60 F.2d 109 (2nd Cir. 1932), 391, Rogers v. Hill

Docket Nº:391.
Citation:60 F.2d 109
Party Name:ROGERS v. HILL et al. SAME v. TAYLOR et al.
Case Date:June 13, 1932
Court:United States Courts of Appeals, Court of Appeals for the Second Circuit

Page 109

60 F.2d 109 (2nd Cir. 1932)



HILL et al.



TAYLOR et al.

No. 391.

United States Court of Appeals, Second Circuit.

June 13, 1932

Page 110

Appeal from the District Court of the United States for the Southern District of New York.

Chadbourne, Stanchfield & Levy, of New York City (Nathan L. Miller, Victor J. Dowling, George W. Whiteside, and J. Arthur Leve, all of New York City, of counsel), for appellants Hill, Neiley, Riggio, Taylor, and American Tobacco Co.

Richard Reid Rogers, of New York City, pro se.

Before MANTON, SWAN, and CHASE, Circuit Judges.

MANTON, Circuit Judge.

The appellee is the owner of 200 shares of common and 400 shares of common B stock, and seeks a decree declaring article XII of the by-laws of the American Tobacco Company invalid and ordering that all compensation paid thereunder to appellants be repaid to the corporation and future payments be perpetually enjoined. It is sought to have the court fix the amount of compensation to which the appellants, officers of the corporation, are justly entitled during their respective periods of service and that in the future the officers receive no additional contingent compensation. On motion by the appellee to strike out each of the five separate defenses interposed by the appellants, the court held that they were insufficient.

On March 13, 1912, the stockholders of the American Tobacco Company, appellant, adopted as a by-law article XII, which provided:

'As soon as practicable after the end of the year 1912 and of each year of the company's operations thereafter, the Treasurer of the Company shall ascertain the net profits, as hereinafter defined, earned by the Company during such year, and if such net profits exceed the sum of $8,222,245.82, which is the estimated amount of such net profits earned during the year 1910 by the businesses that now belong to the Company, the Treasurer shall pay an amount equal in the aggregate to ten per cent. of such excess to the President and five Vice-Presidents of the Company in the following proportions, to wit: Onefourth thereof, or 2 1/2 per cent. of such amount, to the President; one-fifth of the remainder thereof, or 1 1/2 per cent. of such amount, to each of the five Vice-Presidents as salary for the year, in addition to the fixed salary of each of said officers.'

By section 5 of this by-law, it was provided that the by-law may be modified or repealed only by action of the stockholders of the company and not by the directors. The by-law was adopted by a large majority in interest of the company's shares, 35 preferred shares voting against its adoption. Appellee became a stockholder in 1916. Appellant Hill became a director in 1921, and president on April 7, 1926; appellant Mower, a director on April 6, 1921, and has since become a vice president; appellant Penn, a dirctor on April 6, 1921, and since a vice president; appellant Neiley, a director on April 6, 1921, and a vice president May 1, 1929; appellant Riggio, a director on April 4, 1928, and a vice president May 1, 1929.

Until the present suit was instituted, the legality of this by-law was never questioned. The charges of illegality are: (a) That by the charter of the company, the directors are empowered to apply surplus or net profits only to the acquisition of property or the payment of dividends, and they are not authorized to divert any portion of the profits to officers of the corporation by way of additional compensation; (b) that profit participation by the officers and employees of a New Jersey corporation was not legal prior to the passage of chapter 175, p. 354, of the Laws of 1920, subsection (b), § 1 (Comp. St. Supp. § 47-183); (c) that the power to make and alter by-laws was conferred upon the directors, and the stockholders had no power to adopt the by-laws; (d) that the notice of the meeting at which the by-law was adopted did not specify the officers to whom the profit participation was to be paid, that it did not specify that the profit participation was to be paid to the officers as salaries in addition to their fixed salaries, and

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did not state that the participation was to be continued beyond the year when adopted.

Among the defenses which were held below to be insufficient were:

(1) That the stockholders of the company, including the appellee, ratified the payments made to the appellants in accordance with and under the authority of article XII.

(2) That the present suit is an attempt to interfere with the internal management of a corporation doing a nationwide business, the affairs of which are dependent upon the statutes of New Jersey, and that by-law XII was legally adopted and is valid.

(3) That the amount of compensation paid to the individual appellants was and is fair and reasonable for their services, that the board of directors had the right to fix the compensation of its agents, and that the payments were made in accordance therewith, as well as under the authority of by-law XII.

When the appellee purchased his stock, he was presumed to know the provisions of the corporation's by-laws, and he made his investment with that knowledge. Giesen v. London & Northwest American Mortgage Co., 102 F. 584 (C. C. A. 8)...

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