Rogers v. Guaranty Trust Co. of New York, 390.

Decision Date13 June 1932
Docket NumberNo. 390.,390.
Citation60 F.2d 114
CourtU.S. Court of Appeals — Second Circuit

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

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

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

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

John W. Davis, Victor J. Dowling, George W. Whiteside, and J. Arthur Leve, all of New York City, of counsel, for all appellees.

Before MANTON, SWAN, and CHASE, Circuit Judges.

MANTON, Circuit Judge.

Appellant, a stockholder of 200 shares of common and 400 shares of common B stock of the American Tobacco Company, a New Jersey corporation, seeks by these suits, which have been consolidated, to enjoin the execution of an employees' stock subscription plan approved by the directors of the corporation on June 25, 1930, and by the stockholders on July 28, 1930. He has joined as defendants with the company, the Guaranty Trust Company, and Junius Parker, as trustees of 56,712 shares of the common B stock, and the directors of the American Tobacco Company. These shares of stock were distributed among the directors and 527 other employees of the corporation, and the relief sought is the cancellation of the shares issued.

Four defenses were interposed in the answer filed, and a motion to strike out such defenses was made. The court, in the exercise of its discretion, declined to entertain jurisdiction of the bill for the reason that the corporation existed under the laws of the state of New Jersey and it held that the court of the domicile of the corporation was the forum to which appellant should appeal. The complaints were dismissed.

The American Tobacco Company has its principal office in New York City, where its chief executives are located and where its board of directors hold its meetings and keeps its corporate records.

The defenses which were sought to be stricken out are (a) that the appellant failed to comply with the provisions of Federal Equity Rule 27 (28 USCA § 723); (b) that the stockholders of the corporation, including the appellant, ratified the action of the board of directors in the allotments made to the members of the board under the employees' stock plan by re-electing them to the board, thus making them eligible for the benefits of the plan; (c) that, since the action is an attempt to regulate the internal affairs of a foreign corporation, the court below should decline to take jurisdiction; (d) that the amount of compensation paid to the individual appellees was and is fair and reasonable by virtue of the valuable services that they have rendered to the company, and, under the by-laws of the corporation, the directors have the right to fix the compensation of its agents, and the allotment under the plan was in accordance therewith as well as in accordance with the statutes of New Jersey.

At a meeting of the directors on June 25, 1930, in accordance with section 2, c. 175, p. 354 of the Laws of 1920 (Comp. St. Supp. § 47 — 184) they duly declared the advisability, and directed the submission, to the stockholders of a plan for the issuance and sale of its common B stock to employees and those actively engaged in the conduct of the business, by way of compensation for services to be rendered. Section 1, c. 175, of the Laws of 1920 (Comp. St. Supp. § 47 — 183), empowers a New Jersey corporation to provide and carry out a plan for the following purposes: "(a) The issue or the purchase and sale of its capital stock to any or all of its employees and those actively engaged in the conduct of its business or to trustees on their behalf, and the payment for such stock in installments or at one time with or without the right to vote thereon pending payment therefor in full, and for aiding any such employees and said other persons in paying for such stock by contributions, compensation for services, or otherwise." The stockholders met July 28, 1930, and passed two resolutions, one involving a change in the capital structure of the company, and the other authorizing the adoption of this stock subscription plan. The change in capital structure consisted in a decrease of the par value of the common stock and common B stock of the corporation from $50 to $25, and an increase of the authorized shares, in the case of common stock from one to two million shares, and in the case of common B stock from two to four million shares. The resolution also provided that the voting power of the preferred stock be increased from two to four votes in order to maintain the proper ratio. Each stockholder was to receive two shares of new stock, common or common B, for one share of old stock. There was outstanding on this date 526,997 shares of preferred stock, 778,548 shares of common, and 1,535,850 shares of common B stock. The plan was approved by a vote of 389,573 preferred, 620,268 common, and 1,220,855 shares of common B stock. There were voted against the resolutions 170 shares of common, 1,995 shares of common B, and 10 shares of preferred stock.

On January 28, 1931, the directors held a meeting which neither the president nor the vice president Penn attended. The board adopted a resolution providing that there be submitted to the president a number of employees who, in the opinion of the board, should be considered in the allotment of stock, together with a statement of the services rendered by each and with an estimated rating, on a percentage basis, of the value of the services to the company, as compared in each department with the key executive in such department, and the annual rate of compensation of each as of December 31, 1930, including all salary and other compensation of any kind. The board recommended that in determining the individual allotments under the plan there should be used as a general basis a number of shares of stock having an aggregate par value equal to 33 1/3 per cent. of the amount of compensation paid or accrued to such individual for his services to the company for the calendar year 1930, and that, "in view of the unusual ability and efficiency of the President George W. Hill, particularly in connection with sales as well as the general oversight and supervision of all the activities of the corporation and its subsidiaries, and in view of the unusual ability and efficiency of the Vice-President Charles A. Penn in connection with the manufacturing activities of the Company, this Board recommends that the said George W. Hill and Charles A. Penn be given recognition on the basis of 100 per cent. rating of the value of their services to this corporation, as indicated on the list hereinabove referred to."

As a result of the meeting, there was accorded to 535 employees, including directors who were active employees, the right to subscribe to a number of shares at $25 par value upon the terms and conditions described in an agreement between the company, the respective employees, and the trustees who were named in the agreement. Under the agreement, the stock certificates could not be delivered to the allottee until the purchase price, and all interest accrued thereon should be paid in full, and, in any event, should not be delivered to the participant until after December 31, 1931. If on or before that date the connection of any employee of the company should be severed by discharge, with or without cause, or by resignation, then the trustees had the power to cancel forthwith any right such employee had under the agreement for the delivery of the stock.

The American Tobacco Company, in 1912, by a decree of the United States Supreme Court, was ordered to disintegrate. United States v. American Tobacco Co., 221 U. S. 106, 31 S. Ct. 632, 55 L. Ed. 663. Those companies which were permitted to continue under the decree were estimated to have at that time 37.11 per cent. of the cigarette business in the United States. However, between 1912 and 1925, due to competition, the percentage dropped to 21.81 per cent. In December, 1925, the appellee, Hill, became president of the company. Under his management, and in co-operation with Vice President Penn and the rest of the board, most of whom were employees of the company, a new policy was inaugurated in all the departments. The result of the change of policy in the operation of the business made the American Tobacco Company the leader in the cigarette industry. In 1931 the total increase of sales over 1929 of cigarettes of all kinds in this country was approximately half a billion. The increase in the sale of the company's most popular brand, "Lucky Strike," was nearly six billions. The business is world-wide in scope, with many factories, branches, and organizations in all parts of this country. The company in 1930 expended $20,400,000 in advertising. In that year it sold 38.10 per cent. of the cigarettes produced in the United States. Its net earnings, after deducting all charges for management and taxes, amounted to $43,294,769. It paid dividends on its common stock of $29,294,000 in 1930, with an extra dividend of $1 for the first quarter of 1931. The total dividends on the common stock for the latter year exceeded $28,300,000; on its preferred stock, $3,161,982. It paid the United States government taxes of $150,000,000 in 1930. These figures give some idea of the gigantic problem confronting those engaged in the active management of the company's affairs. It has had most unusual commercial success. The services rendered by the individual appellees have been extraordinary and unique.

On April 1, 1931, at a meeting of the stockholders, the directors were re-elected, indicating a renewed confidence of those in charge of the corporation. On January 28, 1931, it was publicly announced through the newspapers that the directors had voted to allot 56,712...

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