of these bonds were hypothecated by the directors of the Kentucky company (five of its seven directors being also> directors of the distilling company), and have been pledged in the proportion of $1,000 of bonds to secure $100 of loan; that no proper occasion existed for borrowing money for the Kentucky company, and that the execution and pledging of the bonds was part of the general
The objection as to tire equity of the charge appears to be unfounded, and I can see no equitable reason, under the circumstances disclosed by the evidence, why the Kentucky company should not pay its proportion of the expenses incident to loans made for its benefit as well as that of the other companies, and which it has secured and used for its own purposes.
It must be borne in mind that since the act of April 3d, 1902 (P. L. of 1902 p. 459), corporations can no longer set up the plea of usury on any obligations executed by them, even if this transaction between the companies comes within the scope of the Usury acts. But these questions as to the liability of the Kentucky company for interest alleged to' be usurious, or for charges for expenses claimed to be inequitable, are plainly premature. None of these charges or expenses has been in fact paid, and the Kentucky company has not yet paid or offered to pay its loan of $3,500,000, the money actually received, with legal interest, all of which is undoubtedly due, and until it does so, all questions as to the legality of charging additional expenses or additional interest before returning the bonds or other evidences of debt to the Kentucky company are premature. When the Kentucky company has in fact paid, or offers to pay, the admitted debt, with legal interest, the question whether any additional payments or charges can be enforced against it by the distilling company, or, if actually made by the Kentucky company, should be returned to it, may perhaps be brought in question, in appropriate proceedings brought to test the question, but until payment of the admitted debt is made or tendered, decision upon the question is premature and therefore unnecessary.
By the amended bill two other classes of diversion of assets of the Kentucky company are alleged. One is that in 1899, and shortly after the organization of the Kentucky company, this
The Kentucky company has organized, under the laws of West Virginia, two subsidiary companies, for the purpose of selling and distributing some of the whiskies which it manufactures to retailers. It conveyed to each of these companies a portion of its stock of whiskey; to one company, whiskey valued at $75,000; to the other, an amount valued at $900,000, for which it has received full-paid capital stock of the respective companies to these amounts. These sums are the entire capital stock of the companies, and this stock in both companies is owned by the Kentucky company and is controlled by it through its nominees, who are employes subject to removal. The company with the capital of $75,000, called the “Y” company in the proofs, was formed for the purpose of selling to the retail trade direct a particular brand of whiskey manufactured by the Kentucky company, and according to the evidence of Mr. Bradley, the president of the company, it has been successful and profitable—the Kentucky company selling to the “Y” company its whiskies at a profit, and in turn making a reasonable profit upon the capital of the “Y” company. With the “Z” company, capitalized at $900,000, business of the same character is transacted, but on a larger scale, and at present it supplies the largest outlet for the product of the Kentucky company, distributing about fifty thousand barrels a year, upon which both the manufacturers’ and retailers’ profits are made. The Kentucky company is also the owner of another distributing company, which was previously organized, called the “W” company, the stock of which it purchased and controlled. The “W” company distributes for the Kentucky company annually between twenty thousand and thirty thousand barrels, about one-seventh of its entire product, and is doing now a business of about $100,000 monthly. -The business and property of the “W” company, including its good will, were purchased for about $150,000. As appears by its certificate of incorporation, the Kentucky company was formed for the manufacture, sale and dealing in whiskies, and also for the purpose of carrying on any part of its business, to invest in all kinds of property,
The legislature has here expressly authorized the manufacture and sale of a product, and this sale may undoubtedly be either at wholesale or retail; it has also (by the certificate) authorized the purchase of stocks of other corporations for the purpose of this business of selling, and by the express provisions of the Corporation act (section 51) has also authorized the purchase of the stock of corporations of other states. Considering this fifty-first section of the statute to be subject to the implied limitation that the purchase and ownership must be for the purposes of the business, this condition is complied with in the present instance, for the purchase and ownership is exclusively for the promotion
The ownership of stock of other corporations for the purpose of the corporate business is the substantial thing authorized in these provisions, and, in the case of a private business corporation, exercising' no public franchise of any kind, the method of acquiring such ownership of stock is incidental only. The second section of the Corporation act of 1896 expressly, authorizes corporations to exercise all the powers contained in the act, so far as the same are necessary or convenient to the attainment of the objects set forth in the charter or certificate. Tinder this provision no question is or can be raised as to the power of purchasing stocks of existing companies for the purpose of accomplishing the distribution of the product, and, -in my judgment, the organization of subsidiary companies for the same purpose and with the same object may be fairly and reasonably regarded as incidental to^ or consequential upon, the business which is expressly authorized and convenient for the attainment of its objects, and should not, by a judicial construction, be held to be ultra vires.
As to companies in which New Jersey companies may hold stock and the states in which subsidiary companies may be organized, it may be that the late decision of the court of errors and appeals, in Coler v. Tacoma Railway Co. (March, 1903), limits the power of New Jersey companies to hold stock of corporations of other states to the stock in companies organized in states whose laws authorize their own domestic corporations to hold stock in and control their owm domestic companies. In the Goler Gase the court of errors and appeals, on the application of the stockholder of a New Jersey company, which owned a railroad in the State of Washington, enjoined the sale of the railroad to a Washington company, in consideration of stock of the Washington company, one ground being that, under the statutes of Washington and the decisions of the Washington courts, a Washington corporation had no power to purchase or hold the stock of a Washington company, and that it must therefore be concluded by the courts of this state that the ownership of the stock of a
In the present case there is no proof as to the statutes or decisions of the State of West Virginia upon the question of the right of a West Virginia corporation or of a foreign corporation to hold stock in a West Virginia corporation, and it must, in the absence of such proof, 'be assumed, under the laws of evidence as well as of comity, that the laws of West Virginia are similar to our own laws, and authorize the Kentucky company, formed under our laws, to exercise within the limits of West Virginia the powers conferred upon it under our statutes and its charter. The law of comity, settled in American jurisprudence by the decisions to which I referred at some length in my opinion in Coler v. Tacoma Railway Co., 19 Dick. Ch. Rep. 117, is that a corporation of one state of the Union may exercise within another state all the powers of its charter to the extent that its exercise thereof has not been prohibited in such other state or affirmatively declared by the constitution, statutes or decisions of such other state to violate its own public policy. Such violation of the declared public policy of a foreign state must be proved and cannot be assumed.
The questions above considered are all of the claims for relief raised by the bill or amended bill, which were, relied on at the argument, or briefs on final hearing, and the only remaining question is the application of complainants to amend the bill. This application, which was made after the closing of the proofs and at the time fixed for argument of the cause, is resisted. Eb application is made to open the proofs, and the general rule applicable to amendments applied for under such circumstances is that amendments may then be made, if necessary and proper, in order that issues which have been, in fact, tried by the parties, arid upon which both parties have been practically and fully heard, may-be formally set out in the pleadings, so that the pleadings may conform to the proofs. Story Eq. Pl. § 905; cases cited in Ogden v. Thornton, 3 Stew. Eq. 569, 573, &c. But