Unlike an action at law by stockholders to recover dividends that have been declared, a suit in equity to compel the declaration of dividends is in theory against recalcitrant directors to cause them to perform their duty as officials of the corporation. It has even been held in some cases that directors are indispensable parties ( Jones v. Van Heusen Charles Co., 230 App. Div. 694; Schuckman v. Rubenstein, 164 F.2d 952). The idea was succinctly expressed by COXE, District Judge in NY PA NJ Utilities Co. v. Public Service Comm. ( 23 F. Supp. 313, 314): "The power to declare dividends resides in the directors; and their discretion in that respect will not be interfered with by a court of equity except for manifest abuse, City Bank Farmers' Trust Co. v. Hewitt, 257 N.Y. 62, 177 N.E. 309, 76 A.L.R. 881; Staats v. Biograph Co., 2 Cir., 236 F. 454, L.R.A. 1917B, 728; and the ordinary suit to have dividends declared is against the directors themselves for misconduct, Jones v. Van Heusen Charles Co., 230 App. Div. 694, 246 N.Y.S. 204; Hiscock v. Lacy, 9 Misc. 578, 30 N.Y.S. 860; Dodge v. Ford Motor Co., 204 Mich. 459, 170 N.W. 668, 3 A.L.R. 413."
The older cases, which did not involve an application of section 61-b of the General Corporation Law because it was not then enacted, and where the questions largely turned upon the indispensability of parties or the necessity of fulfillment of conditions precedent to the bringing of the action, held that an action to compel the declaration of dividends was derivative. (Jones v. Van Heusen Charles Co., 230 App. Div. 694; Von Au v. Magenheimer, 126 App. Div. 257, affd. 196 N.Y. 510; Hiscock v. Lacy, 9 Misc. 578.) The authorities in other jurisdictions have largely been in accord with this view.
So far, section 61-b of the General Corporation Law has been made applicable only to actions instituted or maintained in the right of the corporation, and I hold that an action to compel the payment of dividends is maintained in the right of the stock-holders and not in the right of the corporation. Jones v. Van Heusen Charles Co. ( 230 A.D. 694) strongly relied upon as stating the contrary, was an action, not merely to compel payment of a dividend, but, also, to compel directors to restore to the corporation money they had wrongfully diverted from it, and it was that feature which led the court to characterize the action as one brought in the right of the corporation. In Davidoff v. Seidenberg ( 275 A.D. 784) also relied upon by defendant, the actual holding was that the complaint did not set forth a sufficient cause of action to compel the declaration of a dividend, and the court's characterization of the action as "a stockholder's derivative action" necessarily related to other allegations of a different cause of action.
So far, section 61-b of the General Corporation Law has been made applicable only to actions instituted or maintained in the right of the corporation, and I hold that an action to compel the payment of dividends is maintained in the right of the stock-holders and not in the right of the corporation. Jones v. Van Heusen Charles Co. (230 App. Div. 694) strongly relied upon as stating the contrary, was an action, not merely to compel payment of a dividend, but, also, to compel directors to restore to the corporation money they had wrongfully diverted from it, and it was that feature which led the court to characterize the action as one brought in the right of the corporation. In Davidoff v. Seidenberg (275 App. Div. 784) also relied upon by defendant, the actual holding was that the complaint did not set forth a sufficient cause of action to compel the declaration of a dividend, and the court's characterization of the action as "a stockholder's derivative action" necessarily related to other allegations of a different cause of action.
If this means that the plaintiff may in the present action establish its right to have dividends declared and paid, it will hardly bear analysis. The power to declare dividends resides in the directors; and their discretion in that respect will not be interfered with by a court of equity except for manifest abuse, City Bank Farmers' Trust Co. v. Hewitt, 257 N.Y. 62, 177 N.E. 309, 76 A.L.R. 881; Staats v. Biograph Co., 2 Cir., 236 F. 454, L.R.A. 1917B, 728; and the ordinary suit to have dividends declared is against the directors themselves for misconduct, Jones v. Van Heusen Charles Co., 230 App. Div. 694, 246 N.Y.S. 204; Hiscock v. Lacy, 9 Misc. 578, 30 N.Y.S. 860; Dodge v. Ford Motor Co., 204 Mich. 459, 170 N.W. 668, 3 A.L.R. 413. This difficulty is not avoided by the allegation that the only reason dividends are not declared and paid is the existence of the restriction. The plaintiff is still asking the court to pass on a hypothetical claim, which is not permitted under the Federal Declaratory Judgment Act, 28 U.S.C.A. § 400. Aetna Life Ins. Co. v. Haworth, 300 U.S. 227, 57 S.Ct. 461, 81 L.Ed. 617, 108 A.L.R. 1000; Anniston Mfg. Co. v. Davis, 301 U.S. 337, 57 S.Ct. 816, 81 L.Ed. 1143; Electric Bond Share Company v. Securities Exchange Commission, 58 S.Ct. 678, 82 L.Ed. ___, decided by the Supreme Court, March 28, 1938.
In such a suit, a stockholder may prosecute the action without alleging demand and refusal. Murphy v. Greensboro, supra; Cannon v. Wiscassett Mills, 195 N.C. 119, 141 S.E. 344; Hawes v. Oakland, supra; Jones v. Van Heusen Charles Co., 246 N.Y.S. 204; Tarlow v. Archbell, 47 N.Y.S.2d 3; Collier v. Mayflower Apartments, 196 Ga. 419, 26 S.E.2d 731; Caldwell v. Eubanks, 326 Mo. 185, 30 S.W.2d 976, 72 A.L.R. 621; Schmidt v. Schmidt (Civ. App. of Texas), 52 S.W.2d 778. Minority stockholders do not have the right to dictate corporate policies.
52 Miss. 665; State ex rel. Evans v. Wheatley, 197 Ark. 997, 125 S.W.2d 101; Commonwealth ex rel. Dummit v. O'Connell, 298 Ky. 44, 181 S.W.2d 691; Baumohl v. Goldstein, 95 N.J. Eq. 597, 124 A. 118; Garrett v. Philadelphia Lawn Motor Co., 39 Pa. Super. 78; Berle and Means, "The Modern Corporation and Private Property," (1939), p. 138. (4) Sho-Me Corporation is properly organized as a profit corporation under the General and Business Corporation Act. 1 Fletcher, Cyc. Corp. (1931), sec. 68; Snyder v. Chamber of Commerce, 53 Ohio St. 1, 41 N.E. 33; People ex rel. Hughes v. Universal Service Assn., 365 Ill. 542, 7 N.E.2d 310; Rensselaer County Agricultural and Horticultural Soc. v. Weatherway, 255 N.Y. 329, 174 N.E. 699; Clay Sewer Pipe Assn. v. Commissioner of Internal Revenue, 139 F.2d 130; American Cotton Coop. Assn. v. Union Compress Warehouse Co., 7 So.2d 537; Neidringhaus v. William C. Neidringhaus Inv. Co., 329 Mo. 84, 46 S.W.2d 828; Mo. R.S.A. (Supp. 1946), Secs. 4997.43, 4997.2; Jones v. Van Hansen Charles Co., 230 A.D. 694, 246 N.Y.S. 204; Dodge v. Ford Motor Co., 204 Mich. 459, 170 N.W. 668. (5) Questions relating to the proposed financial structure of Sho-Me Corporation are irrelevant. Mo. R.S.A. (Supp. 1946), Secs. 4997.53, 4997.50(d); Sylvester Watts Smyth Realty Co. v. American Surety Co. of New York, 292 Mo. 423, 238 S.W. 494; Secs. 5652, R.S. 1939; Re Missouri Electric Power Co., 50 P.U.R. (N.S.) 257. (6) Questions relating to the proposed deed of trust are irrelevant. Sec. 5651, R.S. 1939; State ex inf. McKittrick v. Murphy, 347 Mo. 484, 148 S.W.2d 527; State ex rel. Johnson v. Consumers Public Power District, 143 Neb. 753; People v. City of Paris, 380 Ill. 503, 44 N.E.2d 154. R.B. Oliver, Jr., R.K. McPherson and A.Z. Patterson for intervenors.
CPLR 503(a) provides, in pertinent part, "except where otherwise prescribed by law, the place of trial shall be in the county in which one of the parties resided when it was commenced." Here, since the plaintiff and the defendants, the only parties to this derivative action (see Niles v. New York Cent. & Hudson Riv. R.R. Co., 176 N.Y. 119, 124, 68 N.E. 142 ; Flynn v. Brooklyn City R.R. Co., 158 N.Y. 493, 508, 53 N.E. 520 ; Jones v. Van Heusen Charles Co., 230 App.Div. 694, 697, 246 N.Y.S. 204 ; cf.Jacobs v. Cartalemi, 156 A.D.3d 605, 67 N.Y.S.3d 63 ; Barbaro v. Spinelli, 121 A.D.3d 727, 728, 994 N.Y.S.2d 624 ), were residents of Nassau County when it was commenced, venue was improperly placed in Queens County. Contrary to the plaintiff's contention, the fact that two of the corporations and the LLC are located in Queens County did not make Queens County a proper venue to commence this action, since those entities are not parties to the action.
As the question is posed to us by the parties, it is whether such an action is representative in the personal right of the stockholders or is derivative in the right of the corporation. Judicial authority both ways has been cited ( Davidoff v. Seidenberg, 275 A.D. 784; Jones v. Van Heusen Charles Co., 230 A.D. 694; Swinton v. W. J. Bushs&sCo., 102 N.Y. S.2d 994; Hiscock v. Lacy, 9 Misc. 578; Lydia E. Pinkham Medicine Co. v. Gove, 303 Mass. 1, 12-13; Stevens v. United States Steel Corp., 68 N. J. Eq. 373; Laurel Springs Land Co. v. Fougeray, 50 N. J. Eq. 756). We shall not attempt to review that authority in this opinion beyond noting our agreement with the learned court at Special Term that the weight of authority is in accord with the view that such an action is derivative.
Such a representative action by a minority stockholder against the corporation and its directors is amply sustained by authority. ( Sage v. Culver, 147 N.Y. 241; Jones v. Van Heusen Charles Co., 230 App. Div. 694; Earl v. Brewer, 248 id. 314; affd., 273 N.Y. 669.) This counterclaim was struck out of the answer by the court below as one which might not properly be interposed because the proceeds to be realized as the result thereof belonged to the corporation and not to the defendant stockholder.