Bond v. Atlantic Terra Cotta Co.

137 A.D. 671, 122 N.Y.S. 425, 1910 N.Y. App. Div. LEXIS 759

Opinions

Laughlin, J.:

When the injunction order was obtained a meeting of the stockholders had been duly called for January 19,1910, to vote on reducing the number of the directors of the defendant corporation from twelve to six. .

The defendant corporation was organized under the laws of the State of New York for the purpose of manufacturing and selling architectural terra cotta. • It was organized by. a committee of three, individuals representing “ substantially all of the stockholders ” of three corporations then existing and conducting a, like business.. These corporations were.the Perth Amboy Terra Cotta, Company,. Excelsior, Terra Cotta Company and Atlantic Terra Cotta Company. An agreement was- made between “ substantially all of the stockholders ” of these corporations and a committee consisting of one representative of each of the - companies in writing ■ on. the 10th day of December, 1906, with a view to carrying out a plan for the consolidation of the three companies by forming a corporation under the laws of New York,

The plaintiff owns 328 shares of the capital stock of the defendant corporation, and brings this action to prevent the reduction- of the number of the. directors from twelve to six, upon the theory that the corporation and all of its stockholders are precluded by the agreement in question and by subsequent acts of the corporation pursuant thereto from ever exercising the statutory, authority conferred upon the stockholders by section 26 (formerly section 21) of the Stock Corporation Law (Consol. Laws, chap. 59 [Laws of 1909, chap. 61], § 26; Gen. Laws, chap. 36 [Laws of 1892, chap. 688], § 21, as amd. by Laws of 1905, cha„p. 750) to decrease the number of the directors.

The agreement is not set forth in full in the record, but sufficient appears to show that it was therein provided that on a certain percentage of the stockholders of each company depositing their stock with the committee, the committee should organize a new corporation with a view to exchanging its capital stock for the capital stock of the old companies upon a basis provided for in the agreement. The provisions of this agreement, so far as they are quoted in the record, are as follows: “ The Certificate of Incorporation of the new company shall provide for cumulative voting. * * * The committee shall cause the board of directors of the new company to be increased as soon as it shall have accepted the said proposition for the purchase of the stock and assets of the said Terra Cotta Companies hereinabove referred to, to twelve directors who shall be divided into three classes to hold office respectively for one, two and three years and at the expiration of each of said terms, four directors shall be elected for three years. * * * The committee shall also cause to be elected as directors for the aforesaid one-year term, W. Harris Eoome ” (one of the defendants herein), “ Dwight W. Taylor, Henry M. Watson” (one of the defendants herein), “ George P. Putnam; for the term of two years John H. Partridge ” (one of the defendants herein), “ Madison Grant, Edward J. Hall” (one of the defendants herein) “ and William Manice; for the three-year term Dé Forest Grant, Joseph Winterbotliam, Jr., William H. Powell ” (one of the defendants herein) “ and Charles B. Ludwig.”

On the 28tli day of February, 1907, the committee duly filed a certificate incorporating the defendant company under the laws of Hew York. This certificate provided that the capital stock should be $1,000, which was subscribed for by the incorporators; that there should be three directors, and that the incorporators should act as’ temporary directors, and it contained the following provisions : “ At all elections of Directors of the Corporation each stockholder shall be entitled to as many votes as shall equal the number of his shares of stock multiplied by the number of Directors to be elected, and he may cast all such votes for' a single Director, or may distribute them among the number- to be voted for, or any ■ two or more of' them, as he may see fit.” On the 29th day of March, 1907, the members of the committee, as owners of all of .the stock of the new corporation, filed a certificate increasing its capital stock to 30,000 shares of the par value of $.100 each, orie-half preferred and one-half common stock, and on the tenth day of April thereafter they filed a consent in writing in the office of the Secretary of State and of the clerk of the county of New York, the material part of which is as follows: “. that the present number of directors, viz., three, of thé said corporation, be increased to twelve, four of whom shall hold office until the next annual meeting of stockholders in 1908, four of whom shall1 hold office until the annual me'etirtg of stockholders in 1909, and four of whom shall hold office until the annual meeting of stockholders in 1910, and that the successors to each class shall hold office for three years.”

The original certificate of incorporation contained no' provision for the classification of the directors, and it was never amended as atithorized by law. The by-laws of the corporation were, however, amended so as to classify the directors in the manner stated in said consent herein quoted, but such by-laws expressly provided that they might be “ altered, amended or added to ” by an affirmative vote of the stockholders representing the majority of the whole capital stock, either at an annual meeting or at a special meeting' called for that purpose. The original certificate might have contained a provision for the classification of the directors, and with respect ,to the term for whipli each class should hold office (Gen. Oorp. Law [Gén. Laws, chap. 35 ; Laws of 1892, chap. 687], § 10, as amd. by Laws of 1895, chap. 672; Id. § 20, as amd. by Laws of 1901, chap. 355 ; revised in Gen. Oorp. Law' [Oonsol. Laws, chap. 23; Laws of 1909, chap. 28], §§ 10, 24) for it is provided in said section 26 (formerly section 21) of the Stock Corporation-Law, which authorizes the increase or reduction of the number of directors, that “ if the original or an amended certificate of incorporation of the corporation shall provide that the directors shall be divided into two or more classes, whose terms of office shall respectively expire at different times, the additional directors shall be divided among such classes as nearly as practicable in proportion to the respective numbers of directors constituting each class prior to such increase.” That section provides two methods for increasing or reducing the,', number of directors. The first is by action of the stockholders owning a majority of the stock of the corporation, at a meeting to be held on two weeks’ notice in writing to the stockholders of record as therein provided, and in that case proof of service of such notice is required to be filed in the office of the corporation “ at or before the time of such meeting,” and the proceedings of the meeting are required to be entered in the minutes of the corporation and a transcript thereof, verified by the president and secretary of the meeting, is required to be filed “ in the offices • where the original certificates of incorporation were filed.” The second method is by the unanimous consent of the owners of all of the stock issued and outstanding, without any meeting; and in that casq the consent of such stockholders in writing, signed by them or by their duly authorized proxies, with an affidavit of the custodian of the stock book of the corporation stating that the persons who have signed the consent “ either in person or by proxy, are the holders of record of the entire capital stock of said corporation issued and outstanding,” is required to be filed in said offices. Section 18 of the present Stock Corporation Law (Consol. Laws, chap. 59; Laws of 1909, chap. 61), which was revised from section 32 of the former Stock Corporation Law (Gen. Laws, chap. 36 [Laws of 1892, chap. 688], as amd. by Laws of 1905, chap. 751), would doubtless authorize the amendment of the original certificate so as to provide for the classification of the directors as was provided in the by-laws and as might have been provided in the original certificate of incorporation. It provides as follows : “ Any stock corporation heretofore or hereafter organized under any general or special law of this State may alter its certificate of incorporation so as to include therein any purposes, powers or provisions which at the time of such alteration may apply to corporations engaged in a business of the same general character, or which might be included in the certificate of incorporation of a corporation organized under any general law of this State for a business of the same general character, by filing in the manner provided for the original certificate of incorporation an amended certificate,, executed by the president and secretary, stating the alteration proposed1, and that the same has been duly authorized by a vote of a majority of the directors and also by vote of stockholders representing at least three-fifths of the capital stock, at a meeting of. the stockholders called for the purpose in the manner provided in section sixty-three of this chapter, and a copy of the proceedings of such meeting, verified by the affidavit of one of the directors present thereat, shall be filed with such amended certificate ; ” but as has "beenseen that was not done. It will be observed that this section does not provide for an amendment of the certificate of incorporation hy consent of the stockholders, but requires that such amendment be authorized by a vote of the majority of the directors and by a vote of stockholders representing three-fifths of the capital" stock, and that the certificate shall be executed by the president and secretary of the corporation, and that a copy of the proceedings of tjie stockholders with respect thereto, verified by the affidavit of one of the directors who was present, shall be filed with the amended certificate*

The plaintiff held stock in the old Atlantic Terra Cotta Company of the par value of $10,000, which he surrendered to the committee and received 164 shares of the preferred stock and a like number of shares of the common stock of the new company in return therefor. All of the stock of the old corporations was transferred to the new in consideration for capital stock of the new company as contemplated by said agreement. " In consummating this arrangement 28,306 shares of the 30,000 shares of the capital stock of • the new company were issued, leaving a balance of 1,694 shares, and it further appears that 1,600 of these remaining shares have since been issued without reference to said agreement of December 10, 1906, for the purchase of property by the company, and some of those shares have passed into the hands of the individual defendants as voting trustees. It further appears that'shares" of the capital stock of. the defendant company originally issued for stock in the other companies, have to a considerable extent changed hands and are now held by the voting trustees, and that “ a substantial number ” of shares are now held by the voting trustees which were not issued in consummating said agreement and were not in any manner connected therewith. It is not alleged, nor is it shown, either that the corporation or the voting trustees or the owners of the stock held by them accepted or became in any manner bound by said agreement of December 10, 1906, otherwise than as has been stated.

There is no charge of fraud or bad faith in the contemplated action which might justify or require the intervention of a court of equity. The plaintiff bases his right of action upon the ground that these facts lender said agreement binding upon the corporation and upon all stockholders for all time, and that it precludes a change in the number of the directors. In other words, the plaintiff contends that the proposed reduction of the number of directors will interfere with a vested contract right which he and other stockholders derived under said agreement of December 10, 1906, which he claims was adopted by the new corporation by accepting the stock of the old corporations and issuing its stock in exchange _ therefor. The plaintiff has appealed to a court of equity and he is met by a serious charge that the suit has not been brought in good faith but in the interest of a rival company which he and associates,. who are also stockholders. of the defendant company, have organized and to which they have agreed to transfer their holdings in this company. We do not deem it necessary to decide whether plaintiff should be denied relief on that ground. The law is well settled that the promoters could make no contract for the corporation and that it came into existence unfettered by any contract obligations, and could become bound by said agreement only by subsequent acts of its board of directors or officers within the apparent scope of their duties by ratifying or accepting or adopting it. (Munson, v. S., G. & C. R. R. Co., 103 N. Y. 58; Oakes v. Cattaraugus Water Co., 143 id. 430; Dillon v. Commercial Cable Co., 87 Hun, 444; Martin v. Remington-Martin Co., 95 App. Div. 18; Rogers v. N. Y. & Texas Land Co., 134 N. Y. 197.) It is perfectly clear that it is not competent for a corporation, by adopting or ratifying an agreement made with promoters or otherwise, to provide ffor the management of the corporate affairs in a manner different from that prescribed by the statute under which the corporation was organ ized, for that would contravene the public policy of the State. It is contended, however, by the learned counsel for the respondent that no; public policy of our State is contravened by an agreement by which the corporation and its stockholders bind themselves not to exercise a discretionary power given by statute, such as authority to increase or decrease the capital stock or to increase or decrease the number of the directors, and cases in other jurisdictions are cited in support of this contention. (Loewenthal v. Rubber Reclaiming Co, 52 N. J. Eq. 440; Matter of Newark Library Assn., 64 N. J. L. 217 ; Hays v. Commonwealth, 82 Penn. St. 518.) Those decisions are clearly distinguishable from the case' at' bar. In Loewenthal v. Rubber Reclaiming Co. a corporation had been formed, not as here to merge or' consolidate existing companies, but to léase their plants, and the stockholders of the old companies retained their stock therein and the stock of the new company was issued to the old companies for the leases. Each of the old corporations was to have representation in the board of directors of the new corporation, and this was secured by a by-law which provided for cumulative voting, and its continuance was. secured by a provision to the effect that the by-laws could only be amended by a two-thirds vote. The Legislature subsequently amended the law under which the company was incorporated by providing that by-laws might be amended by a' majority vote. The court held 'that the amendatory statute could not annul the by-law or affect the- rights Of the stockholders, but it was not even suggested that the stockholders, acting under the by-law and by the vote therein prescribed, could not have changed the plan for cumulative voting. The facts herein stated- clearly, distinguish the case at bar from the other authorities relied on by respondent, and it would not be profitable to point out in detail the distinction between this case and each of them. The .case, as we view it, does not necessarily present the question as to whether the stockholders and corporation may by agreement debar themselves from exercising discretionary statutory rights; but we deem it proper to observe that the authority to increase or decrease the number of the directors of a corporation is, by the provisions of law herein quoted, vested not in the corporation to-, be exercised by its board of directors, but exclusively in the stockholders, and while it may be competent in some cases for stockholders to bind themselves by such an agreement, it would seem that the agreement would not be binding on subsequent owners of the stock who purchased the same in good faith and without notice of the agreement (See Munson v. S., G. & C. R. R. Co., 103 N. Y. 58 ; Kent v. Quicksilver Mining Co., 78 id. 159, 184; Driscoll v. West Bradley & C. M. Co., 59 id. 96; Leitch v. Wells, 48 id. 585), for it is contemplated that the capital stock of business corporations shall frequently change hands, and in some respects elements of negotiability attach thereto, and it is quite likely that such stock could not readily be sold in the market if it may be subject to any restrictions other than those provided in the statute under which it was issued. (Lyman v. State Bank of Randolph, 81 App. Div. 367; American Press Assn. v. Brantingham, 75 id. 435.)

We are of opinion, however, that neither the agreement of December 10, 1906, nor the action of the corporation in consummation thereof, nor the consent filed purporting to increase the number of directors to twelve, nor the by-law with respect to the classification of the twelve directors, was intended -to constitute a contract or agreement that the stockholders should not thereafter exercise their statutory authority to increase or decrease the number of the directors, and, if it was' so intended, such intention cannot be given effect as against subsequent stockholders. As well might it be said of any corporation that those who purchase stock under the original certificate of incorporation and by-laws have. a vested contract right with one another, and with the corporation to have no change made in the amount of the capital stock, or in the number of directors, notwithstanding the fact that both are authorized by statute and by the reserved power to amend the by-laws. The cases cited in support of the contention of the respondent are authorities for the familiar doctrine that the certificate of stock or of membership based on the original certificate of incorporation and by-laws, constitute contracts between the corporation and the stockholders and that changes may not be made in the certificate of incorporation or in the by-laws or even in the statutes that will impair vested property rights of stockholders or members of the corporation by virtue of their contracts evidenced by certificates of stock or of membership).

(See Kent v. Quicksilver Mining Co., supra ; Parish v. New York Produce Exchange, 169 N. Y. 34; Farmers' Loan & Trust Co. v. Aberle, 19 App. Div. 79.) The proposed decrease in the number of the directors will not impair any vested property right of the plaintiff. It is not proposed to forfeit his stock or to affect his share and interest in the corporation, or to deprive him of an equal voice in the management of its affairs with any other stockholder owning the same amount of stock. His complaint is that on the-present basis with four directors elected annually, he may combine with other stockholders owning one-fifth of the capital stock and by cumulating their votes secure representation in the board of directors; and that by. the proposed action in reducing the number of directors to be elected annually to two, the percentage of stockholders who might combine and thus secure representation, would be materially increased and that it would be necessary for him to combine with the owners of one-third instead of one-fifth in order to insure the election of a director of their choice. We think this is not a vested property right within the contemplation of the law which may not be affected under the authority conferred by statute and reserved in the by-laws. He neither had at the.outset, nor is there any evidence that' he has now, any agreement with other stockholders with respect to combining their votes, and if he had it would not be pursuant to any statutory authority, and neither the corporation nor the other stockholders would be obliged in exercising their statutory powers to respect the same. A stockholder may not be deprived of his right to participate in the management of the affairs-of the corporation by voting on his stock in the same manner and to the same extent as other stockholders in' the proportion that his holdings bear to theirs; and his share or interest in the corpora-, tion cannot be affected — unless the statutory law expressly so provided before he became a stockholder — without his consent or — except in the case of stock issued for property — without affording him an opportunity to purchase a share or interest, in proportion to his holdings, in any increase of the capital stock so as to enable him, • if he so desires, to retain the same proportionate share or interest in: the corporation. (Stokes v. Continental Trust Co., 186 N. Y. 285; Lord v. Eguitable Life Assurance Society, 194 id. 212; Page v. Am. & British Mfg. Co., 129 App. Div. 346 ; Kinnan v. Sullivan County Club, 26 id. 213.) His vested property rights of which he cannot be deprived under the reserved power to amend the statute, certificate of incorporation or by-laws are not in contemplation of law affected by the number of directors to whom the management of the property and affairs of the corporation are to be committed (Looker v. Maynard, 179 U. S. 46 ; Miller v. State, 82 id. [15 Wall.] 478, 498), which is a matter of administration vested exclusively in the stockholders to be.exercised as authorized by law. It is to be borne in mind that plaintiff long since ceased to be a stockholder of the old company and that whatever contract rights he has now with the defendant corporation or its stockholders are those arising out of his certificates of stock which were issued under a statute providing that the number of directors might be increased or diminished and witli no provision in the certificate of incorporation or in the by-laws purporting to limit or restrict the exercise of this right by the stockholders and with an express provision in the by-laws with respect to the number of the directors which was' expressly made subject to alteration or amendment. These provisions were inserted in the promoters’ agreement merely as authority and directions from the stockholders of the old companies to the committee who were their agents in organizing the new corporation. When the new corporation was launched as contemplated, the agreement between the. stockholders of the old companies and the committee was fully performed. Its force was spent, and it now embodies no rights or obligations either on the part of the stockholders of the old companies or on the part of the new corporation or its stockholders; nor was it by any fair construction of the language employed intended that it should survive the fulfillment of its functions. After that time the parties must have contemplated that the statutes of this State should govern the corporation and prescribe the powers and rights of its stockholders. ■ The parties are presumed to have known that under the statutory law of this State the stockholders cbuld increase cr decrease the number of the directors, for it was then so provided in section 21 of the Stock Corporation Law (Gen. Laws, chap. 36 [Laws of 1892, chap. 688], as amd. by Laws of 1905, chap. 750); and if it had been intended to withold this power and authority for all time to come, or for any time, it is probable that an attempt would have been made to incorporate such a provision in the original certificate or that' it would, have been amended and that the by-laws containing the provision Would not have been left, expressly subject to amendment and it is reasonable to infer that appropriate language would have been employed to indicate such intention ; and had it been it might be necessary to decide whether it was competent for the corporation or its stockholders to make such a contract and whether it would be binding on future stockholders; but, for the reasons stated, those questions are not necessarily presented for decision now. This injunction order could not be sustained in. any event for it rims only against the corporation which is neither threatening to decrease the number of directors nor has it such power. The acts of the officers of the corporation which have been enjoined are merely incidental to the right of the stockholders to meet-and vote on the question. If the. stockholders have a right to meet and vote, the officers of the corporation cannot be enjoined in an action against the corporation f-ro,m performing the duties enjoined not on the corporation but on them of carrying into effect, in the manner provided by law, the will of the stockholders.

It follows, therefore, that the order should be reversed, with ten dollars costs and disbursements, and motion denied, With ten dollars costs.

Ingraham:, P. J., and Clarke, J., concurred; Scott and Miller, Jj., dissented.