92 N.J. Eq. 515 | New York Court of Chancery | 1921
This is a stockholders) bill, alleging two causes of action; to compel the defendant corporation to declare and pay dividends, and to restrain the directors from paying themselves excessive salaries.
Johnson & Higgins was incorporated in 1899, under “An act concerning corporations” (Rev. 1896), with an authorized capital stock of $500,000—half preferred and half common. The preferred stock is eight per cent., non-cumulative, dividend bearing, with priority over the common,, in dividends, and in the capital upon dissolution. The authorized capital stock has been increased to $1,000,000, similarly divided. The preferred stock is not entitled to vote for directors or officers. The principal object for which the company was formed, as stated in the charter, was
“to purchase, acquire and take over the business of the copartnership of Johnson & Higgins, as insurance brokers, insurance agents, agents of underwriters and of insurance companies, adjusters of averages and their kindred business, all as conducted by them in New York and in other places [excepting their business as now conducted in Boston, Philadelphia, Baltimore, New Orleans, Chicago and San Francisco].”
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'In 1845 Messrs. Johnson and Higgins formed a copartnership 'to engage in the insurance business as brokers, agents and
“In tlie event that any share or shares of the common stock of the corporation become the property of any person who is not an officer, director or employe of the corporation actively engaged in its service, or in the event that any owner of a share or shares of the common stock of the corporation ceases to be an officer, director or employe of the corporation actively engaged in its service, the owner of such share or shares of stock shall thereby and thereupon be disentitled to dividends upon such stock unless and until he shall surrender or cause to be surrendered the said stock and the certificate therefor to the corporation, upon which surrender he shall receive from the corporation in exchange for such stock a certificate entitling him to such dividends as may be declared upon said stock for the next succeeding period of ten years, and such stock shall from the time of surrender be subject to reissue under the direction of the board of directors and upon any terms approved by them, and with or without specific consideration [any eon*518 sideration, however, to be the property of the corporation] ; but the new holder or holders of such stock so reissued shall not be entitled to dividends thereon until ten years from the time of the surrender of the stock to the corporation as aforesaid, and prior to the reissue of such stock there shall be written or stamped upon the face of the new certificate or certificates therefor a statement indicating at and after what time the holder of the stock shall be entitled to receive dividends.”
.For twenty years there was perfect harmony and cohesion. The directors held the common stock during their period of service, and when they ceased to be active they turned in their stock for the ten-year dividend paying certificates, and their places were taken bjr others. The stock so turned in was reissued to the remaining members, usually in proportion to their holdings.' The uniform practice of the directors was to set aside at the beginning of each year one-half of the pet profits in prospect, for their compensation; the* other half for dividends. Then the amount set aside'for salaries was apportioned among the members on a j>ercentage basis, presumably, according to- the value of their service.
In 1911, the complainant, Prindiville, was selected a director. He had been engaged in the insurance business in Chicago under the name of Prindiville & Company, a corporation, of which he was half owner, the other half belonging to Johnson & Higgins. His interest was taken over at an appraised value of $12,500, for which he was given one hundred and twenty-five shares in the defendant company of the par value of $100 each. Mr. Prindiville was taken into the corporation, not for his assets in Prindiville & Company, but for his singular excellence in the insurance line, which was calculated to add to the prestige, advancement and success of Johnson & Higgins. That, he and his associates fully understood, and he took his position and his stock,'well knowing the plan of operation and tire limitation of his status. He continued with Johnson & Higgins, with headquarters at Chicago, until December 31st, 1918, subscribing at all times to its scheme, taking his share of the yearly profits by way of compensation and dividends upon his stock, and also from time to time accepted his allotment of the common capital stock surrendered by his fellow-members of the dictorate who ceased to be active—in all, one hundred and fif
His retirement came about in this manner: When America entered the war in April, 1917, he went into the service, without consulting his coworkers and obtaining their leave. They protested, not against his ideals and zeal, but against his arbitrary and abrupt manner of putting country above company. All was smoothed over, however, and throughout his service in the navy, until the end of 1918, he drew his annual compensation as before—and it was princely—and also dividends on his stock for the year 1917, which was no paltry sum. Upon his release by the government, and when he was due to resume Ms duties as an active director on January 1st. 1919, he demanded an increase in compensation for the year 1919, equal in percentage to that of Lowe and Davy, his so-called ‘Tunning mates,” who had come into the concern with him, but who worked while he was absent. During the period of Ms absence he drew pay at the rate of six per cent, of the net profits set aside annually for directors5 compensation, and the company proposed continuing him at that rate. Lowe and Davy had in the meantime been raised to nine per cent. plus. After considerable controversy, sometimes acrimonious, the directors refused to accede to his demands, and he quit. He then brought this suit to recover dividends aggregating two hundred and five per cent, on the common stock declared out of the profits of 1918. The company stands ready and oilers to pay them upon surrender by him of his certificates of shares .in exchange for dividend certificates in accordance with the requirements of the charter. This he declines to do, maintaining that the condition is ultra vires the corporation, and that it is an unlawful restraint upon the alienation of his capital stock. His contention is, that the Corporation act does not authorize a charter, with limitations upon shares perpetuating the control of the company in the organizers and their chosen successors; that capital stock in a corporation, is personal property, so declared by section 20 of the Corporation act; and that inasmuch as the free and untrammeled right of disposition is an essential and in
(1) It may well be doubted that a partnership may be perpetuated-in the garb of a corporation, with its corporate rights and powers, and immunity to personal liability, without complete submission to its cardinal ordinances, of which a conspicuous one 'is that “the shares of stock in every corporation shall be personal property” (Comp. Stat. p. 1610 § 20), and I seriously question that the provisions of section 8 of the Corporation act countenance corporate existence with copartnership privileges of choosing one’s associates. Subdivision -1 requires that the certificate of incorporation contain:
“If there be more than one class of stock created by the certificate of incorporation, a description of the different classes, with the terms on which the respective classes of stock are created,”
and subdivision 7 provides that
“the certificate of incorporation may also contain any provision which the incorporators may choose to insert, for the regulation of the business and for the conduct of the affairs of the corporation, and any provision creating, defining, limiting and regulating the powers of the corporation, the directors and the stockholders, or any class or classes of stockholders; provided, such provision be not inconsistent with this act.”
These broad grants of power were intended^ in my opinion, to be exercised consistently with the declared policy that “the shares of stock in every corporation shall be personal property,” and in entire subordination to this declaration. The point is not, however, up for decision. If the defendant corporation has arrogated to itself powers that are not conferred, or that are obnoxious in the eyes of the law as against its policy, it is guilty of an invasion of tire public right, and direct redress lies with the state through its duly-appointed agency—the attorney-general.- Strangers may resist- their imposition, but the complainant is not in a position to assail them. The charter restric
(2) The principal point to which counsel have addressed their arguments, orally and in voluminous briefs, is whether the charter provision above quoted, terminating the right to dividends, is in conflict with the policy of the law against restraint of trade, and therefore void; and much that has been said and written, supported by long lines of authority pro and con the subject, though exceedingly helpful in interpreting the clause, is, it seems to me, beside the question. As I view the clause, it limits the quality of tire shares, not their alienability. That is to say, the limitation is upon the property in the shares, their normal dividend bearing capacity is curtailed, but there is no restraint upon their transferability. The shares came into being with this condition as a part of their essence; it was one of their original incidents, and the complainant contracted with the corporation and his fellow-stockholders for them with this inherent characteristic attached. He and his associates are not deprived of the rights or privileges of stockholders, save as to dividends, and those he agreed to forego in a certain contingency, which has come to pass. He got all he bargained for, and what he has he is at liberty to sell and transfer. As to that there is no restriction. He may transfer his shares, such as they are, at will, and to whom he pleases. That he will not be able to find as ready-a market or as smart a price as could be secured for shares otherwise unlimited, may be embarrassing and disappointing, but that’ does not impair the vendibility of the article he bought and has for sale. I can perceive no infraction of public policy.
Where shares are unqualified, full fledged, so to speak, restraints upon their transfer, whether by charter or by-law, except for convenience of corporate regulations, are in contravention of public policy and void. The authorities are unanimous' in enunciating this principle, but a call for its application in the
(3) Furthermore, to exscind from the charter the limitation upon the right to dividends, or to ignore it altogether—and that is really the complainant’s aim—would evolve property by judicial decree that had never been acquired by complainant, nor created by the parties, incorporators and their successors, nor had ever been within the contemplation of either. By the new order of things thus to come into being, the complainant’s shares —not only those which he acquired by his initial purchase from the company, but also those that were allotted to him through the corporate scheme he now denounces—would take on qualities and characteristics for which no warrant can be found in his engagement. By the magic stroke of the judicial pen, so to speak, that which was a conditional fee would be metamorphosed into an absolute estate, if I may indulge in those terms; the shares would become perpetually dividend bearing, translated from choses in action to things in possession, as it were, and this, not by virtue, but in spite of the complainant’s undertaking. Equity determines, protects and enforces property rights, it never creates them.
(4) Now, if we were to accept the complainant’s contention and argument at face value, and as sound (a) that the Corporation act does not grant charter privileges of conditional shares such as the defendant’s articles of incorporation presume to
(a) The complainant’s second cause of action—to restrain the corporation from paying the directors excessive salaries in the future—is, in view of the foregoing conclusion, not ripe for decision. Excessive salaries are in diminution of tire dividends, and only those who are entitled to them may complain of their deprivation. The complainant sues only in right of the one hundred and twenty-five shares originally purchased by him, and as to these he has lost his claim to dividends, only to be restored upon the surrender of his shares, and to be vouched to him by a ten years’ certificate. When he shall have complied with his contract and assumes the status of a dividend certificate holder he will then, and not until then, be in a position to complain that he is deprived of his just share of the company’s profits.
The bill will be dismissed, with costs.