72 N.J. Eq. 224 | New York Court of Chancery | 1907
The United States Silver Company is the owner of ninety-three thousand shares of the common and five thousand shares of the preferred stock of the International Silver Company, and the latter company owns all of the capital stock of the United States Silver Company, and controls, through such ownership, its management. The direct result intended by this arrangement is the voting of the shares of the International company, registered in the name of the United States company by the officers of the International company for such persons as they may desire to continue in, or appoint to, the management of their company, the directors of the United States company being also directors of the International company. The testimony shows that all of the capital stock of the United States Silver Company was purchased by, and now belongs to, the International company, although some of the shares stand in the names of the officers of the International company for the purpose of qualifying them as directors. That the International company is the real owner of the stock, and that its officers should not be allowed to exercise the voting power usually incident to stock ownership, either directly as owners, or indirectly through its control of the United States company, seems to me •very clear, and their right to vote the stock was not seriously pressed on behalf of the defendants on the argument. No substantial change in the situation upon this branch of the case has occurred since the matter was passed upon by the court of errors and appeals in O’Connor v. International Silver Co., 68 N. J. Eq. (2 Robb.) 680, and the argument for the defendants was based upon the assumption that, in equity, the International company was the owner of the stock. The present controversy arises over the right claimed by certain pledgees, to whom the stock has been assigned in pledge as collateral for the
The first question presented is, can a corporation, by pledging its own stock as collateral to another corporation, empower the pledgee corporation to exercise a power or incident of ownership which the real owner does not possess? Section 38 of the Corporation act of this state declares “shares of stock of a corporation belonging to said corporation shall not be voted on directly or indirectly,” and if by pledging stock as collateral security the directors of a corporation can endow the stock with a virtue it does not possess in the hands of the real owner, and the disqualification of the pledgor to vote the stock does not extend to the pledgee, it would appear that in .every case where a corporation is the owner of its own stock a ready method is provided by which the officers of a corporation desiring to perpetuate themselves in office can bring about that result, and it should not be allowed unless the law plainly requires it, because it is in effect an indirect way of voting the stock. According to section 37 of the same act the pledgor may represent his stock at all meetings and vote thereon as a stockholder, “unless in the transfer to the pledgee on the books of the company he shall have expressly empowered the pledgee to vote thereon.” The right to vote on stock pledged as collateral remains, under our law, with the pledgor, unless by his act he shall empower the pledgee to vote thereon. The transaction is a contract between the parties, settling as between them who shall exercise the voting power incident to the ownership of the stock. It is in its natufe a proxy given by the pledgor to the pledgee to repre
My conclusion is, that under our law whenever the owner of stock is disqualified to vote it, that disqualification is not removed by simply hypothecating the stock as collateral for a loan, and that the right which the law gives to the pledgor to empower “the pledgee to vote thereon” is limited to such pledgors as are themselves possessed of the right to vote on the stock which they own, and that the pledgees in this case hold the stock of the International company subject to the same disqualification, so far as the power to vote thereon is concerned, as that which the statute imposes on the pledgor.
The second question presented is whether the pledging of this stock was made in good faith for the purpose of affording additional security for loans made to the International company, or for the purpose of placing the stock in the hands of those friendly to the existing management in order that it might be voted to retain them in power, and thus avoid the letter and spirit of the prohibition contained in our law. The evidence convinces me that the directors pledged this stock, not as security, but simply for the purpose of restoring to it a voting power that the pledgees might exercise in their interest. It was a palpable attempt to evade the law and to secure the benefit of the votes which the stock would represent in the hands of a duly-qualified owner. This stock had only a nominal value, and was intrinsically worthless as security independent of the fact
We do not have to look very far to ascertain the motive of these directors. In March, 1904, a circular letter was mailed to all of the stockholders of the International company by three of its stockholders who claimed to be the largest individual holders of the stock of the International company, one of them being the complainant in this cause, requesting the attendance of stockholders at the next annual meeting, for the purpose of securing representation on the board of directors for such stockholders as were not either officers or managers of the company. A careful reading of the letter shows that there is nothing improper or unfair in its statements, nor does it indicate any motive other than a desire to bring about what they esteemed to be a more economical management of the company. Whether they were justified in their claim that the business could be conducted with greater economy than was then being exercised, I am not called upon to determine, but the right of stockholders largely interested, to appeal to their fellow-members of the company to attend the annual meeting and urge reforms and retrenchments in the management of the company, or if unable to attend the meeting to send a proxy that others might represent them, is not an act which the officers of a well-managed company ought to complain of or discountenance, and I cannot find in it any cause for the alarm which Mr. Rockwell, the president of the First National Bank of Meriden, Connecticut, said induced him to start a concerted movement by the banks to secure from the company a pledge of its own stock as collateral for its debts, existent and anticipated. It is not denied that up to this time the International company kept large balances in the institution to which the stock was afterwards pledged, and that its credit was sufficient for it to procure all necessary funds to carry on its business without giving any collateral, and as an effort by stockholders to reduce the expense of conducting the business
On this branch of the case my conclusion is, that these pledgees are not bona fide holders of this stock as collateral for loans made by them, but took it for the sole purpose of aiding in the indirect voting of the stock of a corporation owned by the corporation itself, and that the pledgees hold this stock in equity,
I will advise an injunction preventing the defendant pledgees from voting on the stock held in pledge.