Appleton v. Worne Plastics Corp..

• Decision Date: 29 July 1947
• Docket Number: 158/204.
• Citation: 54 A.2d 612
• Parties: APPLETON et al. v. WORNE PLASTICS CORPORATION et al.
• Court: New Jersey Court of Chancery

54 A.2d 612

APPLETON et al.

v.WORNE PLASTICS CORPORATION et al.

158/204.

Court of Chancery of New Jersey.

July 29, 1947.

Suit by William C. Appleton and others against Worne Plastics Corporation and others, for the appointment of a custodial receiver for named defendant, for a restraining order, and for other relief, wherein defendants filed a motion to strike the bill of complaint.

Decree in accordance with opinion.

Syllabus by the Court

1. The Court of Chancery has inherent jurisdiction to appoint a custodial receiver for a foreign solvent corporation where its directors and officers are residents of New Jersey and amenable to process of this court, where practically all of its business and all of its assets are within the State of New Jersey and where the directors are fraudulently motivated in the conduct of its business to the detriment of its stockholders.

2. Dissension among the board of directors over the management of a corporation is not in and of itself sufficient to warrant the appointment of a receiver. In addition, there must be present a fraudulent motive on the part of the majority of the board of directors or lack or absence of a properly constituted board of directors, with the result that there arises an urgency for the protection of the property or the business interests of the corporation.

3. The Court of Chancery will not interfere with the judgment of a corporate board of directors upon a business policy, where it has been honestly determined without fraudulent intent.

4. The question of a dissolution of a corporation at some future time is a problem of business judgment to be accomplished in the manner provided by statute and an application for a restraint against a prospective dissolution, where no statutory action has been initiated at the time of such application, will be denied in the absence of a showing of fraud.

5. Upon a consideration of the facts, held: complainants' application for a custodial receiver and preliminary restraint denied and the defendants' motion to strike denied.

Herbert J. Kenarik, of Newark, for complainants.

Platoff & Platoff, of Union City, for defendants.

HANEMAN, Vice-Chancellor.

This is a matter originally argued before Vice Chancellor Berry on the return of an order to show cause why a custodial receiver should not be appointed for Worne Plastics Corporation and for such other and further relief as is prayed for in the bill. Subsequent to the original argument leave was granted to the complainants to amend their bill and the matter was then continued until June 12, 1947. Thereafter the defendants moved to strike the bill of complaint. Upon the filing of the amended bill of complaint it was agreed that the motion to strike the bill should be deemed to be directed at the amended bill and that the order to show cause and the motion to strike the bill should be argued simultaneously. Both the complainants and the defendants filed voluminous affidavits in support of their respective motions. The amended bill of complaint and the affidavits of the respective parties disclose the following set of facts:

It appears that one Howard E. Worne claims to have developed a method of producing and manufacturing acrylic resin by an electrical polymerization process. Sometime in the fall of 1946 one I. Rogosin became interested in this process and caused a company, Beaunit Mills, Inc., of which he was president, to invest $160,000 in Worne Plastics Corporation, a corporation of the State of Delaware, organized for the purpose of manufacturing, producing and vending acrylic resin produced under the formula of Howard E. Worne. Sometime prior to this investment by I. Rogosin the Worne Plastics Corporation had attempted to sell this stock to the public and had conducted the sale in such manner that the Securities and Exchange Commission considered the attempt a public offering. It likewise developed that at the time of this public offering the Worne Plastics Corporation was not the owner of the improvements, fixtures, machinery and equipment to which they claimed to have title, but that another corporation, Synthetic Resins, Inc., a New Jersey corporation, was the actual owner. As a result, the Securities and Exchange Commission commenced proceedings against Worne Plastics Corporation but agreed to stop any further proceedings for an allegedly illegal offering provided that all of the stockholders who had theretofore purchased stock in that company were offered an opportunity of rescission and repayment of the money paid for the purchase of its stock. This was apparently accomplished through the funds invested by I. Rogosin. A number of individuals who had purchased stock in Worne Plastics Corporation at the public offering refused the opportunity to rescind their agreement to purchase. After the investment by I. Rogosin and in accordance with the agreement entered into with Worne Plastics Corporation prior to said purchase, a new board of directors and new officers were elected. This board of directors consisted of Z. A. Aronson, H. Gregory, N. H. Polonsky and John Platoff, who were allegedly employees, associates or agents of the said I. Rogosin and the above referred to Howard E. Worne. Out of the total number of shares issued and outstanding 39,100 are owned by the present complainants, 167,900 shares are owned by Beaunit Mills, Inc., or its nominee and an undisclosed lesser number of shares owned by other stockholders. At the time that I. Rogosin became interested in the investment in the stock of Worne Plastics Corporation it was represented to him that the formula or method developed by Howard E. Worne for the production of acrylic resin had proceeded beyond the experimental stage and that Worne Plastics Corporation, with the receipt of the additional capital so invested by him, was in a position to produce such acrylic resin on a commercial industrial basis which would show a great profit to said corporation.

Shortly after the acquisition of the stock by I. Rogosin or his nominees there developed a conflict between the Rogosin interests and the Worne interests. At no time up to the date of the filing of the bill herein was there any large scale production of acrylic resin. Howard E. Worne contends that the reason for the failure to so produce is attributable to the attitude of I. Rogosin, who insisted upon the completion of the main plant when the so-called ‘pilot’ plant should have been first completed, and further, in the general interference by the said Rogosin with the actual conduct of the operations and business of said corporation. I. Rogosin, on the other hand, contends that the reason that no real production of acrylic resin has resulted to date is attributable to the fact that the formula or method which Howard E. Worne had developed was still in a formulative and experimental stage and that it was not feasible to so produce acrylic resin in either quantity or quality which would commercially compete with other resin producing firms. There appears from the affidavits of both the complainants and defendants a serious dispute as to whether the production method is beyond the experimental stage and whether it is presently commercially feasible. The affidavits of the defendants further disclose that on innumerable occasions they attempted to have Howard E. Worne conduct a successful production of acrylic resin at either the pilot plant or the main plant located at Pinewald, New Jersey. The affidavits of complainants, on the other hand, allege that the failure to make a successful demonstration of the ability to produce acrylic resin is attributable either to the interference of I. Rogosin and his associates or to so-called ‘bugs' in the mechanical equipment, which were of a minor nature and could easily be cured. Matters continued in this position until sometime around May 16, 1947 when the plant was finally closed down by the action of the majority of the board of directors for the reason, as stated by I. Rogosin, that he was convinced that no commercially acceptable acrylic resin could be produced and that he had made a bad investment. On May 19, 1947 a special meeting of the board of directors of the Worne Plastics Corporation was held in New York City which was attended by all of the directors with the exception of Worne, but which was attended by the following stockholders, who are not directors-Mr. O. James Morelock, Mr. Herbert J. Kenarick, Mr. Worne's attorney, Mr. Appleton, one of the complainants, and Mr. Werner, one of the minority stockholders, Harry Rogosin, vice president of the Beaunit Mills, Inc., and I. Rogosin. At this meeting it was decided to engage an independent research organization to investigate the processes, plant and the possibilities of Howard E. Worne's formula, but such an investigation was never completed. On May 21, 1947 Z. A. Aronson, secretary of Worne Plastics Corporation, Mailed notices to all of the stockholders calling a special meeting for June 25, 1947 of said stockholders for the following purposes: (1) to consider the advisability of continuing operations and (2) to consider such other business as may properly come before the meeting. This meeting was never held but was adjourned. The complainants charge that the shutting down of the plant and the acts and conduct of I. Rogosin and the other directors, with the exception of Howard E. Worne, were capricious, arbitrary and a fraud upon the rights of the minority stockholders and that as a result thereof the plant and assets of said corporation will be liquidated at prices far below their true value and that a threatened dissolution by I. Rogosin will effect a fraud upon the stockholders in that it will be necessary to dispose of the property and assets of said corporation below their actual value. In substantiation of the alleged fraudulent intent of I. Rogosin in his general conduct of affairs complainants cite two examples in addition to his...