Diamond v. Davis

Full title: DIAMOND v. DAVIS et al

Court: Supreme Court, Special Term, New York County

Date published: Feb 14, 1942

38 N.Y.S.2d 103 (N.Y. Misc. 1942)

Opinion

February 14, 1942.

Derivative stockholder's action by one Diamond against Francis B. Davis, Jr., E.I. du Pont de Nemours Co., and others. E.I. du Pont de Nemours Co.'s application for summary judgment was granted. On motion by the other defendants for summary judgment dismissing the first three of the six causes of action alleged in the complaint.

Motion granted.

Jay H. Kanarek, Nathaniel Phillips, and Weinstein Levinson, all of New York City, for plaintiff.

Davis, Polk, Wardwell, Gardiner Reed, of New York City (John W. Davis, of New York City, of counsel), for individual defendants.

Arthur, Dry Dole, of New York City (Paul H. Arthur, of New York City, of counsel), for defendant United States Rubber Co.

Wiley Willcox, of New York City (formerly Wiley, Willcox Sheffield, Bertram F. Willcox, of New York City, of counsel), for defendant E.I. du Pont de Nemours Co.

HAMMER, Justice.

This action is a derivative stockholder's suit brought by plaintiff, the holder since November 15, 1939, of 10 shares of the 1,710,592 common shares of defendant United States Rubber Company (a New Jersey corporation), hereinafter referred to as the "Rubber Company." The complaint joined as a defendant E.I. du Pont de Nemours Co., which corporation also moved for summary judgment dismissing the six causes of action stated in the complaint.

The application by the defendant du Pont Company has been granted (see opinion in Diamond v. Davis, Jr., et al., filed herewith, ___ Misc. ___, 38 N.Y.S.2d 93).

This motion is by defendant "Rubber Company" and also by all of its directors and officers, who are defendants in this action and who have been served with process, for summary judgment pursuant to Rules 113 and 114 of the Rules of Civil Practice dismissing the first three of the six causes of action alleged in the complaint.

In their application the defendants assert that the wrongs complained of alleged solely upon information and belief are manifestly sham and false and their defense thereto stating true facts which are established by documentary evidence submitted in support of the motion are conclusive and show that the defenses are sufficient as matter of law, and there is no cause of action against or liability upon defendants.

The present motion is directed only to the allegations of the first three causes of action. The three causes will be discussed in their numerical order. All of the causes allege that plaintiff is the owner and holder of 10 shares of the common stock of the defendant Rubber Company; this defendant is a New Jersey corporation authorized to do business in the State of New York; defendant E.I. du Pont de Nemours Company, hereinafter referred to as "du Pont Company," is a Delaware corporation which since 1929 was and still is the largest stockholder of the common stock of Rubber Company, owning approximately 314,000 shares, or about 19 per cent. of said common stock; defendant Francis B. Davis, Jr., hereinafter referred to as "Davis," was and still is president, director and chairman of the board of directors and chairman of the executive committee at the instance and direction of defendant du Pont Company; the directorate and officer personnel of Rubber Company were directors and/or designees of du Pont Company, and by reason thereof du Pont Company had absolute domination and control of Rubber Company; defendant Davis, as representative of du Pont Company, also dominated and controlled Rubber Company; and that the laws of the State of New Jersey and of New York imposed the duty upon said directors and officers of Rubber Company to administer the affairs of the corporation honestly and diligently.

The first cause of action then alleges "that, in violation of law and in utter disregard of their duties as directors and officers Rubber Company, in or about February 1936, while exercising domination and control of Rubber Company, the defendant Davis, collaborating with du Pont and acting in concert with the defendant directors of Rubber Company, constituting a majority of its Board of Directors, caused Rubber Company, through its defendant officers, to grant to said Davis, an option running for a period of five years from January 14, 1936, for the purchase by Davis of 25,000 shares of common stock of Rubber Company, or any portion thereof, at a price fixed therein of $20 per share."

It is further alleged that Davis on or about December 20, 1938, exercised the option to the extent of purchasing 5,000 shares of common stock from "Rubber Company" at $20 per share, at which time the company's stock was selling on the New York Stock Exchange in excess of $50 per share. That in December, 1940, the option was extended to June 1, 1946. It is alleged that the granting of the original option and the transfer of stock thereunder by Rubber Company through its directorate and officers were without consideration and intended as and did constitute a gift of the sum of $150,000, being the difference between the value of the 5,000 shares transferred by Rubber Company to Davis and the amount he was required to pay therefor, by reason of which the assets of the defendant Rubber Company have been wasted.

The answers interposed by movants in addition to denying most of the allegations to the complaint set up seven affirmative defenses. The first defense alleges that New Jersey Revised Statutes, 14:9-1, 2, 3, 4 and 5, N.J.S.A. 14:9-1 to 14:9-5, give power to a corporation to provide for participation of employees in the purchase of stock, profits, welfare work or management of the corporation. The second defense sets forth facts tending to establish that the option to Davis was a method of granting compensation to the principal executive of the company as an incentive for service. The third defense alleges knowledge on the part of stockholders of Rubber Company of the said option and ratification thereof and authorization to make the new compensation agreement with Davis. The fourth and fifth defenses allege neither plaintiff nor the prior owner of the stock protested or complained of the alleged wrongful acts and the directors relied upon the stockholders' silence, acquiescence and approval, and allege an estoppel has arisen to deny the validity of the stock option plan. The sixth alleges present change in personnel of the board of directors and failure of plaintiff to make demand upon Rubber Company to institute suit. The seventh defense alleges that the facts set forth in the first cause of action involve the internal management of Rubber Company, and the construction and application of New Jersey statutes, and that this court should decline jurisdiction. Each of several of the individual defendants in an "eighth separate defense" alleges that he was not a director of Rubber Company during the period of the alleged wrongdoing.

The defendants upon this motion rely upon the denials and the defenses setting forth the alleged true facts regarding the "Davis Option," the good faith and due care of the directors and their compliance with the law of the State of New Jersey in respect thereto. In support of the application they have submitted documentary proof consisting of certified copies of corporate records, official documents on file with the Securities and Exchange Commission and the New York Stock Exchange and photostatic copies of the New Jersey statutes upon which they place reliance.

Under Rule 113 of the Rules of Civil Practice, when the answer sets forth a defense sufficient as a matter of law, established prima facie by documentary evidence or official record, unless plaintiff establishes by affidavit or other proof facts sufficient to raise an issue with respect to the verity and conclusiveness of such documentary evidence or official record, the complaint may be dismissed. See Diamond v. Davis, Jr., et al., decided herewith, ___ Misc. ___, 38 N.Y.S.2d 93; Lederer v. Wise Shoe Co., 276 N.Y., 459, 12 N.E.2d 544; Pross v. Foundation Properties, Inc., 158 Misc. 304, 285 N.Y.S. 796.

Rule 114 provides that if such defense applies to part of plaintiff's claim or the motion applies to one or more of several causes of action or one or more of several parties plaintiff or defendant, and defendant's contentions are sufficient to dispose of the claims of the complaint in such part the defendant may have final judgment forthwith dismissing the complaint to the extent warranted on such terms as may be just, and the action may be severed.

Reference to the complaint shows that plaintiff contends defendant du Pont Company by ownership of 314,000 shares of the common stock of Rubber Company controlled the actions of the directorate and officer personnel of the latter company. The documentary evidence made a part of the motion papers establishes conclusively that du Pont Company was not and is not a stockholder, and could not have dominated or controlled the actions of Rubber Company's officials. The plaintiff has not by any credible evidence established facts by which a triable issue is raised in respect of such ownership, participation, domination and control. See opinion in Diamond v. Davis, Jr., et al., supra.

In considering this motion the allegations by which plaintiff sought to involve du Pont Company are eliminated from consideration.

The option given to Davis (Exhibit 69), which forms the basis of plaintiff's cause of action, was executed February 5, 1936, after authorization by the board of directors of Rubber Company (Exhibit 21). It refers to the employment of Davis since January 15, 1929, as chairman of the board of directors and as president and provides for the continuance of such employment, at the salary theretofore fixed by the company, for an indefinite period subject to cancellation by either party on one year's notice in writing. The agreement further provides that Davis be granted an option to purchase 25,000 shares of the common stock of Rubber Company at $20 per share, which could be exercised up to January 14, 1941, providing Davis was in the employ of the company at the time he exercised the option.

Defendant contends that the evidence establishes the continuance of service by Davis was consideration for the granting of the option. As substantiation of this position the agreement of February 5, 1936 (Exhibit 69), as well as numerous other documents and official reports are submitted (Exhibits 11, 12, 15, 16, 21 to 25, inclusive, 68, 69, 70, 77 to 81, inclusive, 87, to 89, inclusive, 91 to 99, inclusive, 104 to 108, inclusive, 122, 127, 128). Upon examination of the exhibits the following facts are found:

About September 3, 1929, the directors approved and recommended to the stockholders for adoption a bonus plan and a managers shares plan (Exhibit 17). Notice of a special meeting of stockholders inclosing copies of the plans was given, and at the meeting of October 15, 1929, the plans were adopted by an affirmative vote of 316,854 shares of first preferred stock and of 928,415 shares of common stock with 100 shares of first preferred and no common stock in the negative (Exhibits 1, 2). On November 12, 1929, the directors adopted the bonus plan (Exhibit 18), and on February 4, 1930, the managers shares plan was put in operation by action of the board of directors. On March 10, 1930, notice of annual meeting of the stockholders and for the approval and ratification of the acts and proceedings of the directors, finance committee, executive committee and officers was given to all stockholders. The meeting was held on April 15, 1930, and ratification was given, including the thirty-eighth annual report, which set forth the approval of the bonus and managers shares plans and that they had been put in operation but that no distribution was made as earnings were not available (Ex. 14). On March 7, 1934, the directors considered reducing the price per share of common stock under the Managers Share Plan from $35 to $20 and for other changes in the plan required thereby (Ex. 20). Notice of the 1934 annual meeting of the stockholders was given which contained reference to proposed action in respect of the Managers Share Plan and also to a proposal to grant President F.B. Davis, Jr., an option to purchase 20,000 shares of common stock at a price to be fixed at not less than $20. The meeting of stockholders was held on April 17, 1934. The former was approved (Ex. 78). The latter was not acted upon until the stockholders' meeting of 1936. Plaintiff argues "it is doubtful whether the stockholders were sufficiently apprised of the proposed option sought to be given Davis." On February 5, 1936, it was proposed and approved by the directors at their meeting that an employment contract be entered into with Davis. The form of contract was approved and it was made the same day. It recited that Davis had been in the employ of the company since January 15, 1929, and the employment was continued, terminable only on one year's notice, and "that as one of the terms of said employment" Davis had the option to purchase 25,000 shares of Rubber Company common stock "at $20 per share until and including January 14, 1941, but only during so much of said time as he (Davis) shall continue in the employment of the Company." (Ex. 21, Contract, Ex. 69). On March 4, 1936, a meeting of the directors was held and an officers stock option plan was proposed and adopted for recommendation to the stockholders (Ex. 22).

Notice of the annual stockholders' meeting to be held April 21, 1936 (Exhibit 11) was duly given to the stockholders. It informed the stockholders of the proposed plan and intended action for their adoption, and also to extend the managers share plan from 1939 to 1946. A copy of the stock option plan was referred to as shown on the reverse side of the notice. At this meeting the stock option plan was adopted (Exhibit 12). This plan provided for the grant by Rubber Company to officers and directors actively engaged in the business of options to purchase the stock of the company at a price not less than the closing New York Exchange price on the day preceding the granting of the option.

The question then arose as to whether the option given to Davis in February, 1936, came within the provisions of the stock option plan (Exhibit 22). There appeared to be a discrepancy in certain provisions and Davis, by letter, on June 2, 1936 (Exhibit 70) agreed to waive the provisions of the agreement of February 5, 1936, to conform same to the stock option plan. At the meeting of the board of directors held June 8, 1936 (Exhibit 24) it was voted that the agreement as modified conformed substantially to the terms of the stock option plan and was, therefore, subject to the opinion of counsel, deemed to be an option entered into and existing under the said plan. General counsel, at the request of the company, rendered his written opinion (Exhibit 68). It was to the effect that the Davis option plan. The board of directors at a meeting held on July 1, 1936, than declared that the Davis stock option, under the opinion of counsel, conformed substantially to the stock option plan. The board of directors at a meeting held on July 1, 1936, then declared that the Davis stock option, under the opinion of counsel, conformed substantially to the stock option plan, and was no longer conditional (Exhibit 25).

On April 1, 1938, the stockholders were given notice (Exhibit 15) that at the annual meeting to be held April 19, 1938, there would be considered and action would be taken on a new employment contract with Davis at a specified salary, and for stated retirement benefits, and that he would relinquish all rights under all stock plans other than those held by him under the stock option plan of the Rubber Company. A letter dated April 1, 1938 (Exhibit 15), accompanying the notice, incorporated the salient facts relative to the Davis option of 1936 and stated that option was unexercised.

At the meeting held April 19, 1938, a resolution authorizing the execution of a contract of employment of Davis by the Company, pursuant to the terms above, was adopted by a vote, 1,133,247 shares for and 677 shares of the capital stock of Rubber Company (Exhibit 16) against the proposition.

On December 20, 1938, Davis exercised his option to the extent of 5,000 shares of stock, which fact was reported to the Securities and Exchange Commission, as well as the New York Stock Exchange (Exhibits 81 and 91). Notice of such exercise of option was given to the stockholders of Rubber Company by the 1938 annual report of Rubber Company. The option was extended in December, 1940, to June 1, 1946.

The complaint attacks the original grant of the Davis option, its partial exercise on December 20, 1938, and its subsequent extension in 1940, as illegal, without consideration, and as a gratuitous gift to Davis, constituting illegal waste of corporate assets.

Plaintiff contends that the basic factual issue is whether there was fraud and bad faith in the granting of the option, or whether it was a fraudulent scheme to give Davis an unwarranted and gratuitous gift of corporate assets. He urges that all the circumstances must be investigated.

Plaintiff's claim is that the statutes of New Jersey did not authorize granting the option to Davis. Plaintiff argues what transpired as outlined above shows a scheme to, and acts designed for, mulcting the corporation for the benefit of the officers, particularly the president, to the detriment of the stockholders. Plaintiff states, "in the first year that earnings accrued to the company from which a dividend might have been paid, namely, 1935, no dividend was paid, but instead the said earnings, through the device of bonuses, were diverted by these directors-officers to themselves, so that they personally profited thereby. In fact, as pointed out in the complaint, payments aggregating about $712,000 were made in or about the year 1937 to these defendant-directors-officers. Said amount was paid in the form of bonus or extra compensation out of a total of about $720,000 paid that year although no dividends were paid that year on either the preferred or the common stock."

Chapter 192 of the Laws of 1932 of the State of New Jersey, N.J.S.A. 14:9-1 to 14:9-5, with prior similar enactments, provides in substance that "any stock corporation formed under any law of this state may, upon such terms and conditions as may be determined * * * provide and carry out a plan or plans for any or all of the following purposes: a. The issue or the purchase and sale of its capital stock to any or all of its employees and those actively engaged in the conduct of its business * * *." (Exhibit 108.)

An option to purchase is the right obtained for a consideration of calling for and receiving specified property, usually commodities or securities, in our instance stocks, at a fixed price within a certain time. It is a contract by which the owner agrees with another that the latter has the right to buy the former's property at the price fixed within the certain time prescribed. Some authorities consider an option as a binding agreement to keep an offer open, which upon acceptance, ripens into a bilateral contract. Perry v. Paschal, 103 Ga. 134, 29 S.E. 703. By others it is described as a complete unilateral contract in which the obligation of the optioner is subject to the condition precedent of tender of payment by the holder or optionee, who does not become bound by mere notice of acceptance. 18 Harvard Law Review, 11, 12, Prof. Langdell. On either theory the covenant to pay money as consideration for the option is a contract subject to the general rules pertaining to such engagements. Reilly v. Steinhart, 161 App.Div. 242, 146 N.Y.S. 534, reversed on other grounds, 217 N.Y. 549, 112 N.E. 468; 66 Corpus Juris 485, 486. "* * * if consideration is paid for an offer, though no seal is attached, the offer is a contract. A promissory estoppel may also make an offer irrevocable. Such contracts are generally called options." Williston on Contracts, Revised Edition, sec. 61, p. 176.

It may be, as plaintiff contends, that a bonus payment which has no relation to the value of the services for which it was given is a gift, especially if there is overreaching by the beneficiary, and that the majority of the stockholders have no power to give away corporate property against the protest of the minority. Rogers v. Hill, 289 U.S. 582, 53 S.Ct. 731, 77 L.Ed. 1385, 88 A.L.R. 744. This, however, is only half stating the rule. Where the services are of value and are so recognized, in the absence of statutory provision or decision to the contrary, stockholders and directors acting in good faith may grant a bonus, or an option, to a valuable officer, by which a proprietary interest may be purchased by him or any employee so favored, at a price fixed in the agreement, as an incentive to retain his services, sharpen his interest, intensify his zeal, spur him on to more ardent effort in the interest and for the benefit of the company, and to enable him thereby to share in the resulting success of the enterprise.

The rule is stated in Fletcher Cyclopaedia Corporations, volume 5, section 2143, and is supported by cited cases from various states, as well as from the federal courts.

"* * * Corporations, generally through their boards of directors, may pay or promise to pay to * * * officers or other employees extra compensation in the way of a bonus, and when properly authorized, it is not in itself a fraud upon dissenting stockholders, nor is it illegal or against public policy, unless the directors acted under an illegal by-law, provided, of course, that the officers are not thereby receiving more in the way of salary and bonus than the fair value of their services; and the company may also be estopped to deny that it had contracted to pay a bonus to its officers. * * * a bonus is not a gift or gratuity, but a sum paid for services, or upon a consideration or in addition to that which ordinarily would be given. * * * The action (of the board when authority is exceeded) is not void, but at best voidable. * * * It has been held that a promise to pay an officer a certain percentage of profits in addition to his salary is supported by sufficient consideration, where the officer abrogates his privilege of annulling his contract of employment." Where only one stockholder, owning a relatively small number of shares, objects and stockholders owning an overwhelming number of shares granted or ratified the bonus, it is most convincing proof not only of the absence of fraud but also that benefits honestly and reasonably flow from the practice. Putnam v. Juvenile Shoe Corp'n, 307 Mo. 74, 269 S.W. 593, 40 A.L.R. 1412. Ordinarily, it is where the bonus is voted for past services during a period for which the officer has been paid his compensation previously fixed that the grant without payment of the price of the stock is regarded as a gift or mere gratuity. See White on New York Corporations, vol. 1, sec. 27, p. 329, and cases cited.

Defendants argue that agreement to continue in the employment was consideration sufficient to support the agreement of February 5, 1936, as an employment contract with the stock option as part of the compensation. Be that as it may, and even if there might be question of the power under law of a corporation, i.e., the Rubber Company, to make such a contract with its president and director, it is clear that under the notice of meeting of April 19, 1938, the stockholders had full knowledge thereof brought to their attention and by an overwhelming vote Davis at that meeting was re-elected president and granted the continuation of his rights under the stock option plan of the Rubber Company. It was after that and on December 20, 1938, that Davis exercised his option to the extent of 5,000 shares. Reports to the Securities and Exchange Commission disclosed the purchase to that public authority (Exhibits 81, 91).

It seems clear that the corporation was empowered by the law of the state of its creation to provide a plan for the purchase and sale of its capital stock to any or all of its employees, and those engaged in the conduct of its business, including its president and its other officers.

Plaintiff's assertion that the grant or option to Davis was in fact a gift is not supported by any credible evidence. The proof establishes that Davis had rendered valuable services to Rubber Company in various capacities throughout the lean years of Rubber Company's business. The directors and stockholders in a position to know may be assumed to have regarded his capacity and loyalty as worthy of the action taken. When the business commenced to show a profit, the company and its directors and stockholders mindful of the service rendered, as an incentive and an inducement to continue his employment and increase or intensify his interest, granted him the option to purchase stock. Valuable consideration must be regarded as existing by reason of the very action taken pursuant to the New Jersey law. It was voted by a board of directors in whose election all stockholders had a voice. Of the eight directors who voted for the February 5, 1936, agreement, five were not officers and were not beneficiaries of any incentive compensation plan of the Rubber Company. Exs. 35, 37, 39, 41, 66.

Fraud or bad faith is charged but cannot be sustained as to the directors who voted in favor of granting the option. The record of the meeting of February 5, 1936, clearly shows that Mr. Davis did not vote on the proposition. It further shows that the stock was selling at that time at between $19.25 and $20 per share, and the price fixed in the option was the then market value of the stock, and no gift or special favor in respect of price was being conferred on Davis by the directors of Rubber Company. The proof offered by plaintiff does not disclose any ulterior purpose or self-interest which may have motivated the board of directors to authorize the granting of the option to Davis. In the absence of such proof the presumption that the directors acted honestly and in good faith must prevail. Corbus v. Alaska Treadwell Gold Mining Co., 187 U.S. 455, 463, 23 S.Ct. 157, 47 L.Ed. 256; Litwin v. Allen, Sup., 25 N.Y.S.2d 667, 699; Hun v. Cary, 82 N.Y. 65, 72, 37 Am.Rep. 546.

Good faith on the part of the board of directors is shown by the documentary evidence known as the stock option plan (exhibit 22), which was adopted by the stockholders at the annual meeting on April 21, 1936 (exhibit 12). This plan devised options to be granted officers and directors of Rubber Company actively engaged in the business. It had been recommended for adoption by the board of directors at their March, 1936, meeting (exhibit 23). The records (exhibits 24, 25, 69) further show that the directors used due care and diligence in determining the rights of Davis under the stock option plan after they sought and obtained written advice of general counsel to the company (exhibit 68). Aided by that legal opinion they determined that the option granted to Davis conformed substantially to the terms of the plan. The approval of the stockholders at their meeting April 19, 1938, when they had full information of the facts (exhibits 15, 16) and the vote by which Davis' employment was continued for a six-year period at a stipulated salary and rights under the stock plan option, conclusively showed the Rubber Company and its stockholders desired to and did grant him the right to purchase the company's stock on the terms stated. While not decisive if plaintiff showed any evidence of fraud, the open and above board character of the action taken is indicated by the fact that the option to Davis was given due publicity to stockholders by reports filed with the Securities and Exchange Commission and New York Stock Exchange and articles published in "The Wall Street Journal" and "New York Times" (Exhibits 77, 78, 79, 87, 88, 89, 96, 97).

The plaintiff's opposing affidavits are barren of a single fact which in any way tends to sustain his theory of fraud or bad faith. Mere repetition of the allegations of the complaint constitutes no ground and furnishes no reason for further judicial investigation. Plaintiff has not shown he is entitled to a trial under Rule 113 of the Rules of Civil Practice. O'Meara Co. v. National Park Bank, 239 N.Y. 386, 395, 146 N.E. 636, 39 A.L.R. 747; General Investment Co. v. Interborough Rapid Transit Co., 235 N.Y. 133, 139, 139 N.E. 216.

Plaintiff by Rule 113 was required to but has not shown facts which may be deemed by the court sufficient to raise an issue with respect to the verity and conclusiveness of defendants' documentary evidence. Strasburger v. Rosenheim, 234 App.Div. 544, 547, 255 N.Y.S. 316.

Plaintiff states that the language of the stock option plan is "prospective and not retroactive" and therefore did not inure to the benefit of Davis. This statement is not founded in fact because the plan (Exhibit 22) specifically provides: "Any or all options heretofore granted which in the option of the board of directors conforms substantially to the terms of this plan and which remain wholly or partly unexercised shall be deemed to be options entered into and existing under this plan."

Plaintiff charges in his answering affidavit that the report of Rubber Company filed with the New York Stock Exchange pursuant to Security and Exchange Act of 1934 concerning the partial exercise of the option by Davis in December, 1938, indicates that Davis paid no consideration for the issuance of the 5,000 shares of stock (Exhibits 81, 91).

The report recites in part: "On December 20th, 1938, Davis acquired 5,000 shares under the option plan, which acquisition is not regarded as remuneration. The exercise of such option was considered as a sale of securities by registrant."

If, argues the plaintiff, the acquisition of this stock by Davis was not by way of remuneration, there was no consideration for its issuance and defendants are liable for the difference between the price of $20 paid by Davis and the market value on December 20, 1938. Apparently plaintiff overlooks the established fact that the agreement to sell the stock to Davis on the terms set forth in his option was made in February, 1936, when the stock sold for approximately $20 per share, and not in December, 1938, when it sold at a substantially increased price. The filed reports filed referring to the granting of the option to Davis, as well as to another officer (Exhibits 77, 87), specifically stated that "the consideration for the granting of such options was the agreements of the optionees to continue in the employment of the registrant (Rubber Company) in their respective capacities * * *." The reports (Exhibits 81, 91), filed in 1939, showing the partial exercise of the option granted to Davis, in reality show that the stock was not issued as compensation for services, but was a sale of the stock by the company to Davis at the price and pursuant to the terms of his contract as it became incorporated in the stock option plan under which he was granted the option to make such purchase. These circumstances could not have spelled out a gift of the stock as Davis, nor could it have resulted from an inadequate consideration, as the price paid and reported was the agreed price.

Plaintiff also argues that the stock option to Davis granted an excessive compensation to him for the year 1938. The complaint is barren of any allegation in respect of this charge. It only alleges lack of consideration for the granting of the option. Under the circumstances there is no merit to this contention.

The foregoing leads to the conclusion that defendants' documentary evidence has established their defenses and plaintiff has failed to present proof as to the verity and conclusiveness thereof. Accordingly, no triable issue exists and defendants' motion as to plaintiff's first cause of action must be granted.

This leads to a consideration of the motion addressed to the second cause of action.

Allegations 1 to 16, inclusive, are realleged. They deal with the alleged ownership of the stock of Rubber Company, the directorate and officer personnel and the alleged domination and control by du Pont of Rubber Company and the participation in the wrongful acts hereinafter alleged.

The complaint then alleges that certain of the officers and directors of Rubber Company and defendant du Pont Company owned substantial amounts of the preferred stock of Rubber Company. That the amended certificate of incorporation of the latter company provided for declaration and payment of dividends on said stock not exceeding 8 per cent. per annum and that said dividends be not cumulative; that during 1939 "defendants directors constituting a majority of the board of directors of Rubber Company and its officers in violation of law — in utter disregard of their official duties and at the instigation and direction of du Pont caused Rubber Company to declare and pay dividends on its preferred non-cumulative 8% stock as follows: 8% dividend for the year 1939; also 4% dividend as the alleged unpaid balance of the 1938 dividend during which latter year only 4% had been declared and paid on said preferred stock."

It is further alleged that the net earnings of Rubber Company for 1938 remaining after payment of said 4 per cent. dividend "had been expended for corporate uses and purposes" and that the declaration of 4 per cent. balance of the 1938 dividend was illegal, improper and a waste of the assets of Rubber Company to the extent of $2,604,364.

The answers of movants deny the allegations set forth in the second cause of action except the true facts contained in its amended certificate of incorporation, and the declaration and payment of dividends on Rubber Company's preferred stock in 1938 and 1939. Separate defenses are interposed, the first and second of which are relied upon on this motion. The first alleges that the New Jersey law governs and that under the law of that state the dividends complained of were proper; the second alleges that assuming that they were not lawful, the declaration and payment thereof were in good faith and in the exercise of due care and that no evidence exists to the contrary, and if such declaration and payment be considered ultra vires acts, there is no showing that defendants knew or ought to have known that the acts were unauthorized creating liability on the part of defendant officers and directors.

The gravamen of plaintiff's charge against the remaining defendants is that they declared and paid 4 per cent. on its 8 per cent. preferred stock from the earnings of the company that year, expending the balance of net income for corporate uses and purposes and then in 1939 paying the balance of 4 per cent. from the alleged earnings of 1938 and in addition thereto 8 per cent. from the 1939 earnings.

The movants contend that the declaration and payment of said dividends were lawful and proper and are controlled by the law of the State of New Jersey.

It is admitted that defendant Rubber Company was incorporated and exists under the laws of the State of New Jersey. The Corporation Act of New Jersey, chapter 123, Laws of 1930, N.J.S.A. 14:8-1 to 14:8-4, authorizes the creation of one or more classes of stock by New Jersey corporations. Thus the creation and issuance of the preferred stock in question was entirely proper and legal. Likewise the fixation and limitation of dividends on the preferred stock was within the purview of the law of New Jersey. McVity v. Albro Co., 90 App.Div. 109, 86 N.Y.S. 144, aff'd 180 N.Y. 554, 73 N.E. 1126; McClement v. Supreme Court, Order of Foresters, 222 N.Y. 470, 119 N.E. 99.

Plaintiff's contention that section 114 of the Stock Corporation Law of New York State should be considered in the light of the laws controlling declaration of dividends is not well founded. Nor is the case, German-American Coffee Co. v. Diehl, 216 N.Y. 57, 109 N.E. 875, cited by him authority supporting his position. Section 114, Stock Corporation Law, provides that directors of a foreign corporation doing business in New York shall be liable in the same manner as directors of a domestic corporation under the provisions of chapter 59 of the Consolidated Laws (Stock Corporation Law) for the making of "1. Unauthorized dividends." However, the only liability thus created is for the payment of dividends out of capital, which is not plaintiff's complaint here.

While it is true that a foreign corporation authorized to do business in this state must yield obedience to our laws and a violation of a condition may impose a penalty on the directors, it is only where they have illegally declared dividends from capital that such liability becomes effective. This was so decided in German-American Coffee Company v. Diehl, supra, the case upon which plaintiff relies. See also McVity v. Albro Co., supra.

It is therefore necessary to ascertain whether the dividend declared and paid was authorized and legal under the laws of New Jersey.

Defendants, in support of their motion addressed to the second cause of action, have offered documentary evidence and official records tending to establish their contentions. They consist of exhibits 33, 74, 100 to 103, inclusive, 107, 109 to 113, inclusive, 122 and 126. Exhibit 33 is an extract from the minutes of the directors' meeting of March 1, 1939, whereat a declaration of a dividend of 2 per cent., payable March 24, 1939, from the earnings of the Rubber Company for 1938 and 2 per cent., payable June 23, 1939, exhibit 74, disclosed that seven out of ten directors who attended the aforesaid meeting owned no preferred stock, whereas they owned approximately 12,570 shares of common stock.

Exhibits 100 to 103, inclusive, disclosed publication of notice of declaration of the aforesaid dividends in New York newspapers.

Exhibits 109 to 113, inclusive, are decisions of New Jersey appellate courts tending to sustain defendants' position; exhibit 122 is the annual report of Rubber Company for the year 1938, including consolidated balance sheet as of said date, certified to by public accountants and showing an item of earned surplus of $3,520,735.90. Exhibit 126 is Article III of the Amended Certificate of Incorporation of Rubber Company providing for payment of dividends on preferred stock.

Article III of the Amended Certificate of Organization of Rubber Company provides in part as follows: "* * * The holders of the first preferred stock shall be entitled to receive semi-annually or quarterly all net earnings of the company determined and declared as dividends in each fiscal year, up to but not exceeding eight per centum per annum in all outstanding first preferred stock before any dividend shall be set apart or paid upon any other stock of the Company, but such dividends upon the first preferred stock shall not be cumulative and the first preferred stock shall not be entitled to participate in or to receive any profits or earnings other than or additional to, such dividends" (Exhibit 126).

There appears to be no dispute that the earnings of Rubber Company for the year 1938 were sufficient to pay the entire 8 per cent. dividend for that year (Exhibit 122). If it had been declared and paid no complaint could have arisen. But it is contended by plaintiff that after the payment of the 4 per cent. dividend for that year, the balance of the earnings for 1938 were "expended" for corporate uses and purposes and that therefore earnings not declared as dividends during the year made but used for capital improvements were lost forever to the noncumulative preferred stock. He urges that under the Rubber Company's charter, the directors were compelled to declare in 1938 all they determined to be payable as dividends in 1938. That the directors usurped a right which the charter did not vest in them by exceeding the maximum declaration of 8 per cent. in 1939 to 12 per cent. on a false assertion that it was lawfully being paid as part of the 1938 dividend obligation. He stresses the assertion that the undistributed surplus income for 1938 was not earmarked for 1938 dividends but applied to general corporate purposes.

While the charter of Rubber Company limits the amount of dividends to be declared and payable to preferred stockholders, it does not provide that earnings not declared become a part of the working capital of the corporation. Neither is there any provision which makes it obligatory to declare and pay the full dividend during the year it is earned.

No credible evidence has been submitted from which it appears that the surplus net income after payment of the 4 per cent. dividend in 1938 on the preferred stock was used for corporate purposes. To the contrary, the annual report of the company for the year ending December 31, 1938 (Exhibit 122) shows that its current earnings were $5,885,888 and that if a full dividend of $8 per share on the preferred stock were provided there would remain a net earned surplus on a fully consolidated basis of $916,372. It shows that out of the aforementioned earnings of $4 per share amounting to $2,604,364 was paid on December 23, 1938, being the first dividend since February 15, 1928, and that the directors declared two further dividends of $2 per share out of such earnings payable March 24, 1939, and June 23, 1939.

Plaintiff's argument that the failure to declare the full dividend during 1938 bars the declaration and payment thereof in 1939 is not supported by authority applicable to the defendant corporation Rubber Company.

Defendants urge that under the law of the State of New Jersey, the net profits of Rubber Company were earmarked for the payment of the full 8 per cent. dividend on the noncumulative preferred stock and might be paid in a subsequent year. They rely upon the authorities of Bassett v. United States Cast Iron Pipe Foundry Co., 74 N.J.Eq. 668, 70 A. 929 (Exhibit 109), Id., 75 N.J.Eq. 539, 73 A. 514 (Exhibit 110), Moran v. United States Cast Iron Pipe Foundry Co., 95 N.J.Eq. 389, 123 A. 546 (Exhibit 111), Id., 96 N.J.Eq. 698, 126 A. 329 (Exhibit 112), Day v. United States Cast Iron Pipe Foundry Co., 96 N.J.Eq. 736, 126 A. 302 (Exhibit 113).

It was held in the Bassett cases that corporate earnings withheld from preferred stockholders over a period of years and placed in a reserve fund for additional continuing capital were proper funds from which the directors of the corporation could legally declare and pay the balance of a dividend on the 7 per cent. noncumulative preferred stock due in a prior year. The court said in part "* * * when the reserve fund is accumulated in whole or in part, by the cutting down of dividends which would otherwise have been paid to preferred stockholders, that fund, so far as it represents moneys so retained, is available for the payment of subsequent dividends upon the preferred stock." 75 N.J.Eq. 541, 73 A. 514.

There can be no dispute of the fact that the statutory policy of New Jersey permits directors of corporations to define and regulate the respective rights of preferred and common stockholders and to apply such parts of the annual net earnings to the payment of dividends as they may deem proper. N.J.Corporation Act of 1896, sec. 47, and amendments thereto, N.J.S.A. 14:8-20; Raynolds v. Diamond Mills Paper Co., 69 N.J.Eq. 299, 60 A. 941.

Counsel for plaintiff argues that the authorities relied upon by the defendants are not applicable, because in each of those cases the charter of the corporation provided that "the preferred stock shall be entitled out of any and all surplus net profits whenever declared by the Board of Directors to non-cumulative dividends at a rate not to exceed 7% per annum"; whereas in the case at bar the corporate charter provides for payment out of "* * * all net earnings of the Company determined and declared as dividends in each fiscal year up to but not exceeding 8% per annum * * *." He also argues that in the Bassett case there was an actual earmarking of the earnings into a separate, existing fund.

The latter contention is not supported by the facts, for there was no earmarking by the corporation of the earnings applicable for dividends. On the contrary, the earnings were set aside as a "Reserve for Additional Working Capital," and only a part of the reserve was made up of such earnings withheld from the preferred stockholders. "Earmarking" is perhaps only a descriptive expression. Its use here may be inept. In the Bassett case it was held where profits of past years applicable to dividends are kept in reserve, or there are current profits applicable, the full amount due preferred stockholders must be awarded to them before any amount is allowed to common stockholders. Whatever "earmarking" there may have been there arose when the court in determining that there were profits available for dividends on the preferred stock held they belonged to the owners of such stock. On the appeal the Court of Errors and Appeals stated: "It seems to us that neither the contention of the complainant nor that of the defendant is altogether sound. On the one hand, the corporation has no right to accumulate a reserve fund from earnings which would otherwise be paid out as dividends to the holders of common stock, and afterward use it to pay dividends to the preferred stockholders, when the net profits of the year for which the dividend is declared are not sufficient for that purpose. On the other hand, when the reserve fund is accumulated, in whole or in part, by the cutting down of dividends which would otherwise have been paid to preferred stockholders, that fund, so far as it represents moneys so retained, is available for the payment of subsequent dividends upon the preferred stock." Ex. 110, also 75 N.J.Eq. 539, 541, 5 Buch. 539, 541, 73 A. 514.

In the present case the consolidated net income for 1938 of Rubber Company and its subsidiaries was $5,885,887.55. A full 8 per cent. dividend to the preferred stockholders would amount to $5,208,728. A dividend of only 4 per cent. on preferred stock was declared, and it was paid on December 23, 1938. On December 31, 1938, after such payment, there remained in the consolidated surplus $3,520,735.99, and Rubber Company alone without subsidiaries had a surplus of $2,656,267.32. The amount required for the additional 4 per cent., i.e., the balance of 8 per cent., was $2,604,364. It is shown then that for the year ending December 31, 1938, after the payment on December 23 of the 4 per cent. dividend, there remained funds applicable for dividends accumulated by the cutting down of the dividend which would otherwise have been paid to preferred stockholders. That consolidated earned surplus of $3,520,735.99 was carried as such in the earned surplus account is shown in the 1938 annual report to stockholders (Ex. 122). The report was certified by Haskins Sells, certified public accountants (pp. 12, 13, Ex. 122). As the surplus funds were available for the payment of a full dividend of 8 per cent. in 1938 the part above the prior 4 per cent. payment continued to be available thereafter for the payment of subsequent dividends upon the preferred stock up to 8 per cent. for 1938.

Plaintiff's position in reference to the difference in language contained in charters in the Bassett case and that in the case at bar is not well taken. To compel determination of net earnings in a fiscal year, during that year, is impractical if not impossible. Corporations doing a substantial business cannot determine income and expense until after the close of the fiscal year. To adopt the construction attempted by plaintiff to be placed on Rubber Company's charter would be grossly unfair to preferred stockholders. It was never intended by the language of Rubber Company's charter to require net income to be determined and dividends declared before the end of the year during which the earnings occurred.

Plaintiff relies upon and contends that the case of Wabash Railway Co. v. Barclay, 280 U.S. 197, 50 S.Ct. 106, 74 L.Ed. 368, 67 A.L.R. 762, supports the argument that noncumulative stock is only entitled to a dividend if declared during the year out of the annual profits for that very year and that if such profits have been applied to capital improvements and no dividends are declared within the year for that year no profits out of which dividends may be declared exist, and the power to declare same is gone, and dividends cannot be granted or claimed at a later date.

Examination of that case shows that it applied to its facts which are different than those in the matter at bar. The corporation involved there was organized under the laws of Indiana, and the "expenditures" in that case were for permanent capital improvements.

The earnings there, unlike the case at bar, were retained in the business in such manner as to preclude withdrawal therefrom for the payment of dividends. Here the retention of the surplus net earnings by Rubber Company, if one did exist, was not an irrevocable and permanent withholding.

Plaintiff cites the case of Lich v. United States Rubber Co. D.C., 39 F.Supp. 675, 682, in which it appears that 1935, 1936 and 1937 earnings were absorbed in reducing an accumulated deficit. The court held that such annual earnings had been "justifiably applied to legitimate corporate purposes, such as payment of debts, reduction of deficits, and restoration of impaired capital." The net income having been lawfully expended, the rights of noncumulative preferred stockholders therein were lost. There is nothing inconsistent with the holding in this case and decisions in the Bassett cases, supra.

Movants further argue that, even assuming that the declaration and payment of the dividend of 4 per cent. in 1939 as the balance of 1938 dividend can be said to have been illegal, the directors cannot be held personally liable in the absence of evidence of bad faith and negligence. This seems to be the rule stated in the authorities. Scott v. Depeyster, 1 Edw.Ch. 513; Hun v. Cary, 82 N.Y. 65, 37 Am.Rep. 546; Citizens' Building, Loan Sav. Ass'n v. Coriell, 34 N.J.Eq. 383.

The record is barren of any evidence that the directors acted in bad faith, or were negligent. The assertion of the plaintiff that there was a "flagrant and deliberate diversion of an extra 4% dividend, in order to give favorite insiders, who own large blocks of preferred stock," is not supported by any credible evidence. The documentary evidence of defendants shows the contrary.

As heretofore pointed out, a majority of seven of the ten directors attending the meeting at which the dividend was declared owned no preferred stock and in fact owned a substantial amount of common stock which might have been benefited if the preferred dividend had not been declared. Defendants' documentary evidence establishes that the act of declaring the dividend was not ultra vires. As it is here determined that the dividend was lawful it could not be beyond the power of the Rubber Company and its directors.

In respect of the second cause of action, defendants' evidence establishes their defense and plaintiff has not presented proof which raises an issue as to the verity and conclusiveness thereof, and no triable issue exists.

In the third cause of action, plaintiff realleges his claim of "Dupont Company's" stock ownership and domination of "Rubber Company." In addition, it is alleged that in 1929 defendant Davis, acting in concert with "Dupont," put into effect two plans, the "Employees' Bonus Plan" and the "Managers' Shares Plan," whereby Davis and the other defendant directors constituting a majority of the Board of Directors of "Rubber Company" and its officers would receive special grants of huge sums of money in the form of bonus payments or additional stock compensation. The complaint alleges, and the answers admit, that there was credited under the two plans an aggregate amount in 1936, based on earnings of 1935, of $600,000; in 1937, based on earnings of 1936, of $720,000; in 1938, based on earnings of 1937, of $600,000; in 1939-40, based on earnings of 1939, of $990,000; total $2,910,000.

It is further alleged in the complaint that most of the $2,910,000 was disbursed over the five-year period to the defendant officers and directors, and in 1937 of the $720,000, $712,000 or "about 99% of the total distributed that year, was paid to seven officers and/or directors of Rubber Company."

It is then alleged that during the years when the bonus plan and the "Managers' Shares Plan" distributions were paid, no dividends were paid on either the preferred or the common stocks of Rubber Company until 1938, when 4 per cent. was paid. It is further alleged that no dividends on the common stock had been paid since 1921, and during the years 1935, 1936, 1937 Rubber Company had deficits, respectively, of $25,870,403, $17,332,572 and $10,471,627, and it is then charged that the "Bonus Plan" and "Managers' Shares Plan" were "improper and unlawful and rendered possible the making of unreasonable, excessive and unlawful payments by Rubber Company to its officers and directors * * * who fraudulently, improperly and unlawfully caused Rubber Company to adopt said plans and to place them in operation at a time when said Rubber Company for the first year since 1927 showed any substantial earnings," and whereby Rubber Company has been damaged to the extent of $2,910,000.

Except for admissions of the adoption of the "Bonus Plan" and "Managers' Shares Plan" and admissions of the amounts that were credited under the two plans, defendants' answers deny the allegations of collusive motive in the adoption of the "Bonus Plan" and the "Managers' Shares Plan," that they were adopted by the directors and the charges of alleged wrongful acts, and allege what is stated to be the true facts in relation to the matters of which complaint is made.

The provisions of the "Bonus Plan" and the "Managers' Shares Plan" are alleged in both the complaint as well as in the answers, and there is no substantial conflict in these allegations. However, the plans are set forth in full in Exhibits C and D attached to the Rubber Company's answer and are shown and established by Exhibit 17 of the documentary evidence.

The "Bonus Plan" provided for three classes of bonus awards of which only Class B bonus awards are involved in this cause of action. Class B bonus awards were to be granted to those contributing most in a general way to the success of the company and were to be from a fund not to exceed 10 per cent. of surplus net receipts out of 6 per cent. of capital employed in the business for the period for which the bonus was awarded. It was provided that the awards were to be made either in cash or in any class of the company's securities.

The "Managers' Shares Plan," after amendments, hereafter referred to, provided for a trust agreement between "Rubber Company" and the Shares Trustees whereby 100,000 shares of "Rubber Company" common stock would be issued at $20 per share to the Shares Trustees, who in turn would issue trust certificates to "Rubber Company" for resale to certain of its executives, chosen by a special committee of the board of directors which was also composed of nonparticipants. The "Managers' Shares Plan," as amended, further provided that "Rubber Company" credit each year to the trustees the same aggregate amount as was credited to the Class B bonus fund in that year, said amounts plus any dividends being applied to the purchase price of the common stock, and that when the aggregate of said credits, together with payments to be made by the holders of the trust certificates in the amount of $5 per share, should total $2,000,000, all of the 100,000 shares of common stock were to be deemed fully paid.

As a convenience, for purposes of consideration, discussion and decision, the charges in the third cause of action will be set off numerically and taken up in the order so given. The charges are as follows:

1. In 1929, the directors of "Rubber Company" adopted the "Bonus Plan" and the "Managers' Shares Plan," whereby the defendant directors "constituting a majority of the Board of Directors of Rubber Company and its officers, would receive special grants of huge sums of money in the form of bonus payments."

2. The bonus and managers' shares plans "rendered possible" the making of unreasonable, excessive and unlawful payments by "Rubber Company."

3. Most of the bonus payments were to the directors, and officers, and in 1937, $712,000 out of $720,000 was paid to seven directors and officers of "Rubber Company."

4. In the years 1935, 1936, and 1937, when bonuses were paid, the company had a deficit in excess of $10,000,000 and paid no dividends on its stock until 1938. Then the resumption of dividends was made possible only through a recapitalization.

The charges above enumerated will now be examined in the light of the documentary evidence and official records which the defendants have submitted and which they assert establish prima facie their denials and allegations which are asserted to be the true facts.

1. The defendant directors did not adopt the "Bonus Plan" and "Managers' Shares Plan." They were adopted by the stockholders of "Rubber Company" at a meeting held October 15, 1929 (Exhibit 2). The notice of that meeting, dated September 4, 1929, stated that one of the purposes of the meeting was to consider the proposed "Bonus Plan" and the proposed "Managers' Shares Plan," copies of which were enclosed with the notice. The notice also contained a summary of each of the plans. At the meeting on October 15, 1929, there were present and voting holders of 316,954 shares of preferred stock, and 928,415 shares of common stock. All of the common stock and all but 100 shares of the preferred stock voted in favor of the resolution which adopted the plans. Copies of the "Bonus Plan" and of the "Managers' Shares Plan" are set forth in the minutes directly following the record of the resolution (Exhibit 2). The minutes of the directors' meeting of September 3, 1929 (Exhibit 17), which are referred to in the stockholders' resolution, show that the directors did not adopt but formulated and advised the adoption of the plans. This was done in accordance with the provisions of the New Jersey statute under which the stockholders' meeting also acted. Laws of New Jersey, chap. 175, 1920, Exhibit 106.

The annual reports of "Rubber Company" for the years ending December 31, 1929 and 1930, show that no distributions were made for those years under either the "Bonus Plan" or the "Managers' Shares Plan," as earnings were not available (Exhibits 114, 115). A majority of the directors who formulated and advised the adoption of the plans at the meeting of September 3, 1929, never received any benefit under either of them and in no year were a majority of the directors beneficiaries under either or both of the plans. The names of the directors who attended the meeting are shown in the minutes (Exhibit 17). The documentary evidence sets forth the name of each bonus recipient for the years complained of by the plaintiff, and no director is shown as such recipient (Exhibits 35, 37, 39 and 41).

The documentary evidence sets forth each employee of "Rubber Company" who was a recipient under the "Managers' Shares Plan" and shows the directors who attended the meeting of September 3, 1929, and the directors for the years 1936, 1937, 1938, 1939 and 1940 (Complaint, par. 10). The documentary evidence shows that of the directors who attended the meeting of September 3, 1929, and of the directors in the years of which plaintiff complains, the non-recipients constituted a majority of the board and not the recipients (Exhibit 66).

Complaint is made of various amendments to the "Managers' Shares Plan." This is referred to above, and it is pointed out that on March 7, 1934, the directors of Rubber Company adopted a resolution recommending to the stockholders an amendment of the Managers' Shares Plan whereby the stock issued to the shares trustees should be reduced in price from $35 per share to a price to be determined by the directors, but not less than $20 per share (Exhibit 20). The notice of the annual stockholders' meeting of September 17, 1934 (Exhibit 7), informed the stockholders that one of the purposes of the meeting was to take action with respect to the directors' recommendation, and on April 17, 1934, 1,267, 819 shares of Rubber Company stock present at the meeting voted unanimously in favor of the reduction (Exhibit 8).

In 1936 the directors of Rubber Company considered the question that higher federal income taxes would accrue through distribution of all of the 100,000 shares of common stock at one time, as provided under the Trust and Financing Agreement, Exhibit 19, entered into pursuant to the Managers' Shares Plan. At the meeting on June 3, 1936, they considered an amendment of the plan whereby so much of the stock as should become fully paid in each year would be distributed (Exhibit 23). They also considered at this meeting an amendment to the rules and regulations for the operation of the Bonus Plan whereby class B bonus awards instead of being distributed in four quarterly installments, would be completely distributed at the time of the award, so that the recipient would not be required to pay the increased federal income tax which would appear to accrue if the undistributed portion of the stock should rise in market value during the installment period. The matter was put over to be taken up at a special meeting called for June 8, 1936. The directors at the later meeting adopted the proposed amendment to the "Managers' Shares" and "Bonus Plan" subject to the approval of the `Rubber Company's general counsel (Ex. 24). Legal approval in accordance with the expressed opinion by the New Jersey counsel for the "Rubber Company" and general counsel for the "Rubber Company" was given to the amendments (Opinions, Exs. 67, 68).

At a meeting on July 1, 1936, the directors considered the legal opinions of counsel approving the proposed amendments and it was declared that the resolution adopted was no longer subject to any condition. At the same meeting there was considered a further modification of the "Managers' Share Plan" providing that the directors should retain the discretion, for a period of two years after each credit to the "Managers' Shares" Trustees, as to whether or when during that period any portion of the fully paid shares of the common stock should be distributed to the participants (Ex. 25).

At a meeting on August 5, 1936, the directors ratified and confirmed the acts of the officers of the "Rubber Company" in carrying out the modification of the "Managers' Shares" trust and financing agreement to conform with the modification of the "Managers' Shares Plan" as adopted at the meeting of July 1, 1936 (Ex. 26).

The documentary evidence establishes that the modifications of the "Managers' Shares" trust and financing agreement dated July 1, 1936 (Ex. 48), and the rules and regulations for the operation of the "Bonus Plan" as amended on July 8, 1936 (Ex. 44), were adopted in the interest of "Rubber Company" to preserve the incentive purpose intended by the plans at the time of their original adoption. There were additional minor amendments to the rules and regulations for the operation of the "Bonus Plan" adopted at meetings held on December 7, 1938, and January 8, 1941 (Exhibits 45, 46). These do not in any wise lessen the verity and conclusiveness of defendants' documentary evidence, but merely show the steps taken to complete the plans and aid in their execution.

The New Jersey statute (Laws 1920, chap. 175), referred to, provides that any stock corporation formed under the law of that state, upon such terms and conditions as are formulated and recommended by the board of directors and approved by the stockholders, after suitable notice, may issue or sell its stock to any or all of its employees and those actively engaged in the conduct of its business, or to trustees on their behalf. It has been held that the fixation of compensation to executive officers and employees of a corporation is a question of internal management to be determined by the corporation itself in which neither the people of the state nor the public generally were interested; and the stockholders were entitled to determine what, if any, compensation should be paid to the officers; and a minority stockholder disagreeing with the majority had no right to impose his will upon the majority and thus control the action of the corporation. Lewis v. Matthews, 161 App.Div. 107, 112-113, 146 N.Y.S. 424; Gamble v. Queens County Water Co., 123 N.Y. 91, 25 N.E. 201, 9 L.R.A. 527; Bull Co., Inc. v. Morris, 132 Misc. 509, 230 N.Y.S. 122, aff'd 226 App.Div. 868, 235 N.Y.S. 906; Bagley v. Carthage, W. S.H. RR., 165 N.Y. 179, 58 N.E. 895; Hirsch v. Jones, 115 App.Div. 156, 100 N.Y.S. 687; Fitchett v. Murphy, 46 App.Div. 181, 61 N.Y.S. 182. It was within the competence of the stockholders of "Rubber Company" to delegate to its board of directors the duty and responsibility of carrying out "Bonus Plan" and the "Managers' Shares Plan." The denials and the allegations stated to be the true facts, which constitute the defense, established prima facie by documentary evidence and official record a defense sufficient as matter of law. The facts established show that none of the directors were ever recipients under the "Bonus Plan," and that a majority of the directors were never recipients under the "Managers' Shares Plan," and also that the acts in adopting and amending the plans were done under the advice and approval of eminent counsel and were authorized by and in accordance with the law of the state under which the corporation was organized, and did not violate any public policy of the State of New York.

The established facts show an absence of any proof given by plaintiff in substantiation of his charges of fraud or collusion which might give him the right to maintain the action. Rous v. Carlisle, 261 App.Div. 432, 26 N.Y.S.2d 197. No substantiation is found in any reasonable interpretation of the acts of the board of directors and its officers and no other proof of facts sufficient to raise an issue with respect to the verity and conclusiveness of the documentary evidence is offered by the plaintiff to substantiate the plaintiff's charge that the "Bonus Plan" and the "Managers Shares Plan" rendered "possible the making of unreasonable, excessive and unlawful payments by Rubber Company" to its officers and directors. The opposite is indicated by the documentary evidence (Exs. 35, 37, 39, 41, 43-45).

The minutes of the directors' meeting of July 1, 1936 (Ex. 25), with respect to the year 1935 show that the chairman presented calculations computed in accordance with the "Bonus Plan," and the rules and regulations thereunder, which calculations had been reviewed by Haskins Sells, auditors, indicating $446,760.36 available as the credit to the Class B bonus fund from operations of the year 1935 and that, after discussion, the directors credited $300,000 to the Class B bonus fund for 1935, or $146,760.36 less than the amount available. In 1936, the amount computed as available was $750,000. The finance committee, none of whom were ever recipients and a majority of whom were never participants under the "Managers' Shares Plan" directed the crediting of $360,000 to the B "Bonus Fund" (Ex. 36). In 1937, the same finance committee credited an amount of $300,000 from an estimated available fund of $388,000 (Ex. 38), and in respect of 1939, $495,000 out of an available fund of $499,400 (Ex. 41).

Paragraph 3 of the "Managers' Shares Plan" (Ex. 17) provided that the employees of the "Rubber Company" who might participate in the plan from time to time should be determined by a special committee of the board of directors. Of the special committee appointed by the directors, documentary evidence shows none was ever a participant in that plan (Ex. 19, 21, 66). No act of fraud, collusion or bad faith is shown by any evidence produced by the plaintiff. The documentary evidence shows there was none, but rather that the special committee acted in good faith for the best interests of the company as they conceived it, and they altered the participations of the emloyees from time to time as they found their services to the company increased or decreased in value (Exs. 50, 52-65, 114-118; and S.E.C. and N.Y.S.E. Reports Exs. 76 and 86). The documentary evidence furnishes no support to plaintiffs' assertion, but on the contrary establishes prima facie defendants' denials and allegations of the facts in respect of plaintiff's charge that "most of the payments" under the "Bonus" and "Managers' Shares" plans in 1936, 1937, 1938 and 1939 were made to the directors and officers and in 1937 $712,000 out of $720,000 was paid to seven directors and officers of "Rubber Company."

In the complaint and the answers there is agreement as to the credits made by "Rubber Company" to the "Bonus Plan" and "Managers' Shares Plan" over the period 1936 to 1940. The payments were as follows: Credit earned, 1935; year credit made, 1936; bonus credit, $300,000; managers' shares credit, $300,000. Credit earned, 1936; year credit made, 1937; bonus credit, $360,000; managers' shares credit, $360,000. Credit earned, 1937; year credit made, 1938; bonus credit, $300,000; managers' shares credit, $300,000. Credit earned, 1939; year credit made, 1939; bonus credit, $495,000; managers' shares credit,¹ $495,000. Total bonus credit, $1,455,000; total managers' shares credit, $1,455,000.

1 One-half of the stock distributed pursuant to this credit was distributed on December 18, 1939, and one-half on January 5, 1940 (Ex. 41, p. 192; Ex. 42, p. 210; Ex. 66).

As pointed out above, no director was ever a recipient under the "Bonus Plan." One-half of the fund credited to the plans by "Rubber Company" over the period was free of any participation by any director. The participations of individual officers or directors in the "Managers' Shares Plan," as stated above, were determined by the special committee of non-participants, and the participants were required to pay to the Rubber Company 25 per cent. of the issue price of the stocks distributed. The total shares distributed under the "Managers' Shares' Plan" and the "Bonus Plan" is tabulated from Exhibits 35, 37, 39, 41 and 66 as follows: Year credit, 1935; total shares distributed under both plans, 32,760; total shares to officers who were directors, 11,400; percentage of total, 34.1. Year credit, 1936; total shares distributed under both plans, 38,330; total shares to officers who were directors, 13,680; percentage of total, 35.6. Year credit, 1937; total shares distributed under both plans, 31,160; total shares to officers who were directors, 7,400; percentage of total, 23.7. Year credit, 1939; total shares distributed under both plans, 52,038; total shares to officers who were directors, 10,220-10,220; percentage of total, 39.3. Years credit, 1935-1939; total shares distributed under both plans, 154,288; total shares to officers who were directors, 52,920; percentage of total, 34.3.

Defendants in their answers admit that the 13,680 shares delivered in 1937 to executive officers who were directors of "Rubber Company," together with 3,600 shares distributed to two other persons who were officers of a wholly-owned subsidiary of "Rubber Company" but neither officers nor directors of "Rubber Company" (Exhibits 66, 120), had an aggregate market value of $712,800. The 13,680 shares distributed to the officers who were directors did not constitute 99 per cent. of the total distributed, but only 35.6 per cent. of the 38,330 shares distributed under the two plans in that period. If the 3,600 shares distributed to the two persons not officers or directors of "Rubber Company" are included with the 13,680 shares, making a total of 17,280, the computation of the amount is 45 per cent. of the total distributed under both plans.

There remains for consideration plaintiff's final charge which is enumerated above by the number 4. Defendants' documentary evidence disproves and no evidence is adduced by plaintiff to support plaintiff's allegations that the financial condition of the "Rubber Company" in the period 1935 to 1940 did not warrant the distributions made under the Bonus Plan and Managers Shares Plan. In the year 1929 in which, up to the market crash in October, the summit of prosperity had been reached, "Rubber Company's" net sales were $192,962,040, as compared to $193,480,121 in 1928. After provisions for depreciation and expenses for reorganization of operations the annual report for year ending December 31, 1929, showed the company experienced a loss of $3,378,412 (Exhibit 114). In 1933, a year of crisis in industry and banking, after provision for depreciation of $6,462,612.58, and writing off "idle plant assets of no further value" amounting to $429,036.37, the loss shown was $606,337.60 (Exhibit 116). In 1934 the loss was $543,608.73 (Exhibit 117). Thereafter, the "Rubber Company's" affairs greatly improved. In 1935 there was a net profit of $6,532,237.47, in 1936 the sum of $10,172,484.46 (Exhibit 119); in 1937 a net income of $8,607,902 (Exhibit 120); in 1938 a net income of $5,885,888 (Exhibit 122); in 1939 a net income of $10,218,849 (Exhibit 123); and in 1940 the net income amounted to $11,425,241 (Exhibit 124). The annual reports of 1936 (Exhibit 119) and 1937 (Exhibit 120) show the incorrectness and lack of reliability of the allegations of the complaint as in paragraph 43 it is stated "it (Rubber Company) had the following deficits, namely: for 1935 — deficit of $25,870,403; for 1936 — deficit of $17,332,572; for 1937 — deficit of $10,471,627." Obviously, those figures are not annual deficits for those years as stated, but the deficit accumulated from losses of prior years, which the records show were being reduced each year by net earnings.

Plaintiff's opposing affidavit does not bring forward any evidentiary facts in support of the charges in the allegations of the complaint. It repeats and reiterates those charges and states as facts suspicions which defendants' documentary evidence shows are baseless and without support in the established facts.

Rule 113 should be construed liberally to promote the beneficial results anticipated and intended. Montgomery v. Lans, Sup., 194 N.Y.S. 96; Reddy v. Zurich General Accident Liability Ins. Co., Lim., 171 Misc. 69, 11 N.Y.S.2d 88. Summary judgment properly granted does not unlawfully deprive the losing party of the guaranteed right of jury trial, nor unlawfully deprive him of property or the right of orderly trial. Stewart v. Ahrens, 273 N.Y. 591, 7 N.E.2d 707. The affidavits supporting plaintiff's complaint must speak with knowledge and state evidentiary facts sufficient to establish the cause or causes of action stated. Dwan v. Massarene, 199 App.Div. 872, 192 N.Y.S. 577; United Products Corp. v. Standard Textile Products Co., 224 App.Div. 371, 231 N.Y.S. 115; Curry v. Mackenzie, 239 N.Y. 267, 146 N.E. 375. The defendant answering a motion by the plaintiff made on sufficient papers must by affidavit and sufficient proof show a bona fide defense consisting of a plausible ground fairly arguable and of a substantial character. Dwan v. Massarene, supra. The form and character of the documentary evidence or official record is not limited by Rule 113 and may be such, including corporate minutes and records as are prima facie evidence. Levine v. Behn, supra; White v. Merchants Despatch Transp. Co., 256 App.Div. 1044, 10 N.Y.S.2d 962. Defendant may move for summary judgment in any action by making prima facie proof by documentary evidence establishing a good defense. White v. Merchants Despatch Transp. Co., supra; Levine v. Behn, supra. Frivolous, sham and transparently insufficient proof, mere denials or statements of innuendo or suspicion, and offered proof, will not entitle a moving party respondent from its grant where the movant established his cause of action or defense by sufficient competent evidentiary proof. O'Meara Co. v. National Park Bank, 239 N.Y. 386, 146 N.E. 636, 39 A.L.R. 747; General Investment Co. v. Interborough R.T. Co., 235 N.Y. 133, 139 N.E. 216. "A defendant must show real and substantial facts `sufficient to entitle him to defend' (rule 113) if he is to avert summary judgment, under these rules which were carefully devised to eliminate unnecessary delay and further the prompt administration of justice". Strasburger v. Rosenheim, 234 App.Div. 544, 547, 255 N.Y.S. 316, 320. "Suspicions are not sufficient to raise a genuine issue of fact. Suspicions might be directed to the other side of this litigation also, as to the real source of the notices, demands and litigations herein. * * * This Court will not base its decision of these motions on suspicions, but on facts. Rule 56(c) of the Federal Rules of Civil Procedure [28 U.S.C.A. following section 723c] requires the existence of a genuine issue as to a material fact, on which to base a denial of a defendant's motion for summary judgment. The same is true under Rule 113 of the New York Rules of Civil Practice. Curry v. Mackenzie, 239 N.Y. 267, 146 N.E. 375." Banco de Espana v. Federal Reserve Bank, D.C., 28 F.Supp. 958, 973.

The statements and contentions of the plaintiff, according them the most favorable aspect in which they may be viewed, are not facts or proofs which themselves raise an issue of verity and conclusiveness but statements of analyses and arguments therefrom which urge that defendants' evidence examined with care falls short of being conclusive. It seems apparent from the complaint and affidavits that plaintiff was in possession of much of the information shown as fact in defendants' proof. Much thereof is cast in bulk. Portions are disarranged or rearranged to give an appearance far different from the true originals. From it all there are many charges drawn with the aid of conclusions, suspicions and innuendoes. With it all plaintiff pleads for scrutiny and inference to uncover hidden motives and collusion suggestive of an examination micro-projectory in character. Giving plaintiff's allegations in the complaint and affidavits the benefit of liberal construction and most favorable inference, defendants' documentary evidence has been examined and tested in that questioning attitude suggested by plaintiff without the retrospective suspicions, however, with which in his partisanship he insists they must be regarded. Nevertheless the conclusion becomes irresistible that defendants' documentary evidence has established their defenses and plaintiff has failed to present proof as to the verity and conclusiveness thereof.

The foregoing requires that the motion of the moving defendants for summary judgment dismissing the first three causes of action in plaintiff's complaint be granted.

The facts in defenses 4, 5, 6 and 7 interposed to the first cause of action are not passed upon in a determinative sense, as this decision is made upon the facts in the other defenses established by defendants' evidence.

Settle order.