Strong v. Fromm Laboratories, Inc.

• Decision Date: 05 June 1956
• Citation: 273 Wis. 159,77 N.W.2d 389
• Parties: Harlan B. STRONG, as Trustee under Will of Robert Gladding Green, Deceased, Appellant, v. FROMM LABORATORIES, Inc., Respondent.
• Court: Wisconsin Supreme Court

Page 389

77 N.W.2d 389

273 Wis. 159

Harlan B. STRONG, as Trustee under Will of Robert Gladding Green, Deceased, Appellant, v. FROMM LABORATORIES, Inc., Respondent.

Supreme Court of Wisconsin.

June 5, 1956.

Rehearing Denied Sept. 11, 1956.

Robertson & Hoebreckx, Milwaukee, for appellant.

Smith, Okoneski, Puchner & Tinkham, Wausau, Jerome A. Maeder, Wausau, of counsel, for respondent.

CURRIE, Justice.

The plaintiff's cause of action for a forced liquidation of Fromm Laboratories, Inc. is based upon section 180.771, Stats., reading in part as follows:

'(1) Circuit courts have power to liquidate the assets and business of a corporation:

'(a) In an action by a shareholder when it is established:

'1. That the directors are deadlocked in the management of the corporate affairs and the shareholders are unable to break the deadlock, and that irreparable injury to the corporation is being suffered or is threatened by reason thereof; or

'2. That the acts of the directors or those in control of the corporation are illegal or fraudulent; or

'3. That the corporate assets are being misapplied or wasted; or

'4. That the shareholders are deadlocked in voting power, and have failed, for a period which includes at least 2 consecutive annual meeting dates, to elect successors to directors whose term has expired or would have expired upon the election and qualification of their successors.'

Unless the deadlock on the part of the shareholders of Fromm Laboratories, Inc. was broken by that which took place at the October 12, 1954 stockholders' meeting, there can be no question but that the trial court was authorized by paragraph 4, sub. (1)(a), section 180.771, Stats., to decree a forced liquidation of the assets and business of that corporation. This is because the shareholders have been deadlocked in voting power and have failed for a period of approximately seven years to elect successor directors to those in office when Dr. Green died in 1947. The by-laws of the corporation required the annual meeting of stockholders to be held on the first Tuesday in June of each year so that the terms of all three directors in office when Dr. Green died on September 6, 1947, would normally have expired on the first Tuesday in June, 1948, except for the provision contained in the by-laws that they were to continue in office until their successors were elected and qualified.

We cannot agree with the conclusion reached by the learned trial judge that the deadlock of the shareholders was broken by that which transpired at the October 12, 1954 stockholders' meeting. In order for a person to have been elected a director at such meeting it was necessary that he receive a majority of the votes cast. 5 Fletcher, Cyclopedia (perm. ed.), Corporations, p. 105, sec. 2020. If the 250 votes cast by Strong against the candidates of the Fromm interests, as well as the 250 votes cast for himself, are to be counted, no candidate received a majority of the votes cast and there was a deadlock.

Counsel for the respondent corporation contend that Strong could not cast votes against a candidate but had to vote for some eligible person, and, therefore, Edward Fromm, as chairman of the October 12, 1954 meeting properly ruled that the votes cast by Strong against the Fromm candidates were void. If such contention is followed to its logical conclusion, Strong had no legal way of blocking the election by the Fromm interests of at least three of their candidates to the board of directors. Because of the Fromms' refusal to amend the by-laws so as to render Gale Slater eligible for election as a director, the only eligible candidate for whom Strong could vote for director, other than shareholders of the Fromm group, was himself. Strong being present at the meeting, the trust's 250 shares had to be counted in deciding whether a quorum was present, the by-laws providing that a majority of the issued shares constituted a quorum. Therefore, if he refrained from voting at all, the votes cast by the Fromm interests would have elected all four of the Fromm candidates, as such candidates would have received a majority of the votes cast, which would have been sufficient to have elected them. On this latter point, see 5 Fletcher, Cyclopedia (perm. ed.), Corporations, pp. 106-107, sec. 2020.

Under the peculiar facts of this case we have no hesitancy in holding that the 250 votes which Strong cast against the Fromm candidates for director were not a nullity and must be counted in determining whether any candidates received a majority. Surely an owner of 50 per cent of the outstanding stock must be accorded some legal way of so voting such stock as to prevent the other hostile 50 per cent stock interest from electing a majority of the board of directors. Any other determination would reach a grossly inequitable result.

Counsel for the respondent corporation further urge that, in order for a court to invoke par. 4 of section 180.771(1)(a), Stats., and order a forced liquidation of a corporation, there must be a showing made that such liquidation will be beneficial to the interest of the stockholders. The trial court in its memorandum decision held that liquidation would be detrimental to the plaintiff trustee as well as the defendant, thus clearly indicating that the trial court was of the opinion that a liquidation would not be beneficial to the stockholders.

An excellent discussion of the problems which confront courts in exercising their power to dissolve or liquidate a corporation, where a deadlock of the shareholders has occurred, is contained in an article entitled, 'The Sacred Cow of Corporate Existence--Problems of Deadlock and Dissolution' written by Carlos L. Israels, a member of the New York bar, appearing in 19 University of Chicago Law Review 778. Many of the decided cases dealing with such problem are cited therein. We quote from such article as follows (at p. 785):

'It has been suggested that the courts' reluctance to dissolve varies in inverse ratio to the prosperity of the enterprise; that where the faction which happens to be in office at the date of the resignation, death or other incident which caused the deadlock is continuing to manage the company successfully, it is necessary in addition to prove some measure of exploitation of the minority. In the writer's view the cases do not bear this out.'

The respondent's brief quotes the following statement appearing in the annotation appearing in 13 A.L.R.2d 1260, 1267, entitled 'Dissolution of corporation on ground of intracorporate deadlock or dissension':

'The view is taken that to permit dissolution under a statute of the kind under consideration, it must be shown that dissolution will be beneficial to the interests of the stockholders.'

The only cases cited in the annotation in direct support of the above quoted statement are New York cases, of which the most recent in date is Application of Cantelmo (In Re Brewer-Cantelmo Co.), 1949, 275 App.Div. 231, 88 N.Y.S.2d 604. The New York statutes authorizing court dissolution in event of a stockholder deadlock is quoted in the opinion in that case. Such statutes contain an express provision that it is only mandatory on the court to order a dissolution because of stockholder deadlock if it shall appear 'that a dissolution will be beneficial to the stockholders'. ¹

Minnesota has a statute authorizing the involuntary dissolution of a corporation, which statute is set forth in the opinion in In re Hedberg-Freidheim & Co., 1951, 233 Minn. 534, 47 N.W.2d 424, 427, which reads as follows:

"That there is internal dissension and that two or more factions of the shareholders in the corporation are so deadlocked that its business cannot longer be conducted with advantage to its shareholders'.'

We consider it highly significant that our statute, section 180.771(1)(a) 4, contains no provision similar to that found in the statutes of New York and Minnesota requiring the court to take into consideration the element of whether a forced liquidation or dissolution would be beneficial to stockholders in determining the issue of whether to order such a liquidation or dissolution.

In 1951 the Wisconsin legislature enacted a new business corporation code which constitutes present ch. 180 of the statutes except as subsequently amended by the 1953 and 1955 legislatures. This code was drafted by the corporation committees of the Milwaukee and Wisconsin bar associations working together as a joint committee. The members of this joint committee consisted of lawyers who possessed wide experience in corporation practice and included members of the faculty of the law schools of the University of Wisconsin and Marquette University who taught the subject to 'Corporations'. A summary of the exhaustive research made by, and the prodigious work of, this committee is set forth in Volume VI, The 1950 Report, which the Wisconsin Legislative Council submitted to the governor and legislature in April, 1951. As originally drafted by such joint committee and enacted by the 1951 legislature, section 180.771(1)(a) consisted of present paragraphs 1 to 3, inclusive. Following the enactment of the new code...