72 N.J. Eq. 580 | New York Court of Chancery | 1907
This is an injunction bill filed by a stockholder of the United Box Board Company against the company and its directors, and also against another corporation, the American Box Board Company, and its directors, to enjoin the execution of an agreement between the two defendant companies for (he sale of certain assets oi-the United/bomnanv to the American company. 'The defendant companies are corporations Of Lilly klurlie. ""The agreement for sale is attacked as a fraud on the United company, and the bill is filed to protect its rights in the assets proposed to be sold. Application is now made for a preliminary injunction restraining the sale.
The affidavits disclose substantially the following facts: The United Box Board Company (which I shall call the United
The United company, on December 20th, 1906, made an agreement with the American Box Board Company, a third company, for the sale to the latter of all of the strawboard company stock and $562,500 of its general mortgage bonds. The entire purchase price of the stocks and bonds is fixed together at the single sum of $850,000, payable in three installments of $250,000 each, on the 15th day of January, April and July, 1907, respectively, and the balance of $100,000 on October 15th, 1907. The American Box Board Company agrees, in addition, to execute an agreement assuming the payment of the outstanding collateral trust bonds, with interest, after January 15th, 1907, together with the sinking fund payments. The deliveries of the bonds and stock are, however, separated, and on the payment of the first installment of $250,000 on account of the whole purchase price, mortgage bonds to the amount of $300,000 are to be delivered, and on payment of the second installment of $250,000 on account the remaining $262,500 of bonds are to be delivered. On payment of the third installment of $250,000 the one thousand nine hundred and seventy-five unpledged shares of the strawboard company stock are to be delivered to the American company, and
The agreement contains two provisions, inserted, as is now claimed by the defendant directors, for the purpose of specially protecting the rights of the United company and all its stockholders. The first is a clause in-the agreement by which the United company has the right to repurchase all of the property and rights to be sold to the American company at any time before January 2d, 1908, upon repayment to the United company of the purchase-money which has been paid, with ten per cent, interest, and surrendering for cancellation any agreements assuming payments on the collateral trust mortgage. The second is a provision by which the American company gives to the stockholders of the United company the prior right to subscribe for its stock, for the purpose of carrying out this agreement of sale between the two companies, and the terms of subscription offered by the American company for its full-paid shares of $100 are cash installments of thirty-four per cent., three installments of ten per cent, each, payable on the 10th days of January, April and July, 1907,. and four per cent, on October 10th, 1907, the balance as called for by the directors of the American company (not more than ton per cent, a year) until fully paid.
It is admitted in defendant’s affidavits that the vendee companjp the American Box Board Company, was organized at the instance of the officers and directors of the United company, and also that Messrs. Barber and Fleming are the underwriters for twenty-five thousand shares of its capital stock, being all of its stock except $1,000 subscribed for organization purposes. To what extent stockholders of the United company have subscribed
Counsel on both sides have argued the case from this standpoint, and complainant claims—first, that on the admitted facts the sale is illegal and void, and should be altogether restrained, without regard to the question of fairness of price; second, that the sale of the strawboard company stock is for a grossly inadequate price, and third, that the proposed sale is a scheme or conspiracy to deprive the United company of its most valuable asset and secure its benefit to the directors making the sale. On the part of the defendant directors it is claimed—first, that the sale is made by the directors as managers of the business of the company, and, in the absence of fraud or dishonest exercise of judgment, cannot be questioned by the company or stockholders suing in the right of the company; second, that the sale was for a full and fair price, and, in the present circumstances and financial condition of the company, is the best and only method of relieving it of pressing debts and assuring a more satisfactory finan
The charges of conspiracy and actual fraud seem to be fully and fairly answered by the affidavits,’ but in order to have relief on this bill it is not necessary, in my judgment, to prove such actual fraud. If the sale should be held voidable as against the vendor company, by reason of legal or constructive fraud, arising from the fact that the sale was made to its directors, or to a vendee controlled by them in making the purchase, or that the sale was not at a fair price, the sale might be set aside on this bill. The application will therefore be disposed of from that view of the scope of the bill.
As to the validity of a contract made by a corporation, through its directors,, with om^OT^TOYA^o^Eelrji^yTmrUistinetion seems to be made in the decisions of our courts, dependent to ^ some extent-muthe naturej3fjbhe.xontract. Contracts for the services of a director, to be performed in the management of its ordinary business, are valid, but subject to judicial review so far as the amount of compensation is concerned, and this either on behalf of stockholders of a going corporation or the creditors of an insolvent corporation. I examined all the decisions of our courts on this point in Lillard v. Oil, &c., Co., 70 N. J. Eq. (4 Robb.) 197. Advances of money by a director to the corporation may be secured, and a sale of property to the director, to pay such debt, is valid, so far as the transfer is concerned, but the price must be a fair one, and the price actually fixed is not final, but is subject to review. Wilkinson v. Bauerle, 41 N. J. Eq. (14 Stew.) 635, 643, &c. (Court of Errors and Appeals, 1886). In Stewart v. Lehigh Valley Railroad Co., 38 N. J. Law (9 Vr.) 505, 522 (Court of Errors and Appeals, 1875), the language of Mr. Justice Dixon, while saving to the director of a corporation rights not arising out of express contract, including the right to the repayment of money loaned, is broad enough to-exclude all express contracts, and if applicable to the circumstances of this case might makeJbis sale-altogether- voidable 'Ey Yhe company. For while the transaction in one aspect of it was, or may be claimed to be, a sale of the company’s assets for the purpose of
In the present case the agreement for sale was not communicated to the stockholders until after its execution. It has not been affirmed bjr the stockholders at any meeting, and if no such affirmance tabes place one of the questions at final hearing will be whether the^ company—for complainant suing on its rights) can avoid the transaction as being substantially a sale of the company’s assets to one or more of its directors, and not merely, as in Wilkinson v. Bauerle, an exercise in good faith of the power of the directors to sell or transfer assets of the company for the purpose of paying its debts, leaving the fairness of the price to be determined. If the sale should be held to be a proper exercise of the power of the directors, the further question will then arise as to the fairness of the transaction and of the price-If the sale is to be treated as a sale to the directors, then thej burden of showing such fairness is on the directors. These questions cannot be properly decided until all of the facts relating to the sale and to the value of the strawboard company stock, and the probable effect upon the United company of the permanent withdrawal of the strawboard company stock from its assets and from its control, are developed at final hearing.
But inasmuch as the proofs now presented show that the complainant may at the hearing make out a case entitling him to avoid the sale on behalf of the company, he is entitled to such preliminary restraint as will render a decree in the company’s favor effective, if it should finally be made. This can be secured, I think, by enjoining the final delivery of the shares of straw-board company stock, and the execution and delivery of the assignment of the shares of this stock now in the custody of the trust company, until the final hearing or further order.
As to the delivery of the bonds the situation is different. In the circular letter of December 20th, 1906, issued by the directors, announcing the sale to the American company and inviting stockholders to participate, the consideration price of the bonds and of the strawboard company stock is separated, $400,000 being fixed as the value of the stock in the directors’ judgment, and $450,000 as the value of the $562,500 bonds,