Rogers v. Guaranty Trust Co. of New York

• Decision Date: 16 February 1932
• Parties: ROGERS v. GUARANTY TRUST CO. OF NEW YORK et al. SAME v. AMERICAN TOBACCO CO. et al.
• Court: U.S. District Court — Southern District of New York

60 F.2d 106 (1932)

ROGERS v. GUARANTY TRUST CO. OF NEW YORK et al.

SAME v. AMERICAN TOBACCO CO. et al.

District Court, S. D. New York.

February 16, 1932.

Richard Reid Rogers, of New York City, pro se.

Chadbourne, Stanchfield & Levy, of New York City, for defendants Hill, Riggio, Harvie, Boylan, and American Tobacco Co.

William M. Parke, of New York City, for defendant Taylor.

Victor J. Dowling, Louis S. Levy, George W. Whiteside, and J. Arthur Leve, all of New York City, and J. Edward Ashmead and Merritt Lane, both of Newark, N. J., of counsel, for defendants Hill and others.

Davis, Polk, Wardwell, Gardiner & Reed, of New York City, for defendants Guaranty Trust Co., and Parker.

PATTERSON, District Judge.

This suit is brought by a stockholder of the American Tobacco Company suing in his derivative right against the company, its directors and certain trustees who hold some 56,712 shares of its common stock. The suit was commenced in the New York Supreme Court, and came here by removal proceedings. The plaintiff's object is to enjoin the distribution of the shares among the directors and others connected with the company and to obtain the cancellation of the shares. Issue having been joined, the case comes up on the plaintiff's motion to strike out four defenses pleaded by the defendants and for judgment on the pleadings.

According to the amended bill, the American Tobacco Company is a New Jersey corporation, but its principal office is in New York where the chief executives have their headquarters, the board of directors hold their meetings, and the corporate records are kept. The board of directors, at a meeting on June 25, 1930, passed a resolution declaring the advisability of increasing the number of shares of common stock and reducing the par value of each share, and also a resolution formulating and declaring advisable a plan of issuing and selling shares of common stock to employees and those actively engaged in the conduct of its business. This plan, styled the "Employees' Stock Subscription Plan," made reference to New Jersey Laws of 1920, chapter 175, p. 354 (Comp. St. Supp. N. J. § 47 — 183 et seq.), to the effect that a corporation may provide a plan for issuing or selling stock to those working for it and for aiding them in paying for the stock, and that to carry out the plan the directors may formulate it, pass a resolution in favor of it, and thereafter call a stockholders' meeting, the plan to become operative in case two-thirds in interest of the stockholders vote for it. The "Employees' Stock Subscription Plan" in this case recited that the board of directors might offer and allot shares for subscription to such employees and those actively engaged in the business as the president might determine, by way of additional compensation for their services; that no one should be deemed ineligible because he was a director; and that the price of the shares should be not less than par value.

The next step in corporate sequence referred to in the amended bill was the stockholders' meeting on July 28, 1930. At this meeting more than the requisite number of each class of stockholders voted in favor of both measures recommended by the board of directors — the increase in number of shares to 6,000,000 with the reduction of par value to $25 per share, and the adoption of the "Employees' Stock Subscription Plan." At a meeting of the board of directors held on January 28, 1931, the plan was put into execution. The president submitted the names of some 529 persons and the number of shares to be allotted to each. The shares totaled 56,712. On the list of names submitted were those of all the directors, and the number of shares recommended for them was 32,770. The board thereupon passed resolutions adopting the president's report and allotting the shares for subscription to the persons named in the list at the price of $25 a share, said to be by way of additional compensation for services to be rendered for the year 1931. The shares were sold to the Guaranty Trust Company and Junius Parker as trustees for the participants, to be turned over to the latter upon payment of the price, but not prior to the close of the year 1931. The plaintiff says that, at the time when the shares were so allotted to the directors and others at $25 a share, the market value of the stock on the New York Stock Exchange was $112 a share. As soon as the plaintiff learned of the allotment, he protested to the directors and demanded that the stock issue be halted, but his protest went unheeded.

As further facts said to indicate deceit and suppression of the truth by the directors, the plaintiff sets forth in considerable detail several earlier transactions wherein it is alleged that the same directors or some of them had received large sums of money and large blocks of stock at the expense of the corporation and without disclosure to the stockholders. For present purposes, it is unnecessary to pursue this portion of the amended bill, because the plaintiff asks for no relief in this suit as to these matters. His attack is upon the "Employees' Stock Subscription Plan" and upon the shares issued under it. He charges that the entire plan is void under the act of 1920, because the directors, being then potential beneficiaries of the plan, were not qualified to pass the original resolution recommending it, and also because the statute contemplated a plan whose benefits would be available to any and all employees, whereas this plan was only for the benefit of such persons as the president might select. As another ground of invalidity, he says that the plan, in its provision that the stock offering should serve as compensation for future services, is contrary to chapter 195 of Laws of 1917 (Comp. St. Supp. N. J. § 47 — 176 et seq.), which deals with the kinds of consideration for which stock of New Jersey corporations may be issued. The plaintiff also charges that the plan as carried out by the January resolutions of the board is void because it is a "fraud upon the statute," meaning presumably a perversion of the true purpose and effect of the 1920 act, and also because the stock was not first offered pro rata to the stockholders as required by chapter 318 of the Laws of 1926 (Comp. St. Supp. § 47 — 7 et seq.).

The relief demanded is an injunction against any further steps toward carrying out the plan, cancellation of the shares of stock issued under it, and an accounting and damages.

The third defense in the answer is that the matters raised in the suit involve the internal management of a foreign corporation and present questions of construction of New Jersey statutes, and that the court should for this reason decline to take jurisdiction. This is a defense in point of law arising upon the face of the bill, which may be made either by motion to dismiss or by incorporation in the answer. Equity Rule 29 (28 USCA § 723). As I am of opinion that the defendants' point is a valid one and that the suit cannot be maintained in this court, it is unnecessary to discuss any of the other points argued by counsel.

The general rule is that a suit having to do with the internal affairs of a corporation will not be entertained by a court sitting in another state from that in which the corporation is domiciled. The rule applies to suits brought in or removed to the federal courts as well as to suits in the state courts. Wallace v. Motor Products Corporation (C. C. A.) 25 F.(2d) 655, certiorari dismissed in 279 U. S. 859, 49 S. Ct. 417, 73 L. Ed. 999; Chicago Title & Trust Co. v. Newman (C. C. A.) 187 F. 573. It is true that in such cases there is no lack of jurisdiction in the strict sense. The disinclination of courts of equity to exercise jurisdiction is due to considerations of expediency, justice to the parties, inability to...