Opinion
February 2, 1917.
John D. Fearhake [ James M. Gifford with him on the brief], for the appellant.
Lewis H. Freedman [ Adrian H. Larkin and Orville C. Sanborn with him on the brief], for the respondent.
This appeal involves the rights of a dissenting stockholder left practically alone by his staying out of a general sale of stock without a merger, which has emptied his corporation of its property and terminated the functions of its board of directors. A business corporation cannot thus ignore a stockholder for fifteen years. Neither may it equitably demand to respond only in a stockholder's suit, after defendant has obtained every other share of its stock and place them together in the hands of the combination, so that no parties could be brought in to form a representative action. Here the alienation of corporate effects, interposed as a defense, is supported by the saying of a vice-chancellor in 1831, that the corporation does not stand in any fiduciary relation to its stockholders ( Verplanck v. Mercantile Ins. Co., 1 Edw. Ch. 84, 87, and repeated as late as 1867 in Karnes v. Rochester Genesee Valley R.R., 4 Abb. Pr. [N.S.] 107), a principle confining to the directors the affirmative trust duties toward stockholders. Certainly this is not applicable to directors who have ceased to exercise their functions.
Modern authority sustains this jurisdiction in like circumstances. "There is a limit to this discretion [of directors]; and the courts will not allow the directors to use their powers oppressively by refusing to declare a dividend when the net profits and the character of the business warrant it. A court of equity may compel the declaration of a dividend at the suit of the minority stockholders of a corporation. It has been held that the court will compel the officers of a foreign corporation to declare a dividend where it clearly appears that it is their duty to do so." (7 R.C.L., tit. "Corporations," § 269.)
The rights of minority stockholders in equity are sustained in Farmers' L. T. Co. v. N.Y. N.R. Co. ( 150 N.Y. 410); Sage v. Culver (147 id. 241); Pondir v. New York, L.E. W.R.R. Co. (72 Hun, 384, 389).
The circumstances here resemble those in Jacobus v. Diamond Soda Water Mfg. Co. ( 94 App. Div. 366). (See, also, Hinds v. Fishkill Matteawan Gas Co., 96 App. Div. 17. See, also, Schwab v. Potter Co., 194 N.Y. 409, as to the invalidity of the defendant's plan to create another corporation.)
This, however, is not a suit to set aside a sale or annul or disposition of the corporation's assets, but simply to obtain the plaintiff's share of the profits and earnings of defendant's business. The merit of such a right seems incontestable. (See Wheeler v. Abilene Nat. Bank Bldg. Co., 159 Fed. Rep. 391, and authorities cited at p. 394; other decisions are Hawes v. Oakland, 104 U.S. 450, 460; Pratt v. Pratt, Read .Co., 33 Conn. 446, 455; Miner v. Belle Isle Ice Co., 93 Mich. 97, 112; Fougeray v. Cord, 50 N.J. Eq. 185, 197.)
In Stevens v. United States Steel Corporation ( 68 N.J. Eq. 373) the court said: "Subject, of course, to provisions in the charter, and also to the by-laws of the company, it is for the directors to say whether profits shall be distributed to the stockholders or retained for the purpose of the corporate business. It is, however, equally well settled that this discretionary power is not absolute, and when the directors 'improperly refuse to make a division of unused profits,' a court of equity will intervene on behalf of any stockholder who may complain. Laurel Springs Land Co. v. Fougeray, 50 N.J. Eq. (5 Dick.) 756, 759, 760 [1893]; Fougeray v. Cord, 50 N.J. Eq. (5 Dick.) 185, 197 [1892]; Griffing v. Griffing Iron Co., 61 N.J. Eq. (16 Dick.) 269, 271; 2 Cook Corp. [4th ed.] § 545. These general principles must be kept in mind in dealing with such statutes as those which a little later we are to construe. It does not follow that if the minority stockholders have not the benefit of a hard and fast statutory rule for the distribution of profits, that therefore they are exposed to a permanent deprivation of dividends, and that they must wait indefinitely and accept an increasing book value of their stock in place of the cash dividends which they would prefer to enjoy. The New Jersey cases above cited, as well as many cases in other States, illustrate how ample are the powers of courts of equity to enforce the rights and satisfy the reasonable expectations of stockholders in the matter of the declaration of dividends when profits, which are not required to be retained for the purposes of the corporate business, including protection against emergencies, are unreasonably and unjustly allowed to remain undistributed." (Pp. 377, 378.) Except that here the plaintiff necessarily sues alone, his rights seem enforcible under the reasoning of Godley v. Crandall Godley Co. ( 212 N.Y. 121).
The other shares besides plaintiff's have all been exchanged and passed into control of a third corporation. His option to sell, which he revoked, has been declared unenforcible in equity against him. He has a right to an accounting. Although it may appear that his money has been paid to others, he may still elect to take a decree against defendant, instead of seeking to follow these profits into the hands of illegal holders. We fail to see any lack of equity in appellant's position.
The answer, by its denials, in a qualified way, raises no issue. The right to an appraisal of plaintiff's stock under section 17 of the Stock Corporation Law (Consol. Laws, chap. 59; Laws of 1909, chap. 61) and section 221 of the General Corporation Law (Consol. Laws, chap. 23; Laws of 1909, chap. 28), invoked in the ninth defense, would charge plaintiff under a statute not in existence until March 20, 1901 (Laws of 1901, chap. 130.) Plaintiff's signing an option (which he afterwards revoked) supplies no defense to defendant, who was not a party thereto.
The prior provisions for appraisal of a stockholder's interest in corporate assets were for cases of sale or exchange of assets after, or in the course of, corporate dissolution. (See Stock Corp. Law [Gen. Laws. chap. 36; Laws of 1892, chap. 688], § 57, added by Laws of 1896, chap. 932, as amd. by Laws of 1900, chap. 760.) — [BY THE COURT.
On an accounting, however, plaintiff should not be allowed to go back to the date of this combination in 1900. In these special circumstances, where no directors met, and it was clear that the earnings were going to other concerns, so that plaintiff would be permanently deprived, the period of accounting should go back to the 23d of July, 1902, under the ten-year Statute of Limitations provided by the Code of Civil Procedure, section 388.
I advise to reverse, with costs of this appeal, and to grant, with ten dollars costs, plaintiff's motion for an interlocutory decree, directing an accounting for the period since July 23, 1902.
JENKS, P.J., THOMAS and RICH, JJ., concurred; CARR, J., not voting.
Order and judgment reversed, with costs of this appeal, and plaintiff's motion for an interlocutory decree granted, with ten dollars costs. Order to be settled on notice.