40 N.J. Eq. 114 | New York Court of Chancery | 1885
This suit is brought by the complainants, as stockholders of the Grant Locomotive Works, to compel the payment of a further or greater dividend than that which the' directors of the corporation have declared. The complainants sue not only for themselves, but for all other stockholders standing in the same right that they do.
“Fourth. That each certificate of stock assigned to each general creditor shall be stamped on its face : ‘This certificate of stock is held as security for the payment of 5-, without interest, and is to be assigned to David B. Grant on the payment of the above amount.’ All dividends paid on this stock shall be credited to account of such payment and endorsed thereon.
“Fifth. That all the net profits of the company, after the payment of taxes, insurance and the necessary amount for the proper maintenance of the property of the company in its present condition and capacity, shall be divided annually among the stockholders.”
This agreement was subsequently brought to the attention of the court by petition, and the court, on the application of all
Real estate... $30,000'
Buildings.... 110,000
Machinery... 160,000
Merchandise. 225,000
Debts due.... 75,000
The fairness of this valuation seems to have been assented tO' by all parties. This is made manifest by the fact that a valuation of the property of the corporation is, by the agreement, made the standard by which the net profits were to be ascertained. The agreement, it will be remembered, provides that all the net profits, after the payment of taxes and insurance, “ and the necessary amount for the proper maintenance of the property of the company in its present condition and capacity,” shall be divided annually. It is obvious that it would be impossible to ascertain, with certainty, what the net gains of any business were, at any time during its progress, where the thing put in as capital consisted of merchandise, or something else than money, unless the money value of the thing contributed as capital was fixed definitely, at the very outset of the business. In view of the provisions of the agreement, I regard it as entirely clear that the valuation made by the officers was made for the purpose of fixing, definitely and unalterably, the amount
No division of net profits was made until February 12th, 1883. On that day the directors declared a dividend of twelve per cent. The sum thus distributed, in its aggregate, amounted to $104,714. The directors, about the 1st of January, 1883, caused a balance-sheet to be made up, showing the financial condition of the corporation on the 31st day of December, 1882, and sent copies of it to the stockholders. According to this statement the net profits realized up to December 31st, 1882, exceeded, by nearly two-thirds, the sum Avhicli the directors ordered to be distributed, in dividends, on the 12th of February, 1883. The net profits shown on the face of this statement or balance-sheet are a little over $260,000, but the complainants contend that they are, in truth, $50,100 more, and that their actual amount is $310,100. The value of the assets of the corporation, as given in this statement or balance-sheet, is $50,100 less than the sum at which they were estimated by the officers of the corporation on the 1st of July, 1875, and thus the net profits are made just $50,100 less than they would have been if the assets had been put down at the same valuation that they were given on the 1st of July, 1875. The change was made in this way: The value of the buildings and machinery was reduced; the buildings $22,000, and the machinery $32,000, total, $54,000, and the value of the real estate was increased $3,900, making the difference $50,100.
The complainants insist that this reduction was wrongful as to the stockholders, and that the court should, on the facts before it, declare that the amount of the net profits divisible under the agreement, in the year 1883, was $310,000. The decision of this question must be controlled by the contract. The subject is one that it was competent for the parties to regulate by contract. The contract unquestionably imposes very important limitations upon the power of the directors. In cases where the power of the directors of a corporation is without limitation, and free from restraint, they are at liberty to exercise a very liberal discretion as to what disposition shall be made of the gains of the business
There is nothing, however, in the action of the directors which gives either pledge or indication that the $50,100 will be appropriated for purposes authorized by the contract. The book’ of minutes of the corporation contains no record of their action. All they have done is to mark down the value of the buildings and machinery. This was done, they say, because they believed that seven years’ wear and tear had depreciated them to the extent that their value was reduced, but the proofs show that, during that period, nearly $100,000 had been expended in their maintenance. It is manifest, I think, that the stockholders have a right, under the agreement, to have this matter dealt with in a manner very different from that in which it would appear it has been dealt with. If the buildings or machinery are out of repair, or need to be renewed, so that some part of the net profits must be expended to put the works of the corporation in the condition and to raise them to the capacity they had in July, 1875, the stockholders have a right to have the judgment of the directors as to how much shall be expended for each of those purposes, and if net profits are reserved, they also have a right to know for what purpose they are reserved, in order that, if the purpose is one not authorized by the contract, they may challenge the action of the directors, and if it is, that they may know how the net profits have been disposed of. Although there is no express provision of the contract so declaring, yet I think, when
The remaining and more important question is, Were the stockholders entitled under the contract to a larger dividend in 1883 than that which the directors declared ? They distributed nearly $105,000. This left of the $310,000 nearly $205,000. If this balance consisted of money, or of securities which could easily and readily be converted without loss, there can be no doubt that the directors were bound by the contract to divide it. The proofs show that, on December 31st, 1882, the corporation held railroad securities, consisting of notes and bonds, which had been taken in payment for locomotives, for a little over $212,000. They had been taken at par. These were, of course, included in the statement of December 31st, 1882, and represented in part the sum shown on that statement to be net profits. None of them were then due, and none became due until February 10th, 1883. After that date portions of some of them fell due every month, and portions of others every quarter. The one having the longest period to run will not mature until January 1st, 1888. The securities were not sold at the New York stock exchange and had no market value. The proof is that they were absolutely unsalable. They were taken, as already stated, in payment for locomotives. The corporation was created for the purpose of manufacturing and selling locomotive engines and other machinery. The contract under which the corporation resumed business imposes no limitation upon the power of the directors
The words “ net profits ” define themselves. They mean what shall remain, as the clear gains of any business venture, after deducting the capital invested in the business, the expenses incurred in its conduct, and the losses sustained in its prosecution. If, as in this case, merchandise is sold and securities payable at a future day are taken in payment, it is entirely proper — nay, if accuracy is desired, it is indispensable — that in making a statement of the condition of the business, the securities should be put down as part of its assets, and they must, as a general rule, if the statement shows that profits have been made, represent the profits either wholly or in part. And if, subsequently, in attempting to collect them, losses are sustained or expenses incurred, the sum shown as profits will be reduced just to the extent of such loss or expense. Now, the agreement in this case
Two fundamental objects are apparent on the face of the contract. They are, first, that the creditors who hold the stock of the corporation as security for their debts shall be paid out of the net profits of its business; and, second, that the persons who assigned their stock as security for the debts of the corporation, shall, as soon as the debts are paid, have their stock returned to them. The directors are bound, in conducting the business of the corporation, to have regard to both of these objects, and, if possible, so to manage its affairs that both may be ultimately accomplished. If the directors were to attempt to sell the securities of the corporation, which they had taken at par, and which were maturing at short dates and at frequent intervals, at merely nominal prices, or at prices far below their face value, they would attempt to do what, in my judgment, would constitute a flagrant breach of duty against both classes of oestuis que trust— both those who have the present interest, and those who have a prospect of having an ultimate interest. To divide the securities in kind is an impossibility. The only other method open, then, is by a'sale of them, and that, according to the proofs, is also an impossibility, or, if not, it can only be effected at a loss which would be ruinous to all concerned. My conclusion is that the complainants were not entitled to a greater dividend in 1883 than that which the directors declared.