309 N.Y. 168 | NY | 1955
Lead Opinion
In a stockholder’s derivative action brought by plaintiff, an attorney, who owns 25 out of the company’s over 2,300,000 shares, he seeks to compel the return of $261,522, paid out of the corporate treasury to reimburse both sides in a proxy contest for their expenses. The Appellate Division has unanimously affirmed a judgment of an Official Referee dismissing plaintiff’s complaint on the merits, and we agree. Exhaustive opinions were written by both courts below, and it will serve no useful purpose to review the facts again.
Of the amount in controversy $106,000 were spent out of corporate funds by the old board of directors while still in office in defense of their position in said contest; $28,000 were paid to the old board by the new board after the change of management following the proxy contest, to compensate the former directors for such of the remaining expenses of their unsuccessful defense as the new board found was fair and reasonable; payment of $127,000, representing reimbursement of expenses to members of the prevailing group, was expressly ratified by a 16 to 1 majority vote of the stockholders.
The essential facts are not in dispute, and, since the determinations below are amply supported by the evidence, we are bound by the findings affirmed by the Appellate Division. The Appellate Division found that the difference between plaintiff’s group and the old board “ went deep into the policies of the company ”, and that among these Ward’s contract was one of the “ main points of contention ”. The Official Referee found that the controversy ‘ ‘ was based on an understandable difference in policy between the two groups, at the very bottom of which was the Ward employment contract ”,
Other jurisdictions and our own lower courts have held that management may look to the corporate treasury for the reasonable expenses of soliciting proxies to defend its position in a bona fide policy contest (Peel v. London & North Western Ry. Co., [1907] 1 Ch. 5; Kadel v. Segal Lock & Hdwe. Co., N. Y. L. J., Sept. 21, 1953, p. 488, col. 4 [Sup. Ct., N. Y. Co.]; McGoldrick v. Segal, N. Y. L. J., Sept. 14, 1950, p. 461, col. 2 [Sup. Ct., N. Y. Co.]; Matter of Zickl, 73 N. Y. S. 2d 181,185; Howard v. Segal Lock & Hdwe. Co., N. Y. L. J., Feb. 13, 1953, p. 496, col. 6 [City Ct., N. Y. Co.]; Appeal Print. Co. v. Segal Lock & Hdwe. Co., N. Y. L. J., Dec. 22, 1952, p. 1563, col. 3 [City Ct., N. Y. Co.]; Steinberg v. Adams, 90 F. Supp. 604 [S. D. N. Y.]; Hand v. Missouri-Kansas Pipe Line Co., 54 F. Supp. 649 [D. Del.]; Empire So. Gas Co. v. Gray, 29 Del. Ch. 95; Hall v. Trans-Lux Daylight Picture Screen Corp., 20 Del. Ch. 78).
It should be noted that plaintiff does not argue that the aforementioned sums were fraudulently extracted from the corporation ; indeed, his counsel conceded that ‘ ‘ the charges were fair and reasonable ’ ’, but denied ‘ ‘ they were legal charges which may be reimbursed for ”. This is therefore not a case where a stockholder challenges specific items, which, on examination, the trial court may find unwarranted, excessive or otherwise improper. Had plaintiff made such objections here, the trial court would have been required to examine the items challenged.
If directors of a corporation may not in good faith incur reasonable and proper expenses in soliciting proxies in these days of giant corporations with vast numbers of stockholders, the corporate business might be seriously interfered with because of stockholder indifference and the difficulty of procuring a
It is also our view that the members of the so-called new group could be reimbursed by the corporation for their expenditures in this contest by affirmative vote of the stockholders. With regard to these ultimately successful contestants, as the Appellate Division below has noted, there was, of course, “ no duty * * * to set forth the facts, with corresponding obligation of the corporation to pay for such expense ”. However, where a majority of the stockholders chose — in this case by a vote of 16 to 1 — to reimburse the successful contestants for achieving the very end sought and voted for by them as owners of the corporation, we see no reason to deny the effect of their ratification nor to hold the corporate body powerless to determine how , its own moneys shall be spent.
The rule then which we adopt is simply this: In a contest over policy, as compared to a purely personal power contest, corporate directors have the right to make reasonable and proper expenditures,- subject to the scrutiny of the courts when duly challenged, from the corporate treasury for the purpose of persuading the stockholders of the correctness of their position and soliciting their support for policies which the directors believe, in all good faith, are in the best interests of the corporation. The stockholders, moreover, have the right to reimburse successful contestants for the reasonable and bona fide expenses incurred by them in any such policy contest, subject to like court scrutiny. That is not to say, however, that corporate directors can, under any circumstances, disport themselves in a proxy contest with the corporation’s moneys to an unlimited extent.
The judgment of the Appellate Division should be affirmed, without costs.
Concurrence Opinion
(concurring). We granted leave to appeal in an effort to pass, and in the expectation of passing, on this question, highly important in modern-day corporation law: is it lawful for a corporation, on consent of a majority of its stockholders, to pay, out of its funds, the expenses of a “ proxy fight ”, incurred by competing candidates for election as directors? Now that the appeal has been argued, I doubt that the question is presented by this record. The defendants served' were Allis who was on the old board but was re-elected to the new board, McOomas and Wilson, defeated members of the old board, and Fairchild, leader of the victorious group and largest, stockholder in the corporation. The expenses of the old board, or management group, in the proxy fight, were about $134,000,. and those of the victorious Fairchild group amounted to about $127,500. In the end, the corporation paid both those sums, and it is for the reimbursement thereof, to the corporation, that this stockholder’s derivative action is brought. Of the proxy fight expenses of the management slate, about $106,000 was paid out on authorization of the old board while the old directors were still in office. The balance of those charges, as well as the whole of the expenses of the new, and successful, Fairchild group, was paid by the corporation after the new directors had taken over and after a majority of stockholders had approved such expenditures. The election had been fought out on a number of issues, chief of which concerned a contract which Ward (a defendant' not served), who was a director and the principal executive officer of the company, had obtained from the corporation, covering compensation for, and other conditions of, his own services. . Each side, in the campaign for proxies, charged the other with seeking to perpetuate, or grasp, control of the corporation. The
Plaintiff asserts that it was illegal for the directors (unless, by unanimous consent of stockholders) to expend corporate moneys in the proxy contest beyond the amounts necessary to give to stockholders bare notice of the meeting and of the matters to be voted on thereat. Defendants say that the proxy contest revolved around disputes over corporate policies and that it was, accordingly, proper not only to assess against the corporation the expense of serving formal notices and of routine proxy solicitation, but to go further and spend corporate moneys, on behalf of each group, thoroughly to inform the stockholders. The reason why that important question is, perhaps, not directly before us in this lawsuit is because, as the Appellate Division properly held, plaintiff failed “ to urge liability as to specific expenditures ”. The cost of giving routinely necessary notice is, of course, chargeable to the corporation. It is just as clear, we think, that payment by a corporation of the expense of “ proceedings by one faction in its contest with another for the control of the corporation ” is ultra vires, and unlawful (Lawyers’ Adv. Co. v. Consolidated Ry. Lighting & Refrig. Co., 187 N. Y. 395, 399). Approval by directors or by a majority stock vote could not' validate such gratuitous expenditures (Continental Securities Co. v. Belmont, 206 N. Y. 7). Some of the payments attacked in this suit were, on their face, for lawful purposes and apparently reasonable in amount but, as to others, the record simply does not contain evidentiary bases for a determination as to either lawfulness or reasonableness. Surely, the burden was on plaintiff to go forward to some extent with such particularization and proof. It failed to do so, and so failed to make out a prima facie case.
We are, therefore, reaching the same result as did the Appellate Division but on one only of the grounds listed by that court, that is, failure of proof. We think it not inappropriate, however, to state our general views on the question of law.principally argued by the parties, that is, as to the validity of corporate payments for proxy solicitations and similar activities in addition to giving notice of the meeting, and of the questions to
A final comment: since expenditures which do not meet that test of propriety are intrinsically unlawful, it could not be any answer to such a claim as plaintiff makes here that the stockholder vote which purported to authorize them was heavy or that the change in management turned out to be beneficial to the corporation.
The judgment should be affirmed, without costs.
Dissenting Opinion
(dissenting). The-decision of this appeal is of far-reaching importance insofar as concerns payment by corporations of campaign expenses by stockholders in proxy
No resolution was passed by the stockholders approving payment to the management group. It has been recognized that not all of the $133,966 in obligations paid or incurred by the management group was designed merely for information of stockholders. This outlay included payment for all of the activities of a strenuous campaign to persuade and cajole in a hard-fought contest for control of this corporation. It included, for example, expenses for entertainment, chartered airplanes and limousines, public relations counsel and proxy solicitors. However legitimate such measures may be on behalf of stockholders themselves in such a controversy, most of them do not pertain to a corporate function but are part of the familiar apparatus of
The Appellate Division acknowledged in the instant case that “It is obvious that the management group here incurred a substantial amount of needless expense which was charged to the corporation ”, but this conclusion should have led tó a direction that those defendants who were incumbent directors should be required to come forward with an explanation of their expenditures under the familiar rule that, where it has been established that directors have expended corporate money for their own purposes, the burden of going forward with evidence of the propriety and reasonableness of specific items rests upon the directors (Godley v. Crandall & Godley Co., 153 App. Div. 697, 711, mod. 212 N. Y. 121; Hine v. Lausterer, 135 Misc. 397, 401-402, mod. 232 App. Div. 719, affd. 257 N. Y. 523). The complaint should not have been dismissed as against incumbent directors due to failure of plaintiff to segregate the specific expenditures which are ultra vires, but, once plaintiff had proved facts from which an inference of impropriety might be drawn, the duty of making an explanation was laid upon the directors to explain and justify their conduct.
The second ground assigned by the Appellate Division for dismissing the complaint against incumbent directors is stockholder ratification of reimbursement to the insurgent group. Whatever effect or lack of it this resolution had upon expenditures by the insurgent group, clearly the stockholders who voted
There is no doubt that the management was entitled and under a duty to take reasonable steps to acquaint the stockholders with essential facts concerning the management of the corporation, and it may well be that the existence of a contest warranted them in circularizing the stockholders with more than ordinarily detailed information. As this court said in Lawyers’ Adv. Co. v. Consolidated Ry. Lighting & Refrig. Co. (supra, p. 399): “ Proper and honest corporate management was subserved by widespread notice to stockholders of questions affecting the welfare of the corporation, and there is no impropriety in charging the latter with any expenses within reasonable limits which were incurred in giving sufficient notice of the special meeting at which the stockholders could be called upon to decide these questions.”
What expenses of the incumbent group should be allowed and what should be disallowed should be remitted to the trial court to ascertain, after taking evidence, in accordance with the rule that the incumbent directors were required to assume the burden of going forward in the first' instance with evidence explaining and justifying their expenditures. Only such as were reasonably related to informing the stockholders fully and fairly concerning the corporate affairs should be allowed. The concession by plaintiff that such expenditures as were made were reasonable in
The familiar rule, applied in those and other decisions, is that merely voidable acts of the directors of a corporation can be ratified by majority stockholder approval, such as contracts between corporations having interlocking directorates (Continental Ins. Co. v. New York & Harlem R. R. Co., 187 N. Y. 225), loans of surplus funds by a trading corporation (Murray v. Smith, 166 App. Div. 528 — although not in the case of loans to stockholders in violation of the Stock Corporation Law, § 59), and other irregularities involving acts which are neither ultra vires, fraudulent or illegal.
In considering this issue, as in the case of the expenses of the incumbents, we begin with the proposition that this court has already held that it is beyond the power of a corporation to authorize the expenditure of mere campaign expenses in a proxy contest (Lawyers’ Adv. Co. v. Consolidated Ry. Lighting & Refrig. Co., supra).. That decision is not distinguishable upon the ground that those expenditures were made by the secretary of that corporation without previous authorization by its directors. That point was involved, but this court said: ‘ ‘ Thus we have it that the publication of the last three notices was not authorized by the hoard of directors and that it could not have been lawfully authorised even if the attempt were made. They bore upon their face sufficient notice to the plaintiff [the printer suing for printing fees] that they were of a character beyond the limit of anything which could be published in behalf of or at the expense of the corporation ” (p. 400; italics supplied). The decision was placed upon both grounds. The statement in the carefully considered opinion written by Judge Hiscock was not dictum that “ it would be altogether too dangerous a rule to permit directors in control of a corporation and engaged in a contest for the perpetuation of their offices and control, to impose upon the corporation the unusual expense ”. In that case, and in all of the other decisions which have been cited with the single exception of a Federal district court decision (Steinberg v. Adams, 90 F. Supp. 604, 606), the question concerned reimbursement of a management group. Moreover, with the exception of an English decision (Peel v. London & North Western Ry. Co.,
The Delaware cases which are cited consist of Hall v. TransLux Daylight Picture Screen Corp. (20 Del. Ch. 78), Empire So. Gas Co. v. Gray (29 Del. Ch. 95), and the Federal cases applying Delaware law (Hand v. Missouri-Kansas Pipe Line Co., 54 F. Supp. 649, and Steinberg v. Adams, supra). The Hand case (supra) merely denied a preliminary injunction to restrain the management from expending corporate funds to hire professional proxy solicitors. There is a difference between hiring-solicitors merely to follow up proxy notices so as to obtain a quorum, and a high pressure campaign to secure votes by personal contact. The district court in the Hand case did not attempt to decide that aspect of the case, merely ruling that it should be determined after trial, and that no irreparable injury had been shown justifying the issuance of a temporary injunction even if the practice were ultimately held to have been ultra vires. In Empire So. Gas Co. v. Gray (supra), it was held that a corporation might sue to enjoin insurgents from soliciting proxies fraudulently by means of a false statement that such solicitation was being made by order of the board of directors. The case most frequently cited and principally relied upon from among these Delaware decisions is Hall v. Trans-Lux Daylight Picture Screen Corp. (supra). There the English case was followed of Peel v. London & North Western Ry. Co. (supra) which distinguished between expenses merely for the purpose of maintaining control, and contests over policy questions of the corporation. In the Hall case the issues concerned a proposed .merger, and a proposed sale of stock of a subsidiary corporation, These were
In our view, the impracticability of such a distinction is illustrated by the statement in the Hall case (supra, p. 85) that “ It is impossible in many cases of intracorporate contests over directors, to sever questions of policy from those of persons ’ ’. This circumstance is stressed in Judge Rifkind’s opinion in the Steinberg case (supra, p. 608): “ The simple fact, of course, is that generally policy and personnel do not exist in separate compartments. A change in personnel is sometimes indispensable to a change of policy. A new board may be the symbol of the shift in policy as well as the means of obtaining it.”
That may be all very well, but the upshot of this reasoning is that inasmuch as it is generally impossible to distinguish whether “ policy” or “ personnel” is the dominant factor, any averments must be accepted at their face value that questions of policy are dominant. Nowhere do these opinions mention that the converse is equally true and more pervasive, that neither the “ ins ” nor the “ outs ” ever say that they have no program to offer to the shareholders, but just want to acquire or to retain control, as the case may be. In common experience, this distinction is unreal. It was not mentioned by this court in Lawyers’ Adv. Co. v. Consolidated Ry. Lighting & Refrig. Co. (supra). As in political contests, aspirations for control are invariably presented under the guise of policy or principle. A valiant effort was made in the English case of Peel v. London & North Western Ry. (supra, p. 21) to conserve the distinction in the opinion by Buckley, L. J., who said: “ Those who are conversant with the affairs of joint stock companies are well aware that cases often arise in which the board in power are anxious to maintain themselves in power, to procure their own re-election, or to drive a policy not really in the interests of the corporation, but for some private purpose of their own, down the throats of the corporators at a general meeting, and in which they issue at the expense of the company circulars and proxy papers for the purpose of attaining that object. When a case of that kind comes before the Court, I sincerely trust that the decision of this Court in this case will not be cited as any authority for justifying the action of the directors.”
These circumstances are mentioned primarily to illustrate how impossible it is to distinguish between “ policy ” and “ personnel ”, as Judge Rifkind expressed it, but they also indicate that personal factors are deeply rooted in this contest. That is certainly true insofar as the former management group is concerned. It would be hard to find a case to which the careful reservation made by the English Judge in the Peel case (supra) was more directly applicable.
Some expenditures may concededly be made by a corporation represented by its management so as to inform the stockholders, but there is a clear distinction between such expenditures by management and by mere groups of stockholders. The latter are under no legal obligation to assume duties of managing the corporation. They may endeavor to supersede the management for any reason, regardless of whether it be advantageous or detrimental to the corporation but, if they succeed, that is not a determination that the company was previously mismanaged or that it may not be mismanaged in the future. A change in control is in no sense analogous to an adjudication that the former directors have been guilty of misconduct. The analogy of allowing expenses of suit to minority stockholders who have been successful in a derivative action based on misconduct of officers or directors, is entirely without foundation.-
The questions involved in this case assume mounting importance as the capital stock of corporations becomes more widely distributed. To an enlarged extent the campaign methods consequently come more to resemble those of political campaigns, but, as in the latter, campaign expenses should be borne by those who are waging the campaign and their followers, instead of being met out of the corporate or the public treasury. Especially is this true when campaign promises have been made that the expenses would not be charged to the corporation.
Nothing which is said in this opinion is intended as any reflection upon the motives of the insurgent group in instigating this corporate contest, nor upon the management group. Questions of law are involved which extend beyond the persons and the corporation presently before the court. It is the established law of this State that expenditures may be incurred by management limited to informing the stockholders fully and fairly concerning1 the affairs and policies of the corporation, which may
The release given to J. Carlton Ward, Jr., by the authority of his codirectors, could not have the effect of discharging liability to which they were otherwise subject upon the theory that it operated to release them as joint tort-feasors.
The judgment appealed from should be reversed so as to direct respondent Fairchild to pay to the corporation the sum of $118,448.78, with appropriate interest, representing the moneys reimbursed to him by the corporation and, upon his default, the respondent, Allis should be required to pay said sum; respondents Fairchild and Allis should be required to pay to the corporation the sum of $9,107.10, with appropriate interest, representing the amount reimbursed to L. M. Bolton by the corporation; and an interlocutory judgment should be entered for an accounting to determine what part of the $133,966, representing expenses incurred by the old board, was improperly charged to the corporation and requiring the respondents Wilson and McComas to pay to the corporation the sum thereof, and the respondents Allis and Fairchild such amounts thereof as were paid out after July 15, 1949, with costs of the action to the plaintiff in all courts.
Conway, Ch. J., and Burke, J., concur with Froessel, J.; Desmond, J., concurs in part in a separate opinion; Van Voorhis, J., dissents in an opinion in which Dye and Fuld, JJ., concur.
Judgment affirmed.