Shonnard v. Elevator Supplies Co., Inc.

• Decision Date: 20 July 1932
• Citation: 161 A. 684
• Parties: SHONNARD et al. v. ELEVATOR SUPPLIES CO., Inc.
• Court: New Jersey Court of Chancery

161 A. 684

SHONNARD et al.

v. ELEVATOR SUPPLIES CO., Inc.

Court of Chancery of New Jersey.

July 20, 1932.

Syllabus by the Court.

1. The appointment of a receiver is not a matter of absolute legal right. Sound discretion should be exercised by the court before any such appointment is made.

2. A receiver will not be appointed for a corporation which is not insolvent, at the suit of minority stockholders, solely because of errors of business judgment of its board of directors, resulting in losses, in the absence of bad faith or abuse of power.

3. Where it appears to the court that the officers and directors of a corporation are honest and capable and are striving to the best of their ability with a fair prospect of success to relieve the corporation from its embarrassment and put it in a condition where it may carry on its business successfully, and its property is free from judgment or other lien under which it may be sold speedily at a sacrifice, the court should not interfere by the appointment of a receiver.

4. Section 12 of the Corporation Act as amended (Comp. St. Supp. § 47—12) provides that the business of every corporation shall be managed by its directors. The authority of the directors in the conduct of the corporation's business must be regarded as absolute when they act within the law. It is a well-known rule of law that questions of policy of management are left solely to the honest decision of the board of directors.

5. The court may and should take judicial notice of changed economic conditions affecting business generally. It is the outstanding contemporary fact, dominating thought and action throughout the country. A depression such as the country is now passing through is a new experience to the present generation.

6. The declaration of a dividend, and the fixing of the amount, time, and terms of payment, is entirely within the discretion of the board of directors of a corporation, and the court cannot substitute its judgment for the judgment of the directors, if honestly exercised.

Suit by Harold W. Shonnard and others against the Elevator Supplies Company, Inc. Decree dismissing the bill of complaint.

Scammell, Knight & Reese, of Trenton, for complainants.

McCarter & English, of Newark, for defendant.

FALLON, Vice Chancellor.

Complainants, as stockholders of defendant, pray inter alia that this court adjudge and decree that the business of defendant has been and is being conducted at a great loss and greatly prejudicial to the interests of its stockholders, so that its business cannot be conducted with safety to the public and advantage to the stockholders, and that an injunction issue to restrain defendant and its directors and officers from exercising any of its privileges or franchises, and that a receiver be appointed for said defendant. The gist of the allegations of complainants' bill is that defendant's business has been and is being mismanaged by its directors and officers. Complainants concede in their bill and argument that defendant is solvent. The defendant is a domestic corporation with an authorized capital stock of $2,000,000, divided into 20,000 shares of a par value of $100 each. 7,500 shares are classified as preferred stock, and 12,500 shares as common stock. 12,398 shares of common stock and 5,266 shares of preferred stock are issued and outstanding. Its principal place of business is in the city of Hoboken, and it employs approximately 350 people. It controls by stock ownership the Canadian Elevator Equipment Company, Limited, of Canada.

The owners of upwards of 12,000 shares of defendant's stock oppose complainants' present endeavor to have a receiver appointed herein. Defendant admits that for several years prior to its present executive officers and directors being placed in charge of its management its business was operated at a substantial loss, but attributes such loss to incompetency of its previous executive officers, of whom complainant Shonnard is alleged to be one, and to incompetent management of its previous board of directors of which complainants Shonnard, Sims, and Rowntree, are alleged to have been members. The proofs herein manifest that the person who was elected vice president and general manager of defendant on May 19, 1930, and as president on September 24, 1930, is by training and education a mechanical engineer who has been practicing as such for upwards of twenty-two years, and who previous to his association with the defendant had a business experience which well fits him for rendering capable service to the defendant. Since his official connection with the defendant, various changes were effected which he and those associated with him in defendant's management considered conducive to the well being of defendant and for advancing the interests of its stockholders. Some of the changes effected resulted in a substantial reduction in overhead expense and operating costs. The grievances and criticism which complainants apparently considered themselves warranted in urging against the ways and means resorted to in the conduct of the business of the defendant during the administration of its former president and board of directors, resulting in the losses hereinabove referred to, cannot reasonably be ascribed to the conduct of defendant's business since the administration of the board of directors and executive officers now serving the defendant. The proofs herein demonstrate that the defendant's present directors and executive officers are capable and experienced business men, all of whom striving to the best of their ability to prosper the defendant. Affidavits of officers of the defendant filed herein express optimism for the betterment of the business affairs of the company in the near future, and evidence that as a result of economies effected since the advent of defendant's present directors and executive officers a considerable saving has resulted, and in future will inure to defendant's benefit. Items manifesting such economies and saving are mentioned in numerous affidavits filed in defendant's behalf, among which, affidavits of President Smith, and of Director, Secretary, and Treasurer Brent, also affidavit of William H. De Veer, cashier of the First National Bank of Hoboken, the depositary of the defendant.

Considerable proof was taken herein, much of which I deem unnecessary to refer to for the purpose of my determination of the matter sub judice. The following quotation from Madsen et al. v. Burns Brothers, 108 N. J. Eq. 275, at pages 278, 279, 155 A. 28, 31, I regard as applicable to the matter sub judice: "To grant the relief prayed by complainants herein (in view of the fact the defendant is not insolvent), three statutory requisites must be clearly established: (1) That the defendant's business has been conducted at a great loss and greatly prejudicial to the interests of its creditors and stockholders; (2) that its business is being so conducted; (3) that its business cannot be conducted with safety to the public and advantage to the stockholders. Such statutory requisites must be clearly manifest in order to confer jurisdiction upon the court. Kelly v. Kelly-Springfield Tire Co., 106 N. J. Eq. 545, 152 A. 166."

The proofs herein do not establish the aforesaid requisites. The bill of complaint was filed by complainant Shonnard in behalf of himself and all other stockholders who might wish to join with him therein. At the inception of the hearing herein application was made for leave to amend the bill by adding thereto other complainants, and an order allowing same was entered; thereupon counsel for the defendant, conceiving that this court was unauthorized to permit such amendment, appealed from the order therefor, whereupon this court stayed its said order so as to enable defendant's counsel to apply to the Court of Errors and Appeals for a further stay pending appeal. Such further stay was denied by said court, and thereupon the instant case was proceeded with to finality. The burden is cast upon complainants to substantiate the essential allegations of their bill by clear and convincing proof. They have not done so. It appears to me that such losses as were experienced since the advent of defendant's present management cannot be ascribed to mismanagement, but, in great measure, to a stringent business depression suffered by business generally.

Section 12 of the Corporation Act, as amended (Comp. St. Supp. § 47—2) provides that the business of every corporation shall be managed by its directors. The authority of the directors in the conduct of the corporation's business must be regarded as absolute when they act within the law. It is a well-known rule of law that questions of policy of management are left solely to the honest decision of the directors of a corporation. Ellerman v. Chicago Junction Railways & Union Stockyards Co., 49 N. J. Eq. 217, 23 A. 287; Elevator Supplies Co. v. Wylde, 106 N. J. Eq. 163, 150 A. 347; Kelly v. Kelly-Springfield Tire Co., supra, at page 554 of 106 N. J. Eq., 152 A. 166. A receiver will not be appointed for a corporation which is not insolvent, at the suit of minority stockholders, solely because of errors of business judgment of its board of directors, resulting in losses, in the absence of bad faith or abuse of power. City Bank Farmers' Trust Co. v. Ringwood Co., 110 N. J. Eq. 525, 160 A. 824. The appointment of a receiver is not a matter of absolute legal right. Sound discretion should be exercised by the court before any such appointment is made. Glaser v. Achtel Stetter's Restaurant, 106 N. J. Eq. 150, 149 A. 44; Kelly v. Kelly-Springfield Tire Co., supra. I have in mind...