Baumohl v. Goldstein

• Decision Date: 24 March 1924
• Docket Number: No. 55/163.,55/163.
• Citation: 124 A. 118
• Parties: BAUMOHL et al. v. GOLDSTEIN et al.
• Court: New Jersey Court of Chancery

124 A. 118

BAUMOHL et al.

v. GOLDSTEIN et al.

No. 55/163.

Court of Chancery of New Jersey.

March 24, 1924.

Suit by Maurice D. Baumohl and others against Milton J. Goldstein and another. On order to show cause why a preliminary injunction should not issue. Preliminary injunction granted.

Treacy & Milton, of Jersey City, for complainants.

William L. Edwards, of Long Branch, for defendants.

BENTLEY, V. C. On order to show cause why a preliminary injunction should not issue.

This is a bill filed by certain stockholders of the Long Branch Steamboat Company and that corporation itself, to establish a trust in certain shares of stock; for a transfer thereof from one of the defendants to the corporation; and to enjoin the voting, transferring, etc., thereof. The defendants also counterclaim with many charges, of no moment in the decision of this motion, praying that the said shares of stock be decreed to be transferred on the books of the company, together with a temporary injunction.

The company was organized in 1919 with 250 shares of common stock authorized, whereof 240 have been issued and are now outstanding, and which are invested with the control of the company; the preferred stock being of the ordinary sort having no voting power. Originally, the common stock was held by five individuals of whom the complainants, Baumohl and Danser, the defendant Goldstein, and one J. Lester Eisner, each held 50 shares, and one Joseph Goldstein, 40 shares.

The by-laws of the company provide in section II as follows:

"The right to assign or transfer the common stock of the company shall be subject to the company's option of purchase from the stockholder of record within twenty days on written notice of the desire of said stockholder to sell, assign or transfer the same."

The other pertinent provisions of the by-laws are: (a) The right of the corporation to acquire its own capital stock, and (b) that only stockholders of record may vote, they being entitled to one vote for each share of stock owned.

On July 21, 1922, the said J. Lester Eisner transferred his stock to his wife, the defendant Marguerite E. Eisner, with the consent of the corporation. She, in turn, on September 20th of that year, sold and assigned the same stock to the defendant Milton J. Goldstein, for the sum of $25,000, although it was not until December, 1923, that the same was presented for transfer upon the books of the corporation, whereupon counsel was retained and this bill filed. The complainant Baumohl, as secretary of the corporation, has refused to make such transfer. The gist of the bill is that the sale of stock by the defendant Marguerite B. Eisner to the defendant Milton J. Goldstein was in violation of the section of the by-laws just quoted, and the latter having knowledge thereof is precluded from taking any advantage thereby and holds the same as trustee for the company, subject to its reimbursing him. The defense is that the by-laws contravene the policy of this state against restricting the power of alienation of property, is violative of section 15 of the Uniform Stock Transfer Act (chapter 191, P. L. 1916) and, even if innocuous, is too indefinite to be enforced.

The bill, answer, counterclaim, and affidavits are exceedingly voluminous and as venomous as it has ever been my duty to read. However, the charges and countercharges of the respective parties against each other may be disregarded for the purposes of this motion, and the questions to be decided, fortunately, rest upon facts that are, to all intents and purposes, not in dispute, and which bring the issues within the narrow compass just indicated.

The by-laws of a corporation may be enforced as a contract between the corporation and the stockholders, and between the latter inter sese. 14 Corp. Jur. 346; Miller v. Hillsborough, etc., Ass'n, 42 N. J. Eq. 459, 7 Atl. 895.

The right of a stockholder to sell his stock cannot be defeated by any provision contained in the by-laws of a corporation. Morris v. Hussong Dyeing Machine Co., 81 N. J. Eq. 256, 86 Atl. 1026. The questioned provision in the by-laws of the complainant company, however, does not amount to a restriction on the power of sale. It is, in its very essence and purpose, the first step or agreement in such a sale. No such limitation can be imposed upon one that takes from him the right to dispose of his property; but he may divest himself of the right to do so as to all the world except one individual with whom he has made a valid and binding contract. This is the purpose of the provision in question and not to compel the individual stockholder to keep his shares forever, unless by grace of the governing body of the company. That such an agreement is enforceable as an option under some authorities is intimated by Vice Chancellor Emery in Morris v. Hussong, etc., supra, although he individually appears to have questioned the soundness of the rule. Vice Chancellor Backes, in Prindiville v. Johnson & Higgins, 92 N. J. Eq. 515, at page 522, 113 Atl. 915, 918, says, unequivocally:

"Charter provisions of this character, obviously, are not restrictions on the transfer, but conditional contracts of sale, and specifically enforceable as contracts, and were sustained in the cases upon that theory."

Then he cites a great many authorities from various jurisdictions supporting the text. It is true that he was not dealing with a covenant in restraint of trade, but rather as he himself points out, one "limiting the quality of the shares, not their alienability." The Court of Errors and Appeals, in affirming this decision in 93 N. J. Eq. 425, 116 Atl. 785, did not pass upon the merits of the case, but contented themselves in agreeing with the Vice Chancellor that after many years of complicity the complainant in that case should not be heard to complain of the fraud in which he charged himself with having been a partner. It is true that there is no decision in this state to serve as an authority to enforce the obligation of a contract such as the one under consideration. It is also true that there is no binding authority against it, because Vice Chancellor Emery, while he did say in Morris v. Hussong, etc., supra, at page 261 (86 Atl. 1026): "Some authorities are cited sustaining provisions in charters or by-laws, expressly providing for a prior offer of sale to the company, or submitting to directors the name of the transferee for approval. But the weight of authority and— in my judgment—the better rule, seems to be against the validity of such provisions, as being an unreasonable restraint of alienation" —it was entirely unnecessary, and, as he emphatically said, his mere opinion upon a question that was not before him. In this virgin field, it may be of some assistance to consider the paths that have been trodden in other jurisdictions in laying down ways to be followed in seeking a similar goal. In the case of New England Trust Co. v. Abbott, 162 Mass. 148, 38 N. E. 432, 27 L. R. A. 271, an option on the stockholder's shares in favor of the corporation was sustained against his executor. The court say:

"It is held in this state that a corporation unless prohibited may purchase its own stock (Dupee v. Boston Water Power Co., 114 Mass. 37); and we see nothing opposed to public policy in such an agreement as this with corporations like this. If honestly carried out by the directors it tends to secure a trustworthy body of stockholders, from which those having the care and management of the affairs of the corporation naturally would be selected. It certainly cannot be contrary to public policy that the managers of this and similar institutions should be persons of skill, who possess the confidence of the public, and the restraint upon alienation is no greater than is often agreed to.

"In England it is not unusual to find in the deeds of settlement or articles of association under which corporations or joint-stock companies have been organized, and which correspond to the charter and by-laws here, provisions requiring the stockholder, in case he wishes to transfer his stock, to offer it to the directors, or to submit to them the name of the transferee for approval."

It is true that in that case the decision was placed upon a written contract by the executor distinct from the provision in the by-laws; but, nevertheless, the court also say:

"We think that the case well may stand on the ground that the defendant's testator entered into an agreement with the plaintiff to do what the plaintiff now seeks to compel his executor to do. It is manifest that a stockholder may make a contract with a corporation to do or not to do certain things in regard to his stock, or to waive certain rights, or to submit to certain restrictions respecting which the stockholders might have no power of compulsion over him."

In Nicholson v. Franklin Brewing Co., 82 Ohio St. 113, 91 N. E. 991, 137 Am. St. Rep. 764, 19 Ann. Cas. 699, a provision of the sort under consideration was sustained. To like effect are Farmers' M. & S. Co. v. Laun, 146 Wis. 252, 131 N. W. 360; Weiland v. Hogan, 177 Mich. 626, 143 N. W. 599; Jones v. Brown, 171 Mass. 318. 50 N. E. 648; Barrett v. King, 181 Mass. 476, 63 N. E. 934. In some of these cases it is true the issue was framed under a contract distinct from the by-laws, but the reasoning in all of them...