Opinion
07-26-1935
FRASER v. GREAT WESTERN SUGAR CO. et al.
Louis J. Platt, of West New York, Herbert R. Kaus, of New York City, and Hamlet J. Barry, of Denver, Colo., for complainant. Albert C. Wall, of Jersey City, G. Tracy Vought, of New York City, and Mr. Caldwell Martin, of Denver, Colo., for defendants.
Suit by Robert W. Fraser against the Great Western Sugar Company and others.
Bill of complaint dismissed.
Decree of dismissal affirmed in 185 A. 64.
Louis J. Platt, of West New York, Herbert R. Kaus, of New York City, and Hamlet J. Barry, of Denver, Colo., for complainant.
Albert C. Wall, of Jersey City, G. Tracy Vought, of New York City, and Mr. Caldwell Martin, of Denver, Colo., for defendants.
FIELDER, Vice Chancellor.
This is a suit by the holder of 10 shares of preferred stock of the defendant Great Western Sugar Co. (hereinafter called the Sugar Co.) on behalf of himself and all other stockholders of said defendant who might join herein.
In November, 1933, said defendant had a surplus of $30,000,000 and its officers and directors caused the organization of the Cache La Poudre Co. (hereinafter called the New Co.) and applied $9,000,000 of the Sugar Co.'s surplus to the purchase of the entire authorized capital stock of 360,000 shares of the New Co. of the par value of $20 per share, and thereupon immediately distributed such shares among the common stockholders of the Sugar Co. pro rata according to their holdings. At that time the authorized capital of the Sugar Co. was $30,000,000, one-half of which was represented by 150,000 shares of preferred stock of the par value of $100 each and the remaining $15,000,000 was represented by 1,800,000 shares of common stock of no par value.
Complainant's bill alleges that the withdrawal of $9,000,000 from the Sugar Co.'s surplus seriously impaired the ability of the company to assure future dividends to its preferred stockholders; greatly diminished the assets of the company in which all stockholders, preferred and common, are entitled to share on distribution or liquidation; and impaired the company's working capital. The complainant attacks the transaction as ultra vires the Sugar Co., as without consideration, and as a fraud on that company's stockholders. The defendants are the Sugar Co., the New Co., and the directors of the Sugar Co., and the bill prays that the New Co. be dissolved and ordered to restore the $9,000,000 to the Sugar Co., or that the other defendants be ordered to restore that sum. No other stockholder has joined in complainant's suit.
The Sugar Co.'s surplus was accumulated prior to 1933, and had been held as protection against uncertain conditions in the sugar market, falling prices, and operating deficits. In 1933 it appeared that the company was again operating at a profit, and its directors considered what disposition to make of its surplus. Probably fear of federal legislation taxing corporate surplus had something to do with the directors' decision that part of the surplus should be distributed, and it is possible that the method adopted was for the purpose of avoiding taxes which might be imposed under the federal revenue laws had distribution to stockholders been made in cash. The plan adopted was first discussed by the president of the company informally with his directors, and, meeting with their approval, the New Co. was incorporated. A meeting of Sugar Co. directors was held November 15, 1933, at which formal consideration was given to the plan, and it was the unanimous decision of the directors that $9,000,000 of the company's surplus should be distributed among its common stockholders, and that the method of distribution subsequently followed was most favorable for them. On the day of that meeting a notice was mailed to all Sugar Co. stockholders, preferred and common, notifying them of the incorporation of the New Co. and that the directors of the Sugar Co. had authorized a plan of "reorganization" between the Sugar Co., and the New Co. whereby the New Co. would take over $9,000,000 of the Sugar Co.'s earned surplus as consideration for the entire 360,000 shares of stock of the New Co. of the par value of $20 each; that such stock of the New Co. would be distributed on or before December 15, 1933, to the common stockholders of the Sugar Co.; that the New Co. would have a capital of $7,200,000 and a paid-in surplus of $1,800,000. The notice further stated the purposes for which the New Co. was organized. Following the receipt of this notice by complainant, he addressed a letter under date of November 20, 1933, to the directors of the Sugar Co. protesting the proposed action as illegal on the ground that he, as a preferred stockholder, was entitled to share in a distribution of assets of the company and threatening that he might bring legal proceedings to preserve his rights. December 15, 1933, the Sugar Co. notified its common stockholders that the plan of "reorganization" had been consummated, and with the notice it enclosed to each common stockholder his pro rata share of stock in the New Co. No common stockholder, save one holding 25 shares, refused to accept his stock. After complainant had sent his letter of November 20, 1933, he did nothing further until he filed his bill herein April 10, 1934.
Complainant charges that the transaction was not put through in good faith; that the directors failed to inform the stockholders of the true reason for the method adopted and characterized the transaction as a "reorganization," when in fact it was not, and he insinuates that there was an undisclosed ulterior motive behind the plan. I can find nothing in the evidence to justify the claim that the plan was not proposed and carried out by the Sugar Co. directors in absolute good faith, with an honest desire to further the interests of the company's stockholders. In describing the plan, the word "reorganization" was used within the meaning of the Federal Tax Act of 1932 (Revenue Act 1932, § 112 (i) (1) (B), 26 U.S.C.A. § 112 note), which defines the term to mean (quoting from complainant's brief): "A transfer by a corporation of all or part of its assets, to another corporation, if immediately after the transfer, the transferor or its stockholders, or both, are in control of the corporation to which the assets are transferred," and which Tax Act seems to provide that in the method here carried out by the common stockholders of the Sugar Co. receiving stock of the New Co. no gain to those stockholders would be recognized. As I have said,it is possible that the plan was adopted to come within the provisions of the federal tax laws for the purpose of avoiding the payment of federal taxes, and, if legal within the provision of the act, it was certainly for the benefit of the Sugar Co. common stockholders. But no stockholder could have been misled by the use of the word "reorganization." They knew that the Sugar Co. was absolutely solvent and the plan outlined in the notice of November 15, 1933, showed them that no reorganization was contemplated within the commonly accepted meaning of the word. The Sugar Co. lost nothing by the transaction because it retained none of the stock of the New Co., and therefore it can suffer no loss by the operations of that company. It merely took $9,000,000 of its surplus, and, instead of giving it to its common stockholders in cash, it bought the stock of another corporation and distributed that stock to its common stockholders, which stock, at the time of distribution, was worth $9,000,000.
Of the 150,000 shares of preferred stock of the Sugar Co., complainant, holding 10 shares, is the only one objecting to the transaction, and of the 1,800,000 shares of common stock only one stockholder, holding 25 shares, objected. The annual meeting of stockholders was held May 9, 1934, notice of which stated that one of the purposes of the meeting was to approve and ratify all acts of the directors since the last stockholders' meeting, and fifteen days prior to the meeting the company's annual report referring to the transaction in question was mailed to all stockholders, and it is probable that all stockholders were aware of the fact that complainant had filed his bill of complaint about a month prior to the meeting, yet the only votes cast against such approval and ratification were those of complainant and of the holder of 25 shares of common stock.
The articles of incorporation of the Sugar Co. provide that the holders of preferred stock shall receive from surplus or net profits a dividend of 7 per cent annually and no more, and that, in case of liquidation or distribution of assets, the holders of preferred stock shall be paid the par value thereof before any payment shall be made the holders of common stock, and, after payment of an equal amount to the holders of common stock, the remaining assets shall be distributed, one-half among preferred stockholders and one-half among common stockholders.
The decision of the United States Circuit Court of Appeals for the Eighth Circuit, on appeal from the United States District Court for the District of Colorado, reported in People of Colorado ex rel. Fraser v. Great Western Sugar Co., 29 F.(2d) 810, was rendered in a suit brougnt by the present complainant against the present defendant Sugar Co. That suit arose out of complainant's claim to participation as a preferred stockholder in earned surplus distributed by the Sugar Co. as extra dividends to common stockholders. The present complainant there contended that such payment amounted to a distribution of assets in which preferred stockholders were entitled to participate under the provisions of the Sugar Co. charter. The decision of the court was that the Sugar Co. directors in their sound discretion had the right to distribute surplus or net profits to common stockholders; that preferred stockholders of that company were not entitled to receive out of surplus or net profits anything in excess of the regular preferred dividends, so long as the Sugar Co. was a going concern; that the charter provision giving preferred stockholders an interest in the company's assets over the par value of their stock in case of liquidation or distribution of corporate assets refers to final dissolution and winding up of the corporation, and does not apply to distribution of surplus among stockholders, while the company is a going concern.
The decisions of the courts of this state and of other courts settle beyond question that distribution of corporate surplus to stockholders is within the sound discretion of the directors as to time, manner, and terms, subject only to such limitations as may be imposed by statutes or corporate charters. It is clear that, had the directors of the Sugar Co., exercising sound judgment, decided to distribute $9,000,000 of surplus to the common stockholders in cash, no stockholder, common or preferred, would be heard to object, and it is not perceived how the interests of complainant as a preferred stockholder could be affected by the directors' decision to distribute that amount of surplus by a method other than cash. The company was clearly a "going concern," with ample assets to secure its stockholders, both common and preferred. Dividends had been paid on its preferred stock regularly since its incorporation in 1905, and the record shows that the payment of $9,000,000for the New Co. stock did not impair the company's working capital or its ability to pay future dividends on its preferred stock. The company's financial statement issued in February, 1933, showed that it and its exclusively owned subsidiaries had gross assets exceeding $76,000,000 and an earned surplus of approximately $30,000,000 as against its capital stock of $30,000,000. The following year, after distributing $9,000,000 surplus to common stockholders, it had a surplus of approximately $24,000,000. I consider that the decision in People of Colorado ex rel. Fraser v. Great Western Sugar Co., supra, determines that, so long as the Sugar Co. continues to carry on business under its charter, it can be no concern of complainant as a preferred stockholder how its directors in the exercise of sound judgment determine to dispose of corporate surplus. Here the directors cannot successfully be charged with failure to exercise sound judgment when they decided to make distribution of surplus to common stockholders, and complainant has failed to sustain his claim that the reduction of the surplus by $9,000,000 in December, 1933, worked any injury to his rights as a preferred stockholder.
Complainant seeks to void a transaction which was not against public policy or prohibited by law, and which, as I find, was entered into in good faith by the directors of the Sugar Co. and wherein that company received full consideration for its part of the transaction and suffered no loss whatever. If it be assumed that the transaction was ultra vires the Sugar Co., it would not be set aside at the instance of that company, and, since this is a derivative action, complainant's right to urge ultra vires is no greater than that of the Sugar Co. After the stock of the New Co. had been wholly distributed among the common stockholders of the Sugar Co., it was extensively traded in, with the result that many of the shares have been sold and transferred to third parties. When complainant filed his bill, 601 of the original recipients of stock had transferred 31,712 of the shares received by them; 327 stockholders had transferred 8,201 shares not acquired by distribution, but acquired by transfer from prior holders; 129 stockholders had acquired 23,511 shares in addition to those received by distribution. When this cause came on for hearing, about eight months later, 1,015 stockholders had transferred 55,366 shares received as distribution; 444 stockholders held 18,917 shares not received as distribution, but acquired by transfer from prior holders; 165 stockholders had acquired 36,449 shares in addition to those received by distribution. It is not now possible to restore the status quo ante. It might be possible to direct the New Co. to return $9,000,000 to the Sugar Co., but, if that be done, the stock of the New Co. should be ordered returned to it. Perhaps a decree to that effect could operate on those stockholders of the Sugar Co. who acquired and still hold the New Co. stock distributed to them by the Sugar Co., but such decree, to be effective, should also require the Sugar Co. to buy the New Co. stock now in the hands of third parties, and the expense thereof undoubtedly would be great to the Sugar Co., and its stockholders, including the complainant, would suffer by such a decree. Rural Homestead Co. v. Wildes, 54 N.J.Eq. 668, 35 A. 896; Camden Safe Deposit Co. v. Citizens' Ice Co., 69 N.J.Eq. 718, 61 A. 529; Perkins v. Trinity Realty Co., 69 N.J.Eq. 723, 61 A. 167, affirmed 71 N.J.Eq. 304, 71 A. 1135; Whitehead v. American Lamp Co., 70 N.J. Eq. 581, 62 A. 554; Earle v. American Sugar Co., 74 N.J.Eq. 751, 71 A. 391; United States Industrial Alcohol Co. v. Distilling Co., 89 N.J.Eq. 177, 104 A. 216; Dintenfass v. Willat Film Corporation, 108 N.J.Eq. 195, 154 A. 546; Downs v. Jersey Central, etc, Co, 115 N.J.Eq. 348, 170 A. 835, affirmed 117 N.J.Eq. 138, 174 A. 887; Camden & Atlantic R. Co. v. May's Landing, etc, Co, 48 N.J.Law, 530, 7 A. 523; Chapman v. Iron Clad, etc, Co, 62 N.J.Law, 497, 41 A. 690; First National Bank v. Zelley, 106 N.J.Law, 510, 150 A. 413; Farmers' & Merchants' Nat. Bank v. Del-Bay Farms (N.J.Sup.) 131 A. 679.
I think complainant is guilty of laches in bringing his suit. The notice of November 15, 1933, was duly received by him, and it informed him in sufficient detail of what the Sugar Co. proposed to do. He then had the same objection to the plan which he sets up in his bill of complaint, as appears by his letter of November 20, 1933, but he did nothing to prevent the effectiveness of the plan until he filed his bill April 10, 1934, and in the meantime the rights of many third persons who had acquired stock in the New Co. had vested. His failure to act promptly to oppose an act which he believed the Sugar Co. was without authority to perform also bars his claim to relief. Rabev. Dunlap, 51 N.J.Eq. 40, 25 A. 959; Beling v. American Tobacco Co, 72 N.J.Eq. 32, 65 A. 725; Dana v. American Tobacco Co, 72 N.J.Eq. 44, 65 A. 730, affirmed 73 N.J.Eq. 736, 69 A. 223; Windhurst v. Central Leather Co, 101 N.T.Eq. 543, 138 A. 772, affirmed 107 N.J.Eq. 528, 153 A. 402; Breslin v. Fries-Breslin Co, 70 N. J.Law, 274, 58 A. 313; In re Town of Harrison (N.J.Sup.) 151 A. 215.
The bill of complaint will be dismissed, with costs.