Venner v. Southern Pac. Co.

• Decision Date: 18 January 1922
• Docket Number: 42.
• Parties: VENNER v. SOUTHERN PAC. CO. et al.
• Court: U.S. Court of Appeals — Second Circuit

279 F. 832

VENNER v. SOUTHERN PAC. CO. et al.

No. 42.

United States Court of Appeals, Second Circuit.

January 18, 1922

The plaintiff is a citizen and resident of the city and state of New York. The defendant, the Southern Pacific Company hereinafter called the Southern Company, is a corporation organized under the laws of the state of Kentucky. The plaintiff is the owner and holder of 200 shares of the capital stock of the Southern Company, of the par value of $100 each. The outstanding capital stock of the Southern Company is approximately $302,000,000, all common stock. The company also has outstanding approximately $45,539,000 of 5 per cent. bonds, which are convertible into stock at par.

The Pacific Oil Company, hereinafter called the Oil Company, also named as a defendant, is a corporation organized under the general corporation laws of the state of Delaware, with a capital stock of 3,500,000 shares, of no par value. The individual defendants are directors of one or both of the defendant corporations. The defendants Bliss and Jarvie are citizens of the state of New Jersey. The defendant Kruttschnitt is a citizen of the state of Connecticut. The defendant Rca is a citizen of the state of Pennsylvania, and the defendant Shoup is a citizen of the state of California. The defendants De Forest, Harding, Harkness, Huntington Loree, Spence, Sproule, Swenson, Underwood, Goelet, and Mills are citizens of the state of New York. All the individual defendants above named are directors of the Southern Company. The defendants Alexander, Peabody, and Schiff are citizens of New York; the defendant Caldwell is a citizen of the state of New Jersey. The defendants Alexander, Peabody, Schiff, and Caldwell, together with the previously named individual defendants, De Forest, Rea, Swenson, and Shoup, are directors of the Oil Company, elected pursuant to the plan hereinafter referred to, and constitute at least a majority of the board of directors of that company.

The plaintiff commenced this action in the Supreme Court of the state of New York, and in the county of New York, suing in behalf of himself, as a stockholder of the Southern Company and on behalf of all other stockholders thereof, similarly situated, who may join with the plaintiff and contribute to the expenses of this suit. No other stockholder, however, has joined him in the suit. The suit grows out of the separation of the Southern Company's oil properties from its railroad properties, and the distribution of the former to its stockholders; such separation being necessary to enable the Southern Company to conform with the commodities clause (section 1, cl. 6) of the Hepburn Act (Comp. St. Sec 8563(6), and which makes it unlawful for any railroad company to transport in interstate commerce any article or commodity manufactured, mined, or produced by it, or under its authority, or which it may own in whole or in part, or in which it may have any interest, direct or indirect, except such articles or commodities as may be necessary and intended for its use in the conduct of its business as a common carrier.

The complaint attempts to set forth two causes of action-- one by Venner directly against the two defendant corporations, to enjoin or rescind the separation and distribution above mentioned, depending upon whether or not the separation and distribution had been consummated; and the other a derivative suit by Venner, through the Southern Company, seeking to hold theother defendants liable to the Southern Company for any loss which it may have sustained by reason of the consummation of the plan for the separation and distribution of its oil properties. It appears that the Oil Company purchased the oil properties from the Southern Pacific Land Company, one of the Southern Company's subsidiaries, and that the consideration for the sale of the oil properties was paid in cash. The true facts are fully set forth in the circular letters sent by the Southern Company to the holders of its stock and convertible bonds.

Letters stated that the Oil Company would be organized under the laws of the state of Delaware with a capital stock of 3,500,000 shares, of no par value, for which the Southern Company would subscribe at $15 per share; that from the amount so realized, namely, $52,500,000, the Oil Company would purchase from the Southern Pacific Land Company for $43,750,000 about 259,000 acres of oil lands in California and 200,690 shares of the capital stock of the Associated Oil Company; that the entire capital stock of the Land Company is owned by the Southern Company, and that by the sale of these properties the Land Company would thus receive $43,750,000 in cash and the Oil Company would retain $8,750,000 as working capital; that the holders of the capital stock of the Southern Company, registered as such at the close of business on January 14, 1921, would be given the right to purchase at $15 per share, payment to be made therefor on or before March 1, 1921, one share of stock of the Oil Company for each share of the Southern Company's stock so held; that the stock of the Oil Company was fixed at 3,500,000 shares, to correspond as nearly as might be to the total number of shares of Southern Company's stock outstanding, together with the shares reserved for the conversion of its convertible bonds; that warrants would be issued to the stockholders as soon as possible after the closing of the books on January 14, 1921, specifying the amount of stock of the Oil Company which each stockholder was entitled to purchase; that on the back of the warrants would be two forms, one to be filled out and signed by the stockholder, if he desired to purchase the stock, and the other to be filled out and signed by the stockholder in case it was desired to dispose of the privilege of purchase; and, finally, that all of the warrants not returned to the treasurer of the Southern Company on or before March 1, 1921, with payment in full for the stock represented thereby, would be void and of no value.

The complaint also alleges that no stockholders' meeting of defendant Southern Company had been held or called for the purpose of authorizing or ratifying the plan, and that the plaintiff had not in any wise consented thereto, but, on the contrary, shortly after its promulgation, and after informing himself of the meaning and effect of same, he sent to the defendant company and its directors on the 10th day of December, 1920, a letter duly protesting against said plan and the action taken by the board of directors of the Southern Company in respect thereof, but the defendants refused to abandon said plan and insisted upon carrying the same into effect.

The complaint also alleges that the plaintiff is unwilling to subscribe to the stock of the said new corporation, to wit, the Oil Company, and unless he does so subscribe, in case the said proposed plan is carried into effect as intended, he will be deprived, as a stockholder of the defendant Southern Company, of all right and interest in or to certain property in which he is now a part owner as a stockholder of the Southern Company, and which property and the title to the same is to be wrongfully and illegally transferred from the said Southern Company, or its subsidiary, the Southern Pacific Land Company, to the Oil Company and to the stockholders thereof, and that the completion of the said proposed plan will deprive the plaintiff and other stockholders, who are unwilling to subscribe to the stock of the said new corporation, of his and their interest as stockholders in the Southern Company, in and to said property, by force against his and their will, without due process of law, and without adequate compensation therefor. It is alleged that the plan which the defendants have decided to consummate is unjust, illegal, and ultra vires.

An injunction is asked to restrain the defendants from carrying their plan into effect, and that, in the event of the plan being consummated during the pendency of the action, a judgment may be entered, setting aside and declaring null and void all deeds of conveyance, transfers, or assignments of the property involved, and that the Oil Company be ordered to reconvey to the Southern Company or its subsidiary, the Southern Pacific Land Company, the said properties. It is also asked that the Oil Company and its directors and the directors of the Southern Company be held liable for all loss or damage which may be sustained by the Southern Company or its stockholders, and that they be directed to account to the Southern Company for all loss or damage sustained.

Elijah N. Zoline, of New York City, for appellant.

Humes, Buck & Smith, of New York City (J. P. Blair and Gordon M. Buck, both of New York City, of counsel), for appellees.

Before ROGERS, HOUGH, and MACK, Circuit Judges.

ROGERS Circuit Judge (after stating the facts as above).

This is a stockholders' suit, which, having been originally commenced in the Supreme Court of the state of New York, was removed into the District Court of the United States for the Southern District of New York, on January 5, 1921, under an order from the state court, which was obtained by the defendants the Southern Company and the Oil Company. Thereafter the plaintiff obtained from the District Judge an order requiring the defendants above named to show cause why the action should not be remanded to the state court. In due time the motion to remand was heard and denied. The refusal to remand is one of the errors assigned. Thereafter a motion was made to dismiss the complaint upon the ground that there is insufficiency of fact to constitute a valid cause of action in equity. After a hearing upon that motion District Judge Knox filed a carefully considered opinion and dismissed the...