14 Misc. 2d 500 | N.Y. Sup. Ct. | 1954
Petitioner, a director and stockholder of R. Hoe & Co., Inc., has instituted a proceeding pursuant to the provisions of section 25 of the General Corporation Law and article 78 of the Civil Practice Act, to invalidate the election of certain named directors of the corporation on the ground that their election was obtained by means of a proxy solicitation campaign which disseminated false charges among the stockholders.
Section 25 of the General Corporation Law provides that “Upon the application of any member aggrieved by an election * * * the supreme court at a special term thereof shall forthwith hear the proofs and allegations of the parties, and confirm the election or order a new election, as justice may require ’ ’.
The board of directors of the corporation consists of 11 persons. At the challenged election held at the annual meeting on April 13, 1954, the five seats to be filled by vote of the stockholders were won by the directors for whom proxies were solicited by the “Stockholders Protective Committee ” by securing over 70% of the total vote. At a meeting 10 days later three of the remaining six directors resigned and the board thereupon elected three persons to the vacant positions. These eight new directors have been named with the corporation as respondents.
Petitioner has set forth in an exhibit the improprieties in respondents’ proxy material of which he complains. The allegedly fraudulent misstatements and concealments were originally made by the Stockholders Protective Committee organized when the board discharged the president of the corporation in soliciting proxies to compel the holding of a special stockholders’ meeting prior to the annual meeting of April 13, 1954, to pass on charges for removal of four of “Management’s” directors, including petitioner. ‘ ‘ Management ” countered with proxy material of its own answering these charges and counterattacking with accusations against the Committee and the authors of the charges. In October, 1953, the Committee, having proxies from over 55% of the stock entitled to vote, requested the special meeting. Upon refusal the Committee applied for an order under article 78 of the Civil Practice Act directing the new president of the corporation to call the special meeting. The order of Special Term granting the application was affirmed by the Appellate Division and by the Court of Appeals (Matter of Auer v. Dressel, 282 App. Div. 1039, affd. 306 N. Y. 427). It was now March 12, 1954, only about one month before the annual meeting in April, and the Committee determined to obtain proxies for that election of five directors. It accordingly requested that the order affirmed direct the special meeting to be held subsequent to the annual meeting, which was so provided. Petitioner later successfully moved to strike from that order such provision on the ground that the original proxies were obtained for the holding of a special meeting prior to the annual election and could not be used for such a meeting to be held subsequent to the annual meeting.
In the meantime, beginning with March 8, 1954, the Committee issued material to solicit proxies for the annual meeting. The original charges were referred to only incidentally in such material. None of the four directors whose removal had been sought and against whom the allegedly “false”
“ Management ” also solicited proxies for the annual meeting and sent out considerable material of its own.
The charges originally made which are alleged to be false are substantially as follows: That one of the four accused directors proposed, and the other three agreed, that the then president of the corporation be paid a sum of money to resign upon condition that he take no action against any of the directors or officers; that petitioner as counsel wrongfully charged the corporation for office space rental for a limited period; that he engaged a personal friend in connection with certain corporate proceedings without specific authority of the board. Petitioner also claims that the Committee misrepresented to stockholders the cost (to be later paid by the corporation) of its proxy fight. He also charges that in violation of the Securities and Exchange Act the Committee failed to clear with the Securities and Exchange Commission one letter and two reports issued to stockholders (all of the other material was so cleared). In addition, he has set forth various miscellaneous misstatements and concealments in the Committee’s material which were aimed directly at him as the ‘ ‘ one-man ’ ’ management of the corporation.
Respondents have in their answer denied the “ averment that 1 their election was secured in the fraudulent manner set forth ’ in Exhibit A to the petition ’ ’. They have not at this time made a point-by-point response to each of the charges appearing in said exhibit. Although maintaining that each of the statements contained in the Committee’s proxy material had some foundation in fact, their present opposition to petitioner’s application is based on their belief that he has failed to state facts sufficient to entitle him to relief.
Respondents also urge that petitioner is not “ a member aggrieved by an election ”. They point to the fact that no other stockholder is claimed to have been deceived or misled by the proxy material, and that surely petitioner does not claim that he personally was deceived. In effect, they maintain that he is simply a disappointed leader of the opposition. In addition, they maintain that his failure to challenge the election prior thereto, at the time of the election, or immediately thereafter, at all of which times he knew all the facts alleged in the present proceeding, and his subsequent participation in directors’ meetings and acceptance of fees therefor, constitute inexcusable laches and thus bar the proceeding.
Petitioner’s answer to this contention is that he is an aggrieved member, being a stockholder and a director, and a member of “ Management’s ” group whose slate was defeated at the challenged election. In addition to claiming he is not guilty of laches, he points out that the proceeding was timely commenced within the four-month statute (Civ. Prac. Act, § 1286).
I am inclined to the view that petitioner is not barred from maintaining this proceeding. Although an “ aggrieved member ” may institute it, it is actually intended for the benefit of the stockholders as a whole. Accordingly, the term “ an aggrieved member ” should not be strictly construed. Any stockholder or director may bring such proceeding, he being naturally affected in some way by an unfair or irregular election. Similarly, the defense of laches should not be favored to bar a proceeding for which the Legislature has already provided an extremely short Statute of Limitations. Petitioner’s subsequent participation in board meetings was in performance of duties he owed the corporation and do not bar him from commencing this proceeding before the expiration of the time limited by law.
Even assuming there were misstatements or concealments, the election may not be set aside unless the court concludes further that the result would have been different had no such improprieties been injected into the proxy campaign, or that an inequitable result has been thereby produced (Matter of Green Bus Lines [Turner], 166 Misc. 800). Of course, it is not necessary to show that a substantial number of stockholders was actually deceived into voting against “ Management ”; petitioner is entitled to the court’s interposition upon a reasonable showing that they might have been. In my opinion the record as a whole does not disclose either that the solicitation was so tainted with fraud as to require a holding that an inequitable result was accomplished, or that the claimed misstatements and nondisclosures were of such a nature that one may reasonably conclude that they must have affected such substantial number of stockholders as to alter the probable result of the election. A court should not interfere in the internal affairs of a corporation unless a clear showing is made to warrant such action.
Matter of Scheuer (59 N. Y. S. 2d 500) involved an election where the victors received about 55% of the vote. The court found that they had falsely written to stockholders when soliciting their proxies that the substantial reduction in net earnings, of which the opposition complained, was due to the cost of improvements and new equipment being deducted from gross earnings, when the fact known to them was that such cost had been charged to capital and not earnings. The court also found that they had not informed stockholders that a brokerage firm whose praise of the victors was circulated widely had received compensation therefor. In view of the close result and the nature of the fraud and concealment disclosed, the election was set aside.
In Matter of Wyatt v. Armstrong (186 Misc. 216), also decided by Mr. Justice Hobstadteb, some of the successful nominees for whom proxies had been solicited had submitted resignations in advance of the election. This concealment of the real powers for whom the stockholders’ vote was being used was held to be 11 reprehensible in the extreme” and a clear fraud practiced on the stockholders ‘ ‘ for the purpose of handing over the control of the corporation to others than those named as the nominees for the directorships involved” (p. 219).
The type of gross fraud and concealment present in those cases is absent in the proxy solicitations here shown. Stockholders were adequately furnished both versions of the alleged misstatements and then voted overwhelmingly for the Committee’s slate. This was a strenuous and heated proxy battle full of charges and recriminations, but not so tainted with fraud as to justify interference by the courts.
The violation of law complained of by petitioner with regard to the failure to clear with the Securities and Exchange Commission three items which were given only to workers soliciting proxies and not issued to the stockholders, and which the workers may have used in discussions with more than 10 stockholders (S. E. C. Rules, rule X; Code of Fed. Reg., tit. 17, § 240.14a-6, subd. [d]), is not deemed substantial nor cognizable as a basis for granting the relief requested. Exclusive jurisdiction to grant a remedy for a violation of the Securities Exchange Act is in the Federal courts. The “ Committee ” did in fact clear all the other material with the Securities and Exchange Commission and this inadvertence may be deemed to be merely a technical violation. In any event, petition may not be here
The application is accordingly denied.