Holthusen v. Edward G. Budd Mfg. Co., Civil Action No. 3223.

• Citation: 52 F. Supp. 125
• Decision Date: 29 December 1943
• Docket Number: Civil Action No. 3223.
• Parties: HOLTHUSEN v. EDWARD G. BUDD MFG. CO. (FELDMAN, Intervener).
• Court: U.S. District Court — Western District of Pennsylvania

52 F. Supp. 125

HOLTHUSEN v. EDWARD G. BUDD MFG. CO. (FELDMAN, Intervener).

Civil Action No. 3223.

District Court, E. D. Pennsylvania.

October 8, 1943.

Application to Dissolve Injunction Granted December 29, 1943.

Spencer Pinkham (of Holthusen & Pinkham), of New York City, and Frederick B. Smillie and A. Benjamin Scirica (of Smillie & Bean), both of Norristown, Pa., for plaintiff.

Robert D. Abrahams and George Scott Stewart, Jr., both of Philadelphia, Pa., for intervening plaintiff.

Robert T. McCracken and Henry S. Drinker, Jr., both of Philadelphia, Pa., for defendant.

Application to Dissolve Injunction Granted December 29, 1943. See 53 F.Supp. 488.

BARD, District Judge.

The complaint in this matter was filed by a holder of common stock of the defendant corporation on behalf of himself and of any other stockholders who might join or intervene therein, to enjoin defendant from granting options for the purchase of 300,000 shares of authorized but unissued common stock to certain of its executive officials and other employees. Most of the facts were admitted or stipulated at the time of hearing, and there is presented the question whether they entitle the plaintiff to the relief he seeks.

Under date of May 5, 1943, defendant's president sent to its shareholders a letter containing a report on the operations of the company, a notice of a special and adjourned annual meeting of shareholders to be held July 13, 1943, and a proxy statement. Among the stated purposes of the meeting was the adoption of a new article to the by-laws of the company authorizing it "to grant to such of the company's executive and administrative employees (including officers) as the Board of Directors may determine, options, expiring five years from their issuance and not transferable except on the death of the holder, to purchase an aggregate of not in excess of 300,000 authorized and unissued shares of Common Stock of the Company", at a price equal to 125% of the market price of such stock at the time of the granting of the options.¹

Prior to July 13, 1943, the date fixed for the meeting, plaintiff filed his complaint in this case alleging that the proposed bylaw was illegal and incapable of enactment by the shareholders. He moved for an injunction prohibiting defendant and its officers and directors from enacting, or attempting to enact, or permitting its shareholders to vote on the proposed article of the by-laws. Defendant filed a motion to dismiss the complaint on the ground that it failed to state a claim on which relief could be granted. Argument on these two motions was had before me, and on July 9, 1943, I handed down an opinion denying both motions, 50 F.Supp. 621.

Plaintiff's motion was denied on the ground that the proposed by-law was not self-operative and its mere adoption by the shareholders would not irreparably harm non-assenting shareholders or deprive them of their right to challenge the directors' exercise of the power granted thereby, if illegal. Moreover, as pointed out in the opinion, a failure of the shareholders to adopt the proposed by-law would render the plaintiff's complaint moot.

The defendant's motion to dismiss the complaint was likewise denied on the ground that the questions raised by the complaint could be determined if the by-law were adopted and action thereunder proposed by the board of directors, pending which the court retained jurisdiction of the case under its equity powers.

At the meeting of the shareholders a total of 67% of all the outstanding votes was cast in favor of the adoption of the by-law and approximately 5% against it, the remaining shareholders not voting. Under the authority of this by-law the directors propose to grant options for the entire 300,000 shares to 160 specified officers and employees. Pursuant to a suggestion contained in my former opinion, the defendant gave plaintiff due notice of the plan adopted by its board of directors, and he applied for an injunction against the granting of the options, pursuant to which application hearing in this matter was held. Prior to the hearing, another holder of common stock intervened as a party plaintiff. Counsel for defendant very commendably stated to the court that no options would actually be issued to any of the options until the court renders a decision in the instant matter.

The options, the form of which is in evidence, entitled their holders to purchase a stated number of shares of the defendant at any time within five years from their dates at a price equal to 125% of the market price on the dates of their issuance. They are stated to be non-transferable except by operation of law upon the death of the holder, in which event their rights are exercisable by the heirs, executors or administrators of the holders. It is further provided that the options shall not be exercisable by their holders after their employment by defendant has been discontinued, unless otherwise specified by the board of directors.

Plaintiff contends that the granting of the options on these terms and conditions constitutes a gift of corporate property wholly without consideration and that neither the directors nor the majority shareholders have a right to make a gift of its property over the objection of any minority shareholder. He further contends that Section 612 of the Pennsylvania Business Corporation Act of 1933,² which authorizes the creation of an employees' share purchase plan, and on which defendant relies as authority for the by-law in question, is inapplicable and, in any event, does not authorize a gift of corporate property.

Considering first the applicability of the Pennsylvania statute, the section relied upon states:

"Employees' share purchase plan

"Unless otherwise provided in its articles, every business corporation may provide and carry out a plan for the issue and sale of its authorized but unissued shares to its employees, or to the employees of any subsidiary corporation, or to a trustee on their behalf, without first offering such shares to its shareholders, upon such terms and conditions, and in such manner, as shall be provided in the bylaws, except that shares subject to preemptive rights may be so issued and sold under such plan only with the written consent or affirmative vote of the holders of two-thirds of the shares entitled to exercise preemptive rights with respect thereto."³

Plaintiff argues, first, that the granting of options to purchase shares is not the "issue and sale" of shares within the language and intent of this section. But the section expressly grants authority to a corporation "to provide and carry out a plan" for the issue and sale of stock to its employees on such terms and conditions as shall be provided in the by-laws. There appears to be no reason why a corporation may not adopt a plan for the issue and sale of stock to its employees which operates by means of the granting of options. Surely a plan by which employees become entitled to purchase shares of stock of their corporate employer after a specified period of employment, for example, would be entirely within the purview of a "plan for the issue and sale" of the corporation's stock to its employees, even though the plan thereby granted them options to purchase the stock.

The same answer applies to plaintiff's further argument that this section of the Business Corporation Act is limited by Section 603 of the same Act,⁴ which provides that shares of the corporation may not be issued except for money, labor done, or property actually received. No shares of the defendant corporation are, under this by-law and plan, to be issued except for money because the right granted to the holder of the option is merely to purchase the stock of the defendant at a specified price. Such limitation, if any, as may be imposed on Section 612 of the Business Corporation Act by Section 603 thereof in no way, therefore, precludes the adoption of a plan providing for the issuance of stock for cash.

The intervening plaintiff offers one further argument why the plan adopted is not within the scope of Section 612. His argument is that it is not a plan for the sale of shares to the corporation's employees, since at the time the options may be exercised, the holders may no longer be employees. This objections, which was raised at the first hearing on the motions of the parties, defendant has since sought to meet by inserting a provision in the options that they may not be exercised after the holders' employment by defendant has been discontinued, "unless otherwise specified by the Board of Directors." This reservation was made, according to the defendant, to allow some discretion to the directors in this respect in such eventuality as the entry by an employee into the service of his country or his sustaining a disabling injury during the course of his employment. It is true that this reservation leaves open the possibility of abuse of that discretion and that the intervening plaintiff's argument is not without force. In view, however, of my conclusions on the merits of the present plan, set forth later in this opinion, I do not find it necessary to decide whether the plan is beyond the authority of the statute because the employees to whom the options were granted may, subject to the discretion of the board of directors conferred upon it by a duly adopted by-law, not be employees at the time of their exercise of their options.

This brings us to the more difficult and serious question whether the granting of these options is not a gift of the assets of the corporation or is not so out of proportion to the value of any consideration received therefor as to amount to waste of corporate property. The Supreme Court of the United States has held that a waste of corporate property may not be justified by the fact that it results from the carrying...