1. A stockholder, by becoming such, impliedly agrees that, in
respect of its internal affairs, the corporation is governed by the
laws of the its organization. P.
288 U. S.
130.
2. It is settled doctrine that a court, state or federal,
sitting in one State will, as a general rule, decline to interfere
with or control by injunction or otherwise the management of the
internal affairs of a corporation organized under the laws of
another State, but will leave controversies as to such matters to
the courts of the the domicile. P.
288 U. S.
130.
3. Courts will exercise this discretion whenever considerations
of convenience, efficiency and justice point to the courts of the
the domicile as appropriate tribunals for the determination of the
particular case. P.
288 U. S.
131.
4. Stockholders of a New Jersey corporation brought suit in New
York against the corporation, some of its directors, and other
persons to enjoin the issuing and selling of stock to the officers,
directors, and certain employees of the corporation, and to annul
the shares issued. Only a few of the company's directors were
residents of New York, and only a few of the stock allottees were
before the court, though the conditions entitling all to receive
the stock had been complied with, and presumably some of it had
been delivered. The corporation had its principal business office
in New York and had its registered office in New Jersey, where
stockholders' meetings were held, and had property in New Jersey
and did business there and in other States and countries. The
controversy depended on a construction of statutes of New Jersey
which had not been passed upon by New Jersey courts, and involved
grave doubts. The New Jersey law afforded a ready and complete
remedy through an action
in rem and service by
publication.
Held:
(1) That the corporation could not be regarded as having been
organized in New Jersey to do all of its business elsewhere, and
could not be treated as a local concern in New York. P.
288 U. S.
131.
Page 288 U. S. 124
(2) That the case was within the general rule (par. 2,
supra), and the District Court did not abuse its
discretion in dismissing it without prejudice. P.
288 U. S.
132.
60 F.2d 114 reversed.
Certiorari to review the reversal of a decree dismissing the
bills in two stockholders suits, which were begun in the Supreme
Court of New York and removed to the District Court and
consolidated. The opinion here directs that the decree of the
District Court, 60 F.2d 106, be reinstated.
MR. JUSTICE BUTLER delivered the opinion of the Court.
Petitioner, plaintiff below, owns 200 shares of the common stock
of the American Tobacco Company which he acquired prior to the
passage of c. 175, p. 354, New Jersey Laws, 1920, that is here
involved. He also owns 400 shares of common stock B. He brought two
suits in the Supreme Court of New York: one against the tobacco
company and some of its directors, the other against the trust
company, Junius Parker, and others. On application of defendants,
both were removed to the federal court for the southern district of
that state. The first was discontinued as to some defendants, and
the cases were consolidated. The defendants before the court are
the two companies, Parker, and five of the seventeen directors of
the tobacco company, including its president, one of its
vice-presidents, and its secretary.
The tobacco company was organized under the laws of New Jersey,
and in that state maintains its "principal
Page 288 U. S. 125
and registered office" as designated in its charter, holds the
stockholders' meetings, and does a substantial amount of business.
It is authorized by the laws of New York to do business there, and
has in New York City its principal place of business, where its
directors usually meet, its executives have their offices, and most
of its records are kept. It carries on business in that and many
other states, and also in a number of foreign countries.
The grievances alleged by plaintiff concern the issue,
allotment, and sale of stock of the tobacco company. June 25, 1930,
the board of directors adopted a resolution recommending the
reduction by one-half of the par value and the doubling of the
number of shares of its common stock and common stock B. It had
outstanding 526,997 shares of preferred stock, and, as a result of
action in accordance with that recommendation, 1,609,696 shares of
common and 3,077,320 shares of common B. And, by another
resolution, the board advised approval by the stockholders of a
plan for the issue and sale of common stock B to employees pursuant
to chapter 175, New Jersey Laws, 1920.
* The plan
submitted accords to such employees
Page 288 U. S. 126
and others actively engaged in the conduct of the business as
may be selected an opportunity to purchase stock "by way of
additional compensation for services to be rendered," and allots
for subscription shares of unissued stock. The board may offer
stock to such persons in the service at prices not less than par
and upon other terms and conditions determined by the president
pursuant to authority granted him for that purpose by the board. No
employee or person actively engaged in the conduct of the business
of the corporation or its subsidiaries shall be deemed ineligible
to its benefits by reason of being also a director of the
corporation or of any of its subsidiaries or of holding any office
therein.
On July 28, 1930, the stockholders adopted the plan. And January
28, 1931, the board authorized a sale of 56,712 shares of common
stock B at par value of $25 per share. It directed that there be
furnished to the president, to be considered in determining to whom
the stock should be allotted for purchase, a list showing the
services rendered, and, having regard to the value of the same, the
rating on a percentage basis given to each, together with the total
amount of his compensation for 1930. It recommended that the basis
of distribution should be the number of shares having par value
equal to one-third of that year's compensation to each allottee
rated at 100 percent and correspondingly less to those having lower
ratings. And there was accorded to each of 535 employees, including
directors and others active in the business, the right to subscribe
for the new stock on that basis. All
Page 288 U. S. 127
the shares allotted were sold at $25 for cash to the trust
company. The trust company allowed each allottee to subscribe at
the same price. At that time, it was worth $112. The agreement
stated that this was by way of additional compensation for service
to be rendered between January 31 and December 31, 1931; that,
until the end of the year, no allottee could take up his stock;
that he was entitled to have dividends applied on the purchase
price, and that, if he should terminate his employment before the
end of the year, the trustees were to decide whether he should have
his allotment.
The complaint attacked the transaction upon the following
grounds: the directors being disqualified by reason of their
interest as allottees, the plan was not passed by a valid vote or
adopted as required by c. 175. The subsequent vote of the
stockholders, required by the statute to be predicated upon action
by the board, was likewise invalid. The plan was
ultra
vires in that the allotment "by way of additional compensation
for services to be rendered" violated c. 195, p. 566, New Jersey
Laws, 1917. Under the Company's charter and the statutes of New
Jersey -- section 124, Laws 1926 -- every stockholder had the right
according to the number of his shares to have
pro rata
distribution of the stock in question. And the complaint prayed
decree that the defendants be enjoined from carrying out the plan;
that the stock be declared void and cancelled, and that the
defendants, other than the tobacco company, be held for costs and
damages sustained by that company.
Four defenses were set up: plaintiff failed to comply with
Equity Rule 27. The stockholders including plaintiff ratified the
allotments to the directors. The suit is an attempt to regulate the
internal affairs of a corporation foreign to New York, and the
United States District Court sitting therein should decline to take
jurisdiction. The
Page 288 U. S. 128
allotments were fair and reasonable, and were made in accordance
with the company's bylaws and the statutes of New Jersey. Plaintiff
moved for an order striking out the defenses as insufficient, and
for a decree in accordance with the prayer of the complaint or, in
the alternative, for an injunction
pendente lite
preventing the carrying out of the plan.
The District Court filed an opinion, 60 F.2d 106, in which it
said:
"In the present case, the validity of the shares sought to be
cancelled depends primarily upon the interpretation and effect of
the Act of 1920. The directors cited this statute as their
authority for the plan when they formulated it, and have all along
insisted that the plan is in conformity with the statute. The
plaintiff takes the position that the statute is not applicable,
and has been used by the directors merely as a cover for a raid
upon the corporate treasury for their own profit. In addition,
plaintiff submits that two other statutes, that of 1917 and that of
1926, must be taken as limiting the operation of the 1920 Act. It
is obvious that the case presents not merely questions of fact, but
questions of some complexity under the New Jersey laws. There seem
to be no decisions of the New Jersey courts to serve as a guide in
the proper construction and possible interrelation of these
statutes. The legality of the corporate proceedings which resulted
in the issuance of this stock is peculiarly a matter for
determination in the first instance by the New Jersey courts. It
may be noted that the American Tobacco Company is not a local
enterprise. While its chief office is said to be here and it
unquestionably carries on business here, its activities are known
to be worldwide. It has a New Jersey charter; it refers to the New
Jersey office as its principal office; it holds its stockholders'
meetings there. It is not a resident corporation in any sense of
the word. "
Page 288 U. S. 129
And it entered judgment denying the motion and that,
"in the exercise of this Court's discretion, each of the bills
of complaint herein be and the same are hereby dismissed, without
prejudice to the enforcement of the rights of plaintiff, if any, in
the courts of New Jersey."
The Circuit Court of Appeals, 60 F.2d 114, dealing with
plaintiff's contentions before it, held that the plan was
authorized; that the stock was lawfully issued under New Jersey
statutes, and that, for the reasons given in the opinion, the bill
was properly dismissed. A dissenting opinion suggests that the plan
was not sufficiently in detail to comply with the New Jersey
statute. The court affirmed the judgment appealed from, and, upon
its mandate, the District Court entered a decree that the bills of
complaint be dismissed with costs.
Among the points and contentions raised and pressed by plaintiff
in his petition for certiorari and argument here are the following:
the plan is not definite and formulated as required by c. 175. That
chapter, as construed below, is repugnant to the contract clause of
the Federal Constitution. The decision that the plaintiff failed to
comply with Equity Rule 27 is contrary to c. 175. Chapter 195, New
Jersey Laws 1917, does not permit the issue of stock to employees
for services to be rendered. The decree of the District Court
declining to exercise jurisdiction is contrary to decisions of this
Court and in conflict with the decision of the Circuit Court of
Appeals for the Seventh Circuit in
Williamson v.
Missouri-Kansas Pipe Line Co., 56 F.2d 503.
The authorization, allotment, and sale of the shares in question
involved the proportionate ownership of stockholders and their
rights
inter sese. Unquestionably the steps taken and
proposed to formulate and carry out the plan constitute the conduct
and management of the internal affairs of the tobacco company. The
controversy is solely between the plaintiff and other stockholders
not
Page 288 U. S. 130
participating in the distribution, on one side, and the
purchasers of the new stock, the corporation, its directors, and
officers, on the other. When, by acquisition of his stock,
plaintiff became a member of the corporation he, like every other
shareholder, impliedly agreed that, in respect of its internal
affairs, the company was to be governed by the laws of the state in
which it was organized. His rights, whatever the tribunal chosen
for their vindication, are to be determined upon the ascertainment
and proper application of New Jersey law.
It has long been settled doctrine that a court -- state or
federal -- sitting in one state will, as a general rule, decline to
interfere with, or control by injunction or otherwise, the
management of the internal affairs of a corporation organized under
the laws of another state, but will leave controversies as to such
matters to the courts of the state of the domicile.
Wallace v.
Motor Products Corp., 25 F.2d 655, 658;
Chicago Title
& Trust Co. v. Newman, 187 F. 573, 576;
Eberhard v.
Northwestern Mutual Life Ins. Co., 210 F. 520, 522;
Powell
v. United Association, 240 N.Y. 616, 148 N.E. 728;
Sauerbrunn v. Hartford Life Ins. Co., 220 N.Y. 363, 371,
115 N.E. 1001;
Jackson v. Hooper, 76 N.J.Eq. 592, 604, 75
A. 568;
Guilford v. Western Union Telegraph Co., 59 Minn.
332, 340, 61 N.W. 324;
Kimball v. St. Louis & S.F. Ry.
Co., 157 Mass. 7, 31 N.E. 697;
Hogue v. American Steel
Foundries, 247 Pa. 12, 15, 92 A. 1073;
Babcock v.
Farwell, 245 Ill. 14, 33,
et seq., 91 N.E. 683;
Clark v. Life Association, 14 App.D.C. 154, 179, 180;
North State Copper & Gold Mining Co. v. Field, 64 Md.
151, 20 A. 1039.
Cf. Burnrite Coal Co. v. Riggs,
274 U. S. 208,
274 U. S. 212.
While the District Court had jurisdiction to adjudge the rights of
the parties, it does not follow that it was bound to exert that
power.
Canada Malting Co. v. Paterson Co., 285 U.
S. 413,
285 U. S. 422,
and authorities cited. It was free, in the
Page 288 U. S. 131
exercise of a sound discretion, to decline to pass upon the
merits of the controversy and to relegate plaintiff to an
appropriate forum.
Langnes v. Green, 282 U.
S. 531,
282 U. S. 535;
Heine v. New York Life Ins. Co., 50 F.2d 382. Obviously no
definite rule of general application can be formulated by which it
may be determined under what circumstances a court will assume
jurisdiction of stockholders' suits relating to the conduct of
internal affairs of foreign corporations. But it safely may be said
that jurisdiction will be declined whenever considerations of
convenience, efficiency, and justice point to the courts of the
state of the domicile as appropriate tribunals for the
determination of the particular case.
Cohn v. Mishkoff-Costlow
Co., 256 N.Y. 102, 105, 175 N.E. 529;
Travis v. Knox
Terpezone Co., 15 N.Y. 259, 263, 109 N.E. 250;
Kimball v.
St. Louis & S.F. Ry. Co., supra.
The complaint shows that, as of its date, seven directors of the
tobacco company were not residents of New York. Only six allottees
are before the court. The others, over 525, are not mentioned in
the complaint. It appears from the answer that many of them are
outside New York, and it may be inferred that a large number of
them reside in the other states and countries in which the company
does business. At the time, February 23, 1932, of the dismissal of
the bill, the services of the employees for which the allotments
constitute part compensation had been fully performed, and they
were entitled to have, and presumably they, or at least some of
them, had, secured the delivery of the shares so allotted to them.
As the tobacco company, in addition to its registered office, has
property, operates directly or through subsidiary branch factories
in New Jersey, and carries on business there and in other states
and countries, it may not be deemed to have been organized in that
state as a mere matter of convenience for the purpose of carrying
on all its business in another state,
Page 288 U. S. 132
or be deemed in New York to be a local concern. This case is
wholly unlike
Williamson v. Missouri-Kansas Pipe Line Co.,
supra, relied on by plaintiff.
The determination of plaintiff's contentions requires not only
the ascertainment of the true meaning and intent of c. 175 of New
Jersey Laws, 1920, but also its constitutional validity. Its
provisions have never been construed by the New Jersey courts, and
they or their like are not familiar in the statute law governing
corporations organized in other states. And other New Jersey
statutes among which are c. 195, Laws of 1917, and c. 318, § 16,
Laws of 1926, are claimed by plaintiff to have an important bearing
upon this case. But the courts of that state have had no occasion
to consider the interrelation, if any, between them and c.r 175
pursuant to which the stock in question purports to have been
issued to employees. A mere inspection of the New Jersey statutes
directly involved suggests grave doubts as to their proper
application to the facts in this case, and the difference of
opinion expressed below confirms that impression.
So far as concerns the cancellation of the allotted shares and
other relief sought by plaintiff, the situs of the stock is in New
Jersey, and all questions relating to the validity of the plan,
authorization, issue, allotment, and sale of the same may be
conveniently and effectively determined in New Jersey courts, the
authoritative and final interpreters of the statutes of that state.
A proceeding
in rem is authorized, process therein may be
served by publication and a decree, final and binding upon all,
cancelling or sustaining the stock may readily be enforced. New
Jersey Practice Act of 1903, § 84.
Jellenik v. Huron Copper
Co., 177 U. S. 1,
177 U. S. 13;
Andrews v. Guayaquil & Quito Ry. Co., 69 N.J.Eq. 211,
60 A. 568;
Holmes v. Camp, 219 N.Y. 359, 114 N.E. 841. The
facts and circumstances disclosed by the record clearly bring this
case within the general rule, and abundantly justify the
exercise
Page 288 U. S. 133
of discretion on the part of the district court in dismissing
the bills of complaint without prejudice. As the Circuit Court of
Appeals considered and decided the merits of the case, its judgment
is reversed, the judgment of the District Court entered upon its
mandate is vacated, and the case will be remanded to the district
court with directions to reinstate the earlier judgment dismissing
the bills of complaint without prejudice.
Reversed.
MR. JUSTICE ROBERTS took no part in the consideration or
decision of this case.
* Section 1 of that Act provides for the participation of
employees in purchase of stock, profits, welfare work, and
management of any corporation organized under the laws of the
state, and declares:
"Any stock corporation . . . may, upon such terms and conditions
as may be determined in the manner hereinafter designated, 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 or to trustees on their behalf, and the
payment for such stock in installments or at one time with or
without the right to vote thereon pending payment therefor in full,
and for aiding any such employees and said other persons in paying
for such stock by contributions, compensation for services, or
otherwise."
And § 2 provides:
"The board of directors shall first formulate such plan or plans
and pass a resolution declaring that in its opinion the adoption
thereof is advisable, and shall call a meeting of the stockholders
to take action thereon. . . . If two-thirds in interest of each
class of stockholders present at said meeting and voting shall vote
in favor of any such plan or any modification thereof, the said
plan shall thereupon become operative."
And that section gives to any dissenting stockholder the right
upon surrender to receive from the company the appraised value of
any stock that was acquired before the passage of the Act.
MR. JUSTICE STONE, dissenting.
I think the Court should decide this case on its merits in favor
of the petitioner.
Respondent, the American Tobacco Company, organized under the
laws of New Jersey, is a large and prosperous corporation, engaged
in the manufacture and distribution of cigarettes and other forms
of tobacco. It has upwards of 40,000 stockholders. At the
commencement of this suit, it had a board of sixteen directors,
including a president, five vice-presidents, a secretary, and a
treasurer, all actively engaged in its management. For many years,
these officers have receive large annual fixed salaries, as well as
large annual cash profit-sharing bonuses paid under a bylaw of the
company, adopted in 1912.
See Rogers v. Hill, 60 F.2d 109.
In the year 1930, the profit-sharing bonus of the president, added
to his fixed salary of $168,000, gave him a total compensation of
over $1,010,000, which was further augmented by a special "credit"
of $273,470. In the same year, four of the five vice-presidents
received an aggregate annual salary and bonus of more than
$2,077,000. In addition, a number of stock subscription plans have
from time to time been put into operation by the directors, without
authority of the charter of bylaws of the corporation, or the
knowledge or approval
Page 288 U. S. 134
of its stockholders, by which they largely benefited. In that of
1926, the respondent Hill, the president and also a director of the
company, acquired 8,000 shares of common stock, and other
directors, who are respondents here, received substantial amounts.
In that of 1929, one year before the transactions now complained
of, 46,500 of 51,750 shares of common stock purchased by the
corporation and set aside for the purpose were sold to the
corporate directors at $47 per share less than market value.
Convenient arrangements were made for postponed payment of the
purchase price. Respondents received 23,050 shares, of which the
president received 15,050.
On January 28, 1931, a new allotment of stock was made, which is
the subject of this litigation. On that day, the Board of Directors
(the president and officers constituting a majority of those in
attendance) considered and passed upon the adequacy of the
compensation which its members were then receiving for their
services to the corporation, and the necessity of conferring
further benefits on themselves in order to insure the continuance
of those services. Having resolved these questions in their own
favor, they proceeded to award additional benefits in the form of
the privilege to subscribe to unissued common stock B of the
corporation at a small fraction of its market value. By resolution
of that date, they put into effect a stock subscription plan by
which 56,712 shares of unissued common stock B of the corporation
were distributed in accordance with recommendations made by the
president. Of this number, 32,370, more than half, were allotted to
the directors, of which 13,440 were allotted to the president. The
remaining 24,342 shares were allotted in relatively small amounts
to 525 employees. None of the recipients was of lower rank than
factory subassistant. Four hundred and seventy-three received
allotments of less than 100 shares each, the great majority
receiving from 15 to 50 shares. The stated consideration for
issue
Page 288 U. S. 135
of the stock was a subscription price of $25 per share, the par
value, and the services of the allottee, not specifically
described, to be rendered to the American Tobacco Company for the
remainder of the year.
The certificates of stock were to be delivered to the
respondents, the Guaranty Trust Company of New York and an
individual, as trustees. They were authorized to borrow money upon
them to the extent of $25 per share in order to effect immediate
payment of the subscription price to the tobacco company, to apply
dividends received on account of the purchase price to be paid by
the allottees, and to deliver the certificates to them after the
close of the year, upon payment in full of their subscriptions.
They were given discretion to waive performance of the stipulated
service by any allottee, and, in the event that the subscriber was
discharged or resigned from the employ of the company within the
year, to cancel the subscription agreement or not, as they
pleased.
On the day of the resolution allotting the stock, its market
price was $112 per share, more than four times the subscription
price. It was then paying, and has ever since paid, dividends at
the rate of $5 per year, sufficient to pay the subscription price
in five years. Valuing the subscription privilege by the difference
between the subscription price and the market value of the shares,
the president received by the allotment the equivalent of
$1,169,280, in addition to his annual compensation of more than
$1,000,000. The stock subscription rights awarded the five
vice-presidents, similarly valued, amounted to $1,451,595. That the
subscription privilege, accorded for the avowed purpose of assuring
the continuance of these executives in the company's employ, was
then and has been ever since of great value, upon any theory of
valuation, is not questioned.
Conceiving himself aggrieved by this transaction, petitioner, a
nonassenting stockholder, brought two suits in
Page 288 U. S. 136
the Supreme Court of New York, the state in which he resides,
joining as defendants the American Tobacco Company, the trustees of
the allotted stock, and certain of the directors, including the
president, secretary, treasurer, and five vice-presidents, one of
whom has since died and two of whom were not served with process.
Included in the relief sought was a decree that the corporation,
its officers, and directors be enjoined from carrying out the stock
allotments, and that the stock allotted to the directors be
surrendered to the company. On motion of defendants, the tobacco
company and a nonresident director, the causes were removed to the
District Court for Southern New York on grounds of diversity of
citizenship of the parties to a separable controversy, and there
consolidated.
Thus, called upon in this suit to account for their stewardship
and to justify their action, the defendants, the respondents here,
place their whole reliance upon a statute of New Jersey in
conformity with which, they contend, they secured, in advance, the
authorization of the stockholders to make the challenged allotments
of stock.
Section 1, c. 175, of the New Jersey Laws for 1920 authorizes
any New Jersey corporation to provide and carry out a plan for
"(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 or to trustees on their behalf . . . and
for aiding any such employees and said other persons in paying for
such stock by contributions, compensation for services, or
otherwise. . . ."
Section 2(b) provides that where, as in this case, the
corporation has been formed without charter or bylaw provisions
authorizing the issuance or the purchase and sale of stock for such
purposes,
"the board of directors shall first formulate such plan or plans
and pass a resolution declaring that, in its opinion, the adoption
thereof is advisable, and shall call a meeting of the stockholders
to
Page 288 U. S. 137
take action thereon. . . ."
It requires an affirmative vote of two-thirds in interest of
each class of stockholders present at the meeting for the adoption
of the plan.
In June, 1930, the directors, purporting to act under this
statute, presented to the stockholders, by notice of a special
meeting, a so-called "plan" under which the employees of the
corporation and those actively engaged in its business were to be
permitted to subscribe to unissued shares of its common stock B.
The notice of the meeting was accompanied by a document designated
"Employees' Stock Subscription Plan," and by a copy of resolutions
of the board of directors authorizing the submission of the plan to
the stockholders, proposing a reduction in the par value of the
common stock and the nonvoting common stock B from $50 to $25 per
share, and an increase of the authorized common stock from
1,000,000 to 2,000,000 shares, and of the authorized common stock B
from 2,000,000 to 4,000,000 shares, each stockholder to receive two
shares of the new stock for one of the old. By thus increasing the
authorized, unissued shares of common B, stock was to be made
available for subscription by employees.
The Employees' Stock Subscription Plan proposed
"to allot for subscription . . . by way of additional
compensation for services to be rendered, shares of unissued common
stock B . . . to such employees of the corporation and/or its
subsidiaries and those actively engaged in the conduct of its or
their business as may be selected. . . ."
The prescribed method of execution of the plan was that
"the Board of Directors may at such time or times as it may
determine . . . offer and allot such stock for subscription . . .
in such amounts and proportions, to such persons at such prices,
not less than the par value of the shares allotted, payable in full
or in such installments, and upon such other terms and conditions,
all as shall be determined with respect to each offering of
Page 288 U. S. 138
stock to each individual pursuant to authority to be granted by
the Board of Directors to the President for such purpose."
Accompanying the notice of the meeting was a circular letter by
the president to stockholders, in which they were told of the
prosperous condition of the company, that the purpose of the stock
allotment plan was to encourage those who had made the company's
success possible to continue in its employ, and that it was the
expectation of the Board of Directors, if the program set forth in
the notice of the meeting and accompanying documents should be
approved by stockholders, to declare an extra dividend of $4 per
share on the common stock and common stock B, and to initiate
regular quarterly dividends on the newly authorized shares of
common stock and common stock B at the increased annual rate of $5
per share. The letter closed with a request to sign and return the
enclosed proxy, thereby indicating "your approval of the proposed
steps and your support of your Company's management."
Moved, perhaps, by these inducements, the proposal was approved
at the meeting by vote of the requisite number of shares of each
class.
No disclosure was made to the stockholders by the officers and
directors of the stock subscription plans previously put into
operation by them, without authority of the charter or bylaws or
the knowledge and approval of the stockholders. No disclosure was
made of the number or amounts of the annual cash bonuses which had
been paid to the president and vice-presidents of the company under
the bylaw adopted in 1912, and never, so far as appears,
subsequently mentioned to the stockholders until after the stock
allotments here involved. The only hint of the intention of the
management to participate in the proposed Employees' Stock
Subscription Plan was contained in a single sentence appearing in
the Plan:
Page 288 U. S. 139
"No employee, or person actively engaged in the conduct of the
business of the Corporation, or its subsidiaries, shall be deemed
ineligible to the benefits of the Plan by reason of being also a
director of the Corporation or of any of its subsidiaries or of
holding any office therein."
With all these facts presented by the pleadings, the District
Court, acknowledging its jurisdiction both as a federal court and a
court of equity to decide the cause on its merits, nevertheless,
held that, as the suit concerns the internal affairs of a New
Jersey corporation, discretion should be exercised to dismiss it
without prejudice to its maintenance in the courts of New Jersey.
On appeal, the Circuit Court of Appeals for the Second Circuit,
Judge Swan dissenting, considered the merits and upheld the
legality of the stock allotments. The decree of dismissal was
affirmed on the merits, and the trial court has entered a final
decree accordingly. This Court now reverses that judgment,
reestablishing the original decree of the trial court, on the
ground that a proper exercise of judicial discretion requires that
the cause should not be heard. Thus, after approximately two years
of litigation in state and federal courts, all of which could, and
I think should, have decided the case on the merits, the plaintiff
must now start the litigation afresh in the courts of New
Jersey.
In determining whether the federal courts should decline to
exercise the jurisdiction conferred on them by removal, the nature
of this controversy and its merits cannot be ignored. I do not stop
to consider numerous objections to the stock allotments, urged by
petitioner, which are not without weight. It suffices for present
purposes that no plan of sufficient definiteness to comply with the
New Jersey statute was ever submitted to the stockholders for their
approval, and that, even if it be conceded that a "plan" was
approved, the action of the directors in allotting the stock to
themselves, in violation of their duty as fiduciaries, exceeded the
authority conferred
Page 288 U. S. 140
upon them by the stockholders, and was therefore
ultra
vires.
The statute directs that the board of directors shall "first
formulate such plan," declare it "advisable," and call a meeting of
stockholders to act on it. Without presenting for the consideration
of the stockholders any workable plan of stock allotment, the
directors, in effect, asked the stockholders to confer plenary
authority on them to formulate a plan and to carry it into
execution without any disclosure of its provisions. After the
meeting, as before, no stockholder not in the confidence of the
directors knew in what the plan consisted, who were the persons to
participate in it, what principle was to control their selection or
determine the amount of stock they were to receive, or the price
they were to pay. It is a misuse of words of plain meaning to speak
of such a proposal as a "plan," much less a formulated plan for
stock allotment to employees, or as one which, in the form
presented to the stockholders, the directors could have pronounced
advisable or have carried into operation. It was no more than an
invitation to stockholders to abrogate the discretion which the
statute vested in them to approve a formulated plan, having at
least some aspects of definiteness, and vest in the directors
powers which could be conferred on them only by charter amendment
in the manner prescribed by the statute. The invitation was
accompanied by a skillfully phrased suggestion that it was
necessary to accept it in order to hold the services of employees,
and that, if accepted, the directors would cause new benefits to
flow into the pockets of stockholders in the form of extra and
increased dividends. Such a maneuver cannot rightly be regarded as
a compliance with the plain language of the statute, which requires
the directors first to formulate a plan for stock allotment and
declare it advisable, and then to submit it to the stockholders
for
Page 288 U. S. 141
their approval. If it were, it would be difficult to suggest any
conceivable purpose of the statute which could not be thwarted by a
similar procedure.
The respondents stand in no better position, even if we assume
that the proposal submitted to the stockholders was a formulated
plan within the meaning of the New Jersey statute. For, in that
case, authority for the directors' action must be found in the
stockholders' approval of the proposal which they submitted, and we
must interpret the proposal and the action taken by the
stockholders in terms of their legitimate expectation that the
directors were complying with their duty as fiduciaries, and not
dealing with them at arm's length. They were entitled to read the
proposal in the light of the fundamental duty of directors to
derive no profit from their own official action without the consent
of the stockholders, obtained after full and fair revelation of
every circumstance which might reasonably influence them to
withhold their consent.
Wardell v. Railroad Co.,
103 U. S. 651;
General Investment Co. v. American Hide & Leather Co.,
97 N.J.Eq. 230, 233, 127 A. 659;
see United states Steel Corp.
v. Hodge, 64 N.J.Eq. 807, 813, 54 A. 1;
Globe Woolen Co.
v. Utica Gas & Electric Co., 224 N.Y. 483, 489, 121 N.E.
378;
compare Meinhard v. Salmon, 249 N.Y. 458, 164 N.E.
545;
Wendt v. Fischer, 243 N.Y. 439, 154 N.E. 303. They
were entitled to assume that the proposal involved nothing which
did not fairly appear on its face, and, above all, that it was not
a cloak for a scheme by which the directors were to enrich
themselves in great amounts at the expense of the corporation, of
whose interests they were the legal guardians.
The respondents must therefore rest their case on the bare
statement in their proposal to the stockholders that no employee or
person actively engaged in the business of the company "shall be
deemed ineligible to the benefits
Page 288 U. S. 142
of the Plan," because a director or officer. But it would be
extravagant to say that these words, addressed by men in the
position of trustees to their beneficiaries, gave warning of the
wholesale gratuities which the directors subsequently bestowed upon
themselves. No more extensive authority could be derived from this
language than the disclosure which it made. By consenting that the
directors should be "eligible" to share in a plan avowedly for the
benefit of employees, the stockholders did not consent that they
should be the chief beneficiaries of their own unrestrained
munificence, or that they should add any new bounties to the
unrevealed stock allotments and bonuses which the directors had
previously enjoyed in secrecy. Even if the stockholders consented
that some of the directors should be eligible to benefit from
action taken by other disinterested directors, they certainly did
not consent that the allotments should be made by a group of
directors who, because of the magnitude of the benefits they
anticipated for themselves, were obviously incapable of passing an
independent and unbiased judgment upon the propriety of the
distribution which they cooperated in making to each other.
Respondents' contention that, if the directors were unable to vote
on each other's participation, no plan could be put into effect
under which a majority of the directors were to participate, is
without weight, for it obviously could be if the statute were
followed and the plan revealed in its entirety to the
stockholders.
To surmount these difficulties, respondents point to the fact
that a representative of petitioner stated at the stockholders'
meeting that favorable action on the proposal might result in the
issuance of a large amount of stock to employees, including
officers and directors, without adequate consideration, and that
this did not induce the stockholders to express their disapproval.
It is unnecessary
Page 288 U. S. 143
to speculate whether this outcome is to be attributed to the
fact that those present, being without the aid of prevision,
regarded the prediction as too improbable to be credited, or to the
fact that those who attended the meeting were not, for the most
part, the stockholders, but the recipients of their proxies
selected by the management of the corporation for the occasion. A
statement made to them would, as a New Jersey court has said, fall
"upon ears not allowed to hear and minds not permitted to judge;
upon automatons, whose principals are uninformed of their own
injury."
See Berendt v. Bethlehem Steel Corp., 108 N.J.Eq.
148, 151, 154 A. 321, 322. In any event, it is enough that neither
in the notice of meeting and accompanying documents, which the
stockholders saw and on which they relied, nor at the meeting
itself, did the officers and directors disclose that such was their
purpose.
We need not conjecture whether, if the directors had had the
hardihood to disclose in advance the benefits which they were to
award to themselves, the stockholders would nevertheless have given
their approval. Nor is it important that these directors have
successfully managed the corporation and that, under their
direction it has earned large profits for its stockholders. Their
business competence did not confer on them the privilege of making
concealed or unauthorized profits, or relieve them of the
elementary obligation which the law imposes on all corporate
directors to deal frankly and openly with stockholders in seeking
their consent to benefit personally by reason of their relationship
to the corporation.
The directors, having failed to comply with petitioner's
seasonable demand that they exercise their authority to bring this
suit in the name of the corporation, petitioner was not required by
general equitable principles or by Equity Rule 27 to appeal to the
stockholders before bringing it, as the action complained of here
was not one which
Page 288 U. S. 144
the stockholders could ratify.
Continental Securities Co. v.
Belmont, 206 N.Y. 7, 17, 99 N.E. 138;
cf. Delaware &
Hudson Co. v. Albany & Susquehanna R. Co., 213 U.
S. 435. Authority of the directors to bestow gratuities
upon themselves in the form of subscription rights must be found in
a plan approved in advance as the statute provides, by two-thirds
of each class of stockholders. If no plan was presented to
stockholders, as I think was the case, the entire stock issue was
ultra vires, and cannot be ratified any more than any
other unauthorized disposition of corporate assets. If the proposal
to the stockholders is regarded as a plan, so far as ordinary
employees are concerned, as it plainly does not embrace authority
to the directors to confer such extravagant benefits upon
themselves, the result is the same, as to the stock allotted to the
directors.
I cannot agree that a proper exercise of discretion requires us
to deny to the petitioner the relief to which he is so clearly
entitled. This is the first time that this Court has held that a
federal court should decline to hear a case on the ground that it
concerns the internal affairs of a corporation foreign to the state
in which it sits. We may assume, without deciding, that neither a
federal nor a state court of equity will, as a general rule,
undertake to administer the internal affairs of a foreign
corporation. But the case before us is, in this respect, unlike a
suit to dissolve the corporation and wind up its affairs,
Wallace v. Motor Products Corp., 25 F.2d 655, 658;
Pearce v. Sutherland, 164 F. 609;
Maguire v. Mortgage
Co. of America, 203 F. 858;
cf. Burnrite Coal Co. v.
Riggs, 274 U. S. 208,
274 U. S. 212;
or compel the declaration of a dividend,
Cohn v.
Mishkoff-Costlow Co., 256 N.Y. 102, 175 N.E. 529, or interfere
with the election of officers or the meetings of shareholders or
directors,
Wason v. Buzzell, 181 Mass. 338, 63 N.E. 909;
State
Page 288 U. S. 145
ex rel. Lake Shore Tel. & T. Co. v. De Groat, 109
Minn. 168, 123 N.W. 417;
see Travis v. Knox Terpezone Co.,
215 N.Y. 259, 263, 109 N.E. 250.
We are presented with no problem of administration. The only
relief which the petitioner merits on the record before us or which
he asks here is a decree that certain directors, now before the
court, restore to the treasury of the corporation, also before the
court, certain shares of stock alleged to have been illegally
issued to them, and that certificates for the stock now in
possession of the trustees, who are likewise before the court, be
surrendered. There are no more obstacles to the rendition of an
effective decree than in any other case in which a stockholder
seeks reparation for depredations upon the corporate property
committed by directors, some of whom only are before the court.
Compare Wineburgh v. United states Steam & Street Ry.
Advertising Co., 173 Mass. 60, 53 N.E. 145;
Ernst v.
Rutherford & B.S. Gas Co., 38 App.Div. 388, 56 N.Y.S. 403;
Corry v. Barre Granite & Quarry Co., 91 Vt. 413, 101
A. 38;
Ganzer v. Rosenfeld, 153 Wis. 442, 141 N.W. 121.
The decree will be completely satisfied by delivery of the
certificates, properly endorsed, to the corporation. There is and
can be no suggestion that such a decree cannot be pronounced and
enforced as effectively by the courts in New York as it could be by
those in New Jersey.
Cf. American Creosote Works v.
Powell, 298 F. 417, 419;
see Babcock v. Farwell, 245
Ill. 14, 34, 91 N.E. 683.
The opinion of the court concedes, as, indeed, the authorities
which it cites show, that the decision does not rest upon any
definite rule of general application. It is said that jurisdiction
will be declined whenever considerations of convenience,
efficiency, and justice point to the courts of the state of the
corporate domicile as appropriate tribunals for the determination
of the particular
Page 288 U. S. 146
case. Such considerations are said to require that this suit be
dismissed though the petitioner is thereby subjected to all the
hazards of starting his action anew in the courts of New
Jersey.
To support this conclusion, only two objections to the
maintenance of the suit are suggested in the opinion of this Court
or in that of the district court below. One is that numerous
beneficiaries of the stock allotment, most of whom are not officers
or directors of the corporation, are not made parties to this suit,
and presumably can be reached as a group only by suit in New
Jersey. Hence, the intimation is, if we decide this case and other
suits should subsequently be brought in other jurisdictions,
different results may be reached on the same questions -- a
possibility which can be avoided by forcing the petitioner to bring
a single suit in New Jersey. The other objection is that the court
would be called upon to decide a novel question of New Jersey
law.
As petitioner has chosen to assert demands necessarily
restricted to the stock issued by the directors to themselves, he
had no occasion to join as parties the several hundred lesser
employees, the great preponderance of whom received allotments of
less than fifty shares of stock. Indeed, as the unconscionable
conduct of the participating directors, a major factor in this
case, would afford no basis for proceeding against the other
allottees, it is by no means certain that the suit would be cast in
any different form if brought in New Jersey.
The somewhat speculative possibility that those of the
participating directors who have not been served with process in
this suit may be called to answer in some other court and
exonerated is of slight importance compared to the considerations
favoring the exercise of jurisdiction. Petitioner has chosen to
bring his suit in New York. He and all but one of the individual
defendants reside there.
Page 288 U. S. 147
The principal office of the American Tobacco Company is in New
York City, and it is there that its books and records are found,
its board of directors meets, and the acts complained of took
place. There the respondent Guaranty Trust Company is located and
its cotrustee resides. Before the decree can be enforced, it must
be obtained and the litigation must be brought to a successful
conclusion. That involves the production in court of the necessary
evidence. Of the parties to this case, none but the American
Tobacco Company is amenable to process in New Jersey; all are
amenable in the Southern District of New York. In New York,
petitioner can compel them and others connected with the
corporation to attend as witnesses; all can be ordered to make
complete discovery, and petitioner can compel the production at the
trial of the records of both corporate defendants. We cannot assume
that compulsion will not be necessary. The tobacco company carried
to the highest court of the state its resistance to petitioner's
preliminary application to inspect its books.
Rogers v.
American Tobacco Co., 143 Misc. 306, 257 N.Y.S. 321,
aff'd, 233 App.Div. 708, 249 N.Y.S. 993,
leave to
appeal denied. In New York also, the individual defendants and
the trust company can be reached by injunction
pendente
lite, restraining the transfer to innocent purchasers of the
stock, certificates for which are already issued and in the hands
of the trust company. Under the circumstances of this case, only
considerations of more compelling force than the possibility of
inconsistent decrees should lead a forum, convenient in so many
respects, to decline jurisdiction.
I come then to the only ground which can plausibly be urged for
declining the jurisdiction -- that in one, but not necessarily a
conclusive, aspect of the case, the court may be called on to
decide questions of New Jersey law which, although novel, can
hardly be said to be complicated or
Page 288 U. S. 148
difficult. If there were any principle of federal jurisprudence,
generally applicable, that, in cases between private parties,
federal courts of equity may, in their discretion, decline
jurisdiction because called upon to decide an unsettled question of
state law, I would willingly acquiesce in declining it here. But
this Court has not declared such a principle, and does not
recognize it now. On the contrary, whether jurisdiction rests on
diversity of citizenship or on a substantial constitutional
question, this Court has consistently ruled that it is the duty of
a federal court of original jurisdiction, and of this Court on
appeal from its decree, to pass on any state question necessarily
involved, however novel, and that the decision may be rested on
that ground alone.
Siler v. Louisville & Nashville R.
Co., 213 U. S. 175;
Risty v. Chicago, R.I. & Pacific Ry. Co., 270 U.
S. 378.
Unless we are now to abandon that long settled practice, I can
see much more reason for passing on this question than upon many
others which this Court has decided. Our judgment would conflict
with no local decisions,
compare Black & White Taxicab Co.
v. Brown & Yellow Taxicab Co., 276 U.
S. 518;
Burgess v. Seligman, 107 U. S.
20, nor apply an alien policy to matters which are the
subject of delicate feeling in the state.
Compare 68 U.
S. Dubuque, 1 Wall. 175;
Railroad Commission of
California v. Los Angeles Ry. Corp., 280 U.
S. 145. Indeed, we may not even avoid deciding the
question of state law by sending the case to New Jersey, for it is
not suggested that, if petitioner should elect to sue in the
federal court for New Jersey, or if the suit should be properly
brought there by removal from the state court, either that court or
this may decline jurisdiction. Thus, we should do no more in
deciding the question of New Jersey law now than if the case were
brought to us from the federal courts in New Jersey.
Page 288 U. S. 149
Even if decision of the question of New Jersey law were more
embarrassing than it appears to be here, a proper exercise of
discretion would seem to require that the bill be retained, and
that an interlocutory injunction restraining any disposition of the
stock by respondents be granted as prayed pending the diligent
prosecution by petitioner of a suit in New Jersey.
Compare
25 U. S.
Hinde, 12 Wheat.193;
Dunn v. Clarke,
8 Pet. 1;
Stover v. Wood, 28 N.J.Eq. 253.
If federal courts are to continue the general practice of
deciding novel questions of state law whenever there are necessary
or convenient grounds for the disposition of cases pending before
them, there are peculiarly cogent reasons why there should be no
departure from the practice in cases like the present. While a
corporation, in legal theory, has only one domicile, in practice,
its activities are often nationwide, and the legal domicile of the
corporation, as in this case, is neither the place of its real
corporate life nor the home of its officers and directors. Hence,
if stockholders' suits, such as the present, are to be maintained
with any hope of success, the practical necessities of making
parties, securing evidence, obtaining the production of documents
and relief by injunction against individual wrongdoers, justify, if
they do not compel, their prosecution in the particular
jurisdiction where necessary parties and witnesses may be found,
rather than in the place of the technical corporate domicile.
Extension of corporate activities, distribution of corporate
personnel, stockholders and directors through many states, and the
diffusion of corporate ownership, separated from corporate
management, make the integrity of the conduct of large business
corporations increasingly a matter of national, rather than local,
concern (
cf. A. A. Berle, Jr. and Gardiner C. Means, The
Modern Corporation and Private Property (1932)), to which the
federal
Page 288 U. S. 150
courts should be quick to respond when their jurisdiction is
rightly invoked. We should be slow indeed to make a reluctance to
decide questions of state law, not exhibited in other classes of
cases, the ground for declining to decide this one.
BRANDEIS, J., concurs in this opinion.
MR. JUSTICE CARDOZO, J., dissenting.
Viewing the suit as one to reclaim the shares received by the
directors in breach of their fiduciary duties to the corporation
and the shareholders, I find no adequate reason for the refusal to
exercise jurisdiction, and this though a different conclusion might
be thought to be necessary if relief were to be given upon grounds
affecting the validity of the issue as a whole.
In the circumstances of this case, the certificates allotted to
the directors may be charged with a constructive trust, and
surrendered to the corporation to be held in its treasury, without
impeaching a single certificate other than their own.
There is no need to consider whether the "plan" as proposed is
insufficient on its face, with the result that the innocent
employees as well as the culpable directors will be deprived of its
benefits. If it be taken as sufficient, the shareholders who voted
for it are not chargeable with notice that fiduciary powers would
later be perverted by the award to the fiduciary of extraordinary
benefits. Consent will not protect if reason and moderation are not
made to mark the boundaries of what is done under its shelter.
I leave the question open whether, in other circumstances or
with other consequences, there may be a cancellation of the shares
of a foreign corporation in the absence of an adjudication by the
courts of the domicile. Here, the organic
Page 288 U. S. 151
structure of the corporation, if affected by the decree at all,
will not be changed in such a way as to work substantial detriment
to any stranger to the suit, but the fruits of an unjust enrichment
will be put back into the treasury. I think we are at liberty to do
so much, if nothing more, without waiting upon the judgment of any
other court.
The doctrine of
forum non conveniens is an instrument
of justice. Courts must be slow to apply it at the instance of
directors charged as personal wrongdoers, when justice will be
delayed, even though not thwarted altogether, if jurisdiction is
refused. At least that must be so when the wrong is clearly proved.
The overmastering necessity of rebuking fraud or breach of trust
will outweigh competing policies and shift the balance of
convenience. Equity, it is said, will not be over-nice in balancing
the efficacy of one remedy against the efficacy of another when
action will baffle, and inaction may confirm, the purpose of the
wrongdoer.
Falk v. Hoffman, 233 N.Y. 199, 203, 135 N.E.
243. Of the shares allotted to directors, as contrasted with those
allotted to other employees, most are owned by the defendants sued.
Whatever shares belong to others will be untouched by the decree.
With all the procedural complexities possible hereafter if
jurisdiction be declined, the hazard of inconsistent judgments
affecting the directors
inter se will not avail, without
more, to halt the processes of justice and the award of such relief
as the court is competent to give against those subject to its
power.
I agree with MR. JUSTICE STONE, for the reasons stated in his
opinion, that a breach of the fiduciary duties of the directors is
a legitimate inference from the allegations of the bill, and agree
with his conclusion that the cause should be remanded to the
District Court for a determination of the merits.