Sorin v. Shahmoon Industries, Inc.

• Court: New York Supreme Court
• Writing for the Court: MATTHEW M. LEVY
• Citation: Sorin v. Shahmoon Industries, Inc., 30 Misc.2d 408, 220 N.Y.S.2d 760 (N.Y. Sup. Ct. 1961)
• Decision Date: 12 April 1961
• Parties: , 30 Misc.2d 429 Murray SORIN and Patricia Sorin, suing on behalf of themselves and all other stockholders of the defendant Warren Foundry & Pipe Corporation similarly situated, et al., Plaintiffs, v. SHAHMOON INDUSTRIES, INC., et al., Defendants.

Page 760

220 N.Y.S.2d 760

30 Misc.2d 408, 30 Misc.2d 429

Murray SORIN and Patricia Sorin, suing on behalf of themselves and all other stockholders of the defendant Warren Foundry & Pipe Corporation similarly situated, et al., Plaintiffs, v. SHAHMOON INDUSTRIES, INC., et al., Defendants.

Supreme Court, Special and Trial Term, New York County, Part VIII.

April 12, 1961.

On Motion to Direct Plaintiffs to Post Security for

Litigation Expenses, and for Other Relief Sept. 22, 1961.

Davies, Hardy & Schenck, New York City (John W. Burke and Burton H. Brody, New York City, of counsel), co-general counsel for all plaintiffs and for plaintiffs in Perry action.

Lewis, Durante & Bartel, New York City (J. Norman Lewis and Frederick E. Smithline, New York City, of counsel), for plaintiffs in Sorin action.

Nemerov & Shapiro, New York City (Mortimer Shapiro and Aaron Schwartz, Stanley Nemser, New York City, of counsel), co-general counsel for all plaintiffs.

Louis Kipnis, New York City, for plaintiff Hennesey.

Julius Zizmor, New York City, for defendants Shahmoon Industries, Inc., and Solomon E. Shahmoon.

Jacob Freed Adelman, New York City, for defendants Salomon and Gruner.

Mervin C. Pollak, New York City (Bernhardt M. Meisels, New York City, of counsel), for defendants Darzi, Lederer and Jack E. Hay.

A. Edward Masters, New York City (Joseph J. Bryer, New York City, of counsel), for Ruth Rosen.

MATTHEW M. LEVY, Justice.

Three stockholders' derivative actions were consolidated and tried before me. ¹ The subject corporation, a Delaware company, is Shahmoon Industries, Inc. It was formerly known as Warren Foundry & Pipe Corporation. The principal defendant is Solomon E. Shahmoon, the corporation's president, chairman of the board, director and major stockholder, and it was he (after becoming interested in the Warren company) who gave the impetus to the change of its corporate name.

The charges against the defendants were many, substantial and minor, and the remifications were considerable. The issues were bitterly contested. The presentation of proof, pro and con, occupied many court days. The exhibits were numerous. Voluminous briefs on the law and the facts were submitted. I have studied the entire record, and it is plain that, in the main, the issues requiring resolution are not matters of law, but rather questions of fact. Findings of fact and conclusions of law were duly waived by the parties. This opinion will therefore constitute the formal decision of the court, in accordance with the statute (Civil Practice Act, § 440).

I shall first consider the attack made by the plaintiffs upon the stock purchase agreement, dated March 6, 1953, entered into between the defendant corporation as seller and the defendant Shahmoon as buyer. By this contract, the company agreed to sell, and Shahmoon agreed to buy, at $28 per share 30,000 shares of the company's capital stock, then held in its treasury, $100,000 of the purchase price to be payable on April 1, 1953, and the balance in five equal annual instalments on or before April 1 of each year, with interest on the unpaid balance at 4% per annum, with the right on the part of Shahmoon to prepay any balance due with interest to the date of such prepayment. The agreement further provided that, if Shahmoon should default in any instalment payment, the company may declare the contract canceled and any amounts theretofore paid shall be forfeited to the company as liquidated damages. It was also provided that, to secure the payment of the amounts due under the contract, Shahmoon would assign to the company all dividends due or to become due on the treasury stock until the purchase price thereof had been fully paid. When Shahmoon paid for the 30,000 shares in full, the company would transfer the stock to him. In the 'whereas' clauses in this agreement, it was recited that because of the company's program of expansion, the company was in need of moneys and that it was not feasible to offer the stock for sale to the public, and that the executive committee of the board of directors of the company had, by resolution dated March 5, 1953, approved the transaction set forth in the agreement. Some background setting may be helpful at this point.

Paragraph 9(d) of the certificate of incorporation provides, among other things, that, if authorized by the by-laws, a committee may be designated by resolution passed by a majority of the whole board, which 'shall have and may exercise the power of the Board of Directors in the management of the business and affairs of the corporation'. Article V of the by-laws of the company provides, in part, that the board of directors may designate two or more of their number to constitute an executive committee which 'shall between sessions of the Board have all the powers of the Board in the management of the business and affairs of the Company, * * *. The taking of action by the Executive Committee shall be conclusive that the Board was not in session at the time of such action.' Shahmoon had become a member of the board of directors of the company in 1951. At Shahmoon's invitation the defendant Salomon, an attorney and counsel to the company, also became a board member. ² Salomon suggested that an executive committee be organized to run the day-to-day affairs of the company. At a meeting of the board on October 23, 1952, Shahmoon, Salomon and Jack E. Hay ³ were designated as members of the executive committee, 'having the powers of the Board of Directors when the Board was not in session'.

There was sharp conflict at the trial as to the motivation for, the mechanics involved in and the respective advantages resulting from, the stock purchase agreement. The evidence discloses, and I find, the following facts:

The idea of arranging for the stock purchase originated with Salomon, and it was he, as counsel for the company, who drafted the agreement therefor. The matter was discussed a number of times, the first occasion being some two months before it was submitted to the executive committee for their formal consideration. The reason for the transaction was the company's need for money and its inability to borrow. Cash was required to pay the debt instalment due in June 1953 to Metropolitan Life Insurance Company, the mortgagee of the company's properties, and to have funds available for the modernization, improvement and expansion of the corporation's installations--such as the Mount Hope Mine and the Phillipsburg and Everett plants--for, in their then rather obsolete condition, the cost of production was high and rendered the company unable to compete with other manufacturers.

The company's need for cash was critical. It had sold all but some $45,000 of its securites and still its cash position was down to practically nothing. In connection with the cash condition in which the company found itself in early 1953, the plaintiffs' accountant testified, from his examination of the books and records of the company, that the average monthly expenses and overhead costs in 1953 were between $500,000 and $600,000, that the cash balances at the end of March and April 1953 were, respectively, $88,000 and $41,000 (exclusive of the $100,000 and $200,000 received from Shahmoon on account of the purchase of treasury stock) and that such balances were not sufficient to operate the company.

In the discussions Hay had with Salomon as to the best method of raising the needed and desired cash, the possibility was considered of placing the treasury stock on the public market as well as of selling it to other officers or directors or other persons. Efforts were made to sell some treasury stock to another director of the company--one Lederer, also a defendant here--but he refused even to consider buying stock at any price, and it was felt, after exploring the situation, that it would not be feasible or desirable to sell the stock in the open market. Such a public proposal would undoubtedly have an adverse effect on the stock, and depress its price; and even if such a block of stock could be sold on the market, underwriters would not be interested in handling the transaction except at a fee of $3 or $4 per share and thus the company would not benefit as fully as it would by way of private sale.

As treasurer of the company, Salomon was thoroughly aware of the company's financial condition. There were several unsuccessful attempts to obtain bank loans for the company. In each instance, a loan was turned down, even though applied for on a secured basis. The Guaranty Trust Company refused the company a loan. The Metropolitan Life Insurance Company refused, in the years 1952 and 1953, to increase the amount of its mortgage loans to the company.

The cash resources of the company were drying up; the competitive position of the company was weakening. Salomon was of the opinion that it was necessary to get cash quickly. Accordingly, he devised the idea of tying up and disposing of the entire block of 30,000 shares of treasury stock so as to raise as much money as possible for the company. During February 1953--several weeks before the March 6th agreement was entered into--Salomon discussed with Shahmoon and with Hay (the three of them constituting the executive committee) the entire situation in which the company then was. When Shahmoon was approached to purchase the 30,000 shares of treasury stock, he first expressed his unwillingness to enter into the transaction. Out of 170,000 shares of stock of the company outstanding, Shahmoon and his wife owned approximately 66,600, which made the Shahmoons the principal stockholders by far. Shahmoon did not want to commit himself for the payment of some $850,000 for the additional investment. The stock was selling on the New York Stock Exchange at $26 per share; the price he was to pay was $28. He objected to the proposed forfeiture clause in the agreement.

Salomon testified that he was not certain whether or not the agreement...