Hall v. Trans-Lux Daylight Picture Screen Corp.

• Decision Date: 15 February 1934
• Citation: 171 A. 226,20 Del.Ch. 78
• Court: Court of Chancery of Delaware
• Parties: RAY L. HALL, v. TRANS-LUX DAYLIGHT PICTURE SCREEN CORPORATION, a corporation of the State of Delaware, PERCY N. FURBER, WILLIAM T. BLACK, WILLIAM A. COPELAND, MINTON F. CRONKHITE, ROBERT L. DAINE, GEORGE H. EICHELBERGER, HAROLD P. FARRINGTON, PERCIVAL E. FURBER, LEAVITT J. HUNT, WILLIAM F. H. KOELSCH, ELLERY MANN, ARTHUR C. PAYNE, GEORGE A. SMAINIS, WILLIAM E. SNODGRASS and EDWARD WISE

171 A. 226

20 Del.Ch. 78

RAY L. HALL, v. TRANS-LUX DAYLIGHT PICTURE SCREEN CORPORATION, a corporation of the State of Delaware, PERCY N. FURBER, WILLIAM T. BLACK, WILLIAM A. COPELAND, MINTON F. CRONKHITE, ROBERT L. DAINE, GEORGE H. EICHELBERGER, HAROLD P. FARRINGTON, PERCIVAL E. FURBER, LEAVITT J. HUNT, WILLIAM F. H. KOELSCH, ELLERY MANN, ARTHUR C. PAYNE, GEORGE A. SMAINIS, WILLIAM E. SNODGRASS and EDWARD WISE

Court of Chancery of Delaware, New Castle

February 15, 1934

BILL FOR INJUNCTION AND ACCOUNTING, to which the defendant Trans-Lux Daylight Picture Screen Corporation has demurred. The material facts appear in the following opinion of the Chancellor.

Demurrer sustained.

Aaron Finger, of the firm of Richards, Layton & Finger, for complainant.

Hugh M Morris and John Biggs, Jr., for defendant Trans-Lux Daylight Picture Screen Corporation.

OPINION

THE CHANCELLOR:

The bill in this case seeks to enjoin the Trans-Lux Daylight Picture Screen Corporation from expending any money or incurring any liability in connection with a contest for proxies for use at the annual meeting of stockholders of the corporation held in May of the year 1933, or in connection with a proceeding now pending in this court for a review of the results of that meeting. The bill prays that the individual defendants, directors of the corporate defendant account to it and be directed to pay over to it any and all sums of money heretofore paid by the corporate defendant for any of the purposes above described.

The individual defendants are non-residents and have neither appeared nor been served with process. If they should never be subjected to the jurisdiction, the accounting relief could, of course, never be afforded. The demurrer filed by the corporate defendant goes to the whole bill. But inasmuch as the accounting phase of it may never come to a head because of the absence of the parties charged with the duty to account, and inasmuch as such parties are the proper ones to object to the sufficiency of that branch of the case that is directed solely against them, the demurrer of the corporate defendant will be treated as directed solely against that portion of the bill which concerns it, viz., the right of the complainant to an injunction as prayed. Donalson v. Investors' Realty Corporation, 16 Del.Ch. 20, 139 A. 766; Id., 16 Del. Ch. 214, 142 A. 831.

1. The first question which the demurrer presents is--to what extent may corporate funds be expended in supporting the management's side of a controversy against stockholders who are in disagreement with the management and who are seeking in a contest to elect directors to substitute their views or their control for the views and control of the present management?

Where the controversy is concerned with a question of policy as distinguished from personnel of management and the stockholders are called upon to decide it, it would seem quite clear that the incumbent directors may with perfect propriety make such expenditures from the corporate treasury as are reasonably necessary to inform the stockholders of the considerations which the directors deem sufficient to support the wisdom of the policy advocated by them and under attack; and in the same communications which the directors address to the stockholders in support of their policy they may solicit proxies in its favor. The report of the case of Pell v. London & North Western Ry. Co., [1907] 1 Ch. 5, contains discussions by the three Lord Justices who sat in the case, which very persuasively demonstrate that such expenditures are entirely proper. The underlying reason is given by them as this--that inasmuch as the stockholders are called upon to express their judgment upon the soundness of a questioned policy, it is in the interest of an intelligent decision by them that they should be advised by the responsible managers of the corporation who formulated the policy what were the considerations which induced their approval; and that it would be highly unreasonable to require that the directors should personally defray the expense incident to the performance of a duty which rested upon them to lay before the stockholders the information which is requisite for an informed decision in turn on their part. Where the question is one of a policy to be adopted, the judges in the English case just cited took the view, and very reasonably so, that the corporation was under a duty to advise the stockholders, whose approbation or disapproval was to be determinative, of the reasons for the policy's adoption, and that in such a case the directors are to be regarded as having that corporate duty laid upon them. Any expense incident and reasonably necessary to perform that duty, is an expense incurred in the interest of the corporation and therefore properly chargeable to it.

In Rascovor v. American Linseed Co., 135 F. 341, the Circuit Court of Appeals of the Second Circuit decided that it was proper to charge a corporation with the expense of advertisements which advised the stockholders of an arrangement whereby they might exchange their stock for stock in another company provided an aggregate of two-thirds of the stock was offered for exchange. The trial court held that such advertisements were solely in the individual interest of the stockholders, that the proposed exchange was not a corporate undertaking, that the corporation had derived no benefit from the advertisements and should therefore not be required to pay for the same. The Circuit Court of Appeals conceded that in a sense the proposed exchange was a matter of concern to the stockholders in their individual capacities, but took the view also that inasmuch as, if the exchange were made, the corporation's business might be most vitally affected by being turned over for operation by another company, it was a case where the welfare of the corporation as distinct from its stockholders was at stake and, therefore, it was proper for the corporation to bear the expense of notice by advertisements to the stockholders of what was afoot and of the views of the directors with respect thereto. This case is analogous in point of principle to the English case above cited, because upon analysis it appears to be a case where the corporation incurred expenses in order that stockholders might be advised upon a question which, though it was of concern to them individually, nevertheless, according as two-thirds of them answered it one way or another, intimately touched the ultimate welfare of the corporation and so fell in the category of questions affecting corporate policy.

It is a proper use of corporate funds for a corporation to pay therefrom the costs incurred in the giving of notice by advertisement of a special meeting of stockholders notwithstanding such notice is ampler and more expensive than would be one by mail which the by-laws call for. This was held in Lawyers' Advertising Co. v. Consolidated Railway, etc., Co., 187 N.Y. 395, 80 N.E. 199, 200, on the theory that it is in the interest of the corporation that as full an attendance of stockholders may be had as a timely notice is calculated to produce. The court in that case at one point in its opinion gave expression to a view which so far as it goes, is in harmony with the cases just cited from the English Chancery Division and the United States Circuit Court of Appeals in the second circuit. It said--"Proper and honest corporate management was subserved by widespread notice to stockholders of questions affecting the welfare of the corporation,...