Mathews v. Am. Tobacco Co.

• Decision Date: 19 December 1941
• Docket Number: 523/724.
• Citation: 130 N.J.Eq. 470,23 A.2d 301
• Parties: MATHEWS et al. v. AMERICAN TOBACCO CO. et al. ROGERS v. SAME.
• Court: New Jersey Court of Chancery

23 A.2d 301

130 N.J.Eq. 470

MATHEWS et al.

v. AMERICAN TOBACCO CO. et al.

ROGERS

v. SAME.

523/724.

Court of Chancery of New Jersey.

Dec. 19, 1941.

Syllabus by the Court.

1. Where stockholders institute suits on behalf of the corporation, or for the benefit of themselves and other stockholders, the institution of the proceedings implies no obligation upon them to conduct the suits to final hearing. They are not fettered with any such rule of procedure. They are entitled to be relieved of the burden of suit at any time that they feel there is justification for it.

2. A trustee sues at the expense of the trust. He has a duty to observe in the institution and prosecution of a suit if the trust estate requires such action. Here, in the instant case, the stockholders prosecuted suits at their own expense; they were under no duty to initiate the proceedings or to prosecute them to final hearing after they had been instituted. 3. Discontinuance of a suit settles none of the issues involved and bars neither the claim of the corporation nor any other stockholder suing in its right.

Consolidated stockholders' actions by William J. Mathews and others and by Richard Reid Rogers against the American Tobacco Company and others for a determination whether plan adopted by stockholders of the named defendant, and authorizing directors to offer from time to time a certain number of shares of the named defendant's common stock B to those actively engaged in the conduct of the named defendant's business for purchase at not less than par, was valid, and to determine whether shares of stock allotted pursuant to the plan to certain allottees were validly issued under the plan. Thereafter, a settlement was agreed on by the parties, and the settlement provided that an agreed judgment would be entered incorporating the settlement, as far as practicable on the terms set forth. A decree of dismissal was then entered in the actions. Thereafter, Leo Bondy and other petitioners filed a petition to vacate the decree of dismissal on ground that the entry of the decree was without notice to stockholders and full disclosure of all payments to the complainants.

Order advised denying prayer of petition.

Samuel Kaufman (of Bilder, Bilder & Kaufman), of Newark, for petitioners Lydia Locke et al.

Bernard Freedman (of Koehler, Augenblick & Freedman), of Newark, for petitioner Leo J. Bondy.

Josiah Stryker (of Lindabury, Depue & Faulks), of Newark, for defendant American Tobacco Co.

Lorentz & Stamler, of Newark (Waldron M. Ward, of Newark, of counsel), for defendant George W. Hill.

John Milton (of Milton, McNulty & Augelli), of Jersey City, for defendants Guaranty Trust Co. and others.

George W. C. McCarter (of McCarter, English & Egner), of Newark, for defendants Charles F. Neiley et al.

EGAN, Vice Chancellor.

On July 13, 1933, Vice Chancellor Fallon advised a consent decree of dismissal in the above entitled causes which had been consolidated by an order advised by him on the same day. Several stockholders of the defendant corporation questioning the good faith of the parties to that proceeding filed petitions to set aside the decree, to intervene as complainants in the consolidated cause, and to proceed with the original suit to final hearing. The argument on the petitions was had some months ago, and upon its conclusion counsel requested, and were given a limited time within which to submit their briefs. Some of the briefs were presented within the period allotted, while others were received within the past week.

These suits are incident to and arise from proceedings instituted by the complainant, Richard Reid Rogers, in the Federal Courts and in the Supreme Court of the State of New York. It seems necessary to present part of the background which led eventually to the filing of the petitions herein.

The defendant, the American Tobacco Company, is a corporation of the State of New Jersey. On July 28, 1930, at a special meeting of its stockholders, a plan, allegedly authorized under the provisions of Chapter 175 of the Laws of 1920, page 354, N.J.S.A. 1:1-10, 14:9-1 et seq., was presented enabling its directors to offer and allot for purchase by its employees shares of its unissued common B stock. It provided for the distribution of 312,968 shares to directors, officers and employees at prices not less than the par value thereof upon certain terms and conditions. Each stockholder was given a copy thereof with a notice of the time and place of the meeting. The complainant Rogers attended the meeting and read or caused to be read a statement opposing the plan, and threatened legal action if any appreciable amount of stock were issued thereunder for a price substantially less than its market value. The plan was adopted by an alleged vote of more than two-thirds of each class present and voting at the meeting. Thereafter, in 1931, pursuant to the adopted plan, the directors allotted for purchase at par 56,712 shares of common stock B to a list of 535 persons including the president, other officers and employees of the company. The plan named the Guaranty Trust Company of New York and Junius Parker trustees. They, under a trust agreement, purchased the 56,712 shares at a price of $25 per share for the allotted shares which they were to hold for the benefit of the allottees until they were fully reimbursed. The trust agreement provided for the return to the compay of all, or a portion, of the individual allotments upon the happening of certain contingencies.

After the plan was placed in operation Rogers thereupon instituted two stockholder suits in the Supreme Court of New York wherein he questioned the validity of the plan. One suit was against the American Tobacco Company and certain of its directors, and the other was against the Guaranty Trust Company and Junius Parker as trustees, and others. Those suits were subsequently removed to the Federal Court for the Southern District of New York, and were thereafter consolidated. Rogers also instituted mandamus proceedings in the New York State Supreme Court to obtain an examination of the books and records of the company. 143 Misc. 306, 257 N.Y.S. 321; 233 App. Div. 708, 249 N.Y.S. 993. He was successful in the latter suit and was allowed to examine the books and records of the company, after which he amended his bills of complaint. Under the amended bills he sought to have the defendants enjoined from carrying out the plan, to have the subscription contracts cancelled, the stock returned to the company, the money advanced by employees returned, and the issuance of the 56,712 shares declared void; or, in the alternative if it could not be returned, to have the individual defendants account therefor.

The defendants filed answers to the suits. Rogers moved to strike out the defenses and demanded judgment on the pleadings. His motion was denied by the United States District Court and a judgment dismissing the bills of complaint without prejudice to the enforcement of complainant's right in the courts of New Jersey was entered. 60 F.2d 106.

Rogers then appealed to the United States Circuit Court of Appeals which court decided that the plan and the allotment of the stock thereunder were valid and dismissed the bill of complaint on its merits. 2 Cir., 60 F.2d 114. He then went to the United States Supreme Court on a writ of certiorari. That court on January 23, 1933, reversed the decision of the Circuit Court of Appeals insofar as it had decided the merits of the case and reinstated the earlier judgment of the United States District Court dismissing the bills of complaint without prejudice to the enforcement of the complainant's rights, if any, in the courts of New Jersey. Rogers v. Guaranty Trust Co. of New York, 288 U.S. 123, 53 S.Ct. 295, 77 L.Ed. 652, 89 A.L.R. 720.

On January 28, 1933, after the decision of the United States Supreme Court was announced, the complainant Mathews filed his bill of complaint in this court. Approximately a week thereafter, or on February 6, 1933, Rogers filed his bill of complaint here. Those two suits raised the issues (a) whether the plan adopted by the stockholders authorizing the directors to offer from time to time an aggregate of 312,968 shares of the company's common stock B to those actively engaged in the conduct of the company's business for purchase at not less than par was valid; and (b) whether the 56,712 shares of stock allotted pursuant to said plan to 535 allottees were validly issued under said plan.

Notwithstanding the object of these two suits, both complainants allege, among other things, that they had not waived their rights to subscribe to the shares allotted under the plan. Answers were filed to these suits and both causes were referred to Vice Chancellor Fallon.

On May 29, 1933, the United States Supreme Court, Rogers v. Hill, 289 U.S. 582, 53 S.Ct. 731, 77 L.Ed. 1385, 88 A.L.R. 744, handed down its decision holding that Article XII of the by-laws of the corporation, which had been attacked by Rogers, was valid when it was adopted, but the court remanded the case for further proceedings to the United States District Court for the Southern District of New York.

Rogers had prosecuted three appeals to the United States Circuit Court of Appeals, and two writs of certiorari to the United States Supreme Court before he filed his bill in this court.

In the litigation instituted by Rogers in the New York State and Federal Courts which had been pending for two years or more, no stockholders had intervened.

On April 5, 1933, Rogers attended a stockholders' meeting of the defendant corporation and there stated that in his opinion the litigation which had been prosecuted for the period above stated was injuring the business of the company and should be settled, upon terms fair and just to the company.

A short while thereafter negotiations were had among the litigants concerning the possibility of settlement of all the pending litigation....