Opinion
11-26-1913
HYAMS v. OLD DOMINION COPPER MINING & SMELTING CO.
Edward M. Colie, of Newark, for complainant. Gilbert Collins, of Jersey City, and Edward P. McClennen, of Boston, Mass., for defendant.
Suit by Godfrey M. Hyams against the Old Dominion Copper Mining & Smelting Company to restrain the declaration and payment of a dividend. Final hearing on bill, answer, replication, and proofs. Decree for defendant on condition.
The facts presented in this case are substantially the same as those dealt with by Vice Chancellor Stevenson in the case of Pierce v. Old Dominion Copper Mining & Smelting Company, 67 N.J.Eq. 399, 58 Atl. 319. The Old Dominion Copper Mining & Smelting Company, the defendant in this suit, was organized under the laws of this state on July 8, 1895. Its original authorized capital stock was $3,750,000. This was afterwards increased to $5,000,000, of which shares of the aggregate par value of $4,050,000 were issued and outstanding at the time of the filing of the bill. The original issue of stock was made for the purpose of purchasing a mining property in Arizona, which the company now owns. The transaction was promoted by Albert S. Bigelow and Leonard Lewisohn, who, as was alleged, made a secret profit in the promotion scheme which made them liable to the company for either a large block of stock or a large amount of illegal profits and damages received by them in the course of the promotion transactions. The control of the company appears at that time to have been in Bigelow and his friends. In 1902 the control of the company became vested in the persons who controlled its affairs at the time of the filing of the bill herein. On October 7, 1902, the defendant corporation instituted two suits in equity in the Supreme Court of the state of Massachusetts against the said Bigelow, the first for an accounting for 100,000 shares of the capital of the defendant company received by him as undisclosed promoter's profits on the sale of the said mining properties to the defendant, with an alternative prayer for damages by reason thereof, and the second to obtain a rescission of a sale made by Bigelow and Lewisohn of what was denominated as outside properties, together with a return to the defendant of 30,000 shares of its capital stock issued therefor, with a like alternative prayer for damages suffered by the company thereby. Similar suits were instituted against Lewisohn in the federal jurisdiction. Demurrers to the Lewisohn suits were allowed, and the allowance sustained on appeal, and the bills dismissed. 148 Fed. 1020, 79 C. C. A. 534.
Such proceedings were afterwards had in the Bigelow suits that final decrees were entered therein against him as follows: in the first suit there was a decree against him for $480,000, with interest from September 18, 1895, amounting at the date of the decree to $832,160, with costs; and in the second suit for $700,000, with interest from September 18, 1895, aggregating $1,213,566.67, besides costs. These decrees were affirmed by the Supreme Court of Massachusetts on appeal (203 Mass. 159, 89 N. E. 193, 40 L. R. A. (N. S.] 314), and a further appeal to the Supreme Court of the United States was dismissed upon the ground that no federal question was found in the case (225 U. S. 111, 32 Sup. Ct 641, 56 L. Ed. 1009). From time to time payments have been made on account of these decrees, which payments aggregated on August 26, 1913, $1,933,565.60. This fund is invested partly in securities and partly in the form of loans.
In October, 1903, a plan was formulated by the persons who had control of the defendant corporation to purchase a mining property in Arizona known as the United Globe Mines, and to consolidate it with the defendant corporation as provided in Exhibits A (page 379), B (page 379), and C (page 382). This plan was enjoined by this court on January 12, 1904, in a suit known as the Elliott suit. Beyond the fact that there was such a plan and such a litigation, I find nothing in the circumstances that throws any light upon the present controversy.
This litigation arises out of circumstances which begin with an agreement dated December 30, 1903, made between stockholders of the defendant corporation, stockholders of the United Globe Mines, and F. S. Moseley & Co. of Boston; the assenting stockholders evidencing their assent by signing their names to the agreement The agreement provided that the Old Dominion stockholders should cause a corporation to be organized under the laws of the state of Maine with a capital stock of 350,000 shares of the par value of $25 each, making a capital stock of $8,750,000, and authorized F. S. Moseley & Co. to exchange stock of the assenting stockholders in the Old Dominion Company for stock in the Maine company on the basis of share for share, provided that such exchange should not be made unless two-thirds in interest of all the outstanding stockholders of the Old Dominion Company should assent thereto, and so exchange their stock; nor unless the whole stock of the United Globe Mines and $350,000 in cash should also be acquired prior thereto or simultaneously therewith by the Maine company. The Globe stockholders authorized Moseley & Co. to purchase for their account 138,000 shares of the Maine company stock, and agreed to pay therefor by the delivery to Moseley & Co. of the whole of the outstanding stock of the Globe Company and the sum of $350,000 in cash. This agreement was assented to by all the stockholders of the United Globe Mines and by over two-thirds of the stockholders of the defendant corporation; the result being that the Maine corporation, whose creation is provided for in the agreement is now the owner of all the shares of the United Globe corporation and of 155,245 shares of the defendant corporation, leaving outstanding and in the hands of private stockholders 6,755 shares, of which the complainant owns 3,056 shares, purchased by him in October, 1908, or over one-half of the shares which did not assent. The shares of the defendant which belong to the Maine corporation stand on the defendant's books in the names of Charles S. Smith and D. Blakeley Hoar as trustees, and any dividends which might be declared by the defendant on the shares held by thesaid trustees would be payable to them. This trust is evidenced by certain agreements —Exhibit G (page 398), Exhibit H (page 403), Exhibit I (page 407).
The trustees have issued certificates signed by themselves by which they certify that the holder thereof is entitled to—shares in the trust known as the Old Dominion Trust, created by the agreements just mentioned, which trust certificates are transferable only in writing on the books of the trustees by the shareholder in person, or by his authorized attorney, and upon the surrender of the certificate therefor. The complainant, Hyams, is the holder and owner of one of these certificates for 100 shares in the Old Dominion Trust. It is dated November 2, 1907.
The agreement of December 30, 1903, provides in a general way for the division of the properties of the United Globe Company, and the defendant, for the purposes of the agreement, into two classes by paragraphs 4, 5, and 6 thereof, and for the division pro rata among the stockholders of the respective companies of such of the assets as were intended to be segregated by that agreement, and the agreement provides that the Maine company shall make provision therefor by by-laws or agreements, or both, and that so far as relates to the Old Dominion interest it shall provide that the net proceeds of such assets shall be taken to be the surplus from the proceeds of such assets remaining after deducting therefrom all debts and liquidated claims of the Old Dominion Company incurred prior to January 1, 1904, otherwise than for construction, and which exceed $25,000 in amount, and deducting also the amount required for the payment of counsel fees and incidental expenses of the Old Dominion interest.
The next step in the transaction was the organization of the Maine corporation on January 15, 1904, and the adoption by it on that day of a by-law whereby it agreed to cause the defendant to carry out the terms of the agreement of December 30, 1903; and a few days later, on January 21, 1904, the defendant adopted a resolution, a copy of which is found in the bill of complaint (Record, page 6). It is conceded that by that resolution the Bigelow money, together with the other items mentioned therein, were held as a separate fund, apart from other moneys and property of the corporation.
The defendant company now proposes to pay a dividend of $10 per share out of the assets which were segregated by the resolution of January 21, 1904. The complainant as a stockholder will receive his proportionate share of the fund so to be divided. The fund includes the moneys received on account of the decrees against Bigelow.
On October 12, 1912, the present bill was filed. It prays that the defendant and its officers and directors may be enjoined from declaring as a dividend the whole or any portion of the money received by it from the Bigelow decrees, and from recognizing in any way or doing any act in furtherance of the agreements thereto annexed and designated as Schedules D, G, H, and I. These are the agreements to which specific reference has already been made. No attempt was made to declare such a dividend until June 3, 1913. On that day the board of directors passed the following resolution: (70) "Voted that the president and treasurer be and they hereby are authorized to pay a special dividend from the special fund of ten dollars per share, as soon as counsel advises that the same can be paid, or the injunction restraining payment of same is removed."
The directors of the defendant corporation and of the Maine corporation at the time of the filing of the bill herein were each seven in number. Three of them, C. S. Smith, Altmiller, and J. W. Smith, were directors of both corporations.
Edward M. Colie, of Newark, for complainant. Gilbert Collins, of Jersey City, and Edward P. McClennen, of Boston, Mass., for defendant.
HOWELL, V. C. (after stating the facts as above). It is now proposed by the defendant and its directors to pay to its stockholders a dividend of $10 per share, giving to each his proper proportion thereof, from the funds which have been called the "segregated assets" of the company, and which consist very largely of the moneys recovered by the enforcement of the decrees against Bigelow. Such a dividend will require the sum of $1,620,000, some $300,000 less than the amount collected to this date upon the decrees. It is objected that the Bigelow money is capital and not surplus, and that to distribute it to the stockholders in the form of dividends would be a violation of section 30 of the corporation law (P. L. 1896, p. 286) as amended in 1904 (Laws 1904, p. 275). Consequently the first question to be decided is whether the Bigelow money belongs to and is part of the money capital of the corporation, or whether, taking an account of all the assets and liabilities of the corporation, there remains a surplus out of which the proposed dividend may be lawfully declared. The statute (L. 1901, p. 246) now declares that, unless otherwise provided in the incorporation papers or in by-laws adopted by at least a majority of the stockholders, the directors shall in January of each year, after reserving a working capital fixed by the stockholders, declare a dividend among the stockholders of the whole of its accumulated profits exceeding the amount so reserved and pay the same to such stockholders on demand, but that the directors shall not make dividends except from the company's surplus or from the net profits arising from its business (L. 1904, p. 275). Therefore, before reaching any conclusion on the question of the ability ofthe corporation to pay dividends lawfully, we must inquire into its assets and liabilities and ascertain whether, after payment and satisfaction of all liabilities, taking into account the liability to redeem the capital stock at par, there still remains a fund out of which the proposed dividend can be paid without impairment of the capital, or whether there are net profits arising from the business which can be used for that purpose. Goodnow v. American Writing Paper Co., 73 N.J.Eq. 692, 69 Atl. 1014.
It appears that on July 31, 1913, the books of the company show total assets of $9,344,639.37, and liabilities of $4,808,861.33 (including the capital stock liability), leaving a surplus of $4,535,778.04. Obviously if these figures are correct there is in the possession of the company sufficient surplus for the purpose of the dividend. It was argued that, inasmuch as the decrees went against Bigelow because of the abstraction by him of moneys claimed to belong to the cash capital of the company, the recovery when made should have been credited to capital account for the purpose of restoring the capital which had been depleted by his act in the promotion scheme. But, on the other hand, it now appears, when the Bigelow recovery is included, that the company has sufficient assets over all its liabilities to make good its capital, which has been accumulated from its current net profits, and that consequently the Bigelow money is not needed for the purpose of meeting any impairment of the money capital. It therefore belongs to that portion of the company's funds which is denominated "surplus." It was originally carried on the books of the company in an account entitled "Old Dominion Special Account," and it was subsequently entered in the ledger under the name "Special Fund Account." Later on, and after the bringing of this suit, it was transferred to an account which was called "Reserve Account for the Payment of Dividends." But it makes no difference whether it is carried as surplus or as segregated assets, or in a special fund account, or otherwise. It is money which belongs to the corporation and is under the control of its directors, and it is subject to distribution among the stockholders if the directors see fit to make distribution of it. Bassett v. U. S. Castiron Pipe & Foundry Co., 74 N.J.Eq. 668, 70 Atl. 929, affirmed on appeal 75 N.J.Eq. 539, 73 Atl. 514.
The only items in the defendant's statement of assets and liabilities as of July 31, 1913, which are subject to criticism, are the items relating to mines and mining claims, and new plant, and construction. Mines and mining claims belonging to the company are carried on the books at $3,414,856.81. This appears from the testimony to be a careful and conservative statement of the values of those items. As testified to by the president of the company, their value is from $4,000,000 to $5,000,000, exclusive of any of the plant improvements. The complainant, who is a mining engineer of large experience, and who was the man that was depended upon at the time of the original purchase to advise the officers and directors as to the development of the mine, and who has a perfect knowledge of the mines and mining claims, was asked whether in his opinion the president's valuation was high or low. His answer was that it was low. I think that I must assume from these statements that the real value of the mine and mining claims exceeds the sum at which they are carried on the company's books by a large amount.
The other item, which is called "New Plant and Construction," and aggregates $3,013,754.37, was largely discussed by counsel on the argument. It represents moneys expended on the construction and erection of the operating plant and machinery, and, so far as I can see, it represents actua expenditures and actual values. It cannot be said that the operating plant of a mine has little or no value simply because it is used as a factor in the development and working of a wasting property. It or its equivalent is necessary to the operation of the mine, and its valuation for that purpose must be left to the honest judgment of the board of directors. No case of fraud in the valuation of this item is shown, and a mere mistake of judgment, if honestly arrived at, must stand as the final act of the directorate.
The total surplus of $4,535,778.04 is carried on the books of the company in four items:
| Reserve against special fund | $1,950,483 08 |
| Plant renewals | 759,344 37 |
| Mine renewals | 867,073 91 |
| Profit and loss | 952,846 68 |
| Total | $4,535,778 04 |
If these figures are correct, there can be no doubt but that the company, after providing for all its liabilities upon a full adjustment of all its affairs, including a proper charge for depreciation and renewals, has sufficient money or property with which to pay the proposed dividend without in any way or to any extent impinging upon the fund known as the company's money capital. Having reached this conclusion, it is hardly necessary to say that the question of the declaration of a dividend and its amount, time, and terms of payment are entirely within the honest discretion of the board of directors. Murray v. Beattie Mfg. Co., 79 N.J.Eq. 604, 82 Atl. 1038; Blanchard v. Prudential Ins. Co., 80 N.J.Eq. 209, 83 Atl. 220.
The next objections relate principally to the situation in which the directors of the defendant company find themselves. It is urged that in declaring the dividend in question the directors are acting under the compulsion of an agreement made between the defendant's stockholders and the stockholders of the United Globe Mines, and the agreements supplemental thereto, and that thepresence of three common directors of itself is sufficient to render invalid any act in which the two companies may be interested. It will be remembered that the defendant corporation is not a party to any of the agreements complained of. Neither have its directors or officers in the remotest way become parties to it. The Maine corporation by reason of its large holdings of the stock of the defendant company undoubtedly dictates the personnel of the defendant's directorate, and when it agreed that it would compel the performance of the agreements in question by the defendant, who was not a party to them, it did, so far as I can see, merely what it had a right to do as the predominant holder of the defendant company's stock. The point of these lastmentioned objections seems to have been considered by Vice Chancellor Stevenson in his opinion in Pierce v. Old Dominion Co., 67 N.J.Eq. 426, 58 Atl. 319; and in view of the expression of the Court of Appeals in that case (74 N.J.Eq. 450, 70 Atl. 1101) it may well be argued that the reasoning of the Vice Chancellor on the injunction motion was approved by the appellate court This view appears to me not only to be reasonable, but under the circumstances the only view that could be taken of the situation. The argument of the complainant is that, on account of the circumstances in which the directors of the defendant are, it is impossible that there should be any relations between the companies at all. The other view is that, so long as the defendant's directors confine themselves to lawful acts, this court will not interfere in an honest exercise of their discretion. The fact that the Maine corporation holds nearly all the stock of the defendant corporation casts upon it the duty of seeing to it that the affairs of the defendant company are properly and fairly and honestly managed with respect to the rights of all the defendant shareholders. This appears to me to have been accomplished. The complainant who now objects to the declaration of a dividend is being treated in the same manner in which the other stockholders are being treated, and he must and will receive his pro rata share of the moneys to be divided, without discrimination or distinction.
Finally, it is argued on behalf of the defendant that the complainant is estopped from questioning the validity of the proposed action for the reason that he ratified everything that had been done, with full knowledge of all the details thereof by the purchase of 100 shares in the Old Dominion Trust which he had transferred on the books of the trustees to his own name, and besides other shares which stand in the names of other persons for him. I do not think that this is an acquiescence in the scheme of sufficient force and cogency to operate as an estoppel. Neither do I think that his motives in making these purchases can be inquired into as the case now stands. Hodge v. U. S. Steel Corp., 64 N.J.Eq. 111, 53 Atl. 601. Neither do I think that his appearance at the meeting of April 6, 1910, by his counsel Mr. Tyler, can be so construed, or that the vote by the stockholders on that day, approving all the doings of the officers of the company during the preceding year, and accepting the report of the directors containing the report of the treasurer, can be held to be a ratification of all the company's acts. It is likewise urged than an estoppel grows out of the fact that the complainant holds 400 shares of the defendant company's stock, 200 of which were once owned by Mr. Smith, both of whom were concluded by the decision in the Pierce suit, or actively assented to all the matters concerning which the complainant now complains. It may be true that the predecessors in title of these 400 shares of stock have acquiesced in the policy of which the complainant now complains, but his remaining shares are not subject to the same disability, and I think it quite clear that he may sue with respect to his rights in them.
There is an incidental matter mentioned lastly, but of the first importance. Upon the filing of the bill in this cause on October 10, 1912, an order was made, which is still in force, by which the defendant and its directors were restrained from declaring as a dividend to the defendant's stockholders the whole or any part of the moneys received by reason of the decrees against Bigelow. While this injunction was in force, and on June 3, 1913, a quorum of the directors of the defendant passed the resolution above recited. This action of the directors seems to me to be a violation of the terms of the injunction, and sufficient to charge the defendant with process of contempt. I shall not assume that the contumacy was either wanton or intended as a manifestation of contempt. It is a technical violation of the injunction, however, and the court will not entertain any motion for a final decree on behalf of the defendant until this resolution shall have been rescinded.