Lillard v. Oil, Paint & Drug Co.

• Citation: 56 A. 254,70 N.J.E. 197
• Parties: LILLARD et al. v. OIL, PAINT & DRUG CO. et al.
• Decision Date: 31 October 1903
• Court: New Jersey Court of Chancery

56 A. 254

70 N.J.E. 197

LILLARD et al.

v. OIL, PAINT & DRUG CO. et al.

Court of Chancery of New Jersey.

Oct. 31, 1903.

Suit by Benjamin Lillard and others against the Oil, Paint & Drug Company and others. Heard on bill, answer, and amended answer, replication and proofs. Decree for complainants.

Plavel McGee and Robert L. Lawrence, for complainants.

C. L. Corbin and Mr. Brigham, for defendants.

EMERY, V. C. This is a stockholders' bill filed against three corporations and their several directors (other than one of the complainants), bringing in question the general management of the corporations by the defendant directors, and two specific acts—the reservation of working capital and the payment of excessive salaries to one of the defendants—are attacked as illegal and fraudulent. This reservation of working capital and payment of excessive salaries are also the facts principally relied on at the hearing to sustain the charge of fraudulent management of the companies, it being insisted that the general purpose of the defendants' management of the company has been to reduce its profits and dividends for the purpose of lessening complainant Lillard's income and compelling him to part with his stock at a loss.

In relation to these specific charges, which are the principal matters for determination in the cause, the relief sought is the distribution among the stockholders as dividends of the working capital alleged to have been wrongfully reserved, the setting aside of the by-laws and resolutions fixing the salaries, and the repayment by the defendant Allison to the treasury of the companies of so much of the salary received as is in excess of a fair compensation. Two of the defendant companies—the Oil, Paint & Drug Publishing Company and the Druggists Circularare corporations of this state, and each of these companies is engaged in the publication of a trade paper, while the third company is not engaged in the business of publishing, but holds substantially all the stock of the New Jersey companies. This holding company was incorporated under the laws of West Virginia, and is called the Oil, Paint & Drug Company. For convenience I will designate the companies as the "West Virginia Company," the "Drug Publishing Company," and the "Druggists Circular." The Drug Publishing Company publishes a paper entitled "The Oil, Paint and Drug Reporter," and the Druggists Circular publishes a paper called "The Druggists Circular." The entire capital stock of the Drug Publishing Company ($50,000) is 500 shares of $100 each, of which the West Virginia Company holds 485 shares, the complainant Benjamin Lillard 4 shares, the complainant Mrs. Lillard 1 share, the defendant Allison 8 shares, and the defendant Bell and Mrs. Allison 1 share each. The capital stock of the Druggists Circular is $25,000 (250 shares of $100 each), of which the West Virginia Company holds 235 shares, the other 15 shares being held by the same parties and to the same amount as in the Drug Publishing Company. The complainant Mrs. Lillard is a stockholder only in the New Jersey companies. The West Virginia Company was incorporated August 28, 1890, and, although incorporated for the purpose of manufacturing books and periodicals, has never as yet carried on that business, or any business, other than such as is purely incident to that of a holding company. Its entire capital stock was $750,000 (one-third preferred and two-thirds common), and of this the complainant Benjamin Lillard received 2.500 shares (833 shares in preferred and 1,667 common), and the defendant Allison 5,000 shares. 227 shares of complainant Lillard's preferred stock and 454 shares of common stock were received by Lillard in exchange for 150 shares of stock (par value $15,000) which he then held in the Druggists Circular, while for the balance of his stock (606 preferred and 1,213 common) Lillard gave his notes to Allison for about $90,000 upon receiving the stock. These notes have since been paid, mainly, if not altogether, out of the dividends declared by the West Virginia Company, the source of these dividends being the dividends received from the New Jersey Companies. Lillard, who has always been, and still is, a director of the West Virginia Company, was vice president and general manger of this company, and in this capacity personally managed the business of both New Jersey companies connected with the publications from the time of its incorporation (August, 1890) up to about September, 1893, at a yearly salary of $7,800, without any further compensation from either of the New Jersey companies; nor did any other person receive any salary from the New Jersey companies for the management of their business. This salary was fixed by a resolution of the board of directors of the West Virginia Company. From September, 1893, to March, 1895, defendant Allison, as the president of the West Virginia Company, and Lillard, as vice president and general manager of that company, together managed the business and publications of the New Jersey companies, each receiving $5,200 yearly from the West Virginia Company, but no salary from the New Jersey companies. These salaries were fixed by a resolution adopted by vote of the stockholders of the West Virginia Company at a meeting in January, 1894. In March, 1895, previous to the meeting of the stockholders of the West Virginia Company, an arrangement was made between the defendant Allison, who owned and held in his own name the majority of the stock of this company, and Mr. John L. Riker, who held 300 shares of its stock, and was a director of the company, that the defendant Allison should assume charge of the management of the business of all of the companies for a salary of $18,000, and the further arrangement was made that this salary should be equally divided between the three companies. Allison and Riker controlled the West Virginia Company, which in turn controlled both the New Jersey companies, and the arrangement was formally carried into effect as follows: By the existing by-laws of the West Virginia Company (article 21) there could be no compensation for services rendered by the president or any director, unless it was allowed by the stockholders, and previous to this time no salary had been given to the president. The bylaws directed (article 23) that the president should have general charge and supervision over the business of the company, but up to this time this general charge had not been taken to include services as general manager of the company, having charge as such of the entire business of the publications carried on by the New Jersey companies. Article 12 of the by-laws provided that the board of directors should have the management and control of the affairs and business of the corporation, and should appoint such officers and agents of the corporation as they might deem proper, and prescribe their duties and compensation, the officers and agents to hold their places during the pleasure of the board; and article 18 required the board to choose one of their members president, and that they should choose also a vice president, treasurer, a secretary, and a general manager—any director being authorized to hold more than one of these offices. At a meeting of the board held September 3, 1890, Lillard was elected vice president and general manager, and by the vote of the directors (other than himself) the salary for his services as such was fixed at $7,800 per annum, and by subsequent resolution of the board passed December 4, 1890, it was resolved that he should receive this salary of $7,800 as vice president and general manager for the term of three years from September 1, 1890; and he was yearly elected by the board as vice president and general manager, his last election being on January 23, 1894, and for the ensuing year. At a meeting of the stockholders of the West Virginia Company held March 19, 1895, a resolution was passed that the company pay to its president, as compensation for his services, a salary of $6,000 per year. This was passed by the votes of Allison, holding a majority of the stock (3,789 shares), Mrs. Allison, his wife, 850 shares, Riker, 300 shares, and 35 shares by defendant Bell; Lillard voting 2,500 shares against the resolution. Allison was then elected president at the directors' meeting following the stockholders' meeting by the unanimous vote of the live directors, Allison, Hewitt, Riker, Bell, and Lillard, and was also by the same vote elected general manager of the company for the ensuing year. At this fixing of the president's salary no addition to his previous duties was made either by the stockholders or directors; neither was there any provision by either stockholders or directors that, as compensation for this salary, thus permanently fixed at a large sum by the by-laws of the company, the duties of general manager of the business either of the West Virginia Company or of the New Jersey companies should be included, either wholly or in part, as the duties of the president of the West Virginia Company.

The status of the New Jersey companies in reference to the change was as follows: The by-laws of the Drug Publishing Company directed that the directors should appoint and might remove at pleasure all officers, agents, and employés of the company, prescribe their duties, and fix their compensation; and it was made their duty (article 4, § 10) to conduct, manage, and control the business of the company. They were to elect annually one of their members president, who should have, subject to the advice of the directors, a general direction of the affairs of the company. The by-laws could be amended by the affirmative vote of three-fourths of the stockholders at a meeting, or by all the directors at any regular meeting or meeting specially called. On July 6, 1891 (after the purchase of the stock of the company of the West Virginia Company) Allison was elected president and publisher and Lillard...