3 N.Y.2d 518 | NY | 1957
Lead Opinion
This is a derivative action brought by Max Eisen, owner of 50% of the stock of Senior Estate, Ltd., a real estate corporation, primarily to set aside the sale of a sublease by said corporation through its officers John Post, Jr., and Anita Post Litsky, to defendant Louis Schweitzer. The sublease was of the Theatre de Lys located in Greenwich Village, New York City. While several causes of action were pleaded and tried below, the sole ground upon which the transfer is assailed in this court is that it was consummated without stockholder consent as required by section 20 of the Stock Corporation Law which provides, in part: “ A stock corporation * * * may voluntarily sell, lease or exchange its property, rights, privileges and franchises, or any interest therein or any part thereof; provided, however, that if such sale, lease or exchange is not made in the regular course of
If in view of the purposes and objects for which the corporation was created the particular sale may be regarded as one in the normal course of the business of the corporation, section 20 is inapplicable for, as we said in Matter of Miglietta (2660 Broadway Corp.) (287 N. Y. 246, 254-255): “ The test applied by the courts is not the amount involved, but the nature of the transaction, whether the sale is in the regular course of the business of the corporation and in furtherance of the express objects of its existence, or something outside of the normal and regular course of the business. (Matter of Timmis, 200 N. Y. 177, 181, 182.) ” (Emphasis supplied.) Stated conversely, if the sale is such as to render the corporation unable, in whole or in part, presently to accomplish the purposes or objects for which it was incorporated, section 20 is applicable (see, e.g., Matter of Kunin [Title Guar, & Trust Co.], 281 App. Div. 635, affd. 306 N. Y. 967; Matter of Hake [Hake Mfg. Co.], 285 App. Div. 316; Matter of Drosnes [Film Amusement Co.], 187 App. Div. 425; Matter of Nulle [Savarins, Inc.], 194 Misc. 622).
In the present case the certificate of incorporation of Senior Estate, Ltd.,— and the certificate, of course, determines the business a corporation is authorized to do — provides that such corporation was organized primarily and specifically: “To be engaged in the business of buying, owning, selling, .leasing and generally trading and dealing in lands, buildings and structures; to operate, let and sublet buildings and structures; * * * to buy, sell, trade and deal within the limits allowed by law in the stocks, bonds and obligations of this and other corporations and to perform any and all further acts and things which may in anywise contribute to the enhancement of its business
In respect to the applicability of section 20 to this transaction, there is only one serious disagreement between Eisen and Schweitzer. It is Eisen’s position that whether or not the certificate of incorporation establishes Senior Estate, Ltd., as a real estate corporation only, is not controlling. The claim is made that while trading in real estate may have been the only authorized business for Senior, we must judge the applicability of section 20 on the basis of the business in which the corporation was actually engaged. Eisen’s argument is that Senior was actually engaged in the operation of a theatre and production of plays, that the sale of the lease and chattels effectively put it out of that business, and that, therefore, stockholder consent was necessary under the statute. Thus, he argues that the business of Senior Estate was the operation of the Theatre de Lys; that its sole asset was the leasehold interest in the premises on which the theatre was located; that it licensed the theatre to various productions and gave advice and guidance to its licensees; that it approved the plays, selected the manager, press agent, stage hands, electricians, porters and ticket takers and purchased props. While we do not think that Senior was actually engaged in the operation of
Eisen’s test which makes the actual business of a corporation the controlling feature, rather than its charter powers and purpose, is based in large measure upon certain language in the cases cited above, an example of which is the passage previously quoted from Matter of Miglietta (supra), viz., “ The test applied by the courts is not the amount involved, but the nature of the transaction, whether the sale is in the regular course of the business of the corporation and in furtherance of the express objects of its existence, or something outside of the normal and regular course of the business.” (Emphasis added.) Eisen concludes that to be deemed in the regular course of business, the transaction must be viewed in the light of a corporation’s normal day-to-day activity.
Initially it must be noted that in the cases referred to above, the businesses in which the corporations were actually engaged were businesses which were authorized by their charters. They were not engaged in an ultra vires activity or business. Moreover, the rationale of those eases in no way supports the notion that an activity not authorized by the charter — hence, an ultra vires activity — may be considered the business of the corporation for the purposes of section 20, a statute which, as we read it, assumes that corporations are legally engaged in doing what the State has granted them authority to do. We are not suggesting that the certificate of incorporation determines the business a corporation is in fact doing. Our holding is simply that an ultra vires activity cannot be deemed the regular business of the corporation within the meaning of section 20. The effect of our holding is not to render section 20 applicable only where the transaction is ultra vires. We do hold that if the only business conducted is ultra vires, it may not be deemed the regular business within the meaning of section 20. Obviously, a transaction may require stockholder consent though it be not ultra vires if it is “ not made in the regular course of business * * * and involves all or substantially all of its property * * *. ” What may be deemed the regular course of business cannot depend on some ultra vires and unauthorized pursuit, but rather upon the business which is conducted
It is patent that the transaction here did not affect, in the slightest degree, the power or ability of Senior Estate, Ltd., to carry on the business of buying and trading in real estate, for which it was chartered. Therefore, section 20 of the Stock Corporation Law is inapplicable.
The order of the Appellate Division should be reversed and the judgment of Special Term reinstated, with costs in this court and in the Appellate Division. The question certified should be answered in the negative.
Dissenting Opinion
I cannot accept the court’s thesis that the corporation’s sale of the leasehold, the only property it ever owned or, as far as the record discloses, ever intended to own, was made, within the sense of section 20 of the Stock Corporation Law, “ in the regular course of [the corporation’s] business ”, and, in reaching that conclusion, I place no reliance (as the majority apparently does) upon any alleged ultra vires acts performed by, or attributed to, the corporation. As I see the case before us, the question presented, briefly stated, is this: Does section 20 cover a so-called real estate corporation which, although organized to buy, sell and deal in real estate generally, has engaged only in the business of operating and managing the single piece of property which it sold?
Senior Estate, Ltd., was organized in 1947 — according to the record, for “ tax saving ” purposes — as an “ affiliate ” of the John Post Construction Corporation and was chartered to engage “ in the business of buying, owning, selling, leasing and generally trading and dealing in lands, buildings and structures ”, The company apparently did nothing until March, 1953, when it acquired a sublease of certain theatre premises, located in Greenwich Village, New York City. A year later, in 1954, Eisen purchased 50% of the corporation’s stock from its two stockholders, John Post and his sister Anita Post
Bisen refused to accept his one-half share of the sales price, urging that, by reason of section 20 of the Stock Corporation Law, the company could not sell all of its assets without at least obtaining the consent of two thirds of its stockholders, and this suit followed to invalidate the sale. The trial court decided that section 20 was not applicable and that, in any. event, even if it were, plaintiff, by reason of his misleading conduct, was prevented from urging that it should have been complied with. The Appellate Division, in unanimously reversing, indicated its disagreement on both scores.
Section 20, designed to protect minority stockholders, after authorizing a corporation to sell, lease or exchange its property and assets, goes on to provide that, “ if such sale, lease or exchange is not made in the regular course of business of the corporation and involves all or substantially all of its property * * ® such sale, lease or exchange shall not be made without the consent ” of either all of its stockholders “ given in writing without a meeting ’ ’ or two thirds of the stockholders “ at a meeting * * ® called pursuant to section forty-five.” It is conceded that Senior sold “ all or substantially all ” of its property. However, the court is taking the position that, since its charter empowered the corporation to engage in the business of buying and selling real estate, any sale of realty which it makes must be deemed “ in the regular course of business ”. This, in effect, is a holding that the corporation’s regular course of business must be determined solely by an examination of the words found in the certificate, without considering the activity upon which the company is actually engaged.
In my opinion, as the cases seem plainly to hold, that cannot be. (See Matter of Kunin [Title Guar. & Trust Co.], 306 N. Y. 967; Matter of Hodes [1299 Realty Corp.], 278 App. Div. 803; Matter of Borea [Locust Ct. Apts.], 234 App. Div. 450; Star
A corporation empowered to buy, sell and generally trade in real estate may not be said to be carrying on that “ business ” if its entire corporate life has been devoted to owning, managing and operating but a single piece of property. There is, it seems almost self-evident, a great difference between a company which owns, or has owned, a number of lots or buildings and is, or has been, engaged in turning them over — that is, buying, selling and buying again — and a company which acquires but one piece of property, as an investment and not for resale, derives all of its income from it and spends all of its time and energies upon its operation and management. The “ business ” of a corporation, its “ regular course of business ”, just as that of a partnership or an individual, is the business upon which it is actually engaged, not the business which it was originally authorized to carry on.
It is significant that the statute refers, not to what the corporation’s charter empowers it to do, but to its “ regular course of business ”. And, of equal importance, stockholders make investments in a particular corporation on the basis of the business which the corporation is actually conducting, not the business it may be authorized to pursue — and the purpose of provisions such as those found in section 20 is to prevent the nature of that investment from being changed, to protect minority stockholders from being forced into a business differ
Having in mind that that is the purpose underlying section 20, let us examine the situation here presented. Before the sale, Bisen, a 50% stockholder, had an investment in a corporation engaged, during its entire existence, in owning and operating a particular leasehold and earning a steady income. After the sale, all that he had was a liquidating dividend derived from the purchase price, a far cry from what he had invested in. In point of fact, once Senior Estate sold the only piece of property it ever owned, the asset upon which the enterprise depended, and then proceeded to distribute the moneys realized on the sale among the stockholders, it was, for all practical purposes, out of business, even though it still possessed a charter. It is difficult to understand how a sale effectively terminating the corporation’s “ business ” may be regarded as one made in its regular course, no matter how extensive the recitals of its charter.
Experience has taught that the certificate of incorporation is an unreal and uncertain, if not an impossible, determinant of the business actually conducted. None will dispute that charters ordinarily define the corporate purposes and powers in the broadest of terms to avoid any question of ultra vires. That being so, a corporation, though formed to engage in one business, may emerge as an operator of a quite different business which, however, because of the breadth of its charter terms, it is authorized to conduct. In such a case, if we are to ascertain what the company’s course of business really is, we must look beyond the charter.
Moreover, if we consider the charter alone, then, section 20 applies, if at all, only in the rarest case, and the manifest purpose of the statute — to protect minority stockholders (Matter of Timmis, 200 N. Y. 177, 181)—is plainly thwarted. In fact, if we examine only the charter, no transaction would fall within the protection afforded by section 20 unless it were outside the corporate purposes and beyond the corporate powers, in other words, unless it were ultra vires. Quite obviously, that is not the design of the statute, and it cannot be the law. Section 20 was not aimed at the ultra vires; it deals, as its wording renders plain, not with ultra vires transactions,
These considerations point up the necessity of looking beyond the charter to determine the regular course of a company’s business and that necessity exists just as much in the case of a so-called real estate corporation as any other. It may be true, as urged, that a title company has a more difficult task if it must examine more than the corporate vendor’s charter to determine whether a sale of real property was valid. But, surely, the court may not read into section 20 an exception not even suggested by the legislature and, certainly, it should not defeat the purpose of the statute and jettison the rights of minority stockholders in order to facilitate the work of title companies. As a matter of fact, the fears expressed on behalf of the title companies seem somewhat less than real. The view that section 20 required stockholder consent to a sale of a building by a corporation organized to buy, sell and deal in real estate is not new or novel; it was actually announced as the law of this state by the Appellate Division in 1951 (see Matter of Hodes [1299 Realty Corp.], supra, 278 App. Div. 803) and by a federal court in 1932 (see Starrett Corp. v. Fifth Ave. & 29th St. Corp., supra, 1 F. Supp. 868, 871). It is not to be supposed that the title companies failed to adapt their practice to the law thus expressed years ago, and it is not at all unreasonable to say that in so doing they encountered no insuperable obstacle.
My conclusion that section 20 applies to the sale under consideration provokes the further question — which the court does not reach — as to whether the plaintiff before us may insist on compliance with its provisions. Both courts below found that the plaintiff had orally consented to the sale and that the defendants had relied upon such acquiescence in consummating the transaction. The trial court, on the basis of these facts, intimated that the plaintiff was in no position to complain about the corporation’s failure to comply with section 20. The Appellate Division, however, reached a different conclusion; it was that court’s view that, since the statute was so explicit in its insistence upon either the consent of all stockholders given in writing without a meeting or the consent of
Judges Desmond, Dye, Froessel and Burke concur with Chief Judge Conway ; Judge Fuld dissents in an opinion on question as to applicability of section 20 of the Stock Corporation Law in which Judge Van Voorhis concurs.
Order reversed, etc.
