14 N.J. Misc. 610 | New York Court of Chancery | 1935
This is a suit by the holder of ten shares of preferred stock of the defendant Great Western Sugar Company (hereinafter called the Sugar Company) on behalf of himself and all other stockholders of said defendant who might join herein.
In November, 1933, said defendant had a surplus of' $30,000,000 and its officers and directors caused the organization of the Cache La Poudre Company (hereinafter called the New Company) and applied $9,000,000 of the Sugar Companys’ surplus to the purchase of the entire authorized capital stock of three hundred and sixty thousand shares of the New Company of the par value of $20 per share and thereupon immediately distributed such shares among the common stockholders of the Sugar Company pro rala according to their holdings. At that time the authorized capital of the Sugar Company was $30,000,000, one-half of which
Complainant’s bill alleges that the withdrawal of $9,000,000 from the Sugar Company’s surplus seriously impaired the ability of the company to assure future dividends to its preferred stockholders, greatly diminished the assets of the company in which all stockholders, preferred and common, are entitled to share on distribution or liquidation and impaired the company’s working capital. The complainant attacks the transaction as ultra vires the Sugar Company; as without consideration and as a fraud on that company’s stockholders. The defendants are the Sugar Company, the New Company and the directors of the Sugar Company and the bill prays that the New Company be dissolved and ordered to restore the $9,000,000 to the Sugar Company, or that the other defendants be ordered to restore that sum. No other stockholder has joined in complainant’s suit.
The Sugar Company’s surplus was accumulated prior to 1933 and had been held as protection against uncertain conditions in the sugar market, -falling prices and operating deficits. In 1933 it appeared that the company was again operating at a profit and its directors considered what disposition to make of its surplus. Probably, fear of federal legislation taxing corporate surplus had something to do with the directors’ decision that part of the surplus should be distributed and it is possible that the method adopted was for the purpose of avoiding taxes which might be imposed under the federal revenue laws had distribution to stockholders been made in cash. The plan adopted was first discussed by the president of the company informally with his directors and meeting with their approval, the New Company was incorporated. A meeting of the Sugar Company directors was held November 15th, 1933, at which formal consideration was given to the plan and it was the unanimous decision of the directors that $9,000,000 of the company’s surplus should be distributed among its common stockholders
Complainant charges that the transaction was not put through in good faith; that the directors failed to inform the stockholders of the true reason for the method adopted and characterized the transaction as a “reorganization” when in fact it was not and he insinuates that there was an undisclosed ulterior motive behind the plan. I can find nothing in the evidence to justify the claim that the plan was not
Of the one hundred and fifty thousand shares of preferred stock of the Sugar Company, complainant holding ten shares is the only one objecting to the transaction and of the one million eight hundred thousand shares of common stock only one stockholder, holding twenty-five shares, objected. The annual meeting of stockholders was held May 9th, 1934, notice of which stated that one of the purposes of the meet
The articles of incorporation of the Sugar Company provide that the holders of preferred stock shall receive from surplus or net profits, a dividend of seven per cent, annually and no more and that in case of liquidation or distribution of assets, the holders of preferred stock shall be paid the par value thereof before any payment shall be made the holders of common stock and after payment of an equal amount to the holders of common stock the remaining assets shall be distributed, one-half among preferred stockholders and one-half among common stockholders.
The decision of the United States circuit court of appeals for the eighth circuit, on appeal from the United States district court for the district of Colorado, reported in Fraser v. Great Western Sugar Co., 9 Fed. Rep. (2d) 810, was rendered in a suit brought by the present complainant against the present defendant Sugar Company. That suit arose out of complainant’s claim to participation as a preferred stockholder in earned surplus distributed by the Sugar Company as extra dividends to common stockholders. The present complainant there contended that such payment amounted to a distribution of assets in which preferred stockholders were entitled to participate under the provisions of the Sugar Company charter. The decision of the court was that the Sugar Company directors, in their sound discretion, had the right to distribute surplus or net profits to common stockholders; that preferred stockholders of that company were not entitled to receive out of surplus or net profits anything in excess of the regular preferred dividends, so long as the Sugar Company was a going concern; that the charter pro
The decisions of the courts of this state and of other courts settle beyond question that distribution of corporate surplus to stockholders is within the sound discretion of the directors as to time, manner and terms, subject only to such limitations as may be imposed by statutes or corporate charters. It is clear that had the directors of the Sugar Company, exercising sound judgment, decided to distribute $9,000,000 of surplus to the common stockholders in cash, no stockholder, common or preferred, would be heard to object and it is not perceived how the interests of complainant as a preferred stockholder, could be affected by the directors’ decision to distribute that amount of surplus by a method other than cash. The company was clearly a “going concern” with ample assets to secure its stockholders both common and preferred. Dividends had been paid on its preferred stock regularly since its incorporation in 1905 and the record shows that the payment of $9,000,000 for the Hew Company stock did not impair the company’s working capital, or its ability to pay future dividends on its preferred stock. The company’s financial statement issued in February, 1933, showed that it and its exclusively owned subsidiaries, had gross assets exceeding $76,000,000 and an earned surplus of approximately $30,000,000 as against its capital stock of $30,000,000. The following year, after distributing $9,000,000 surplus to common stockholders, it had a surplus of approximately $24,000,000. I consider that the decision in Fraser v. Great Western Sugar Co., supra, determines that so long as the Sugar Company continues to carry on business under its charter, it can be no concern of complainant as a preferred stockholder, how its directors in the exercise of sound judgment, determine to dispose of corporate surplus. Here the directors cannot successfully be charged with failure to exer
Complainant seeks to void a transaction which was not against public policy or prohibited by law and which, as I find, was entered into in good faith by the directors of the Sugar Company and wherein that company received full consideration for its part of the transaction and suffered no loss whatever. If it be assumed that the transaction was ultra vires the Sugar Company, it would not be set aside at the instance of that company and since this is a derivative action, complainant’s right to urge ultra vires is no greater than that of the Sugar Company. After the stock of the Hew Company had been wholly distributed among the common stockholders of the Sugar Company, it was extensively traded in with the result that many of the shares have been sold and transferred to third parties. When complainant filed his bill, six hundred and one of the original recipients of stock had transferred thirty-one thousand seven hundred and twelve of the shares received by them; three hundred and twenty-seven stockholders had transferred eight thousand two hundred and one shares not acquired by distribution, but acquired by transfer from prior holders; one hundred and twenty-nine stockholders had acquired twenty-three thousand five hundred shares in addition to those received by distribution. When this cause came on for hearing, about eight months later, one thousand and fifteen stockholders had transferred fifty-five thousand three hundred and sixty-six shares received as distribution; four hundred and forty-four stockholders held eighteen thousand nine hundred and seventeen shares not received as distribution, but acquired by transfer from prior holders; one hundred and sixty-five stockholders had acquired thirty-six thousand four hundred and forty-nine shares in addition to those received by distribution. It is not now possible to restore the status quo ante. It might be possible to direct the Hew Company to return
I think complainant is guilty of laches in bringing his suit. The notice of November 15th, 1933, was duly received by him and it informed him in sufficient detail of what the Sugar Company proposed to do. He then had the same objection to the plan which he sets up in his bill of complaint, as appears by his letter of November 20th, 1933, but he did nothing to prevent the effectiveness of the plan until he filed his bill April 10th, 1934, and in the meantime the rights of many third persons who had acquired stock in the New Com
The bill of complaint will be dismissed, with costs.