Pilat v. Broach Systems, Inc.

• Decision Date: 09 December 1969
• Citation: 260 A.2d 13,108 N.J.Super. 88
• Parties: Peter PILAT, Plaintiff, v. BROACH SYSTEMS, INC., a New Jersey corporation, Defendant.
• Court: New Jersey Superior Court

Page 88

108 N.J.Super. 88

260 A.2d 13

Peter PILAT, Plaintiff, v. BROACH SYSTEMS, INC., a New Jersey corporation, Defendant.

Superior Court of New Jersey Law Division.

Dec. 9, 1969.

Albano & Albano, Cedar Grove, for plaintiff.

Collins & Toner, Newark, for defendant.

BRESLIN, J.D.C. (temporarily assigned).

The following facts are not in dispute. Plaintiff was a stockholder and a member of the board of directors of defendant Broach Systems, Inc., and also its vice-president from the time of the corporation's inception in 1967 until May 26, 1969. On July 28, 1969 he was removed as a director and on September 19 was discharged as an employee.

On June 3, 1969 plaintiff, through his attorney, made a written demand upon the corporation to inspect the corporate balance sheet, profit, loss and surplus statements, minutes of the shareholders' proceedings, the record of shareholders and its books, records of account and minutes. The original purpose of the inspection was to ascertain the value of plaintiff's stockholders in the corporation, but in his trial memorandum he indicated that he also wanted 'to be certain whether or not there had been proper management of the corporate affairs and business.' On June 18, 1969 plaintiff again requested the information set forth in the previous communication and made a formal demand for inspection pursuant to N.J.S.A. 14A:5--28. No response was forthcoming from defendant to either communication. On August 18, 1969 a complaint was filed in which plaintiff sought (1) an examination of the books and records of the corporation; (2) reinstatement as a director; (3) a declaration that the executive committee was illegal and (4) an order restraining the corporation from removing its assets from New Jersey to Florida.

By letter dated October 1, 1969 defendant informed plaintiff that he would be allowed to examine the listed documents with the exception of the books, records and minutes of the corporation; that he was reinstated as a director, and that a special meeting of the board of directors would be held on October 6. at said meeting the board approved a proposed amendment to the certificate of incorporation authorizing the shareholders to remove a director without cause, as provided by N.J.S.A. 14A:6--6. On October 16 the amendment was adopted and plaintiff was thereupon removed as a director.

Plaintiff assets that he is acting in good faith, in his own interest as a stockholder and in the best interests of the corporation, and essentially requests this court to rule that (1) he is entitled to inspect the corporate books and records, and (2) the statute enabling stockholders of a corporation to remove a director without cause is unconstitutional.

Defendant contends that plaintiff instituted this action only to harass the corporation and its management and to obtain personal gain; that plaintiff is not entitled to the requested inspection since he has not shown a proper purpose, and that N.J.S.A. 14A:6--6(1) is constitutional.

Other contentions raised by the parties will be treated later on in this opinion.

I

N.J.S.A. 14A:6--6 provides:

(1) One or more or all the directors of a corporation may be removed for cause by the shareholders by the affirmative vote of the majority of the votes cast by the holders of shares entitled to vote for the election of directors. If the certificate of incorporation so provides, one or all the directors may be removed without cause by like vote of the shareholders. (Emphasis added)

Here, plaintiff's first removal from his position on the board of directors was without cause, and since there was no provision existing at the time in defendant's certificate of incorporation authorizing such removal, the same was improper and void. As previously noted, defendant then reinstated plaintiff to his former status, but amended its certificate to provide for removal without cause. Plaintiff enjoyed this renewed status for about two weeks, until the shareholders once again voted him out.

Defendant, by virtue of N.J.S.A. 14A:9--1 (allowing amendments to certificates of incorporation so long as the amendments contain only such provisions as could lawfully be contained in an original certificate filed at the time of making the amendment) and N.J.S.A. 14A:6--6, had the right to amend the certificate to provide for the removal of a director without cause. Although defendant was incorporated prior to the enactment of the present statute, it unquestionably had the right to adopt as its own the provisions of the new Corporation Act. Brundage v. New Jersey Zinc Co., 48 N.J. 450, 226 A.2d 585 (1967). Still, the court is of the opinion that such an exercise could not work to affect plaintiff's existing rights as a director.

The precise question presented--whether an amendment to a certificate, providing for the removal of a director without cause, as authorized by statute, enables the shareholders to remove a director without cause when the director had been elected prior to the amendment--is novel in this jurisdiction, because before the enactment of N.J.S.A. 14A:6--6 New Jersey common law had held that a director could never be removed without cause and without reasonable opportunity for a hearing. Costello v. Thomas Cusack Co., 96 N.J.Eq. 83, 124 A. 615 (Ch.1924).

New York courts, however, faced with situations similar to the present one, have resolved the problem equitably and justly. In Abberger v. Kulp, 156 Misc. 210, 281 N.Y.S. 373 (Sup.Ct.1935), the court reviewed the past decisions in the state and set down the following rules with reference to the removal of directors by the stockholders of a corporation.

(a) That irrespective of the existence of any provision in the certificate of incorporation or of a by-law, a corporation may remove a director during his term of office for cause arising from his acting in a manner inimical to the interests of the corporation; (b) during his term of office, a director may not be removed except for cause Unless at the time of his election there existed a by-law that provided for the removal of a director without cause. If such by-law exists, then he has taken the office subject to the provisions of the by-laws; (c) a corporation may adopt a by-laws providing for the removal of a director with or without cause, but Such by-law, in so far as it refers to the removal of a director without cause, is of no value for the removal of a director who is in office at the time of the enactment of the by-law; (d) without a by-law which is in force prior to his election and at the time of his election, a director has a vested right to continue in his office to the end of his said term except if he is removed for cause. (281 N.Y.S. at 376; emphasis added)

See also Tremsky v. Green, 106 N.Y.S.2d 572 (Sup.Ct.1951), wherein the court upheld the principles set forth above. The present New York statute dealing with the removal of directors differs only slightly from our statute and was based on the past decisional law of that state. See McKinney, Consolidated Laws of New York, c. 4, Business Corporation Law, § 706. It would appear that the legislature saw no inconsistency between the statute that provides for the removal of directors without cause if the certificate of incorporation or by-laws so provide, and the decision in Abberger v. Kulp, Supra.

New York is not the only jurisdiction to pass on the question. In Elevator Operators & Starters' Union, etc. v. Newman, 180 P.2d 42 (Cal.D.Ct.App.1947), the court adopted the reasoning of the above decisions as an equitable one and by analogy held:

* * * as to unincorporated labor unions, where the term of office of an officer is fixed in the constitution and by-laws at a fixed term, and where at the time of election to the office the constitution and by-laws do not provide for his removal by the membership, he may be removed only for cause, and in the absence of such removal is entitled to remain in his office for the balance of his term, even though the constitution and by-laws are subsequently amended so as to shorten the term of that office * * *

* * * the amendment shall be interpreted to apply prospectively to officers taking of office after its passage. (at 49)

A director is a fiduciary and quasi-trustee to the corporation and to the shareholders, Hill Dredging Corp. v. Risley, 18 N.J. 501, 114 A.2d 697 (1955); his acts as a director may lead to his personal liability, McGlynn v. Schultz, 95 N.J.Super. 412, 231 A.2d 386 (App.Div.1967), and the entire management of corporate affairs is committed to his charge upon the trust and confidence that they will be cared for and managed within the limits of the powers conferred by law upon the corporation and for the common benefit of the stockholders. 19 Am.Jur.2d 679. It would appear that the burdens and responsibilities he assumes, and the many economic interests he safekeeps, all give rise to a vested interest in his position.

For these reasons a director cannot be removed without cause unless the certificate of incorporation so provides at the time of his election thereto. Plaintiff, consequently, is to be immediately reinstated as a member of defendant's board of directors.

II

The question now to be considered is whether plaintiff has the right to inspect the corporate books and records. Defendant contends that this right will only be accorded when the applicant has shown a proper purpose and good faith, and that since plaintiff has not shown this, the requested relief should be denied.

It is the law in this State that a stockholder has the right to inspect the books and records of a corporation if it is shown that he is acting in good faith and for some purpose germane to his status or interest as a shareholder. Drake v. Newton Amusement Corp., 123 N.J.L. 560, 9 A.2d 636 (Sup.Ct.1939); Bruning v. Hoboken Printing & Publishing Co., 67 N.J.L. 119, 50 A. 906 (Sup.Ct.1902); Rosenbaum v. Holthausen, 9 N.J.Super. 484, 75 A.2d...