Solimine v. HollanderSolimine v. Hollander
The total stock issued by the American company and outstanding at the time the bill was filed in this cause amounted to 209,700 shares of common stock held by 1,064 stockholders.
The individual defendants filed their answers denying the wrongdoing alleged against them in complainant‘s bill, denying further that the corporate defendant had suffered any losses in consequence of any of their acts and alleging affirmatively that the action was not brought in good faith or under the honest belief that the wrongs complained of had in fact been committed. The answers further asserted that the action had been brought for the sole purpose of vexing and harassing the defendant company and its officers and directors. The answers further set up that the defendants had, as directors of said company, always acted with fidelity to their positions of trust. The answer of the American company presented a neutral attitude with respect to the controversy. That answer invited inquiry into the matters of complaint and called upon the complainant to establish the truth of his bill, so that the company itself could have and enjoy for itself and its stockholders the benefits and fruits of such accounting and other relief as the complainant for himself and all other stockholders could rightfully and equitably establish.
After the defendants had answered the bill of complaint, a stockholder owning 100 shares petitioned the court for leave to intervene as a co-complainant and to file supplemental, additional or other pleadings and for an examination of the company‘s books, records and accounts. Such leave was granted, after which the intervening stockholder filed a supplemental complaint charging the commission of additional wrongs by the directors and officers of the American company. The supplemental complaint contained charges that A. Hollander & Son, Ltd., the Canadian company, with knowledge of the wrongdoing alleged against the individual directors of the American company, had accepted and retained the benefits of that wrongdoing, such benefits consisting of the use of “secret processes, recipes, formulae, information and working methods” which, it is charged, were and are the exclusive property of the American company.
The supplemental complaint also made other specific charges of wrongdoing and alleged that as a result of the conduct of the defendants, Limited made, received and retained profits which should be decreed to be the property of the American company. Limited was thereupon added as a party defendant and voluntarily submitted to the jurisdiction of this court by filing an answer denying the allegations of the intervenor‘s supplemental complaint.
Pursuant to Chancery rule 32, the intervenor applied for an order to compel the American company to furnish him a list of the names and addresses of the stockholders. This application was resisted under the claim that misuse might be made of the list.
Research has disclosed no reported opinion dealing with this rule, although rule 32 has been included within the rules of this court since 1892. It is essential that a complainant in a stockholder‘s suit comply with its requirements.
The rule apparently was adopted as a result of the case of Ellerman v. Chicago Junction Railways, &c., Co., 49 N.J. Eq. 217; 23 Atl. Rep. 287, decided in 1891, and its companion case, Willoughby v. Chicago Junction Railways, &c., Co., 50 N.J. Eq. 656; 25 Atl. Rep. 277, decided in 1892. In the latter case the court, in discussing the res judicata effect of a decision in one stockholder‘s suit upon the rights of other stockholders similarly situated, said (at p. 661):
“The practice has long been recognized of permitting suit to be brought by a few as the representatives of a numerous class, on behalf of themselves and all others of the class, when there is a common interest or a common right which the suit seeks to protect, and against a few as representating a numerous class subject to a common liability which the suit seeks to enforce. Story Eq. Pl. § 97.
“‘In most, if not in all, cases of this sort, the decree obtained upon such a bill will ordinarily be held binding upon all other persons standing in the same predicament, the court taking care that sufficient persons are before it, honestly, fairly and fully to ascertain and try the general right in contest.’ Story Eq. Pl. § 120.”
The practice adopted by the court in the stockholders’ derivative suit of Wallen v. Duro-Test Corp. (Chancery Docket 124/54) was followed and an order was entered directing the American company forthwith to furnish and deliver to a designated special master of this court a list containing the names and addresses of the company‘s stockholders and the master was directed to mail to each stockholder a notice of the pendency, nature and object of the suit in broadest details and of the time and place designated for the final hearing thereof.
Although the notice was sent to 1,064 stockholders, only two, Morton Rosenberg and Joseph Polish, sought and were by order permitted to intervene and file additional pleadings. Rosenberg was the holder of 500 shares purchased by him in December of 1938 and Polish owned 200 shares, 100 of which he bought in April of 1937 and the other 100 in January of 1939. No such pleadings were ever filed by the intervenors, Rosenberg and Polish, although they appeared by counsel at the final hearing and aided complainant in the presentation of his proofs. The stock owned by complainant and the intervenors aggregated 900 shares, or less than one-half of one per cent. of the total outstanding stock. The final hearing occupied sixteen consecutive days. The record, including depositions taken by defendants both in Canada and in New York, covers about 1,600 pages of testimony and more than 2,500 pages of exhibits.
Before presenting the facts upon which the parties have been in contest, it is necessary to dispose of a preliminary question that has arisen with respect to the defendant Albert J. Feldman. It is undisputed that in September of 1938 he became a director of A. Hollander & Son, Inc., and was then appointed its secretary but that prior to that time he
The proofs offered in this case by the complainant and by the defendants are virtually uncontroverted. Complainant‘s case rests substantially upon the testimony of the defendant Michael Hollander and the company‘s accountant A. H. Puder (both of whom were called by complainant as his witnesses) and upon documentary evidence. None of the proofs offered by the defendants was rebutted or otherwise controverted, except only with respect to the translation of the so-called “Polish Government Bonds,” where two experts called by the respective parties differed from each other in their translations of those bonds. That conflict will be later discussed when the Eitingon Schild Fur Corporation transaction is considered.
On the third day of the submission of proofs before me, I informed counsel for both sides that owing to my other court engagements it would not be possible for me to continue sitting after the following day. Counsel desired to continue the examination of witnesses and suggested that a master be appointed to sit for the purpose of receiving the proofs. With the consent of counsel for both sides, I designated a master agreeable to both sides and informed counsel that all objections to testimony would be passed on by me at the conclusion of the case. Thereafter, the master sat until the proofs were all in and all objections to testimony were noted in the record
It should here also be noted that in the course of the final hearing the defendants objected to evidence offered with respect to a transaction with Eitingon Schild Fur Corporation on the ground that the transaction was not within the scope of the bill of complaint. The proofs were admitted subject to a later amendment to conform the bill of complaint to the proof. This was the course pursued with respect to evidence offered on other transactions not then within the scope of the pleading. In view of the serious charges against the directors, the widest latitude in the matter of evidence was permitted and the defendants consented to this unlimited investigation. The pleadings were thereafter amended.
A statement of the origin and development of the American company is important to an understanding of the issues in this case. That company is engaged in the business of dressing and dyeing furs and pelts. Although organized under the laws of the State of Delaware in 1919 its principal place of business, offices and plants are in the city of Newark. The company‘s business is essentially that of rendering labor or service to its customers. It receives from those customers the latter‘s furs or pelts in a raw state and converts the raw skin into a finished product ready for incorporation into fur garments. The company has rarely engaged in merchandising furs, although by its charter it has since 1919 been authorized “to purchase and sell fabrics, skins and furs * * *” and “to deal and trade in goods, wares, merchandise and personal property of any and every class and description and wherever situate * * *.”
The business was founded more than fifty years ago by Adolph Hollander, now deceased. In 1895 he was joined therein by his son, Harry Hollander, also now deceased. Thereafter the business was conducted by the two as a partnership under the firm name of “A. Hollander & Son.” A few years later another son, Michael Hollander — one of the defendants herein — joined the firm. Benjamin W. Hollander, also a son of Adolph, entered the firm in 1903 and Albert
In 1918 the father Adolph Hollander withdrew from the firm and his interest therein was absorbed by the remaining partners, Michael, Albert and Benjamin W. Hollander. These three continued as co-partners until June 27th, 1919, when they organized under the laws of Delaware the corporation known as “A. Hollander & Son, Inc.,” the company for whose benefit this suit is brought. All the assets of the co-partnership including its plants, equipment, business and good will were transferred by the three partners to the new company in exchange for its entire capital stock. From 1919 until 1925 the three Hollanders owned substantially all the issued and outstanding stock of the American company. This ownership continued until the consummation of a transaction between them and Merrill, Lynch & Co., a firm of New York bankers.
On October 7th, 1925, Michael, Benjamin W. and Albert Hollander entered into a written agreement with the firm of Merrill, Lynch & Co., whereby they agreed that within forty days thereafter they would recapitalize the American company so that it would have an authorized, issued and outstanding common stock of 200,000 shares of no par value, which stock would then be fully paid for and non-assessable. By that agreement the Hollanders bound themselves to sell and deliver to Merrill, Lynch & Co. and that firm agreed to buy 30,000 shares of such new common stock at $24 per share or a total purchase price of $720,000. The agreement also granted to the purchaser an option to buy all or any part of an additional 20,000 shares of such stock at the same price, such option to be exercisable up to October 7th, 1926. The agreement contained statements showing the financial condition of the company as of August 31st, 1925, and it was agreed that at the time the shares of stock would be delivered to the purchaser the company was to be in as good financial condition and was to have a net worth at least as great as that shown in a proposed balance sheet attached to the agreement
Due to the sales made by Merrill, Lynch & Co. to the public since 1925 and to sales made since that time by the three Hollanders, the public at the present time owns approximately sixty-five per cent. of the issued and outstanding stock. About 75,000 shares or approximately thirty-five per cent. of the outstanding stock is owned by the three Hollanders and members of their immediate families.
The agreement with Merrill, Lynch & Co. provided that the three Hollanders would enter into contracts with the company whereby each of said individuals would agree to
The agreement with Merrill, Lynch & Co. further contained a provision to the effect that the employment contracts with each of the three Hollanders should provide that during the period of five years from and after January 1st, 1926, the employed Hollander will not engage in or permit his name to be used or employed in any way in any business in the United States of America competitive with that of the company (A. Hollander & Son, Inc., the American corporation) either directly or indirectly, through stock ownership or otherwise. Since January 1st, 1926, Michael Hollander has acted continuously as president of the American company, Albert Hollander as its vice-president and Benjamin W. Hollander as its treasurer.
Until 1930 the American company had not directly or indirectly engaged in fur dressing and dyeing outside of the United States of America. In 1930 it for the first time extended its business beyond the United States when it took an eighty-seven and one-half stock interest in a subsidiary company organized and known as A. Hollander & Son Societe Anonyme, a French company. Since 1930 the French company has engaged in the business of dressing and dyeing furs in France. In 1937 the American company, through its wholly owned subsidiary, Competent Fur Dressers, Inc. (a Delaware corporation), purchased at a cost of approximately $10,500, all the physical assets, business and good will theretofore owned by Competent Fur Dressers, Inc., of New York, which had for several years done a small amount of business in England. It also appears from the testimony, nowhere contradicted, that the American company has never done any business in the Dominion of Canada and that due to tariff impositions there has never been any competition between the fur dressers and dyers of this country and those operating in Canada. This fact is of considerable importance in connection with the claim made by complainant that the acquisition of a Canadian business by Michael, Albert and Benjamin W. Hollander was an act violative of their duty to the American company.
I. THE ACQUISITION OF THE CANADIAN BUSINESS.
The amended bill of complaint charges that the defendants Michael Hollander, Benjamin W. Hollander and Albert Hollander as controlling officers and directors of the American company violated their fiduciary obligation in that they failed to disclose to the stockholders of that company an option to purchase the shares of Limited (the Canadian company) for $50,000 granted to them in 1922 by Adolph Hollander, their father, the owner of all of the shares of the Canadian company, and failed to disclose that said option provided that the defendants Michael Hollander, Benjamin W. Hollander and Albert Hollander might purchase said shares of the Canadian company for their own use or for the use of A. Hollander & Son, Inc. (the American company); that this was done notwithstanding the fact that the business of the Canadian company was a profitable one and within the proper and legitimate scope of the American company; that in 1927 in violation of their duties as such officers and directors the said defendants, without disclosure to the American company or its directors or stockholders and without affording an opportunity to the American company to exercise said option and thereby acquire the stock of the Canadian company, although the American company was financially able so to do, exercised said option of purchase in their own behalf and for the sole purpose of enriching themselves at the expense of and to the detriment of the American company and its stockholders. Earlier in the amended bill it is charged that the said defendants wrongfully appropriated to themselves the business opportunities, offers and interests which were peculiarly within the scope and purview of the corporate business of the American company and which it was the duty of said defendants to acquire for the American company and that the said defendants wrongfully and fraudulently utilized the assets and funds and employed the facilities and personnel of the American company in the appropriation and development of such business opportunities, offers and interests, to
The proof developed the following facts concerning the acquisition of the Canadian stock. In 1916 the four partners constituting the then firm of A. Hollander & Son decided to venture into the fur dressing and dyeing business in Canada. In December of that year they secured a charter from the Dominion of Canada for a new company to which was given the name A. Hollander & Son, Ltd. This corporation preceded in point of time the American company as a corporate entity. The stated object was to carry on in Canada the business of dressing and dyeing all kinds of fur skins. The charter permitted a capital of $100,000 to be evidenced by 1,000 shares of $100 each. The entire authorized capital (excepting one qualifying share to the company‘s Canadian counsel) was issued to the four Hollanders. Immediately thereafter that company rented a factory in Montreal and engaged as its technical head one George Payeur who had for a number of years been a fur dresser and dyer who had had considerable practical experience with dressing and dyeing formulae, some of which formulae he had himself created or developed and others of which he had received from his father. The Montreal factory was fully equipped by Payeur. No employes were brought up from the city of Newark or from any of the other factories operated by the American partnership. The Canadian employes assembled by Payeur in Canada were broken in by him and trained to process furs according to his own methods. It is also of considerable importance to note that when the Canadian company commenced its operations Payeur‘s own formulae, which were contained in a formula book, covered almost every kind of
During the first two years of its operations the Canadian company was fairly successful. In 1918 when the father, Adolph, retired from the American firm of A. Hollander & Son he desired to become the sole owner of the Canadian business. Accordingly, that year he bought out the stock interests in the Canadian company of his sons and son-in-law and continued to own all the stock of that company until 1922. During that period of four years he radically changed the character of the business of Limited. He virtually ceased all dressing and dyeing operations and allowed the company to engage almost exclusively in the business of buying and selling furs. The result of this change was disastrous. During those four years the company lost both money and prestige. By 1922 it was nothing but a mere shell, its entire surplus having been dissipated and its invested capital of $100,000 impaired.
With the business in this condition Adolph desired to get out from under and he requested his sons and son-in-law to buy him out. This they were willing to do only upon certain conditions, one of the principal of which was that the purchase price should be placed in trust for the use and benefit of Philip Hollander and Monroe Hollander, grandsons of Adolph (children of the deceased son Harry Hollander, the first partner in the business). Adolph was agreeable to this providing he would personally be secured with an annuity of $100 per week for the remainder of his natural life.
Accordingly an agreement was entered into on December 28th, 1922, between Adolph as the seller and the three Hollanders
“At any time hereafter the parties of the second part (Michael, Albert and Benjamin) may acquire the full legal and equitable title to the said shares of stock by declaring unto the party of the first part (Adolph) that they have set aside and are holding in trust the sum of fifty thousand dollars in lawful money of the United States of America in place and stead of said shares of stock and subject to the trusts and uses hereinafter provided for; and upon making such declaration in writing and delivering the same unto the party of the first part, they shall instantly become the full, legal and equitable owners of the said shares of stock unencumbered the (sic) the trusts herein place (sic) thereon.”
Contemplating that the three Hollanders might not desire personally to become the absolute owners of said stock, the agreement provides that they might sell the stock to any other person or they might transfer the stock to the beneficiaries of the trust, Philip and Monroe Hollander, but that such transfer or sale should not abrogate or diminish their liability to pay to Adolph his annuity for life. It further provided that if the three Hollanders should at any time after
The agreement of 1922 was performed between the parties. All the stock of the Canadian company was in 1922 transferred to the three Hollanders, each receiving 333-1/3 shares. They became immediately directors and officers of that company and have continued as such ever since. From 1922 to the present time the business of that company has been conducted by a general manager, who in turn is subject to supervision by the three Hollanders. For the period of almost eleven years from January, 1922, until September 27th, 1932 (the date when Adolph Hollander died) the three Hollanders personally paid to their father the stipulated annuity of $100 per week.
Under the new management of the three Hollanders the Canadian company immediately showed improvement in business and profit. The proofs showed this was due to the discontinuance of the merchandising activities of the Canadian company and to confining its business to the dressing and dyeing of skins. In 1923 it showed a net operating profit of about $10,000, in 1924 about $20,000 and in 1925 about $33,000. Not, however, until 1927 did the three Hollanders finally serve upon their father a declaration that they were holding in trust the sum of $50,000 in place and stead of
The sale of 50,000 shares of the stock of the American company to Merrill, Lynch & Co. was predicated upon a certain fiscal condition of the American company, guaranteed by the agreement between the parties to be in effect at the time the sale was to be consummated. Identified assets amounting to approximately $800,000 and shown on a schedule attached to the Merrill, Lynch agreement were to be withdrawn from the company‘s holdings. The option received by the three Hollanders from their father in 1922, under which option they might acquire the absolute ownership of the Canadian stock, was not an asset shown on the financial statements nor reflected in the price agreed to be paid by the purchaser, the Merrill, Lynch firm. The fact that the Canadian business was not to be included is not left to speculation or inference. The testimony establishes that when the Merrill, Lynch transaction was being negotiated with Mr. Charles Merrill of that firm, Mr. Michael Hollander informed him of the Canadian option, the nature thereof and that the option was held by the three Hollanders personally. Mr. Merrill took the position that he was not interested in any foreign enterprise and that Merrill, Lynch & Co. did not want the Canadian business to be included in the deal. Thus the purchaser of the 50,000 shares was fully informed of the fact that the three principal officers of the American company personally held an option agreement under which they could at any time personally acquire the ownership of the Canadian business by acquiring the final and absolute ownership of the
Complainant contends that the opportunity to acquire the Canadian business presented itself to the three Hollanders in 1927 when it was embraced by the service of the aforementioned notice upon Adolph Hollander and the opportunity was one that properly belonged to the American company for the following reasons:
(1) That the opportunity was a corporate opportunity because it was related to the same line of business as that in which the American company was engaged and within its reasonable needs for expansion or that the opportunity was one in which that company had an interest or reasonable expectancy.
(2) That the three Hollanders were prohibited from acquiring the Canadian business because by so doing they would injure or hinder the business of the American company.
(3) That the opportunity belonged to the American company because in the acquisition or development of that opportunity the assets and facilities of the American company were employed.
It is claimed by complainant that the three elements above stated need not co-exist and that it is sufficient if any one of them is found to be present. Without recognizing that to be the rule of law, the proofs indicate that none of the three elements exists.
In the case of Loft, Inc., v. Guth, 2 Atl. Rep. 2d 225, 239 (Del. Ch. 1938); affirmed, 5 Atl. Rep. 2d 503 (Del. 1939), relied upon by complainant, the Chancellor stated the rule of corporate opportunity as follows:
“The defendants state as a proposition of law that ‘where a business opportunity comes to an officer or director in his
individual capacity rather than in his official capacity as an officer and director, and the opportunity is one which, because of the nature of the enterprise, is not essential to his corporation, and is one in which the corporation has no interest or expectancy, the officer or director is entitled to treat the opportunity as his own, and the corporation has no interest in it.’ The proposition, as stated, is in the main acceptable. In support of it, the defendants cite the cases of Colorado and Utah Coal Co. v. Harris Co., 97 Colo. 309; 49 Pac. Rep. 2d 429; Lagarde v. Anniston Lime and Stone Co., 126 Ala. 496; 28 So. Rep. 199; Pioneer Oil and Gas Co. v. Anderson, 168 Miss. 334; 151 So. Rep. 161; Railroad Co. v. Stubbs, 77 Me. 594; 2 Atl. Rep. 9; Lancaster Loose Leaf Tobacco Co. v. Robinson, 199 Ky. 313; 250 S.W. Rep. 997. While these cases support the proposition for which they are cited, they also recognize its converse as equally established. The complainant contends that it is not the proposition but its converse that is applicable under the facts of the instant case. As indicated in Pioneer Oil and Gas Co. v. Anderson, supra, cited by the defendants, whether a given case falls within the proposition or within its converse, it is impossible to determine by any hard and fast rule. Each case is classified by its own individual facts. “An examination of the cases cited by the defendants will disclose that in all of them the fundamental fact of good faith was found in favor of the director or officer who was charged with dereliction. In one or more of them it will also appear that the corporation was unable for one reason or another to acquire the property, or the matter of its acquisition was not of practical but of merely theoretical interest to it, or that the accused officer made no use whatever of his corporation‘s funds, or that the so-called expectancy which the defendant director embraced was not in the line of the corporation‘s business.”
It is clear from an analysis of the two opinions in the Loft Case, as well as of the numerous authorities cited therein, that a finding of “corporate opportunity” will be denied (a) wherever the fundamental fact of good faith is determined in favor of the director or officer charged with usurping the
That the opportunity to acquire the Canadian stock came to the three Hollanders in their individual capacity admits of no reasonable dispute. The option agreement of 1922 ran to them personally and was induced mainly, if not solely, by the blood relationship which existed between the grantor of the option and themselves. The agreement so states. Underlying that agreement and permeating all its provisions is the father‘s desire to secure for himself a life annuity and the sons’ desire to create a trust fund for their nephews, his grandsons. Nowhere in the agreement appears any suggestion that the opportunity to buy the Canadian stock was intended for the benefit of the American company. The two references to that company do not indicate any intention on the part of the grantor to furnish to it any right or opportunity. The first reference to Adolph‘s desire that the stock be acquired by the three Hollanders or their company must be interpreted in the light of the fact that from the viewpoint of a layman the three persons and the company were then, in 1922, one and the same interest. The second reference to the company was merely intended to cover a situation arising if the three Hollanders sold the stock, neither to themselves nor their wholly owned company, but to some third person. The very provision in the agreement enabling the three Hollanders personally to acquire the absolute ownership of the stock by the service of a mere declaration is inconsistent with any notion that by the agreement of 1922 any of the
Complainants insist that the opportunity to acquire the Canadian stock must be regarded as having presented itself in 1927, when, as they claim, it was embraced by the option
In the Loft Case, it was contended that the right of Guth (Loft‘s president) to appropriate a certain business opportunity for himself depended upon circumstances present when the opportunity arose, and this without regard to events subsequently occurring. The Supreme Court of Delaware so held, saying:
“Leaving aside the manner of the offer of the opportunity, certain other matters are to be considered in determining whether the opportunity, in the circumstances, belonged to Loft; and in this we agree that Guth‘s right to appropriate the Pepsi-Cola opportunity to himself depends upon the circumstances existing at the time it presented itself to him without regard to subsequent events, and that due weight should be given to character of the opportunity which Megargel envisioned and brought to Guth‘s door.”
Complainants argue that the effect of the agreement of 1922 was to present to the three Hollanders the opportunity to acquire the Canadian stock “every day, every hour, every moment of the time between 1922 and 1927” and that “the moment at which Michael Hollander, Benjamin Hollander and Albert Hollander exercised the option and took unto themselves A. Hollander & Son, Ltd., was as much a moment of presentment of the opportunity to them as was the moment when Adolph Hollander gave them the option in 1922.” They argue, further, that if in 1922 Adolph had made an offer which the three Hollanders turned down and then in 1927 renewed the offer, its acceptance then by the individuals would constitute a breach of fiduciary duty. The difficulty with this argument is that it overlooks the actual facts. The option furnished by the 1922 agreement and the trusts thereby created were irrevocable not alone by force of law but by the expressed intention of the parties. That option was in
The court is not concerned with the fact that the $50,000 intended to be set up as a trust fund in lieu of the Canadian shares of stock was not actually set up as such. The only ones who might have complained of that circumstance are the beneficiaries of that trust, Philip and Monroe Hollander. No one else has an interest in that question. Those beneficiaries by formal agreement waived the failure to set up the trust fund and accepted instead the personal obligation of the three Hollanders, secured collaterally by the Canadian shares of stock. The stockholders cannot be heard to complain on this score.
An examination of the cases cited leads to the conclusion that the claim of “corporate opportunity” is best tested by the rules expressed by the text writers. In 14A Corp. Jur. § 1883 the rule is well stated as follows:
“Whether in any case an officer of a corporation is in duty bound to purchase property for the corporation, or to refrain from purchasing property for himself, depends upon whether the corporation has an interest, actual or in expectancy, in the property, or whether the purchase of the property by the officer or director may hinder or defeat the plans and purposes of the corporation in the carrying on or development of the legitimate business for which it was created. * * *”
“When acting in good faith, a director or officer is not precluded from engaging in distinct enterprises of the same general class of business as the corporation is engaged in; but he may not enter into an opposition business of such a nature as to cripple or injure the corporation. * * *”
There is one other rule that might here be stated, one invoked by complainant and drawn from the decision of the Loft Case and those kindred to it. A director or officer of a corporation cannot use corporate assets to acquire, finance or develop his own individual business project or venture and insist that either the venture or the profits thereof are his own property. When such diversion or misappropriation of corporate assets is established, the aggrieved principal may elect either to recover the diverted assets or enforce a constructive trust with respect to the venture and its resulting profits. This rule is not peculiar to the liability of directors and officers but underlies all fiduciary responsibility.
The foregoing rules, respecting which there is almost complete unanimity in the cases, were summarized by the Appellate Court in the Loft Case when it said:
“It is true that when a business opportunity comes to a corporate officer or director in his individual capacity rather than in his official capacity, and the opportunity is one which, because of the nature of the enterprise, is not essential to his corporation, and is one in which it has no interest or expectancy, the officer or director is entitled to treat the opportunity as his own, and the corporation has no interest in it, if, of course, the officer or director has not wrongfully embarked the corporation‘s resources therein.”
Tested by the several stated rules, complainant has failed to show that the opportunity to acquire the Canadian business through the acquisition of the Canadian stock was an opportunity rightfully belonging to the American company and one which the three Hollanders were not free personally to embrace. The facts clearly demonstrate that the opportunity came to them in their individual capacities and was merely an opportunity to reacquire a business founded by them even
Nor was the opportunity one essential to the American company. The business of that company and its predecessor partnership had been operated within the confines of the United States so successfully that long before 1922 the American company had become the leader in this country and the largest concern of its kind in the world. This position of pre-eminence was achieved despite the fact that the American company and its predecessor partnership had never prosecuted its business in Canada or in any other foreign country. Extension of its business into foreign territory may have been desirable but certainly was not essential to its business or continued prosperity. It may well be that the establishment of branches in South America, Europe, Australia, New Zealand and other parts of the world would have been desirable as measures of expansion but it surely cannot be claimed that that was so essential to the company‘s business that those other fields were forbidden to the individual enterprise of the company‘s directors. It is not within the right of a company so to pre-empt for itself all possible fields not contemplated by its existing business and into which other fields it might never thereafter venture. The opportunity to acquire a likeness in any of those foreign countries was not in 1922 or even in 1927 essential to the protection of the company‘s American business. The situation may have been different with respect to France after 1930 (when the French company was organized) or with respect to England after 1937 (when the Competent Fur Dressers business was acquired) but neither of these developments had yet come to pass by 1922 or 1927 and there is no proof before me that such expansion was ever contemplated prior to the years in which it occurred. If the company could pre-empt Canada, it could pre-empt
“Harris, as such representative, could embark upon no business which would cripple or injure his principal or acquire interests adverse to it if thereby he would hinder or defeat the very purpose of its organization. But, if he had no duty to act or contract for it with respect to the property in question, he was at liberty to act for himself. Bisbee v. Midland L. P. Co. (C. C. A.), 19 Fed. Rep. 2d 24, 28.
“There being here no existing right, plaintiff must, and does, rely upon expectancy. * * *
“These parties are operating in a territory containing coal deposits of vast, we might almost say of unlimited, extent. Such is the condition of this record as to force the conclusion that, if plaintiff had an interest in expectancy in the property in question, it had a virtual monopoly of extensive fields into which its officers and directors were forever precluded from entering. We find in the authorities, and in reason, no support for such an extension of the doctrine of expectancy. If Harris had no duty to acquire for, or offer to, his company the property in dispute, and we think there is ample evidence to support the trial court‘s conclusion to the contrary, he had
a right to acquire it for himself. Carper v. Frost Oil Co., 72 Colo. 345, 348; 211 Pac. Rep. 370. “Even had Harris gained all his knowledge through his connection with plaintiff, and even had plaintiff been, in a general way ‘negotiating for and endeavoring to purchase’ the interests involved, something more is required to establish the essential expectancy and bar Harris from acquiring individually. Lagarde v. Anniston Lime and Stone Co., 126 Ala. 496; 28 So. Rep. 199; Zeckendorf v. Steinfeld, 12 Ariz. 245; 100 Pac. Rep. 784.
“For plaintiff to prove its expectancy, which was the very crux of its case, we think it was bound to establish, not only that the properties in question possessed value to it, but that it had a practical, not a mere theoretical, use therefor * * *.”
The uncontroverted testimony before me establishes that when the three Hollanders concluded their sale of stock to Merrill, Lynch & Co. in 1925, they entered into employment contracts with the American company wherein they covenanted that for five years ensuing the 1st day of January, 1926, they would not engage in any business in the United States of America competitive with that of the employing company, and that this restriction was designedly confined to the United States so that they would be left free to prosecute their Canadian business. The proofs are to the effect that the territorial limits expressed in the covenant were put in as a result of the information and knowledge that Merrill, Lynch & Co. had concerning the Canadian business, the operation thereof by the three Hollanders and their outstanding option to acquire personally that business by the purchase of the Canadian stock. The exaction of the restrictive covenant corroborates the exclusion of the Canadian company from the 1925 transaction.
The subsequent and continued growth and success of the Canadian enterprise cannot now be pointed to as a reason why it would have been very beneficial to the American company and its stockholders had the Canadian business been absorbed into the American company at the time of the Merrill, Lynch transaction. The company‘s right to the Canadian opportunity is determinable as of the time the opportunity first
Nor was the Canadian business one in which the American company had any interest or expectancy. It was no party to the option agreement of 1922 nor was that agreement taken for its benefit. The right of the three Hollanders to sell that business to their own company was a right in them which they might or might not exercise as they themselves saw fit. That right was no different than their right to sell the Canadian stock to an utter stranger. It was a right but not a duty.
There is nothing in the case from which can possibly be spelled out an existing right in the American company either at the time the option was secured in 1922 or at the time it was exercised in 1927. Cases where the company has been held to be possessed of an existing right are such as Lagarde v. Anniston Lime and Stone Co., supra, where the directors secured for themselves two interests, in one of which their company already possessed rights under a lease and contract of purchase. In the case at bar the American company possessed no right which it could have enforced either against Adolph Hollander, the grantor, or the three Hollanders as the grantees of the option. Nor did the American company have any expectancy with respect to the Canadian business. In the Lagarde Case such expectancy was defined as one “growing out of an existing right.” Although the Lagarde
The complainants argue that by acquiring the Canadian business the three Hollanders hindered or injured the American company and were brought into competition with it. The facts demonstrate that the American company and the Canadian company never competed with each other. Each serviced its own separate field of opportunity without overlapping or encroachment. In point of competition, the respective fields of activity of the two companies were remote, for the proofs showed that the tariff barriers between the United States and Canada are in this field of business economically insuperable. This accounts for the fact that there has been no competition between Canadian fur dressers and dyers and those in the United States. Therefore, the purchase by the three Hollanders of the Canadian business did not create or produce the slightest competition with the American company. Nor did that purchase alter or expand the conditions prevailing at the time of the purchase. From 1917 forward, Limited has pursued its Canadian business. The purchase of its stock by the three Hollanders did not inaugurate its business or create a new situation; it merely accomplished a change in the ownership of the stock. Nor did that stock
It is charged by the complainants that the Canadian business was developed by the three Hollanders by the employment of the funds, resources and facilities of the American company.
If this were the fact, a constructive trust would be decreed in favor of the American company that the Canadian shares of stock are the property of the former. The claim, however, is wholly unsupported by proof and is based upon a misconception of the facts concerning an arrangement between the two companies for mutual aid and assistance. Those facts are as follows:
The arrangement originated in 1917, when the Canadian company was organized and several years before the American
Some of the formulae and working methods of the American company were the result of experimentation in its own plants. Some were acquired under license agreements or purchase, others by the purchase of other fur processing concerns, and many as a result of arrangements between the American company and foreign non-competing companies for exchange of formulae and trade information. The arrangement between the American and Canadian companies was not unique. The American company had similar arrangements with the firm of Wachtel and the firm of Arnhold, both being fur processing concerns in Germany, in neither of which foreign concerns were any of the individual Hollanders financially interested. Under those arrangements the German
A great deal of evidence respecting the interchange of information between the American and Canadian companies was supplied by the defendants. By this proof it is established that the Canadian company took relatively little of value but conferred tremendous benefit upon the American company. Such preponderance of benefit in favor of the American company is hardly necessary in order to persuade me that the arrangement was fairly and honestly entered into and that the arrangement was not a subterfuge for the diversion of valuable assets and property from the American company to the Canadian company. If such arrangement be grounded in honesty and fair dealing, it matters not which of the parties to the arrangement may at any given time enjoy the greater benefits under it. It is conceivable that under such an arrangement the scales would fluctuate and that at various times one or another of the parties to the arrangement might enjoy the greater amount of advantage. Yet, it cannot be overlooked, what has been demonstrated in this case, that much of the success of the American company is due to the help and information furnished by the Canadian company and the latter‘s working personnel. The Canadian, Payeur, who was shown to be a technician of wide experience and creative skill, testified that the Canadian company furnished to the American company about four times as much information and help as it received. This interchange of information does not nor need lend itself to mathematical appraisal. Certain it is, however, from the proofs adduced, that the American company received over the years considerably more information and help than it ever furnished to the Canadian company. While the two companies emphasized in their business the conversion of muskrat into what is known in the trade as “Hudson Seal,” that being the principal product of each company, there were considerable points of difference between their enterprises. The American company has been a specialist in its field, working on but few types of skins and making its profits through volume production,
The proofs establish that in each of the two companies the so-called “Light Goods or Fancy Colors” Department has meant little by way of profit. The American Company consistently lost money in its fancy goods department until it acquired from the Canadian company gratuitously the latter‘s process for mink blend on muskrat; the Canadian company succeeded in making a little profit in its fancy goods department. It is clear that with a single exception, hereinafter set forth, the American company assisted the Canadian company with corrective information only with respect to the latter‘s fancy goods production. On the other hand, the Canadian company‘s assistance to the American company related chiefly to the latter‘s Hudson Seal production. This alone would seem to indicate that such help as the American company received was in direct relation to its most important item of production while the help that the Canadian company received related to its fairly unimportant fancy goods production.
On several occasions the Canadian company saved the day for the American company in the latter‘s production of Hudson Seal. In 1925 serious trouble developed in the plants of the American company in the processing of the muskrat. The difficulty was so grave that the company was about to discontinue that item. Mr. Payeur was requisitioned from Montreal and he spent several weeks at the Newark plant showing the workingmen there just how that type of “rat”
In 1933 the Canadian company made a complete change in its method or system of handling the muskrat. In 1935 the American company again ran into some new and serious difficulty with the muskrat, and again at the very peak of its season. The American customers were dissatisfied and complained of the article. Mr. Payeur was at once summoned from Canada and he immediately installed in the Newark plant the entire Canadian method of handling the muskrat which he had inaugurated in Montreal two years earlier. That method, too, was radically different from the one then in use in Newark. By this substitution the American company avoided claims for damages and produced an article which proved acceptable in the trade. The new method proved so satisfactory that the American company gave it the trade name of “Vita Hair.” The American company is still using the name and method.
In 1939 the Canadian company made some changes to the Vita Hair process. Thereupon Mr. Weiser of the American company went to Montreal to study these changes. Finding them satisfactory he brought them back to Newark and installed them in the Newark plant. These changes accomplished
Only once did the Canadian company require help on its muskrat article. In 1937 some production difficulty developed in Montreal which was solved by one of the American dyers going to Montreal and suggesting points of correction.
Complaint is made that the Canadian company was permitted to employ a secret process, known as “Hollanderizing” for the cleaning of fur garments and also to employ the trade name of “Hollanderizing.” The evidence demonstrates that the process was not a secret one and in substance is known to all furriers. Even if it were a trade secret, the furnishing thereof to the Canadian company was well within the scope and spirit of the arrangement between the two companies for the interchange of all technical formulae, processes and information. While it is true that the American company adopted the name “Hollanderizing” about a year before the Canadian company adopted the same trade name, there is nothing serious in it. The Canadian company had rightfully used the name “Hollander” since 1917 and coining that name into the trade name “Hollanderizing” can hardly be regarded as a trespass. Certainly not in view of the fact that fur garments are not sent from either country to the other for the purpose of being cleaned.
There is evidence, also, of occasional assistance given by each company to the other in connection with the Hollanderizing process. Here, too, the advantage has been with the American company. Certain changes suggested and furnished by the Canadian company have resulted in a saving to the American company of $12,000 for each annual garment-cleaning season. No service of comparable value has ever been furnished to the Canadian “Hollanderizing” business. Canada‘s Hollanderizing business has been conducted at a consistent loss.
In 1938, one of the American company‘s key men went to Montreal for the purpose of experimenting there with a Persian lamb formula obtained by him the preceding year
In 1939 the Canadian company furnished to the American company the process of blending raccoon coats so that the latter would resemble silver fox. That item was installed in the Newark factories by Canadian employes who came from Montreal and instructed the American employes in the practical use thereof.
Perhaps the most important contribution made by the Canadian company to the American company was in 1938, when the former furnished to the latter a formula and method for mink blending on muskrat. That item had never before been produced in any of the factories of the American company but had been worked on by the Canadian company. The item was perfected in Montreal by Feldman and Payeur, two employes of the Canadian company. In 1938, Feldman and one of his assistants came to the Newark plant and there imparted to the representatives of the American company the formula and method and actually put it into practical
There is no support in the evidence for the claim that manpower was diverted from the American company to the Canadian company. It is true that on occasion the American company would help out by sending one or another of its men to Montreal to be of some assistance there. Those occasions are not shown to have been many or the period of assistance of long duration. On the other hand, the evidence shows that the Canadian company sent its master dyer, Payeur, and various others of its practical men to the American company‘s plants to help eliminate production difficulties, to install new methods, to instruct American employes and to render other services of importance. Figures of time spent are available only for the years from 1937 to 1939. It is impossible, nor is it necessary, to determine which company furnished to the other more men and more hours of assistance. Particularly is this true because most of those American employes who occasionally went to Montreal went there to secure information or receive training for the benefit of the American company. Measuring, however, the exchange of personal service by the value of the information exchanged, it is very clear that the American company received and
On the score of machinery furnished by the American company to the Canadian company, the latter was always at a disadvantage. It was proved that the American company made a practice of selling its old and discarded machinery to the Canadian company and charging therefor good prices. That machinery was paid for by the Canadian company at the invoice prices but rarely without complaint. Many, if not most, of the machines sold and shipped to the Canadian company were in such condition that the latter was obliged to make substantial outlay for repairs and reconstruction. There is no evidence that any of the machinery was under-priced or was not paid for in due course. The correspondence in evidence is illuminating that on the machinery transactions the Canadian company enjoyed neither favor nor advantage.
The chemicals purchased through the American company were invoiced to the Canadian company at cost and were paid for in due course. On the other hand, the Canadian company was enabled to buy certain chemicals in Canada at prices lower than what was being paid for those chemicals by the American company. Limited made those purchases for the American company, paying therefor with its own funds and merely charging the American company on the basis of cost. Thus there were mutual running accounts between the two companies which were periodically settled by payment. There can be no cause of complaint on this point.
The representatives of the two companies would occasionally exchange information concerning cost of chemicals, dyestuffs, sawdust, machinery and almost everything used in production. These occasional check-ups proved to the mutual advantage of the two companies and frequently resulted in
Before leaving these facts, it should be mentioned that the Canadian company has for years serviced the business of the French company in Canada, making no charge for that service. It consisted of submitting samples for the French company, quoting the latter‘s prices and looking after its deliveries. The Canadian company‘s salesmen also attended to collecting accounts for the French company and settling its occasional disputes with its Canadian customers. The expenses involved in this service, such as cables to France and other items, have been borne by the Canadian company without reimbursement. In addition to the foregoing, the Canadian salesmen also serviced the American company by furnishing to it names of American buyers attending the Canadian fur auction sales. The purpose of this was to enable the American company‘s salesmen to follow up the prospects and secure for the American company the processing of the raw skins bought in Canada and imported into this country. All of these services are rendered to the American company gratuitously.
It might also here be mentioned that many of the formulae and much of the information requisitioned by the Australian and New Zealand concerns under their agreements with the American company for exchange of information are furnished by the Canadian company, although the latter does not participate in the $2,500 annual royalty payable to the American company by the Australian and New Zealand concerns. Such formulae and information are furnished by the Canadian company gratuitously and only because it is regarded as part of the long standing reciprocal arrangement between the Canadian company and the American company. Limited‘s facilities for furnishing that service to the foreign concerns have been better than those of the American company because of Limited‘s wider experience in all kinds of furs. This and many other instances demonstrate the meticulous attitude adopted by the American directors in their dealings between America and Canada. All transactions
Complainant endeavors to have such of the various services, above enumerated, as were rendered by the American company to the Canadian company construed as acts of diversion of the assets, resources and facilities of the American company. This argument would have force only if the American company had received no consideration therefor. The contrary is the fact. The American company has received manifold recompense for all the information and other assistance rendered by it to the Canadian company. On the whole, the American company has taken under the reciprocal arrangement appreciably more than it furnished and it is vastly the gainer thereby. The reciprocal feature of the arrangement between the two companies and the benefits gained thereunder by the American company fully justified such aid and assistance as the testimony in this case shows was rendered by the American company to the Canadian company. The arrangement obtaining between the two companies for over twenty years was entered into bona fide and has during the intervening years been observed in good faith and with all honesty of purpose.
There is evidence that within recent years the Canadian company in advertising its products in the Canadian press simulated several of the trade-marks and one slogan used by the American company in its advertising literature. It was also proved that in 1938 the Canadian company adopted and used in its Hollanderizing business a tag identical with that used by the American company in its Hollanderizing business. Noticeable, however, is the fact that in all its advertising matter (excepting the tag) the Canadian company clearly and distinctly used its own corporate name with appropriate prominence to the word “Ltd.” While the simulation is undoubtedly a form of plagiarism, there is no ground for complaint at the suit of any stockholder of the American company. No injury could possibly have resulted to the American company for the arrogation by Limited of several trade names and a trade slogan. Inasmuch as each company
We are now brought to the subject of what are said to have been loans made by the American company to Limited. Whether these were or were not loans is one of the disputes calling for decision. Complainant contends that they must be regarded as loans because the amounts thereof were charged to Limited in an account with Limited appearing on the books of the American company. Complainant‘s evidence relating to these alleged loans consisted of defendants’ answer to an interrogatory put by the complainant. The interrogatory asked whether the American company had loaned any money to Limited at the time of and subsequent to the incorporation of Limited. The answer to the interrogatory stated that the American company was not in existence when Limited was incorporated. (Inferentially the answer was that no money was loaned at the time Limited was incorporated because the American company was not yet in existence.) The fuller answer, however, stated that between 1929
Date of Advance Amount of Advance Date of Repayment
Jan. 21, 1929 $1,000 June 24, 1929 Dec. 3, 1930 20,000 Dec. 29, 1930 Sept. 30, 1931 10,000 Dec. 30, 1932 Sept. 22, 1931 26,000 Dec. 26, 1933 Mar. 29, 1933 7,500 Dec. 24, 1934 Jan. 31, 1934 2,000 Dec. 26, 1934 Jan. 8, 1934 10,000 Dec. 26, 1934 Dec. 26, 1935 2,500 Dec. 21, 1936 Mar. 3, 1937 15,000 Dec. 28, 1938
It is not disputed that reimbursement for all of the foregoing was made by Limited. The contest is over the question of interest, the complainant contending that interest should have been paid on these advances. The defense is that these advances were not loans and that none of the items shown was for money passing from the American company to Limited but that all the items were merely debit entries on the books of the American company in connection with transactions intended and occurring solely for the benefit of the American company. Defendants claim that these advances did not represent moneys for which Limited ever became indebted and that therefore there can be no valid claim for interest without the presence and support of a legal debt.
The defendants were not able to furnish any details concerning any of the advances other than the last two. The first seven entries remain unexplained except as it is testified that none of the advances were for the benefit of Limited and that all of them were for the benefit of the American company. The testimony is to the effect that Limited always had ample bank credit and never required any money from the American company for the operation of its business or for the purchase of securities. This explanation carries with it conviction for two reasons. The two explained items show
The $15,000 item is illuminating, for it shows the readiness of the three Hollanders to make personal sacrifice and accept personal loss for the benefit of the American company. That $15,000 debit arose under the following circumstances. Herskovitz, a customer of the American company, offered it 100,000 muskrat skins for processing upon condition that he receive a quotation of five cents per skin below the price established by the American company. This would have meant a concession of $5,000. Mr. Michael Hollander refused to lower the fixed price of the American company but in order to get the business for the American company he arranged with Herskovitz that the latter should buy in the open market 1,000 shares of the American company‘s stock and that the Canadian company would guarantee Herskovitz against any loss. The customer, however, declined to advance the $15,000
The $2,500 item is quite of the same character. Mr. Leber, counsel for the American company, went to Europe in 1935 to adjust a contract between the American company and Lindner & Merkel of Germany. Counsel‘s bill for that service was $5,000. The secretary of the Hollander company thought the bill should be reduced by $2,500, but the president thought differently. The matter was solved by the American company paying Mr. Leber‘s bill in full and charging $2,500 thereof to Limited. That charge was paid by Limited although it had no interest in the services rendered by Mr. Leber and although neither he nor his firm had rendered any professional service to Limited since 1916. Here again a charge was made against Limited and paid by it for something which was neither a loan nor an advance for its benefit.
There are a number of other instances furnished by the evidence where in order to induce business for the benefit of the American company Mr. Michael Hollander guaranteed its customers against loss on their stock purchases and subsequently saddled those losses upon the Canadian company. In view of the illustrations furnished and the entire conduct and testimony of the witness on the stand, the court accepts his statement that none of the seven other advances represented moneys loaned to Limited or advanced for its benefit and that all the nine debits relate to transactions intended to benefit only the American company. It need only be added
Finally, the arrangement between the American and Canadian companies for the interchange of technical assistance and information must be regarded as a transaction between two companies having common directors. The Canadian company
“Under ordinary circumstances, a director who deals with his corporation has the burden of sustaining the fairness of the transaction when it is attacked by the corporation, because the director is a trustee for the corporation and his dealings with his cestui que trust are regarded with suspicion. A contract, therefore, made between a corporation and a director of such corporation is voidable at the option of the corporation. Such option, however, belongs to the corporation and is not exercisable by a minority stockholder unless the contract is ultra vires, fraudulent or oppressive. See Mitchell v. United Box Board and Paper Co., supra; Endicott v. Marvel, 81 N.J. Eq. 378, 382, 383 (Ch. 1913); 87 Atl. Rep. 230; Lillard v. Oil, Paint and Drug Co., 70 N.J. Eq. 197, 205 (Ch. 1903); 56 Atl. Rep. 254; United States Steel Corp. v. Hodge, supra; Colgate v. United States Leather Co., 73 N.J. Eq. 72 (Ch. 1907); 67 Atl. Rep. 657; Bingham v. Savings Investment and Trust Co., 101 N.J. Eq. 413 (Ch. 1927); 138 Atl. Rep. 659; affirmed, 102 N.J. Eq. 302 (E. & A. 1928); 140 Atl. Rep. 321; General Investment Co. v. American Hide and Leather Co., 97 N.J. Eq. 230 (Ch. 1925); 127 Atl. Rep. 659; Stephany v. Marsden, supra.
“The rule that a contract between a director and his corporation is voidable at the option of the corporation has not, however, been applied to contracts between corporations having one or more common directors. Robotham v. Prudential Insurance Co., supra; Pierce v. Old Dominion, c., Smelting Co. et al., 67 N.J. Eq. 399 (Ch. 1904); 58 Atl. Rep. 319; Hyams v. Old Dominion Copper Mining and Smelting Co., 82 N.J. Eq. 507 (Ch. 1913); 89 Atl. Rep. 37; affirmed, 83 N.J. Eq. 705 (E. & A. 1914); 92 Atl. Rep. 588; Marcy v. Guanajuato Development Co. et al., 228 Fed. Rep. 150; General Investment Co. v. American Hide and Leather Co., supra.”
Complainant contends that the mere presence of directors
The directors here have sustained that burden. They proved that the transaction under consideration was honestly conceived and carried out and has at all times been fair and untainted by fraud.
Adverting to the claim of corporate opportunity, above considered, the defendants have pleaded acquiescence and laches. It has already been stated that in 1925, Merrill, Lynch & Co. knew all about the Canadian option and the operation of the Canadian business by the three Hollanders. Merrill, Lynch & Co. as the purchaser of 50,000 shares and the three Hollanders as the holders of the remaining 150,000 shares then constituted the entire body of stockholders. They all knew of the Canadian option and, of course, acquiesced therein. All present stockholders are possessed of derivative holdings and trace their title to the original holders of the 200,000 shares in 1925. The present stockholders are, therefore, bound by the acquiescence of their predecessors in title and are estopped from advancing the claim of corporate opportunity. Wallen v. Duro-Test Corp. (unreported, see Chancery Docket Book 124, page 54); Trimble v. American Sugar Refining Co., 61 N.J. Eq. 340 (Ch. 1901); 48 Atl. Rep. 912. In the Duro-Test Case Vice-Chancellor Fielder said:
“Duro-Test was then a closed corporation in which neither complainant nor any member of the public was financially interested. The stockholders of Duro-Test having all assented to the several transactions with full knowledge of the facts, could not be heard to complain thereof as individuals or on behalf of the corporation (Arnold v. Searing, 73 N.J. Eq. 262 (Ch. 1907); Whitfield v. Kern, 122 N.J. Eq. 332 (E. & A. 1937)) and it would
seem that complainant, having acquired his stock direct from Bilofsky as hereinafter stated, would be bound by Bilofsky‘s assent to and approval of the transactions. Trimble v. American Sugar Refining Co., 61 N.J. Eq. 340 (Ch. 1901); Hodge v. U.S. Steel Co., 64 N.J. Eq. 90 (E. & A. 1902); Goodnow v. American Writing Paper Co., 72 N.J. Eq. 645 (Ch. 1907); affirmed, 73 N.J. Eq. 692 (E. & A. 1908).”
In the Trimble Case, supra, Vice-Chancellor Pitney said:
“With this preliminary observation, I further remark that the bill does not state at what time complainant acquired the 100 shares of stock which he holds, and it is common knowledge that the stock of this company, and many others of the same class, is daily dealt in on the Exchange. For aught that appears, he may have acquired it a very short time before the filing of the bill, from a holder who had acquiesced in everything that the company had done up to that time and in the policy the carrying out of which the complainant seeks to enjoin. That such acquiescence would bar the original holders of the shares now held by the complainant, if he knew of it, is perfectly well settled. It is necessary, on this point, only to refer to the case of Rabe & Cross v. Dunlap, 51 N.J. Eq. 40 (Ch. 1893). And it seems to me that where a person holding so small a fraction of the capital stock as the complainant represents here asks to interfere with a particular phase of the management of the corporation, which is presumably satisfactory to all the other stockholders, he ought to show affirmatively that neither he nor his predecessor in title has acquiesced in the policy of which he now complains, for I think he would be bound by the acquiescence of his predecessor in title.”
The complainant and the other stockholders are here bound by the acquiescence in 1925 of their predecessors, the three Hollanders and Merrill, Lynch & Co., and are estopped from making the claim of corporate opportunity. This makes it unnecessary to discuss the defense of laches.
II. THE JOSEPH HOLLANDER TRANSACTION.
There are only two claims made with reference to this transaction. The first appears in the intervenor‘s supplemental
These two matters call for a brief statement of the facts. Joseph Hollander, who recently died, was an uncle of the three individual Hollanders and had for a great many years been engaged in Newark in the business of dressing and dyeing furs. From about 1918 forward, he conducted his business under the corporate name of Joseph Hollander, Inc. In 1934, A. Hollander & Son, Inc., brought suit in this court against Joseph Hollander and his said company, claiming that the latter were competing unfairly in the manner in which they were using the name “Hollander.” The relief that was sought was to restrain the defendants there from using any name whereof the name “Hollander” would be a
The purchase price for the acquisition of the business and property of the defendant company was the subject of much difference of opinion and considerable negotiation. Joseph Hollander wanted a half million dollars for his business and property, to be paid in cash. A. Hollander & Son, Inc., offered initially a price of $100,000 and wanted that paid over a period of years without interest. Six months’ bargaining brought the parties to an understanding. The price was fixed at $275,000 for the Joseph Hollander company‘s business, good will, real estate, formulae, processes, machinery and other physical assets. The sellers finally agreed to take their money over a period of nine years, without interest, but
A step in the carrying out of the settlement was the incorporation by A. Hollander & Son, Inc., of a New Jersey company known as the Perfection Fur Dressing & Dyeing Co., Inc., all the stock of which company was taken by the former so that Perfection was and continued to be a wholly owned subsidiary of the American company. That company consummated the settlement, taking in its own name all instruments of transfer. It took in its own name the nine-year lease for the Joseph Hollander plant at a reserved net annual rental of $15,000. The gross rental for the period, amounting to $135,000, was payment pro tanto of the amount for which the parties settled. On January 2d, 1937, the day when that lease was taken by Perfection, Joseph Hollander and his associates entered into an agreement with the Canadian company, which agreement has been made the basis of complainant‘s charge of a diversion to the Canadian company. By that agreement the factory, already leased for nine years to the Perfection company, was to be conveyed to the Canadian
The Joseph Hollander transaction is the only one presented by the evidence where the American company purchased any business or property from any relative or friend of the three individual Hollanders. There has been no substantiation of the charge that that purchase was made because of friendship or family relationship or that the property was unnecessary or that the price paid was excessive, or that the whole transaction was entered into for the purpose of furnishing profit to relatives out of the corporate funds of the American company. The Joseph Hollander litigation both in this court and in the Court of Errors and Appeals was strenuously fought and the parties were at all times truly adverse to each other. In fact, the hostility between them was so intense that, according to the evidence, the principals were not on speaking terms for years and until after a peace treaty was reached and the settlement became a reality. In the litigation
The litigation was conducted bona fide and the settlement which terminated it was fairly and honestly arrived at. It is also held that the transaction so far as it involves the executory agreement to sell the Joseph Hollander plant to the Canadian company was fairly and honestly entered into and for the purpose of aiding and benefiting the American company and that that transaction is unobjectionable.
III. THE GOODMAN TRANSACTION.
The amended bill charges that the three individual Hollanders violated their duty as directors and officers in purchasing in 1925 through their privately owned Hollander Securities Co., Inc., all the preferred stock of Bertram J. Goodman, Inc., on which stock substantial dividends were paid and all of which stock was subsequently retired at a premium, the payment of which dividends and retirement was guaranteed by A. Hollander & Son, Inc. It is there further charged that the dividend and retirement payments were made with the funds of A. Hollander & Son, Inc., and that said purchase and the said use of said funds and the said guaranty were at the expense of and to the detriment of the Hollander company and its stockholders and, further, that the purchase of said preferred stock of the Goodman company was within the proper and legitimate scope of the business of the Hollander company. In complainant‘s brief, all of the foregoing is contracted into the single charge that the three Hollanders, in violation of their duties as directors, bought for themselves Bertram J. Goodman, Inc., a New York corporation, and sold it to A. Hollander & Son, Inc., at great profit to themselves.
For the sake of clarity, Bertram J. Goodman, Inc., the New York corporation, will be termed “Goodman, New
In 1925 and for some time previous thereto, Goodman, New York, was engaged in dressing and dyeing what have been called “fancy furs.” Its business was of some importance and the directors of the Hollander company were considering its acquisition. The Merrill, Lynch transaction, mentioned in an earlier portion of this opinion, had already been closed and the banker Charles E. Merrill was already a director of the Hollander company. Mr. Merrill conducted the negotiations by which the Hollander company sought to acquire the Goodman business. Those negotiations ripened into a contract executed on November 25th, 1925, between Bertram J. Goodman and his two associates (the three of them owning all the stock of Goodman, New York) and the Hollanders as the purchasers of that stock. By the terms of the agreement, those owners agreed to sell to the Hollanders all the common and preferred stock of Goodman, New York, then outstanding.
The contract further provided that Bertram J. Goodman, himself, was to be restricted for fifteen years from engaging in a like business anywhere in the United States or permitting his name to be used in such business. The parties contemplated that the subject of the purchase would be turned over to a new company which the purchasers would organize to take over either the assets of Goodman, New York, or the shares of stock which were the subject of the agreement. There are other provisions in the agreement showing that the parties were then contemplating that a new company would be incorporated and that the various contracts and documents to be entered into with the individual Hollanders as purchasers would “be as of the first instance entered into with the newly organized company.”
The agreement made by the three Hollanders was not made by them for themselves or their own benefit but for the benefit of the Hollander company. That was the underlying intention, for within about two weeks thereafter the transaction
Previously the Securities company had paid into the treasury of Goodman, Delaware, $500,000 in cash in payment of the 5,000 shares of the preferred stock. This cash was the Securities company‘s own money which it had borrowed from its own banks and solely on its own credit. Neither the funds nor the credit of the Hollander company was used in the purchase of the preferred stock. The repayment of the money borrowed by the Securities company from its own banks was collaterally secured by its own holdings, amongst which may or may not have been the 5,000 shares of preferred stock. There is some doubt as to whether those shares were included in the collateral, the witness Michael Hollander‘s first impression being that they had been so included and his final recollection being that they were not included and for a given reason could not have been included. It is not surprising that the lapse of fourteen years should dim the memory and somewhat obscure the fact. However, the matter of their inclusion or exclusion is of no importance here. Those shares of stock had been bought by the Securities company and paid for with its own money and it was entirely free to use those shares as collateral if it so chose. Even if so used, the fact remains that other collateral, owned by the Securities company, was also furnished to the lending bank, the Guaranty Trust Company of New York. The Securities company was then amply possessed of other holdings, included in which were about $800,000 of securities and other assets withdrawn at the time of the Merrill, Lynch transaction at the end of 1925. The evidence is clear that at least some of those other securities were furnished by the Securities company to its bank in connection with the $500,000 loan.
The annual meeting of stockholders of the Hollander company was held on January 15th, 1926. The minutes of that meeting show that the president‘s report was presented and read. It contained the statement that on January 5th, 1926, the purchase of the Goodman business on behalf of the Hollander company had been consummated. That report showed
The Goodman business was gradually absorbed into the business of the Hollander company and conducted as part thereof. From that point on the liabilities of Goodman, Delaware, including its liability on the outstanding preferred stock, were met and satisfied by the Hollander company. Dividends on the preferred stock were paid and eventually the entire $500,000 issue was retired by annual redemption. The first redemption was in the sum of $60,000 and occurred in February of 1931, the final redemption of $100,000 taking place in February of 1935. No part of the issue was redeemed between 1926 and 1931. All redemptions between 1931 and 1935 were inadvertently effected at par, the Hollander company neither tendering nor the Securities company demanding the premium of $5 per share. When this deficiency was discovered in 1935, the directors of the Hollander company were of the opinion that the Securities company should receive the unpaid premium of $25,000. This was disputed by the director Criscuolo, whereupon Mr. Michael Hollander again demonstrated his fidelity to his trust by taking the position that the Securities company would not accept the premium unless and until its right thereto were passed upon in a judicial proceeding. The board then resolved to withhold payment until the matter could be adjudicated. Suit was at once started in this court by the Hollander company and the three individual Hollanders as co-complainants. The defendant was the Securities company and the bill told the whole story. The individual complainants fully disclosed their ownership of and their personal interest in the Securities company and that they were directors and officers of both companies and that with respect to the subject of the suit there was a conflict between their relation to the Hollander
The bill gave all the pertinent details of the Goodman purchase, the issuance of its preferred stock, the purchase thereof by the Securities company and the guaranty by the Hollander company. The suit was actively defended and resisted by Mr. Dougal Herr, who appeared for the Securities company. Appearing with him was the dissenting director Criscuolo, who was personally heard in argument against the payment of the redemption premium. The charter of the company, the certificate of preferred stock and the Hollander company‘s guaranty were submitted for examination. Briefs were filed by the adverse counsel and the matter was decided on November 29th, 1935, in favor of the Securities company. That decision was to the effect that the Securities company was entitled to the premium of $25,000 on the Goodman stock and that only upon the payment thereof should the certificate of stock be surrendered for cancellation. A final decree in accordance with that view was entered on December 3d 1935. The defendants in the instant suit claim that said final decree is res judicata of the matters here complained of with respect to the Goodman transaction and they claim the benefit of that defense.
Upon all of the foregoing facts, complainant insists that the transaction was in essence a purchase by the individual Hollanders of the Goodman business and a resale thereof by them to the Hollander company at an increased price, that increase being the dividends and redemption premium which the Securities company later received on its investment of $500,000. This is plainly a misconception of the transaction. There is not the slightest bit of evidence that the venture was ever initiated by the Hollanders for themselves or with hope of profit by resale to the Hollander company. The Goodman purchase was initially conceived as one promotive of the
It is uncontroverted that at the time of the Goodman transaction the Hollander company‘s cash resources were not of impressive size. The statement as of December 31st, 1925, shows that the company had about $137,000 in cash as against which it owed the government for accrued income tax about $112,000. While it also had notes and accounts receivable of well over $1,000,000, their value or liquidity is not shown. It may well be that those other assets were needed by the company to support credit relations with its banks for its normal business operations during the year. The uncontroverted testimony shows that all the cash resources of the company were required for the carrying on of its business operations. It is that condition which moved the president of the Hollander company to say at the time, in his annual report to the stockholders, that the Goodman transaction was financed “without in any manner having sapped the resources of your company.” Even if the Hollander company had possessed in its treasury the full half-million dollars needed to accomplish the Goodman purchase, it would have been quite improvident for it to exhaust all its cash and be left without working capital or be wholly dependent upon bank borrowings. At what point a company may providently and
The point advanced by complainant that the opportunity to finance the Goodman purchase was a corporate opportunity which belonged to the Hollander company and which it should have exercised, so as to save the dividends and premium on the preferred stock, is without merit. As has already been said, the Hollander company had not the cash for that purpose and to borrow the money might have interfered with its normal business. Had it been able to borrow the money for that purpose such borrowing would have necessarily involved the payment of interest together with the repayment of the principal within a reasonably short time, as is customary on bank loans. To have financed the purchase through stock underwriters would have entailed as was testified a very large premium to underwriters, and this on top of the usual premium carried by preferred stock to the investor himself. Such underwriting premium was saved to the company by the manner in which the Securities company advanced its
“The only question then is whether the acquisition by the appellants of the debenture stock from Markle was of such
a character that they should be regarded as trustees for the corporation and required to account for the profit received on the resale. Ordinarily a director may deal in securities of his corporation without subjecting himself to any liability to account for profits, for the corporation as such has no interest in its outstanding stock or in dealings in its shares among its stockholders. Bisbee v. Midland Linseed Products Co., 8 Cir., 19 Fed. Rep. 2d 24, certiorari denied, 275 U.S. 564; 48 S. Ct. 121; 72 L.Ed. 428; Du Pont v. Du Pont, 3 Cir., 256 Fed. Rep. 129; certiorari denied, 250 U.S. 642; 39 S. Ct. 492; 63 L.Ed. 1185. Likewise, a director may ordinarily buy at a discount the unmatured obligation of his corporation with the intention of collecting in full when the obligation matures. Seymour v. Spring Forest Cemetery Association, 144 N.Y. 333; 39 N.E. Rep. 365; 26 L.R.A. 859; Glenwood Manufacturing Co. v. Syme, 109 Wis. 355; 85 N.W. Rep. 432; McIntyre v. Ajax Mining Co., 28 Utah 162; 77 Pac. Rep. 613. It follows from these principles that the appellants had the right to buy for themselves unless the circumstances imposed upon them a `mandate’ to buy for the corporation. Burland v. Earle, L.R. (1902) A.C. 83. Such appears to be the settled rule of law. Bisbee v. Midland Linseed Products Co., supra; Du Pont v. Du Pont, supra; Lagarde v. Anniston Lime and Stone Co., 126 Ala. 496; 28 So. Rep. 199; Pioneer Oil and Gas Co. v. Anderson, 168 Miss. 334; 151 So. Rep. 161; Colorado and Utah Coal Co. v. Harris, 97 Colo. 309; 49 Pac. Rep. 2d 429; Tierney v. United Pocahontas Coal Co., 85 W. Va. 545; 102 S.E. 249. * * * “Moreover, the corporation did not have sufficient surplus with which to make such a purchase of its own stock, or at the very least such a transaction would have been highly improvident. It had no liquid assets sufficient for that purpose, but it is argued that it had other assets, consisting of good will and the shares of stock of Morris Plan Banks, the value of which had been appreciated on the books of the company to an extent which, it is claimed, would have justified the transaction. Even assuming, notwithstanding expressions to the contrary (Hill v. International Products Co.,
129 Misc. 25; 220 N.Y.S. 711; affirmed, 226 App. Div. 730; 233 N.Y.S. 784; Jennery v. Olmstead, 36 Hun 536; affirmed, 105 N.Y. 654; 13 N.E. Rep. 926), that unrealized appreciation of corporate assets based upon a proper estimate of enhanced value would have justified a purchase by the corporation of its own stock, it would have been a most improvident transaction under all the circumstances, resulting in an impairment of capital should any substantial depreciation in the value of those assets have occurred. Thus, upon the entire case, we find no dereliction of duty on the part of the appellants in acquiring the debenture stock.”
See, also, Camden Safe Deposit and Trust Co. v. Citizens’ Ice and Cold Storage Co., 69 N.J. Eq. 718, 723; 61 Atl. Rep. 529; affirmed, 71 N.J. Eq. 221; 65 Atl. Rep. 980.
The facts in the instant case are even more compelling in favor of the directors than the facts in the Morris Case. There the stock purchased by the directors individually was redeemed by their company four years prior to the time when the company was by its obligation required so to do and the profit there made by the directors was not alone large but speedily realized. In the case at bar the moneys of the Securities company were outstanding for ten years and the retirement premium of $25,000 was not received until after the tenth year and then only upon the Chancellor‘s decree directing that it be paid.
The decree of this court directing the payment of the premium to the Securities company is res judicata of the complaint here under consideration. All the facts here involved were there presented to the court in a controversy touching the very premium which complainant here says was unlawfully taken by the three Hollanders through their Hollander Securities Co., Inc. The determination that the premium was due to the Securities company necessarily involved a determination that the whole transaction, forming the basis thereof, was lawful and fair. The personal interest of the three Hollanders in the Securities company and their official connections with the Hollander company were presented to the Chancellor by the very bill of complaint, in which bill were fully disclosed all the circumstances
Although neither the original bill nor the amended bill of complaint charges any wastage of the good will acquired on the Goodman purchase, that charge is made in counsel‘s brief and is based upon two occurrences appearing in the evidence. About two years after the Goodman purchase that business was consolidated into and absorbed by the general business of the Hollander company. This step resulted in a very substantial saving of overhead. By this time the former customers of the Goodman company had very definitely become customers of the Hollander company and the good will of the former had become completely integrated with the good will of the latter. More than five years after the business had been acquired and more than three years after it had been absorbed into the Hollander business, thereby losing its own identity, the Hollander company by agreement permitted
The other occurrence was the action of the directors of the Hollander company in writing off in 1940 $460,000, representing the good will, trade-marks and formulae acquired from Goodman. The resolution directing such write-off states as the reason therefor that the Goodman formulae, trade-marks and good will had previously been absorbed and assimulated into those of the Hollander company and have been and are being put to valuable use by the latter. This action is pointed
IV. EITINGON SCHILD TRANSACTIONS.
Eitingon Schild Co., Inc., is a New York company which has for more than twenty-five years dealt in raw furs. Its business was world-wide and consisted of the importation and exportation of skins. One of its several subsidiaries was a New York company known as the Eitingon Schild Fur Corporation. A third company, not a subsidiary, is the Fur Company‘s Syndicate, Inc., of New Jersey. The first of these companies will be referred to as the “parent company,” the second as the “Subsidiary company” and the third as “Syndicate.”
In January of 1937, the Hollander company ventured into the merchandising field. It made a written agreement with the Subsidiary company by which a joint venture was created. Under the terms of that agreement, the Subsidiary was to purchase muskrats and the Hollander company was to advance the required money. The merchandise was to be sold by the Subsidiary under conditions which would assure to the Hollander company the business of processing the skins. All merchandising profits were to be shared equally but all losses were to be borne by the Hollander company alone. All credit
The underlying reason for the agreement was the need of the Hollander company for a substantial increase in the volume of its muskrat department during such periods as that department was not functioning at capacity. It was believed that the arrangement would result in an increase in the Hollander company‘s business of 350,000 skins and would eliminate its unbalanced production of muskrats. This expectation was fully realized and the Hollander company received and processed those skins. However, before the venture got under way, an important revision in its terms was made. The Hollander company in discussing the proposition with its banks was experiencing some difficulty with them in arranging for the necessary credit to finance the venture. The banks at the outset were not in accord with an agreement where the risk of loss rested entirely upon the Hollander company. In order to meet the situation Syndicate furnished its indemnity agreement which provided that if the joint venture should result in a loss, that loss would upon demand be repaid to the Hollander company by the Syndicate company. Thus, the risk of loss was transferred from the shoulders of the Hollander company to those of the indemnifying company. The Syndicate company was at that time worth $3,000,000, over and above all its liabilities. When this indemnity agreement was obtained, the Hollander company was able to secure from its New York banks the required line of credit to finance the joint venture.
The joint venture before being entered into was submitted to the directors of the Hollander company, who approved thereof. The venture was then launched but it met with eventual loss due to the collapse of the fur market, which followed closely the general economic decline of September, 1937. Both the Subsidiary company and the Syndicate company suffered heavy losses in inventory and in bad accounts. The joint venture came in for its share of the debacle. Towards the enterprise the Hollander company had advanced $600,000, of which $250,000 was repaid during 1937.
(1) All the stock of the Palmer Hill Holding Co., which then owned and still owns unencumbered real estate of the established value of $175,000. That company has no liabilities other than one, which, too, was
(2) Short term instruments of indebtedness due from the Republic of Poland in the principal sum of $189,586.60. These obligations called for interest at three per cent. per annum, payable semi-annually. The instruments are essentially promissory notes from the Government of Poland payable to the Bank of Manhattan and transferred in blank to the Hollander Company. Upon these obligations Poland regularly paid the stipulated interested until shortly before it was invaded ...... 189,586.60
(3) The bond and mortgage of the Retlaw Realty Corporation for $60,000. On this item Hollander actually realized $40,000 in cash during 1940. There being no evidence as to what that mortgage was actually worth in 1938, the Court attributes to it a value equal to what was ultimately realized thereon in cash, viz. .............................. 40,000.00
Total value of the collateral when furnished in January of 1938 ............................. $404,586.60
As part of the transaction by which collateral was taken, the Hollander company granted to Syndicate an extension of one year to pay the indebtedness. During that year Syndicate paid off in cash the aforementioned three notes held by the Hollander company aggregating $150,000. A second extension for another year was requested and granted. No further payments were made by Syndicate other than $40,000 on the Retlaw mortgage. The present unpaid balance amounts to $326,000. As against this amount the company holds the Palmer Hill stock and the Polish government obligations. In 1940 the Hollander company wrote the indebtedness off on its books but, of course, retained and still holds the collateral.
What is wrong in the transaction? There was nothing wrong in the company‘s going into the venture, for under its certificate of incorporation it had the right so to do and its doing so was for the purpose of stimulating the company‘s business opportunities and activities. Engaging in that single venture did not change the essential character of the company‘s
Nor is there ground for criticism in the releasing of the Subsidiary company from its liability for the processing charges of $166,000 and in accepting the substitute liability of the Syndicate company. Judged by the events of 1938, that substitution might well be regarded as a wise move. The substituted debtor was then in a position to furnish collateral worth at the time considerably more than the entire $366,000. Moreover, during 1938, the Syndicate company was in such condition as to be able to pay off the three notes of the Subsidiary company amounting to $150,000. The position of the Hollander company was improved both by that payment and by the collateral furnished to it. Yes, the Republic of Poland is now a conquered nation and its obligations are presently uncollectible, but no one excepting a prophet could have foreseen or predicted the events of the present war which broke out almost two years later. Persons of the utmost degree of intelligence and prudence failed to foresee the events that now distress the world. Wisdom after the event is not a fair or just test of responsibility. The action of the directors must be tested as of the time that action was taken. That is the standard of the cases. The Polish government‘s obligations were fully worth $189,586.60 when they were furnished by the Syndicate company. With that in mind, the entire security now held by the Hollander company amounts to about $365,000 as against a balance
There exists a dispute in the testimony with respect to a translation of the Polish instruments of indebtedness. The question was whether the Polish government‘s obligations were payable to the Bank of Manhattan or at that bank. Complainant argued that if those obligations were payable at the bank the instruments lacked the designation of a payee and could not therefore be transferred by the Bank of Manhattan. Even if the instruments were as complainant translates them they were still capable of transfer as bearer instruments. However, the evidence of the expert Lorenz is persuasive of the fact that the instruments were made payable to the Bank of Manhattan. Complainant also contends that those instruments were incapable of transfer by the Bank of Manhattan because of a restriction expressed in the instruments themselves. That restriction provides that the Polish government‘s evidence of indebtedness “May be transferred only after prior consent of the Minister of Communications as to the person of the transferee.” Admittedly no such consent was secured to the transfer by the Bank of Manhattan and complainant argues that the Hollander company took nothing by that transfer. This point is lacking in substance, for if the transfer from the Bank of Manhattan was ineffectual to vest legally in the Hollander company the title to the instruments then that title and the benefits thereof remained in the bank. The bank‘s assignment would, however, unquestionably operate as an assignment of its right, title and interest and it would in equity be deemed a trustee for the Hollander company of all principal and interest received under the Polish government‘s obligations.
The $25,000 credit allowance already mentioned is viewed by the complainant as an illegal gift. It never was intended as a gift; it never was that and, tested by the undisputed facts in the case, it constituted a rather nominal consideration for a substantial advantage. It was the inducement to the
The facts before me bring these matters well within the rule laid down by this court in Ellerman v. Chicago Junction Railways, &c., Co., supra, where it is said:
“Individual stockholders cannot question, in judicial proceedings, the corporate acts of directors, if the same are within the powers of the corporation, and, in furtherance of its purposes,
are not unlawful or against good morals, and are done in good faith and in the exercise of an honest judgment. Questions of policy of management, of expediency of contracts or action, of adequacy of consideration not grossly disproportionate, of lawful appropriation of corporate funds to advance corporate interests, are left solely to the honest decision of the directors if their powers are without limitation and free from restraint. To hold otherwise would be to substitute the judgment and discretion of others in the place of those determined on by the scheme of incorporation.”
See to the same effect Helfman v. American Light and Traction Co., supra.
V. THE MIDDLETOWN LEASE.
In April, 1936, the Hollander Securities Co. (being an investment company wholly owned by the three Hollanders and members of their families) leased to A. Hollander Son, Inc., a plant in Middletown, New York, together with the machinery and equipment thereon contained. In stating the facts the same designations will be used as were employed in the discussion of the Goodman transaction. The lease was for a term of five years at a reserved net annual rental of $5,000. The Hollander company took possession of the plant where it conducted its Persian lamb processing. When the term had run about two and one-half years active operations were discontinued and not resumed. Complaint is made that notwithstanding such cessation the Hollander company continued to pay the reserved rental. Complainant insists that because the three Hollanders were directors on both sides of the inter-company lease transaction, that lease is voidable. The relief sought is that the lease be set aside and the defendants compelled to account for the value of such renovating as the tenant company did in the premises and for the value of all the machinery which the tenant company installed in the plant, with a credit to the lessor company for the reasonable rental value of the plant only during such time that the Hollander company was actually operating it.
The leased plant and machinery represented to the lessor company an investment of about $100,000 and had been owned by that company since 1925, although the legal title was not passed to it until 1931. From 1930 to 1933 the property was rented at $6,000 to $7,000 a year. It was vacant in 1936 when it was leased to the Hollander company. There is no evidence before me as to the value of the plant and machinery in 1936 but it is fairly inferable that both were in a usable condition, since both had been rented only about two years before. Undoubtedly the building and machinery had depreciated over the years and were not in 1936 worth the $100,000 that they had cost. There is, however, the uncontroverted testimony of the witness, Michael Hollander, that the $5,000 net rental reserved in the lease was a fair rental. This testimony was objected to, not because of any alleged lack of competency on the part of the witness but because the fact was elicited by a leading question and one that called for a conclusion. That objection was overruled. The witness’ forty-five years of experience with fur factories and machinery show that he is qualified. Aside from this, the other evidence on this transaction convinces that the rental was a fair one. No attempt was made by the complainant to disprove the testimony on this point. Therefore, the transaction cannot be regarded as objectionable on the question of the rent reserved in the lease.
The lessee company was justified in paying and the Securities company was justified in taking the rental payments after active operations were discontinued. That stoppage came about as a result of the development of the Persian lamb formula, evolved in the Montreal plant of Limited and furnished to the American company gratuitously. Up to that point, the Hollander company had found it necessary to operate two separate plants in Middletown; the new formula made possible all operations in one plant. Hence, at the end of 1938 there was no further need for a second plant in Middletown, although it is suggested in the testimony that due to increased volume the need for that second plant is likely to arise in the near future. Under these circumstances, the Securities company was under no duty to release its tenant
The circumstance of there being in the transaction directors common to the two companies has been fully considered in connection with all the other proven facts and there is found in the transaction no fraud or unfairness.
VI. LOANS FROM WELFARE FUNDS.
At the beginning of 1940, the defendants Albert Hollander, Herman A. Fenning and Joseph G. Weiser were respectively indebted to a certain fund (referred to in the pleadings and briefs as “Welfare Fund“) in the sums of $11,047.29, $5,845.89 and $8,132.13. Complainant claims that these were loans of corporate funds made to directors and that all the directors should be held accountable therefor. The defendants claim that these were not corporate funds but were funds borrowed from a separate and dedicated trust fund, in which only the employes of the company are interested. Furthermore, the defendants proved that these loans were being paid off in installments and that their full payment is expected by the end of the present year. The main question presented is whether these loans were made of corporate funds or not.
In 1918 the Hollander partnership established what has ever since been known as the Welfare Fund, the purpose of which was to furnish free of charge to the company‘s employes sick benefits, medical attention, life insurance and other advantages. Thereafter, each year the partnership and later the company transferred to a separate Welfare Fund five per cent. of the company‘s annual payroll. The moneys were actually drawn out of the corporate treasury and deposited in a separate bank account. When the partnership was converted into a company in 1919 that fund had an unexpended balance of $9,000 which the partners did not consider their own and which they therefore did not withdraw. When the company ceased to be privately owned the Welfare Fund had an unused surplus of about $59,000, which fund is not
In further support of their claim of a trust fund, the defendants proved that the annual corporate contributions to that fund were deducted as a company expense and that such deduction was recognized and allowed by the federal income tax authorities. Contrary to the defendants’ position, the complainant points out that in certain years unexpended balances in the Welfare Fund were returned by Welfare to the corporation and it is argued that, therefore, the funds at all times possessed corporate character and identification.
The question as to whether or not a trust fund exists has been rather troublesome. The restoration in certain years to the corporate treasury of unused Welfare money might appear to be inconsistent with the idea of a dedicated trust fund. On the other hand, such restorations may be viewed as a breach against the beneficiaries of that fund. On a consideration of all the proof, the conclusion is reached that what the founders originally contemplated and what was actually inaugurated was a special trust in favor of those persons who were employed by the company. The structure presents all the elements of a trust, the res being the moneys as they reached the treasury of the Welfare Fund and the beneficiaries thereof being the company‘s employes. The parties themselves so regarded it, else the individual Hollanders would have been entitled to withdraw the $59,000 of their money remaining unexpended when their privately owned company became publicly owned in 1925. The loans made from that fund could not, therefore, and did not constitute loans by the company to its directors and the company‘s stockholders are without ground of complaint. The only ones who might complain, if the loans had been made without their approval,
Even if it were determined that a trust situation does not exist, the complainant would still be without right to relief. If the court regarded the loans as having been made by the company and decreed their repayment, that relief would be granted only upon equitable terms. The Hollander company, for whose benefit complainant seeks equity, would be compelled to do equity. Of necessity that would call for a repayment by the company to the three Hollanders of the $59,000 of their money which they deposited and left with the Welfare Fund in the belief that those moneys were dedicated to the uses and benefits of the employes, not the stockholders. To undo the entire setup, such undoing would have to be by means fair to everyone and confiscatory of no one‘s property. In their answer to the amended bill the defendants say that if they are to be subjected to any liability with respect to the administration of the Welfare Trust Fund, then such liability should be decreed upon the equitable term and condition that the defendants have and receive credit and off-set to the extent of $60,000, or so much thereof as is equal to the amount of any liability imposed against them. The $60,000 figure stated in the answer is not quite correct; the amount of the unexpended balance left by the three Hollanders was $59,108. In their brief, the defendants assert that while they claim the right of equitable set-off, they do not seek any affirmative money decree. That claim of equitable set-off could not be disregarded were the defendants directed to account for the $25,000 loaned to the three directors above-named. Ordinarily, the allowance of that set-off would result in a decree that the company pay to the three Hollanders the difference of about $35,000. The waiver of the right to such difference merely means that the loans and the limited set-off claim would counter-balance each other and nothing would be due the company. Therefore, under any aspect of the case the loans
All but $2,000 of the $25,000 loaned to the three directors was barred by the statute of limitations. The defendants point this out in their answer, saying, however, that they do not intend to set up or plead the statute and disclaim such purpose and further say that it is the intention of the indebted persons to continue the payments being presently made by them and by such payments to discharge the barred debts by the end of 1940. Complainant, on the other hand, argues in his brief that the right of equitable set-off with respect to the $59,000 is not available to the defendants because of the operation of the statute of limitations. That is not the case. The set-off having been claimed in the defendants’ answer, it constituted an affirmative defense to which complainant might have by special replication pleaded the statute. No such plea was ever filed and therefore the statute was waived. With respect to the statute of limitations as a defense to a claim of set-off, the same rules of pleading are applicable as govern the like defense by a defendant to a complainant‘s demand.
Apart from what has already been said with respect to the status of the Welfare Fund as a trust, and leaving aside the doctrine of equitable set-off and the necessity of pleading the statute of limitations, the whole problem of the Welfare Fund may be disposed of by again referring to the 1925 transaction between the wholly-owned American company and Merrill, Lynch Co. The evidence discloses that the buyer did not consider the Welfare Fund as an asset of the corporation for there is clearly enumerated what specific assets the buyer was designating as corporate property. The $59,000 Welfare surplus was not within the enumerated assets. Nor was it within the specified assets to be withdrawn from the company. Buyer and seller both agreed that the Welfare Fund was neither corporate nor private and they dealt with it thereafter as a separate dedicated fund. Under the cases heretofore cited, the complainants are bound by the acquiescence of their predecessors in title. Furthermore, the court will give effect to the parties’ own interpretation of the character of the Welfare Fund. The complainants have not established a cause of action with respect to the Welfare loans.
VII. SALARIES AND MISCELLANEOUS.
The amended bill charges the payment of excessive salaries to the defendants. No proof was offered in substantiation of this charge and after the close of the case complainant‘s counsel stated on the record that the salaries were not being challenged except the payment of salaries to the defendants Benjamin W. Hollander and Albert Hollander during the period that they had not actually rendered services. This had reference to the period of their illnesses. At the time of the final hearing each of those persons was absent from his work, having been ill since 1939. The evidence shows that Albert Hollander was absent on sick leave granted to him by a vote of the board in July or August of 1939 at a reduced salary of $12,000 per year. Until then the salary paid him was $36,400 per year. Benjamin Hollander became ill in November of 1939 and had not yet returned to work in April of 1940. There is nothing wrong in a board of directors granting temporary leave for the cause of illness to a valuable employe of long service. Both of these men had served the enterprise in important positions for considerably more than thirty years and had contributed greatly to its growth and success. They merited that consideration and treatment which the world over is exhibited by enlightened employers towards old employes stricken with illness. Their indisposition has not been shown to be of any permanent nature and the matter of paying them during their period of convalescence was a matter of policy resting in the honest judgment of the board of directors. There is no valid grievance here.
Certain employment contracts between Competent Fur Dressers, Inc. (a subsidiary of the Hollander company) and three of its managers are questioned by the amended bill of complaint. It is charged that under a contract the Hollander company obligated itself for the payment of approximately thirty per cent. of the profits of the Competent company to certain individuals who had no lawful claim thereto and that the Hollander company was entitled to all of the profits made
It is claimed that the board of the Hollander company has been dominated by the three Hollanders. Unless that fact is to be inferred from the mere circumstance that the three Hollanders were the chief developers of the company‘s business, are the seniors in point of service and are men of wide experience in their industry, as shown by the testimony, there is no evidence to support the charge. In the main, the testimony
The fact that complainant‘s interest and the holdings of the three intervenors show a combined holding of less than one-half of one per cent. in the Hollander company cannot be overlooked, in view of the fact that the holders of more than ninety-nine per cent. of the company‘s stock failed to accept what was tantamount to an invitation to join the complainant and help redress the wrongs complained of. The reasonable inference is that more than 1,000 other stockholders do not consider themselves aggrieved and are not intrigued with the benefits which complainant seeks to obtain for them. See Helfman v. American Light and Traction Co., supra.
The defendants in their answer stated that as directors of the company and also in their various other capacities they have always served the company with fidelity and discharged their duties honestly, loyally and impartially and with due regard at all times to the rights and interests of the company and its stockholders. That answer stands fully substantiated in the record of this case. The evidence shows that in order to retain and enlarge the business of A. Hollander Son, Inc., and in order that it retain the good will and patronage of its customers, the defendant Michael Hollander personally loaned his own funds and furnished his own guarantees to aid those customers and in doing so he personally risked about half a million dollars and as a result actually sustained personal losses of more than a quarter of a million dollars. Furthermore, the three Hollanders voluntarily reduced their
The charges of the amended bill and the supplemental complaint not having been substantiated and the defendants having satisfactorily explained all the transactions called into question, and the court being satisfied that those transactions were attended by honesty and good faith, the amended bill and supplemental complaint will be dismissed. Present decree.