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January 1, 1902, and April 1, 1902. Held, that (64 N. J. E. 807)
this was a compliance with the act of 1902. DODGE et al. v. UNITED STATES STEEL (Syllabus by the Court.) CORP. et al.
Appeal from court of chancery. (Court of Errors and Appeals of New Jersey.
Bill by J. A. Hodge and others against the Feb. 18, 1903.)
United States Steel Corporation and others. CORPORATIONS — STOCKHOLDERS' MEETING
From an order granting an injunction (53 CONTRACTS - NOTICE - DIRECTORS – POW Atl. 601), defendants appeal. Reversed. ERS – RATIFICATION - PREFERRED STOCK DIVIDENDS.
Charles L. Corbin, Richard V. Lindabury, 1. At a meeting of the stockholders of a cor Francis Lynde Stetson, and William D. Guthporation, owners of shares are under no disabil
rie, for appellants. McCarter, Williamson & ity to vote because they are also directors of the
McCarter, Abm. I. Elkus, Joseph M. Proscorporation. They do not vote in their fiduciary capacity, but, like other stockholders, in the kauer, Alan H. Strong, nk Bergen, and right of the shares held by them.
Edward B. Whitney, for respondents. 2. At a duly convened meeting of stockholders they may lawfully enter into or authorize
VAN SYCKEL, J. The subject-matter of a contract between the company and a third party, in which directors are personally inter
this appeal is an order granted by the court ested, if it is done by them with notice of such of chancery at the instance of the complaininterest
ants restraining the defendants from exocut3. The general doctriue is well established in this state that facts known, which are suffi
ing, issuing, delivering, or receiving any cient to put a party upon inquiry, are suff
bond or mortgage, under certain resolutions cient to charge him with all knowledge he of the stockholders of the United States Steel would have acquired by a proper inquiry in the Corporation, passed May 19, 1902, providing ordinary course of business. 4. The rule that directors cannot lawfully en
for the reduction of $200,000,000 of its preter into a contract in the benefit of which even ferred stock, and the retirement thereof out one of their number participates without tbe of bonds or the proceeds of bonds. Three of knowledge and consent of the stockholders, is
the complainants in the bill as originally fled the settled law of this state. 5. Such a contract is voidable at the option
voluntarily withdrew from the suit. The reof the corporation, but is not void per se. maining complainants are Hodge, Smith, and When the facts are disclosed to the stockhold
Curtis. Hodge owns 100 shares, acquired by ers, it may be subsequently ratified by them. 6. When the by-laws of a corporation, adopt
him before the contract in question was ed by the stockholders in pursuauce of authority
made. Smith owns 200 shares acquired since given by the act of incorporation, provide that that time from a holder who assented to the à majority vote at a stockholders' meeting shall
contract. Curtis, so far as appears, owns no be binding on the corporation, every shareholder will be bound by all acts and proceedings stock. The vice chancellor properly held that within the scope of the power and authority the case must be considered as based wholly conferred by the charter, which shall be approv upon the rights of Hodge as a shareholder. ed or sanctioned by the vote of a majority of such shareholders, duly taken and ascertained
The steel corporation was organized under according to law.
the general corporation act of this state (Re7. The act of incorporation of the United vision 1896) on the 25th day of February, States Steel Corporation requires the corpora 1901, and the certificate of incorporation was tion to pay to the preferred shareholders a yearly dividend at the rate of 7 per cent. per
filed on that day. On the 1st day of April, annum in quarterly payments. By the terms of 1901, an amended certificate of incorporathe act of 1902 said corporation cannot take ad tion was filed, which provided, among other vantage of its provisions, unless it shall have continuously declared and paid dividends at the
things, for an authorized capital of $1,100,rate of 7 per cent. on the preferred stock for
000,000, of which $550,000,000 was to be the period of at least one year next preceding preferred stock, divided into 5,500,000 shares a meeting called to avail itself of the act. The
of the par value of $100 each, and a like meeting was held May 19, 1902. A dividend of 134 per cent. was declared and paid for the
number of shares of common stock of the quarter ending July 1, 1901, and a like dividend par value of $100 each. As required by secfor each of the quarters ending October 1, 1901, tion 18 of the general corporation act, the 14. See Corporations, vol. 12, Cent. Dig. $$ 1396,
amended certificate of incorporation stated 1401, 1402.
that: “The holders of the preferred stock 64 A,-1
shall be entitled to receive when and as declared from the surplus or net profits of the corporation yearly dividends, at the rate of seven per centum per aunum, and no more, payable quarterly on dates to be fixed by the by-laws." The by-laws of the company provide as follows: Article 5, § 5: "The dates for the declaration of dividends upon the preferred, and upon the common stock of the company shall be the days by these by-laws fixed for the regular monthly meetings of the board of directors in the months of April, July, October and January in each year, on which days the board of directors shall declare what, if any, dividends shall be declared upon the preferred stock and the common stock or either of such stocks. The dividends on the preferred stock shall be payable quarterly on the sixth Wednesday next after the several dates of the declaration thereof."
The board of directors of said corporation, having resolved that it would be advisable to decrease the capital stock of the corporation to the extent of 2,000,000 shares, and to retire them by means of an issue of bonds, called a meeting of the stockholders to be held on the 19th day of May, 1902, in pursuance of and as required by section 27 of the general corporation law and by the act of 1902, for the purpose of voting upon the proposed plan for the purchase and retirement of that amount of preferred stock and the issue of 5 per cent. bonds. Prior to the notice of this meeting the directors had entered into a tentative contract with Messrs. J. P. Morgan & Co., bankers, under date of April 1, 1902, by which said bankers agreed with the steel corporation that $100,000,000 face value of the new bonds would be taken and paid for, of which $80,000,000 would be paid for by a like amount of preferred stock taken at par, and $20,000,000 would be paid in cash. To guaranty the performance of this contract, a syndicate was formed by J. P. Morgan & Co., the members of which actually deposited with that firm $80,000,000 of preferred stock to be used in the performance of the contract. The effect and purport of this agreement is that the bankers agreed to buy from the steel corporation at least $100,000,000 of 5 per cent. bonds, and to pay therefor $20,000,000 in cash and $80,000,000 in preferred stock at par, with an option to purchase the remaining bonds if the stockholders did not do so; and in consideration of tuis undertaking the bankers were to receive a commission of 4 per cent. on $100,000,000, and contingently a commission of 1 per cent. on any additional amount that might be taken at par by the stockholders or the bankers. This contract with the bankers was to be subject to the approval of the stockholders. At the stockholders' meeting on the 19th of May, 1902, duly convened, the resolution to retire the preferred stock and the resolution to adopt the bankers' contract were separate and distinct, and were voted
upon and passed as separate and distinct resolutions. The shareholders could have adopted the first and rejected the latter. There was in attendance at the meeting in person or by proxy over 73 per cent. of the outstanding preferred stock, and over 78 per cent. of the outstanding common stock. More than 99.83 per cent of the stockholders at such meeting, present either in person or by proxy, voted in favor of both resolutions, and only 17/100 of 1 per cent. voted against them.
The by-laws of the corporation contained the following provision: "The board of directors in its discretion may submit any contract or act for approval or ratification at any annual meeting of the stockholders, or at any meeting of the stockholders called for the purpose of considering any such act or contract, and any act or contract that shall be approved or ratified by the vote of the holders of a majority of the capital stock of the company which is represented in person or by proxy at such meeting: provided that a lawful quorum of stockholders be there represented in person or by proxy, shall be as valid and as binding upon the corporation and upon all the stockholders, as though it had been approved or ratified by every stockholder of the corporation.” This by-law canpot amplify the powers of the corporation, or operate to validate any act ultra vires of the corporation, but it enabled the stockholders by a majority vote to ratify any contract which the entire body of stockholders or the corporation might lawfully make. Both resolutions therefore received more than the vote required by the twenty-seventh section of the corporation act and by the by-law of the company. If all the shareholders had intended to convert their preferred shares into 5 per cent. bonds, they would, of course, have voted for the conversion resolution, and have rejected the bankers' contract. In a scheme involving such an enormous amount of capital, and affecting thousands of shareholders, it could not reasonably have been supposed that all would prefer to accept the 5 per cent. bonds, and it was, therefore, the exercise of a prudent foresight that prompted them, in order to assure the successful execution of the plan, to secure the co-operation of bankers who could command millions of capital. When the subject-matter of this litigation was before this court at the June term, 1902, in the case of Berger v. The United States Steel Corporation, 53 Atl. 68, it was expressly declared: First. That the act concerning corporations, as revised in 1896, authorizes corporations formed under it to retire shares of its preferred stock purchased with bonds or the proceeds of bonds issued for that purpose, the provisions of sections 27 and 29 being complied with. Second. The manner in which a duly authorized plan is to be carried through is part of the busiress of the corporation, and, in the absence of fraud or bad faith, is not the subject of
judicial control to any greater extent than owed to them. Like other stockholders, they other business of the corporation. The court had a right to be influenced by what they cannot substitute its judgment for that of conceived to be for their own interest, and the directors and majority stockholders, and they cannot lawfully be denied that right, say that a less expensive plan could be suc nor can it be limited or circumscribed by the cessfully adopted. These questions, there fact that they occupied the position of difore, are not open controversy in this case, rectors in the company. With respect to in so far as the cost or wisdom of the plan the bankers' contract a very different rule is concerned.
applies. The rule that directors cannot lawThere is an entire absence in the case of fully enter into a contract in the benefit of anything to show a taint of fraud, or an at which even one of their number participates tempt to conceal from the shareholders any without the knowledge and consent of the fact which should have influenced their ac stockholders is so firmly entrenched in our tion. That the entire proceeding was con jurisprudence that it is not open to debate. ducted with good faith, without concealment, It is emphasized and enforced in the followand with fairness to both parties, is evinced ing, among many other cases: Staats v. Berby the fact that during all the litigation gen, 17 N. J. Eq. 554; Winans v. Crane, 36 which has ensued, under the promotion of a N. J. Law, 394; Stroud v. Consumers' Washare owner who did not attend the meeting, ter Co., 56 N. J. Law, 422, 28 Atl. 578; Gardnot one of the vast number of shareholders ner v. Butler, 30 N. J. Eq. 702; Guild v. who were present in person or by proxy, Parker, 43 N. J. Law, 430; Stewart v. Lecomprising men of great business capacity, high Valley R. Rd., 38 N. J. Law, 505; Tracinterested to the extent of millions of dollars tion Co. v. Board of Works, 56 N. J. Law, in the conversion plan, has questioned its 431, 29 Atl. 163. The rule is imbedded in propriety, or expressed a desire, so far as our jurisprudence, and it cannot be too appears, to recede from it. The contract strongly stated or too vigorously applied. with the bankers was submitted to the stock But in the cases cited the contract was made holders without comment, and, as stated in by the trustee without the knowledge or conthe resolutions, of which a copy was tendered sent of the cestui que trust, and without subto the stockholders, "was not finally to be sequent ratification or adoption by which the come or to be operative until after approval vice in it could be cured. The object of the thereof by the stockholders in special meeting rule is to prevent directors from secretly assembled."
using their fiduciary position for their own The first reason to be considered, upon emolument, and not to impair the right of which the complainants rely to maintain stockholders to enter into any lawful engagetheir injunction, is that the action of the di ment with a full disclosure of the facts. In rectors in passing the resolutions for the Stewart v. Lehigh Valley R. R. Co., supra, plan of conversion and approving the bank Mr. Justice Dixon, in delivering the opinion ers' contract was fraudulent and void, be of this court, says: "After an examination of cause 15 or more of the 24 members of the all the cases cited, as also such others as I board of directors were interested in the have found, and a careful consideration of syndicate which was formed to assist in car the principle, and the results of regarding rying out the bankers' contract, and to share and disregarding it, I have come to the con. its profits; and that the plan was never prop viction that the true legal rule is that such a erly and legally ratified by the two-thirds vote contract is not void, ' but voidable, to be of the stockholders required by the corpora avoided at the option of the cestui que trust, tion act, inasmuch as the votes upon the exercised within a reasonable time. I can stock held or controlled by the bankers' firm see no further safe modification or relaxation and members of the syndicate must be count of the principle than this.” It is a settled ed to make up the necessary two-thirds, and rule of corporation law that the personal inwithout those votes the requisite number did terest of directors renders a transaction voidnot approve the reduction of stock. The in
able at the option of the stockholders, and sistment that the votes of members of the not void per se. Under the declaration of syndicate who were also directors of the this court in the case last cited the sharecompany cannot be lawfully counted in order holders may, within a reasonable time after to constitute a two-thirds vote in favor of the the disclosure to them of the interest of a resolution to reduce the amount of preferred director, elect to avoid the contract; but, if stock is without any foundation in reason an unreasonable time is allowed to elapse or in law. They voted upon that resolution, without exercising such option, during which not as directors, not in their fiduciary capac the position of directors becomes so changed ity, but solely in the right of the shares of that it would be inequitable to vacate the stock held by them. A most valuable priv engagement, equity would refuse to interilege, which attaches to the ownership of pose. A fortiori, when the contract is enstock in a corporation, is the right to vote tered into by the stockholders with the di. upon it at any meeting of stockholders. As rectors, or when the stockholders expressly to that resolution, considered by itself, as authorize the directors to enter into a con stockholders, they owed no greater duty to tract, when the stockholders have notice of their co-stockholders than those stockholders the directors' interest, the agreement will be
unassailable in the absence of actual fraud directors were interested in the bankers' conor want of power in the corporation. In this tract, and by reasonable inquiry at the meetcase, not only was the bankers' contract | ing of May 19th they could have ascertained made with J. P. Morgan & Co., and approved the names and number of such directors. by a two-thirds vote of the shareholders, They signified by their votes that they apwith knowledge that J. P. Morgan was one of proved the contract with such full knowlthe directors of the steel corporation,-a fact edge. which they may be presumed to have known, In Durfee v. Old Colony R. Co., 5 Allen, -but also in the circular letter accompany 230, Chief Justice Bigelow says: “It may be ing the call of the stockholders' meeting to stated as an indisputable proposition that
be held on the 19th of May, it was expressly every person who becomes a member of a • stated as follows: "To further the success corporation aggregate by purchasing and
of the plan, there has been formed a syndi- holding shares agrees by necessary implicacate, including some directors, which will re tion that he will be bound by all acts and ceive four-fifths of the four per cent. compen proceedings, within the scope of the powers sation to be paid under the contract with and authority conferred by the charter, which Messrs J. P. Morgan & Company, mentioned shall be adopted or sanctioned by the vote in the notice of stockholders' meeting." The of the majority of the shareholders of the deliverance of this court with respect to the corporation, duly taken and ascertained acsufficiency of notice in Gale v. Morris, 30 cording to law. This is the unavoidable reN. J. Eq. 285, is as follows: "If the party sult of the fundamental principle that the notified make reasonable investigation, he ob majority of the stockholders can regulate tains actual knowledge of these facts; if and control the lawful exercise of the pow. he chose not to make it, he is charged con ers conferred on a corporation by its charstructively with knowledge of them. The ter.” In the case of the steel corporation the rule merely prohibits him from taking ad right of the majority does not rest upon imvantage of his own imprudence to the detri plication. In the by-laws adopted by the ment of another. But as to the matters that stockholders, in pursuance of authority given lie within the notice, the principle assumes by the act of incorporation, such power is another form. It charges the party with expressly given to the majority. In Leaven. knowledge of those matters so far as rea worth Co. v. Chicago Railway Co., 134 U. S. sonable inquiry has not dissipated their cred 688, 10 Sup. Ct. 708, 33 L. Ed. 1064, it was ibility. If he is unwilling to act upon the held that the action of the stockholders val. facts as the notice presents them, then the idated the contract where 9 out of 13 directlaw demands that he shall make proper ex ors were personally interested. In the cases amination, and upon the result of that ex of Nye v. Storer, 168 Mass. 53, 46 N. E. 402, amination he may safely stand. Williamson and Bjorngaard v. Goodhue County Bank, V. Brown, 15 N. Y. 354. But if he prefer 49 Minn. 483, 52 N. W. 48, a like infirmity not to examine, it must be because he is sat in contracts was held to be eliminated by the isfied to act as if the matters disclosed in vote of a majority of stockholders. The like the notice were true; and he cannot after view is expressed by the court of appeals of wards complain if his rights are made to Maryland in Shaw v. Davis, 28 Atl. 619, 23 rest upon them so far as they are true. The L. R. A. 294, as follows: "It may be stated, information given by the notice is equiva as the result of all the authorities, that whenlent to that obtained by inquiry.” In Has ever any action of either directors or stocklett v. Stephany, 55 N. J. Eq. 68, 36 Atl. holders is relied on in a suit by a minority 498, Vice Chancellor Pitney said: “For these stockholder for the purpose of invoking the reasons I think that the facts above stated, interposition of a court of equity, if the act which were clearly within defendant's knowl complained of be neither ultra vires, frauduedge, were sufficient to put him upon inquiry. lent, or illegal, the court will refuse its inThe general doctrine that facts which are tervention, because powerless to grant it, and sufficient to put a party upon inquiry are will leave all such matters to be disposed of sufficient to charge him with all such knowl by the majority of the stockholders in such edge as he would have acquired by a proper manner as their interest may dictate; and inquiry in the ordinary course of business their action will be binding on all, whether is, as I take it, thoroughly established in approved of by the minority or not.” The this state. It was so held in the court of healing effect of the ratification by stockappeals in the case just cited (Power Co. holders upon a voidable contract entered into v. Veghte, 21 N. J. Eq. 463), and that case by directors is fully recognized in Grant v. followed Hoy v. Bramhall, 19 N. J. Eq. 563, United Kingdom Switchback Rys. Co., 40 97 Am. Dec. 687, in the same court. The Ch. Div. 135. In the case sub judice the doctrine of these cases has always been fol contract was, in effect, made between the lowed in New Jersey.” The cases in Eng. stockholders themselves and J. P. Morgan land are to the like effect. Phosphate of & Co., and it cannot be successfully assailed, Lime Co. v. Green, L. R. 7 C. P. 43; May v. without maintaining that stockholders are Chapman, 16 Mees. & W. 355. The stock without capacity to make a valid contract holders of the company are, therefore, with the directors of their company. It chargeable with express notice that some would be manifestly contrary to fair dealing