Rogers v. Guaranty Trust Co of New York

Decision Date23 January 1933
Docket NumberNo. 227,227
Citation53 S.Ct. 295,89 A.L.R. 720,288 U.S. 123,77 L.Ed. 652
CourtU.S. Supreme Court

Messrs. Richard Reid Rogers and Evan Shelby, both of New York City, for petitioner.

Mr. John W. Davis, of New York City, for respondents.

Mr. Justice BUTLER delivered the opinion of the Court.

Petitioner, plaintiff below, owns 200 shares of the common stock of the American Tobacco Company which he acquired prior to the passage of chapter 175, p. 354, New Jersey Laws, 1920 (Comp. St. Supp. §§ 47—183 to 47—187), that is here involved. He also owns 400 shares of common stock B. He brought two suits in the Supreme Court of New York: One against the tobacco company and some of its directors, the other against the trust company, Junius Parker and others. On application of defendants both were removed to the federal court for the southern district of that state. The first was discontinued as to some defendants and the cases were consolidated. The defendants before the court are the two companies, Parker, and five of the seventeen directors of the tobacco company including its president, one of its vice presidents, and its secretary.

The tobacco company was organized under the laws of New Jersey, and in that state maintains its 'principal and registered office' as designated in its charter, holds the stockholders' meetings, and does a substantial amount of business. It is authorized by the laws of New York to do business there and has in New York City its principal place of business where its directors usually meet, its executives have their offices and most of its records are kept. It carries on business in that and many other states and also in a number of foreign countries.

The grievances alleged by plaintiff concern the issue, allotment, and sale of stock of the tobacco company. June 25, 1930, the board of directors adopted a resolution recommending the reduction by one-half of the par value and the doubling of the number of shares of its common stock and common stock B. It had outstanding 526,997 shares of preferred stock, and, as a result of action in accordance with that recommendation, 1,609,696 shares of common and 3,077,320 shares of common B. And by another resolution the board advised approval by the stockholders of a plan for the issue and sale of common stock B to employees pursuant to chapter 175, New Jersey Laws, 1920.1 The plan submitted accords to such em- ployees and others actively engaged in the conduct of the business as may be selected an opportunity to purchase stock 'by way of additional compensation for services to be rendered,' and allots for subscription shares of unissued stock. The board may offer stock to such persons in the service at prices not less than par and upon other terms and conditions determined by the president pursuant to authority granted him for that purpose by the board. No employee or person actively engaged in the conduct of the business of the corporation or its subsidiaries shall be deemed ineligible to its benefits by reason of being also a director of the corporation or of any of its subsidiaries or of holding any office therein.

July 28, 1930, the stockholders adopted the plan. And January 28, 1931, the board authorized a sale of 56,712 shares of common stock B at par value of $25 per share. It directed that there be furnished to the president, to be considered in determining to whom the stock should be allotted for purchase, a list showing the services rendered, and, having regard to the value of the same, the rating on a percentage basis given to each together with the total amount of his compensation for 1930. It recommended that the basis of distribution should be the number of shares having par value equal to one-third of that year's compensation to each allottee rated at 100 per cent. and correspondingly less to those having lower ratings. And there was accorded to each of 535 employees, including directors and others active in the business, the right to subscribe for the new stock on that basis. All the shares allotted were sold at $25 for cash to the trust company. The trust company allowed each allottee to subscribe at the same price. At that time it was worth $112. The agreement stated that this was by way of additional compensation for service to be rendered between January 31 and December 31, 1931; that until the end of the year no allottee could take up his stock; that he was entitled to have dividends applied on the purchase price; and that, if he should terminate his employment before the end of the year, the trustees were to decide whether he should have his allotment.

The complaint attacked the transaction upon the following grounds: The directors being disqualified by reason of their interest as allottees, the plan was not passed by a valid vote or adopted as required by chapter 175. The subsequent vote of the stockholders, required by the statute to be predicated upon action by the board, was likewise invalid. The plan was ultra vires in that the allotment 'by way of additional compensation for services to be rendered' violated chapter 195, p. 566, New Jersey Laws, 1917 (Comp. St. Supp. N.J. § 47—176 et seq.). Under the Company's charter and the statutes of New Jersey—section 124, General Corporation Law as added by section 16 of chapter 318, p. 544, Laws 1926 (Comp. St. Supp. N.J. § 47—119i)—every stockholder had the right according to the number of his shares to have pro rata distribution of the stock in question. And the complaint prayed decree that the defendants be enjoined from carrying out the plan; that the stock be declared void and canceled; and that the defendants, other than the tobacco company, be held for costs and damages sustained by that company.

Four defenses were set up: Plaintiff failed to comply with Equity Rule 27 (28 USCA § 723). The stockholders including plaintiff ratified the allotments to the directors. The suit is an attempt to regulate the internal affairs of a corporation foreign to New York, and the United States District Court sitting therein should decline to take jurisdiction. The allotments were fair and reasonable and were made in accordance with the company's by-laws and the statutes of New Jersey. Plaintiff moved for an order striking out the defenses as insufficient and for a decree in accordance with the prayer of the complaint or, in the alternative, for an injunction pendente lite preventing the carrying out of the plan.

The District Court (60 F.(2d) 106, 108) filed an opinion in which it said:

'In the present case, the validity of the shares sought to be canceled depends primarily upon the interpretation and effect of the act of 1920. The directors cited this statute as their authority for the plan when they formulated it, and have all along insisted that the plan is in conformity with the statute. The plaintiff takes the position that the statute is not applicable and has been used by the directors merely as a cover for a raid upon the corporate treasury for their own profit. In addition, plaintiff submits that two other statutes, that of 1917 and that of 1926, must be taken as limiting the operation of the 1920 act. It is obvious that the case presents not merely questions of fact, but questions of some complexity under the New Jersey laws. There seem to be no decisions of the New Jersey courts to serve as a guide in the proper construction and possible interrelation of these statutes. The legality of the corporate proceedings which resulted in the issuance of this stock is peculiarly a matter for determination in the first instance by the New Jersey courts. It may be noted that the American Tobacco Company is not a local enterprise. While its chief office is said to be here and it unquestionably carries on business here, its activities are known to be world-wide. It has a New Jersey charter; it refers to the New Jersey office as its principal office; it holds its stockholders' meetings there. It is not a resident corporation in any sense of the word.'

And it entered judgment denying the motion and that 'in the exercise of this Court's discretion, each of the bills of complaint herein be and the same are hereby dismissed, without prejudice to the enforcement of the rights of plaintiff, if any, in the courts of New Jersey.'

The Circuit Court of Appeals, 60 F.(2d) 114, dealing with plaintiff's contentions before it, held that the plan was authorized; that the stock was lawfully issued under New Jersey statutes; and that, for the reasons given in the opinion, the bill was properly dismissed. A dissenting opinion suggests that the plan was not sufficiently in detail to comply with the New Jersey statute. The court affirmed the judgment appealed form, and, upon its mandate, the District Court entered a decree that the bills of complaint be dismissed with costs.

Among the points and contentions raised and pressed by plaintiff in his petition for certiorari and argument here are the following: The plan is not definite and formulated as required by chapter 175. That chapter as construed below is repugnant to the contract clause of the Federal Constitution (Const. art. 1, § 10). The decision that the plaintiff failed to comply with Equity Rule 27 is contrary to chapter 175. Chapter 195, New Jersey Laws 1917, does not permit the issue of stock to employees for services to be rendered. The decree of the District Court declining to exercise jurisdiction is contrary to decisions of this court and in conflict with the decision of the Circuit Court of Appeals for the Seventh Circuit in Williamson v. Missouri-Kansas Pipe Line Co., 56 F.(2d) 503.

The authorization, allotment, and sale of the shares in question involved the proportionate ownership of stockholders and their rights inter sese. Unquestionably the steps taken and proposed to formulate and carry out the plan constitute the conduct and management of the internal affairs of the tobacco company....

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