Meredith v. New Jersey Zinc & Iron Co.

44 A. 55, 59 N.J. Eq. 257, 14 Dickinson 257, 1899 N.J. Ch. LEXIS 37

• Court: New Jersey Court of Chancery
• Decided: August 17, 1899
• Status: Published

Opinion

Pitney, V. C.

It seems to me that several of the questions which arise upon the case as made by the pleadings and proof have been disposed ■of by the action of the court of errors and appeals in affirming the order refusing the preliminary injunction. 11 Dick. Ch. Rep. 454. The situation of the cause when it came before that court was precisely like that in the case of Black v. Delaware and Raritan Canal Co., 9 C. E. Gr. 455, where the court declared its duty to review and pass upon the propriety of the action of this court in refusing a preliminary injunction without regard to what had in the meantime occurred. In doing this the court might, in the present case, have assigned its own reason for its action, or it might simply have affirmed without giving any reason. Instead of doing either it declared that it affirmed “ for the reasons given in the court of chancery.” Turning to the reasons (thus approved) given in this court, it will be found that the purchase by the New Jersey Zinc and Iron Company of the various properties in question, those situate out of the state ■as well as those situate within it, was approved as a measure necessary to be adopted in order to .save its property from great depreciation in value by reason of the then recent decision of the court of errors and appeals in the suit between the Lehigh Zinc and Iron Company and the New Jersey Zinc and Iron Company. 30 Vr. 189.

There was, and, indeed, can be no question made as to the-power of the company to buy all the mineral rights that can be-found in the valley of the Wallkill, in Sussex county, and its-power, under the peculiar circumstances, in order to buy those to include with them properties outside of the state was there-affirmed, and the only question left was as to its right to continue to own and operate the works outside of the state so-acquired. See 10 Dick. Ch. Rep. St 19.

The case now presented does not materially vary from that which appeared on the motion for injunction, except that the-contract has been specifically performed and the extra-territorial works have been kept in operation long enough to prove them to be highly useful and profitable to the company.

The contention of the complainants is that the original certificate of organization of 1880, forming as it did articles of association between the stockholders, constituted a contract as well between the corporation and the state as between the stockholders inter sese, which, without the consent of all the stockholders, so far as it is a contract between the stockholders, cannot be changed except by virtue of some enabling act of the legislature in existence and force at the time the contract was entered into, and that the terms of the certificate, properly construed, prohibit the doing of any business within the state except at its mines in Sussex county and at Newark, and from doing any business outside of the state except to sell its wares in the city of New York; arid they contend that the doing business through the machinery of a corporation in the towns of Florence and South Bethlehem, in Pennsylvania, and in the State of Wisconsin, is a breach of that agreement which ought, at the instance of the complainants, to be prohibited by this court, and that the purchase of those plants-out of this state was ultra vires the corporation, and that the whole transaction should be declared void, and the parties restored to their original position. The prayer of the' supplemental bill in that respect, is as follows:

“ That the said contract or agreement set out in the original bill may be declared to have been and to be null and void, and that every act and transaction done thereunder and in pursuance thereof may likewise be set aside and declared null and void, and that the New Jersey Z. & I. Co. may be restored in all things to the position and condition in which it was before the said agreement was executed,”

with the usual prayer for other relief.

The only part of this contention which, under the opinion of the court of errors and appeals, is now open to question is that of the continued operation of the extra-territorial works.

The defendants justify the continued operation of those works by the proceedings which have been taken under the thirty-third section of the act of 1875 and by the fifty-fifth section of the same act, which latter, by its terms, authorizes the purchase of property by the issuing of stock.

It is conceded by the complainants that the original articles of association were made subject to the sections just named, or, as it is sometimes expressed, that those sections are to be “ read into” the certificate of organization.

The defendants further claim that what they are doing at Bethlehem, Pennsylvania, is not a breach of the terms of the original certificate of organization constituting the articles of association.

The complainants contend that the proceedings in question, founded upon a consent of two-thirds of the stockholders, are not authorized by the thirty-third section, and their argument in that behalf is as follows: The eleventh section of the act of 1875 states that the certificate of organization shall contain :

“ I. The name of the company.

“II. The places in this state or elsewhere where the business of such company is to be conducted and the objects for which the company shall be formed.

“ III. The amount of the capital stock.

“IV. The names and residences of the stockholders.

“ V. The periods at which the company shall commence and terminate.”

And further, that “ the certificate may contain any limitation upon the powers of the corporation, the directors and the stockholders that the parties signing the same desire.”

The contention of complainant is that the statement in the certificate of “the place or places in this state or elsewhere where the business of such company is to be conducted and the objects for which the company shall be formed ” constitutes such a limitation.

The thirty-third section provides :

“ Every such corporation except where otherwise provided in the certificate of incorporation may, by a two-thirds vote in interest of the stockholders, * * • * and in all cases by unanimous consent of the stockholders at any meeting called for that purpose, reduce its capital stock or change the nature of its business.”

And the argument of complainant is that the exception just quoted prevents the change of place in this case unless by the unanimous consent of all the stockholders.

The argument advanced by the defendants against that position is that the language “ except where otherwise provided in the certificate of incorporation ” refers to a special limitation to be inserted at the pleasure of the association in the certificate of organization, under the fifth clause'of the eleventh section, which provides that “ the certificate may contain any limitation upon the powers of-the corporation, the directors and the stockholders that the parties signing the same desire,” and that the designation of the place where the business of the company is to.be carried on does not amount to such a limitation, but is simply a ■compliance with the requirement of the act that such a place shall be designated.

It is plain that the original act, passed March 2d, 1849 (P. L. of 1849 p. 300; Nix. Dig. (4th ed.) 534) did not contemplate the formation of a corporation in this state todo business out of the state, for the second paragraph of the first section (which corresponds with the eleventh section of the act of 1875) states simply that the certificate shall state the place or places where the business of such company is to be conducted, and the objects for which the company shall be formed, while the later act of 1875 states “theplace or places in this state or elsewhere” where the business of the company is to be conducted.

Then the act of 1849 does not provide that the certificate may contain any limitation upon the powers of the corporation, &c. It does provide for an increase of the capital stock precisely as does the act of 1875, and the twenty-second section of the older act is substantially the same as the thirty-third section of the act of 1875, except that it does not contain the words “except where otherwise provided in the certificate of incorporation,” and the other words “ and in all cases by unanimous consent of the stockholders.”

The privilege given to the promoters of the corporation to limit its powers, &c., by inserting a clause for that purpose in the original certificate, and the exception against altering such certificate by a majority of two-thirds, found in the thirty-third section of the act of 1875, are first found in that act.

I am of the opinion that the contention of the counsel for the defendants in this behalf is correct, and that the designation of the place where the business should be carried on, provided for in the second subdivision of the eleventh section of the act of 1875, does not, when expressed in the ordinary way, in obedience to the command of that section, amount to a limitation upon the powers of the corporation, such as is provided for in the fifth subdivision of the eleventh section and such as forms an exception to the power to change by the consent of two-thirds given by the thirty-third section. I think that the words “except where otherwise provided in the certificate of incorporation ” refer to and can only be satisfied by some express provision in effect forbidding a change in the nature of the business except by unanimous consent, and such limitation is not to be implied from a mere compliance with the mandate of the statute to state certain matters in the certificate. To hold the contrary, namely, that the ordinary clauses inserted in obedience to the mandate of the statute and forming the contract between the parties, can. amount to a limitation, such as is provided for in the fifth clause of the eleventh section and operate to prevent the action of two-thirds under the thirty-third section, is to prevent any alteration in that instrument except by the unanimous consent of all the stockholders, and so reduce that section to a mere nullity and render it inoperative in every case.

But the complainants answer to this position that the thirty-third section does not provide for any change in the place where the business shall be carried on, but only for ¡a change in the nature of the business, and that there was here by the certificate of February 1st, 1897, no provision for any “change in the nature of the business” such as is contemplated by section 33 of the act of 1875. Counsel who opened the argument for the complainants contended that the business which the corporation carries on out of this state is precisely the same business which it carried on previous to February, 1897, in this state.

This is true, as shown by the answer and evidence, of the business of smelting zinc ores carried on at South Bethlehem, Pennsylvania, in the plant of the Lehigh Zinc and Iron Company, but it is doubtful if it is strictly true of the business carried on by the Mineral Point Zinc Company or by the plant of 'the old — now extinct — Florence Zinc Company. At the Mineral Point works they manufacture spelter out of ordinary ores, which they do not mine, and at Florence they manufacture high-grade oxide of zinc from spelter, which they do not even manufacture. And, turning to the original certificate of 1880, I find that the objects of the company are stated to be: “ The mining of zinc and iron ores, and other ores and mineral substances, and the manufacture and sale of the products of such ores and minerals.” If the force of the word “ such ” is to confine the company’s operations to reducing the ores mined by it, then the work done at Florence and also that at Mineral Point is, upon a strict construction, not within the statement in question.

These manufacturing processes were never carried • on, as I understand the pleadings and evidence, by the New Jersey Zinc and Iron Company; so that there is nothing in the circumstances of the case to relieve the statement in the certificate from the rather strict construction which I have just suggested. If I am right in this view, then there can be no doubt that the works carried on out of the state at the places just named are in effect a change in the nature of the business, and so, manifestly, within the scope of the thirty-third section, and hence authorized by the new certificate. This would leave the only matter to be considered the reducing works at Bethlehem.

Be that as it may, to this position of complainant, however 'well taken, the defendants answer: If there has been no change in the “ nature of the business,” there has been no breach of the stockholders’ contract, for the place of the business so to be •carried on was not — so they contend — a material or essential part ■of that contract.

In answer to this complainants rely upon what was said by Vice-Chancellor Emery in the case of Stickle (and Perkins) v. Liberty Cycle Co., 32 Atl. Rep. 708. In that case the defendant •corporation had been formed after the passage of the act of March 9th, 1889 (P. L. of 1889 p. 412), which is an amendment of, but does not materially alter, the fifteenth section of the act of 1875. The certificate stated :

“That the place in this state where the business of such company is to be •conducted is the borough of Rockaway, in the county of Morris, * *' * The objects for which the company is formed are the manufacture of bicycles, &c. The portion of the business of the said company which is to be carried on out of this slate, in the cities of New York and Brooklyn, and elsewhere, is the selling of the manufactured products of said company.”

Speaking of that certificate the learned vice-chancellor says: “ This certificate, therefore, as to the part of the business to be done out of the state, seems to be a material part of the certificate of incorporation, to the observance of which the incorporators have a right, under this law of 1889, to hold the company and its directors, in the absence of an express provision in the contract of incorporation itself that the company may carry on, outside of the state, other portions of the business than that specified.” Then, after stating that the act of 1892, passed subsequent to the incorporation of the defendant, authorized generally the company to do business out of the state, he says: “The real question is, I take it, whether, since the law of 1892, a manufacturing corporation which, in its certificate, states that its manufacturing plant and business shall be located in this state, and that the outside business is the sale of the manufactured articles, can, under cover of this law, change materially and fundamentally the objects of the company and rights of the company and its shareholders, as stated in the certificate, by removing the-manufacturing plant and business beyond the limits of the state and the protection of its laws. My present view is that it cannot, and that the removal of the plant and manufacturing business beyond the state is a change in a material object of the company, as stated in the certificate, and should be restrained until-the right is determined on final hearing.”

In that case there had been no action taken (as has been here) by the directors with the assent of two-thirds of the stockholders to change the nature of the business. So that the question was not whether two-thirds of the stockholders might not provide for moving the works out of the state, but whether the directors could do that without such provision.

But the conclusion of the learned vice-chancellor, as above stated, seems to me to weaken rather than to strengthen the complainants’ position, for it holds that a mere change of the place in which the business is carried on was in that case a material and fundamental change in the objects of the company, which is-tantamount to holding that it is a matter which may be dealt with under the thirty-third section of the act of 1875. And in fact the counsel who closed the argument for the complainants was constrained to adopt the latter position and contend that the-reducing of ores at Bethlehem was a change in the objects and purposes of the corporation.

But the case of Stickle v. Liberty Cycle Co. differs from this-in another respect. Its certificate of incorporation stated: “ The portion of the business of the said company which is to be carried on out of this state * * * is the selling of the-manufactured product of said company,” thus stating with precision what portion of the business was to be carried on out of the state, and by implication declaring that no other part of its-business was to be so carried on. Now, turning to the original certificate of the New Jersey Zinc Company, we find the language varying from this, thus: “The business of selling the-manufactured products of such ores and minerals out of the State of New Jersey is to be carried on, &c., in the city of New York.” And this language, unlike that in the Cycle Co. Case, does not, by implication, declare that no other business besides selling was to be carried on out of the state. This difference seems to me quite material.

Then, again, we find that case differs from the present in still another respect. The bill and affidavits upon which the motion for an injunction rested showed that the complainants were residents of Rockaway and the owners of real estate there, and interested in advancing the general prosperity of the town, and one of them was the owner of the factory used by the corporation, so that there was room for inference that they were induced to assist in the formation of the company and invest their money in it for the purpose of establishing a manufacturing plant in that town, thereby deriving incidental benefit from it, and that if the plant was moved away from Rockaway, as was threatened, they would lose the benefit of its existence there. The proposition there was to move the whole plant out of the State of New Jersey to the State of Connecticut and beyond the jurisdiction of the courts of this state. The learned vice-chancellor might well hold in that case that such a motion was a material and fundamental change in the objects of the company and the rights of the company and its stockholders.

I think these considerations distinguish that case from the present, where all the business which was contemplated by the original association is still carried on in the State of New Jersey. The purchase of the additional mines and mining rights in the county of Sussex is admitted to be clearly within the object and purpose of the original corporation, and the working of its mines and reducing the minerals derived therefrom to merchantable commodities is the principal object of the company. Now, it could not have been of the least consequence to the original stockholders where that working up into marketable material took place — whether in Newark, or Camden, or Phillipsburg, or Philadelphia, or New York. They had no local interests in any particular place. The question for them was, where could, it be done the cheapest ?

At the time of its organization this company succeeded to the rights of the old original New Jersey Zinc Company, which already owned a manufacturing plant at Newark as well as rights in the mines in the 'Wallldll valley, and they had their selling place in the city of New York, which accounts for the fixing those localities in the certificate of organization. But there is nothing found in the history of the corporation and its operations, or in the circumstances surrounding them, to indicate that there was any particular charm in the working up of the mineral products in the city of Newark rather than in the city of Bethlehem, Pennsylvania, or that such a change of the location of the reducing plant “changes materially and fundamentally the objects of the company and the rights of the company and its shareholders ” to such an extent as to induce a court of equity to interfere to prevent a material injury to the complainants.

The case in hand is in marked contrast with Kean v. Johnson, 1 Stock. 401; Zabriskie v. Hackensack and New York Railroad, 3 C. E. Gr. 178; Black v. Delaware and Raritan Canal Co., 9 C. E. Gr. 455, and Mills v. Central Railroad, 14 Stew. Eq. 1, in which cases the doctrine of the inviolability of contracts between stockholders, without the consent of each stockholder, has been stated, exemplified and upheld by our courts. In each of them there was a radical change in the purpose and objects of the corporation. In Kean v. Johnson, the complainant was a stockholder in a company chartered and organized for the purpose of building and operating a railroad from Elizabeth to Somerville, and the proposition was in effect to merge that into a company for the purpose of extending its line from Somerville to Easton. The transaction was, in form, a sale of the older railroad to the later one. Its real character was well stated by the learned master (at p. 418) as follows: “ In form, it was a sale of the road; in fact, it was an extension of it — an addition to the originally proposed scheme.” The railroad from Elizabeth to Somerville was of easy construction, passed through a thickly populated district, and its operation proved to be highly profitable. The extension from Somerville to Easton passed through a different character and section of country, involving greater expense in its construction, and was not so promising an investment. Whether the extension would be a pecuniary suc■eess or not was problematic and speculative.

The same was true in a more marked degree of the proposed extension of the railroad in Zabriskie v. Hackensack Railroad Co., 3 C. E. Gr. 178. Both these changes in the contractual rights of the stockholders were held by the learned judges to be a “fundamental alteration of the contract” and a “.material deviation ” from the original object, and devotion of the funds to “ objects essentially different ” from those originally contemplated. At p. 182 Chancellor Zabriskie says of the extension in that'case: “The extension authorized by the act of 1861 is a radical change in the object of this corporation; it is an enterprise entirely different from that in the charter.” And at p. 183: “It is settled that the objects and business of the partnership or corporation cannot be changed or abandoned,” &c. And Mr. Be'aeli, in his treatise on “ Private Corporations,” section 41, speaking of amendments to charters which should bind the stockholders, says:

“ If the amendment be for the benefit of the corporation, or merely auxiliary to the original purposes for which the company was organized, the consent of a majority of the members is sufficient to render it effective and binding upon all the incorporators,”

citing a large number of authorities for that position. “But,” he continues, “if the amendment be fundamental, radical and vital, the unanimous acceptance of all the incorporators is requisite to render it binding,” &c. And in section 42, distinguishing between changes that are material and those that are immaterial, he says:

“ Whether an amendment be material or immaterial! depends largely upon the circumstances of each particular case. Under certain circumstances, amendments authorizing railway companies to build branch lines have been held to be merely auxiliary to the original purpose of incorporation, and •acceptance thereof by a majority of the stockholders was deemed sufficient.”

Applying these rules to this case, I am of the opinion that it is distinguishable from Stickle v. Liberty Cycle Co., and that the carrying on of the reducing works at Bethlehem is not a breach, of the original contract.

But I am further of the opinion that if the carrying on of the business out of the state is, under the circumstances, a breach’ of the terms of the contract as contained in the original certificate of organization, then it is within the reach of the clause in the thirty-third section, authorizing a change in the nature of the business by the assent of two-thirds of the stockholders. I think that it would be too narrow a construction of the language just referred to, to confine it within its literal terms, as-contended for by the complainants, and it would b'e strange-indeed if the legislature must be understood to have authorized a change in so important a matter as the nature of the business and omit to provide for a change of its mere location. The law administered in this state with regard to the inviolability of contracts was well settled many years before the passage of the act of 1875. The leading case of Kean v. Johnson was decided in 1853. That was followed by Zabriske v. Hackensack and New York Railroad Co., in 1867, and again by Black v. Delaware and Raritan Canal Co., in 1873. And it is fairly inferable that the thirty-third section was intended to prevent a few dissentient stockholders, as here, from setting up their wills against the will of a large majority, and the statute should be so construed as to-further that object.

The case is one which does not appeal to a court of equity. The ownership and operation of the Bethlehem plant is of great value and importance to the corporation. It would be a positive pecuniary injury to the company to deprive it of the use of those-works.

So far I have considered the case as if the New Jersey Zinc-Company was directly operating these extra-territorial works by its hired agents, and have treated the machinery of the maintenance of extra-territorial corporate organizations as a mere shell, and have not considered a powerful argument addressed to me by the defendants to the effect that the authority to purchase-stock in other corporations was undoubtedly a change in the nature of its business, which is within the language of the thirty-third section of the act, and hence beyond the criticism of the counsel of complainants in that behalf, and that the ownership of the stock carried with it the right to exercise the ordinary ■rights of a stockholder in electing the officers of a corporation, and through them determining its policy. A part of the argument is that while the ownership of the stock in other coi’porations was not perhaps within its power in 1880, when the ■corporation was organized, it has been authorized by subsequent legislation in existence at the time thé contract of January, 1897, was made, and that the fair purview of the thirty-third section ■of the act is to enable the company to change its purposes by ■taking on any business which is within the powers delegated by the legislature to such a corporation at the time the right is exer-cised. Without deciding that question, I am of the opinion, for ¡the reasons already stated, that the amended certificate became •effective to change the objects of the corporation under the thirty--third section of the act of 1875, and that it justified the ownership and the carrying on of all the extra-territorial work, and that it is immaterial whether a mere change of location is strictly within that section or not; and that the bill must be dismissed, with costs.

I will add that the amount involved in the controversy, the ¡importance of the questions presented, and the earnestness of the •counsel for complainants, have induced me to give my reasons At greater length than any difficulty in the solution of those •questions would warrant.