Bookman v. R. J. Reynolds Tobacco Co.

• Decision Date: 31 July 1946
• Docket Number: 129/544.
• Citation: 48 A.2d 646
• Parties: BOOKMAN et al. v. R. J. REYNOLDS TOBACCO CO. et al.
• Court: New Jersey Court of Chancery

48 A.2d 646

BOOKMAN et al.

v.R. J. REYNOLDS TOBACCO CO. et al.

129/544.

Court of Chancery of New Jersey.

July 31, 1946.

COPYRIGHT MATERIAL OMITTED.

Stockholders' derivative action by Arthur Bookman and Judith W. Bookman against R. J. Reynolds Tobacco Company and others.

Decree advised dismissing bill.

See also 133 N.J.Eq. 116, 30 A.2d 823.

Syllabus by the Court.

1. Where, at a stockholders' meeting, a by-law was unanimously adopted after notice of its provisions had been given, and no dissenting voice had been raised to its adoption, there is a presumption that those who did not appear or vote against the measure assented to the vote of the majority.

2. In the instant case, the defendant directors construed under the by-law and charter of the defendant company certain classes of common stock to be a new class of stock; held, their construction was correct.

3. A corporation may compensate its executives and employees by paying them a share of the corporate profits, thereby making their compensation contingent in whole or in part upon the success of the business.

4. Stock is property; and the provisions of our corporation act authorizing a corporation to ‘hold, purchase and convey such real and personal estate as the purposes of the corporation shall require’ empowers a corporation to purchase its own stock.

5. Where complainants and intervenors owned no stock in the defendant company when irregularities were allegedly practiced, they were bound by the notice to and knowledge of their predecessors in title and by the acquiescence of such predecessors of the same.

6. The rule in New Jersey is that a complainant who has acquiesced in the irregular transaction may not bring a derivative suit based thereon.

7. The defense of laches is an equitable defense, governed by the principles of equity, and depends upon the circumstances of each particular case. Where it would be unfair to permit a stale claim to be asserted, the doctrine applies. Where a gross fraud has been perpetrated, the court is hesitant to relieve the wrong doer on the ground of complainant's laches. In the instant case, held, there was no fraud and that complainants and intervenors are guilty of laches.

8. Chapter 131, P.L.1945, N.J.S.A. 14:3-15 to 14:3-17, which bars suits or proceedings against corporations by stockholders who were not shareholders at the time of the transaction complained of, is held valid and binding.

Bilder, Bilder & Kaufman and Samuel Kaufman, all of Newark (Max J. Rubin, of New York City, of counsel), for complainants.

Gross & Blumberg, of Newark, substituted solicitors for complainants on final brief.

Charles Hershenstein, of Jersey City, for Camillo Weiss and Ludwig Lavy, intervenors.

Richard V. Stein, of Elizabeth (Charles B. McGroddy, Jr., of New York City, of counsel), for Mary B. Healey, intervenor.

Carpenter, Gilmour & Dwyer, by James D. Carpenter, Jr., and Elmer J. Bennett, all of Jersey City, for defendant R. J. Reynolds, Tobacco Co.

Stryker, Tams & Horner, by Josiah Stryker, all of Newark, for individual defendants.

EGAN, Vice Chancellor.

This is a stockholders' derivative suit instituted by the complainants, Arthur and Judith W. Bookman, Ludwig Lavy, and Mary B. Healey-the last named two being intervenors. The Bookmans each own 100 shares of the new class B common stock of defendant R. J. Reynolds Tobacco Company. Lavy owns 45 shares of the same stock, and Mary B. Healey owns 38 shares of such stock. The complainants all reside in the State of New York. The bill was filed November 14, 1940. Lavy and a Camillo Weiss filed bills of complaint on April 15, 1941. After the hearing began and an account of the trial appeared in the newspapers, Weiss advised the court that he had never authorized the institution of a suit against the defendants. His counsel was allowed to withdraw Weiss' name as an intervenor. Mary B. Healey first instituted a derivative suit against the same defendants in the United States District Court for the Western District of North Carolina; that suit was dismissed by the court because some of the alleged causes of action involved the internal affairs of a New Jersey corporation-and for the further reason that this suit, which had been previously commenced, was pending here and awaiting a hearing. Healey v. R. J. Reynolds et al., D.C., 48 F.Supp. 207. Mrs. Healey appealed from the decision, and then filed a petition to intervene in this suit. An order was entered here on April 21, 1943, granting her application. The individual defendants, all non-residents, voluntarily appeared herein. They were the directors of the corporate defendant at the time suit was started.

The hearing of this suit consumed many months; the testimony covers many thousands of pages; the exhibits are voluminous; and the original and several replying briefs are very extensive. The presentation of the briefs ran into the second year after the final hearing.

In the instant case complainants and intervenors hold 283 shares out of a total of 10,000,000 shares outstanding. They are four stockholders of a total of over 60,000. The defendant company has outstanding 1,000,000 shares of common stock, and 9,000,000 of new class B common stock.

The defendant company was incorporated under the General Corporation Act in 1899. Its general offices and factories are in Winston-Salem, North Carolina. For some time, until approximately May, 1911, it was a partly owned, but independently operated, subsidiary of the American Tobacco Company, when that Company was dissolved as a trust in restraint of trade under a decision of the United States Supreme Court. United States v. American Tobacco Co., et al. 221 U.S. 106, 31 S.Ct. 632, 55 L.Ed. 663. As the American Tobacco Company held two-thirds of the Reynolds common stock, which by the terms of the decree of dissolution was distributed to the stockholders of the American, it followed that control of Reynolds passed by the decree into the hands of the stockholders of the American. R. J. Reynolds, his brother William N. Reynolds, and directors of their choice had been permitted to manage and operate the Reynolds Company while control was owned by the American, but the evidence shows that they were very unhappy in the association and were determined if possible to wrest control from the American Tobacco Company and its stockholders. In fact R. J. Reynolds expressed delight when the tobacco trust was dissolved.

After the dissolution of the trust the American Tobacco Company and the Liggett & Myers Tobacco Company adopted bonus by-laws. R. J. Reynolds and W. N. Reynolds considered such by-laws, which gave participation in the profits to only a few of the top officials, as being only partly effective. Between them they devised the by-law hereinafter set forth, which would enable any officer or employee to share in the profits of the business provided he remained as an employee and invested all or a part of his estate in the business. It was designed to be both a spur and an incentive.

At a meeting of the board of directors held August 1, 1912, the by-law was considered and a special meeting of stockholders was called to be held August 23, 1912 to consider and act upon it. Notice was given to all stockholders which contained the terms of the proposed by-law, and that the profits of the company for the year 1910 were 22.19% of its $7,525,000 capital stock and were taken as a basis because the calculations on businesses and brands for 1910, as shown in the plan submitted to the court by the American Tobacco Company and others, were in fact those upon which the dissolution of the tobacco trust was based. They were also advised that ‘profits for 1910 served as a basis upon which other companies interested in the dissolution have thus far formulated and adopted by-laws providing funds not exceeding 10% of excess profits for distribution among certain of their officers.’ At the special meeting the by-law XII (formerly XIII) was adopted without objection in the following form:

‘All the Company's officers and employees who have owned its stock and been in its employ for not less than twelve months, may be allowed, in the discretion and at the option of the Board of Directors, beginning with the year 1912, to participate, in proportion to the stock thus owned, in the Company's annual profits which are in excess of the percentage of profits earned during the year 1910, to wit: 22.19%, not exceeding, however, 10% of those profits, in excess of 22.19% of its entire outstanding issue of common stock, taking into account pro rata, any increase or decrease thereof made during the year.’

On December 22, 1915, at a meeting of the board of directors, the by-law was amended to read as follows:

‘All the Company's officers and employees who have owned its common stock and been in its employ for not less than twelve months, then next preceding, may be allowed, in the discretion and at the option of the Board of Directors, beginning with the year 1912, to participate in proportion to the common stock thus owned, in the Company's annual profits, which are in excess of the percentage of profits earned during the year 1910, to wit: 22.19 per cent, not exceeding, however, ten percent (10%) of those profits in excess of 22.19 per cent of its entire outstanding issue of common stock, taking into account pro rata, any increase or decrease thereof made during the year. The common stock owned by an officer or employee, for the purposes of this By-Law, beginning with the year 1916, shall include any stock purchased during the year from an officer or employee or from the personal representative of a deceased officer or employee, provided such stock would have entitled the former owner to participate in proportion thereto, had it been held for the entire twelve months' period.’

The bill of complaint charges that this by-law always was and now is invalid; that profits have been distributed under it in excess of the...