Hodge v. U.S. Steel Corp.

• Decision Date: 18 February 1903
• Citation: 64 N.J.E. 807,54 A. 1
• Parties: HODGE et al. v. UNITED STATES STEEL CORP. et al.
• Court: New Jersey Supreme Court

54 A. 1

64 N.J.E. 807

HODGE et al.

v. UNITED STATES STEEL CORP. et al.

Court of Errors and Appeals of New Jersey.

Feb. 18, 1903.

(Syllabus by the Court.)

Appeal from court of chancery.

Bill by J. A. Hodge and others against the United States Steel Corporation and others. From an order granting an injunction (53 Atl. 601), defendants appeal. Beversed.

Charles L. Corbin, Richard V. Lindabury, Francis Lynde Stetson, and William D. Guthrie, for appellants.

McCarter, Williamson & McCarter, Abm. I. Elkus, Joseph M. Proskauer, Alan H. Strong, Frank Bergen, and Edward B. Whitney, for respondents.

VAN SYCKEL, J. The subject-matter of this appeal is an order granted by the court of chancery at the instance of the complainants restraining the defendants from executing, issuing, delivering, or receiving any bond or mortgage, under certain resolutions of the stockholders of the United States Steel Corporation, passed May 19, 1902, providing for the reduction of $200,000,000 of its preferred stock, and the retirement thereof out of bonds or the proceeds of bonds. Three of the complainants in the bill as originally filed voluntarily withdrew from the suit. The remaining complainants are Hodge, Smith, and Curtis. Hodge owns 100 shares, acquired by him before the contract in question was made. Smith owns 200 shares acquired since that time from a holder who assented to the contract. Curtis, so far as appears, owns no stock. The vice chancellor properly held that the case must be considered as based wholly upon the rights of Hodge as a shareholder. The steel corporation was organized under the general corporation act of this state (Bevision 1896) on the 25th day of February, 1901, and the certificate of incorporation was filed on that day. On the 1st day of April, 1901, an amended certificate of incorporation was filed, which provided, among other things, for an authorized capital of $1,100,000,000, of which $550,000,000 was to be preferred stock, divided into 5,500,000 shares of the par value of $100 each, and a like number of shares of common stock of the par value of $100 each. As required by section 18 of the general corporation act, the amended certificate of incorporation stated that: "The holders of the preferred stock shall be entitled to receive when and as declared from the surplus or net profits of the corporation yearly dividends, at the rate of seven per centum per annum, and no more, payable quarterly on dates to be fixed by the by-laws." The by-laws of the company provide as follows: Article 5, § 5: "The dates for the declaration of dividends upon the preferred, and upon the common stock of the company shall be the days by these by-laws fixed for the regular monthly meetings of the board of directors in the months of April, July, October and January in each year, on which days the board of directors shall declare what, if any, dividends shall be declared upon the preferred stock and the common stock or either of such stocks. The dividends on the preferred stock shall be payable quarterly on the sixth Wednesday next after the several dates of the declaration thereof."

The board of directors of said corporation, having resolved that it would be advisable to decrease the capital stock of the corporation to the extent of 2,000,000 shares, and to retire them by means of an issue of bonds, called a meeting of the stockholders to be held on the 19th day of May, 1902, in pursuance of and as required by section 27 of the general corporation law and by the act of 1902, for the purpose of voting upon the proposed plan for the purchase and retirement of that amount of preferred stock and the issue of 5 per cent. bonds. Prior to the notice of this meeting the directors had entered into a tentative contract with Messrs. J. P. Morgan & Co., bankers, under date of April 1, 1902, by which said bankers agreed with the steel corporation that $100,000,000 face value of the new bonds would be taken and paid for, of which $80,000,000 would be paid for by a like amount of preferred stock taken at par, and $20,000,000 would be paid in cash. To guaranty the performance of this contract, a syndicate was formed by J. P. Morgan & Co., the members of which actually deposited with that firm $80,000,000 of preferred stock to be used in the performance of the contract. The effect and purport of this agreement is that the bankers agreed to buy from the steel corporation at least $100,000,000 of 5 per cent. bonds, and to pay therefor $20,000,000 in cash and $80,000,000 in preferred stock at par, with an option to purchase the remaining bonds if the stockholders did not do so; and in consideration of this undertaking the bankers were to receive a commission of 4 per cent. on $100,000,000, and contingently a commission of 4 per cent. on any additional amount that might be taken at par by the stockholders or the bankers. This contract with the bankers was to be subject to the approval of the stockholders. At the stockholders' meeting on the 19th of May, 1902, duly convened, the resolution to retire the preferred stock and the resolution to adopt the bankers' contract were separate and distinct, and were voted upon and passed as separate and distinct resolutions. The shareholders could have adopt; ed the first and rejected the latter. There was in attendance at the meeting in person or by proxy over 73 per cent. of the outstanding preferred stock, and over 78 per cent. of the outstanding common stock. More than 99.83 per cent. of the stockholders at such meeting, present either in person or by proxy, voted in favor of both resolutions, and only 17/100 of 1 per cent. voted against them.

The by-laws of the corporation contained the following provision: "The board of directors in its discretion may submit any contract or act for approval or ratification at any annual meeting of the stockholders, or at any meeting of the stockholders called for the purpose of considering any such act or contract, and any act or contract that shall be approved or ratified by the vote of the holders of a majority of the capital stock of the company which is represented in person or by proxy at such meeting: provided that a lawful quorum of stockholders be there represented in person or by proxy, shall be as valid and as binding upon the corporation and upon all the stockholders, as though it had been approved or ratified by every stockholder of the corporation." This by-law cannot amplify the powers of the corporation, or operate to validate any act ultra vires of the corporation, but it enabled the stockholders by a majority vote to ratify any contract which the entire body of stockholders or the corporation might lawfully make. Both resolutions therefore received more than the vote required by the twenty-seventh section of the corporation act and by the by-law of the company. If all the shareholders had intended to convert their preferred shares into 5 per cent. bonds, they would, of course, have voted for the conversion resolution, and have rejected the bankers' contract. In a scheme involving such an enormous amount of capital, and affecting thousands of shareholders, it could not reasonably have been supposed that all would prefer to accept the 5 per cent. bonds, and it was, therefore, the exercise of a prudent foresight that prompted them, in order to assure the successful execution of the plan, to secure the co-operation of bankers who could command millions of capital. When the subject-matter of this litigation was before this court at the June term, 1902, in the case of Berger v. The United States Steel Corporation, 53 Atl. 68, it was expressly declared: First. That the act concerning corporations, as revised in 1890, authorizes corporations formed under it to retire shares of its preferred stock purchased with bonds or the proceeds of bonds issued for that purpose, the provisions of sections 27 and 29 being complied with. Second. The manner in which a duly authorized plan is to be carried through is part of the business of the corporation, and, in the absence of fraud or bad faith, is not the subject of judicial control to any greater extent than other business of the corporation. The court cannot substitute its judgment for that of the directors and majority stockholders, and say that a less expensive plan could be successfully adopted. These questions, therefore, are not open to controversy in this case, in so far as the cost or wisdom of the plan is concerned.

There is an entire absence in the case of anything to show a taint of fraud, or an attempt to conceal from the shareholders any fact which should have influenced their action. That the entire proceeding was conducted with good faith, without concealment, and with fairness to both parties, is evinced by the fact that during all the litigation which has ensued, under the promotion of a share owner who did not attend the meeting, not one of the vast number of shareholders who were present in person or by proxy, comprising men of great business capacity, interested to the extent of millions of dollars in the conversion plan, has questioned its propriety, or expressed a desire, so far as appears, to recede from it. The contract with the bankers was submitted to the stockholders without comment, and, as stated in the resolutions, of which a copy was tendered to the stockholders, "was not finally to become or to be operative until after approval thereof by the stockholders in special meeting assembled."

The first reason to be considered, upon which the complainants rely to maintain their injunction, is that the action of the directors in passing the resolutions for the plan of conversion and approving the bankers' contract was fraudulent and void, because 15 or more of the 24 members of the board of directors were interested in the syndicate which was formed to assist in carrying out the bankers' contract, and to share its profits; and that the plan was never properly and legally ratified by...