Langan v. Francklyn — 29 Abb. N. Cas. 102

Majority

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LANGAN v. FRANCKLYN.

City Court of Brooklyn, Special Term ;

March, 1892.

Headnote

1. Business corporations; consolidation.] In an action by a stockholder of a gas company to enjoin its attempt to consolidate with another, under L. 1890, chapter 566,—providing that two or more gas companies may consolidate by complying ‘ with the provisions of the business corporation law,^[1] —Held,.

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(i) that the agreement for consolidation entered into by the directors of the companies could not be attacked by questioning the title of the directors to office, as their title could not be tried in such an action; (2) that, for like reason, the qualification of stockholders voting on the question of consolidation could not be considered.

2. The same.] The notice to stockholders of the meeting to vote on the question of consolidation given by one of the consolidating companies, the Union Gas Light Company, and some of the proxies voted on at such meeting, erroneously described the company as the Union Gas Light Company of East New York.—Held, that as such erroneous description was not misleading, the notice and proxies were not thereby invalidated.

3. Corporations; corporate power si] It seems that a gas company chartered under the laws of another State to deal in gas, stocks may buy and hold the stock of a gas company organized under the laws of this State.

4. Parties; corporation.] In an' action by a stockholder of a gas company to enjoin the consolidation of plaintiff’s company with another, upon the ground, among others, that the pro-' posed consolidation was for the purpose of covering up a fraudulent agreement between the directors of plaintiff’s company with themselves as directors of a third company, under which plaintiff’s company had issued certain mortgage bonds,'—Held, that in such an action the validity of the bonds could not be determined, especially as neither the mortgagee bond holders, nor the company with whom the alleged fraudulent agreement was made, had been made parties.

5 .Business corporatio7is; . consolidation.] Law's of 1890, chapter 567, section 13—providing, that where two or more corporations consolidate, the capital of the consolidated corporation shall not be larger in amount than the fair aggregate value of the property, franchises and rights of the consolidating corporations—limits the amount of capital of the consolidated . corporation to the net value of the property, franchises and rights of the corporations consolidating in excess of their respective liabilities.

6. The same.] A stockholder of a corporation attempting to consolidate with another under such statute may maintain an action to enjoin the consolidation where the capital of the proposed consolidated corporation is larger in amount than the fair aggregate value of the property rights and franchises of both corporations.

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7. The same.] The relief afforded a stockholder by section 14 of the Laws of 1890, chapter 567—providing that any stockholder objecting to consolidation may apply to the supreme court for the appointment of appraisers of his stock, and for payment to him of the appraised value by the new corporation—is not the sole remedy in case injustice is done to a stockholder by consolidation, and does not limit his right to seek relief in equity.

Trial without a jury.

The action was brought by James Langan in his own behalf, and in the behalf of other stockholders of the Union Gas Light Company similarly situated, against Charles G. Francklyn and others for the purpose, among other things, of enjoining a proposed consolidation of the - Union Gas Light Company with the Citizens Gas Light Company.

By the Laws of 1890, chapter 566, § 61, subd. 3, it is provided that two or more gas companies may consolidate into a single corporation by complying with the provisions of the Business Corporation Law (L. 1890, c. 567, §§ 13, et seq).

The complaint in brief charges that the defendant, Francklyn, and others organized the International Gas Company; that said Francklyn and others acting under cover of the International Gas Company in 1889 acquired some 6900 shares of the Union Gas Light Company and caused themselves to be elected directors thereof; that they caused a mortgage of $500,000 to be executed by said company, and that thereafter in their capacity as directors of the Union Gas Light Company, dealing with themselves as the board of directors of the International Company, they entered into a contract for the purchase of certain patent rights or licenses thereunder, which contract, it is claimed was illegal and improvident; and that this consolidation is now sought to be carried out with the view of covering up such illegal proceedings. It was also

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claimed that the provisions for the consolidation of the Union Gas Light Company with the Citizens Gas Light Company had not been carried out in accordance with the statute, and for that reason the consolidation ought not to be allowed. The complaint demanded judgment that the proposed consolidation be permanently enjoined ; that the issue of bonds to secure the $500,000 mortgage by' the Union Gas Light Company be adjudged illegal and void ; that the defendants Francklyn and others (directors of the International Company) be enjoined from further participation as members of the board of directors of the' Union Gas Light Company and for such other and further relief as may be proper.

The answer denied all improper conduct on the part •of the defendants and alleged that all their proceedings had been regular, and that the proposed consolidation would be a great advantage to the Union Gas Light Company. It was further alleged that the plaintiff had a full, adequate and complete remedy' under section 14 of the Laws of 1890, chapter 567., providing that any stockholder objecting to consolidation may apply to the supreme •court for the appointment of appraisers of his stock and for the payment to him of the appraised value.

Edgar M. Johnson and W. H. Page, Jr. (Hoadley, Lauterbach & Johnson, attorneys) for plaintiff.

John Notman and Edward Kent (Butler, Stillman & Hubbard), for defendant.

[after stating the facts.]—It is claimed on behalf of the plaintiff that the consolidation proceedings are illegal because they never received any valid inception from the board of directors of the Union Gas Light Company as required by the statute. In fact, the learned ■counsel contends that there is substantially no valid board of directors ; and he bases his contention on the

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fact th^t the by-laws of the Union Gas Light Company provide that each of its directors “ shall be a bona fide owner of not less than ten shares of the capital stock of the company." Counsel contends that the parties who-voted for the consolidation agreement on behalf of the-Union Gas Light Company were not, with one exception,, “ bona fideowners of the stock standing in their respective names.- That the parties holding the position of. directors were stockholders of record on the books of the-Union Gas Light Company is not disputed, and that would, seem to be a prima facie answer to the contention' of the learned counsel for, the plaintiff.

While it is true that in proceedings properly taken-for .that purpose, a court can go behind the record of stockholders, as shown by the transfer book, with a view of inquiring as to whether the parties in whose names-stock stands are really the owners thereof (Strong v. Smith, 15 Hun, 222 , and cases there cited), yet this is not such a proceeding, and I am of the opinion that I cannot in this action try the title of the directors of the Union Gas Light Company to the offices which they claim to-hold!

Under the statute for consolidation it is provided that notice of a stockholders’ meeting to vote on the question of consolidation shall be given by mailing the sanie to the stockholders thirty days prior to the.meeting, and also by publishing notice of a meeting for three successive weeks.. The -learned 'counsel, for the-plaintiff claims-that such action has not been takén by the Union Gas Light Company, and he seeks to base his contention on the fact that the notice published was addressed to the stockholders of “ The Union Gas-Light Company of East New York," and that the notice was of a meeting of the stockholders-of- “ The Union Gas Light Company of East New York,"' and thát the same designation was contained in- the notice mailed to the stockholders. He claims that by the addition -of the words “ of East New York ” to the corporate

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title of the Union Gas Light Company, no valid notice of" a meeting of the stockholders of the Union Gas Light Company was given. Quite a number of authorities have-been cited by him as affecting the proper designation of corporations. Most of those cases are cases in the nature of trademark, and have no bearing, in my opinion, on the point here raised. This provision of the statute was intended to cause the fullest notice to be given to the stockholders of the corporations proposed to be Consolidated. There is no pretence here that any stockholder of the Union Gas Light Company was deceived or misled by this form of notice. It appears that the notice of the meeting was mailed to each of the stockholders and that the heading thereof was as follows: ‘‘Union Gas Light Company, 26th Ward, Brooklyn, Formerly East New Yorlc.” All but four of the stockholders were present in person or by proxy at said meeting, and those four had knowledge of said meeting, thus showing conclusively that nobody was misled. I think the provision of the statute-has been complied with in this respect.

The further point is raised that the proxies of a portion of the stock sought to be voted on at the stockholders’ meeting referred to a special meeting of the shareholders, of “The.Union Gas Light Company of East New York.” For the same reasons as last stated, this contention cannot be sustained.

The learned counsel for the plaintiff further contends that, even if the proxies had been perfect, .more than two-thirds of the capital stock of the company was disqualified from voting. This contention is based on ■ the fact that the International Gas Company has owned, since August 20, 1889, and still owns, 6,900 shares of the Union Gas Light Company’s stock; counsel claims that such holding-of stock in this company by a corporation is not allowed by the laws of this State, and that, although this stock of the International Gas Company stood in the name of Mr. Weidenfeldt, as representing the pledgees thereof, he took.

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it with notice, and he has no better title to it and is no more entitled to vote on it than the International Company would be. The same answer applies to this proposition as I have above set forth with reference to the point raised that the directors of the Union Gas Light Company were not legally qualified directors. . I may further add that as the International Company by its ■charter under the laws of Kentucky was authorized to purchase, hold and deal in gas stocks, I am of the opinion that there is nothing in the laws of this State which would make such holding by it illegal. ,

The learned counsel for the plaintiff further claims that the mortgage of $500,000 made by the Union Gas Light Company to .the Central Trust Company is void, .and that it never had any valid inception. He even goes further and claims that it was part of a fraudulent scheme and conspiracy by which, substantially, the directors of the International Gas Company, sitting as directors of the Union Gas Light Company, voted to said International 'Gas Company a large portion of the .additional issue of bonds under said mortgage, and that the equivalent given therefor, in the shape of a license to work under the Meese patent on payment of a royalty, was of little or no value, although the International Gas Company realized about $100,000 from the sale of this license to the Union -Gas Light Company.

I do not understand that the mere fact that the action ■of the directors of the International Gas Company sitting as directors of the Union Gas Light Company and dealing in that capacity with themselves as directors of the International Gas Company, makes their acts actually void. The most that can be said, as I read the decisions, is that such acts will be scrutinized with the utmost care; that the greatest good faith must be exercised, and that if, on ■a proper proceeding had for that purpose, it should appear that an undue advantage was taken by one company of the other, such agreement would be unhesitatingly set aside by

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the court. This action is not a proceeding of that character and the simple fact that neither the Central Trust Company, the mortgagee in said mortgage, nor any of the holders of the bonds issued thereunder, nor the International Gas Company are made parties hereto is, in my opinion, a complete bar to any adjudication on my part in this action respecting the validity of that mortgage, or the validity of the contract for the purchase of the Meese license. In arriving at this conclusion, I do not intend in any way to be considered as upholding the fairness and good faith of the bargain made between the International Gas Company and the Union Gas Light Company, which was effected mainly by the action of the directors of the International Gas Company, acting and voting as directors of the Union Gas Light Company. The International Company seems to have been organized mainly with a view to dispose of interests under the Meese patents at a profit to itself. At the time it bought the stock of the Union Gas Light Company at 56, the works of the latter company were in a dilapidated condition and it had ceased to pay dividends for some years; yet no sooner is the International Company in control of a majority of the stock of the Union Gas Light Company than it proceeds to obtain control of its board of directors, to increase its mortgage debt $250,000, and to cause the transfer to it of $180,000 of the bonds of the Union Gas Light Company, giving in return therefor a gas plant costing about $85,-000 and a license to manufacture gas under the Meese patents at a royalty of twelve cents per 1000 feet, coupled with a privilege to purchase within three years the right to'the Meese patents in the Twenty-sixth Ward on paying $100,000 therefor. I can not but regard the bargain, on all the evidence in the case, as an unconscionable one.

The learned counsel for the plaintiff further contends that the proposed consolidation agreement is illegal because the proposed capital of the Consolidated Company, of $2,-000,000 is far in excess of what the law allows. The stat

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utory provision for consolidation above referred to, provides for an agreement of consolidation, which shall pre-' scribe, amongst other things, the amount of the capital stock of the Consolidated Company “ which shall not be larger in amount than the fair aggregate value of the property, franchises and rights of such corporations, etc.” By “ fair aggregate value ” the statute means, in my opinion, the net value of the property, franchises and rights of the corporations proposed to be consolidated in excess of the respective liabilities of such corporations.

The learned counsel for the defendants claims that the following values of the assets of the Union Gas Light Company are established by the evidence: Properties, which include all the real estate, plant, holders, tanks, mains, pipes, etc., he fixes at $435,000; patent rights, ■(license to use Meese patents), $150,000; franchises, $250,000. Total, $835,000.

I am of the opinion that these estimates of value are higher than the evidence fairly justifies. Mr. Young, the president of the company, testifies that the total value of the property of the company, exclusive of its patent rights and franchise, is a little over $400,000. The estimate of the value of the right to work under the Meese patents is, in my judgment, excessive. The company paid $180,000 in its bonds, for this right, and a plant which cost about :$85,ooo to erect, so that the International Company only received (in bonds) for the right so assigned, about $95,000, and no higher estimate of value should be placed thereon.

The value of all the property of the Union Gas Light ■Company, as estimated by its president, exclusive of patent rights and franchises, is $400,000; patent right license, worth say, $95,000; franchise, claimed to be worth $250,-OOO. ' Making a total of $745,000. From which is to be deducted its liabilities as stated by Mr. Young to be between $515,000 and $520,000, Say, $515,000; making the fair net value of the property, franchises and rights of the

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Union Gas Light Company, on a liberal estimate; to be $230,000. •

The learned counsel for the defendants further ¡claims that the following values of the assets of the Citizens GaS Light Company are established by the evidence: All property, exclusive of patent rights and franchises, $1,192,000; patent rights, $1,000,000; franchise, $500,000. Making an aggregate of $2,692,000. These-valuations are likewise excessive.

While 1 am of the opinion that the evidence shows that the Meese patent has proven to be an advantageous process to the company, yet a valuation of $1,000,000 is in miy judgment, utterly absurd.

The evidence shows that there are between 4500 and 5000 gas companies in the United States, yet, notwithstanding the International Company was organized in'1887 with a capital of $500,000, based on these patents and with a view to promote the sale and use thereof, the Citizens Gas Light Company and the Metropolitan Gas Company ■of Elizabeth, N. J., of which the defendant, Francklyn, is president, are the only two companies in the United States rising these patents. If they are anything like as valuable as defendants claim, it is very strange that all the'other gas ■companies in the United States have remained blind to their merits. The Citizens Gas Light Company it is true paid $500,000 in bonds and cash for thé sole right to use these patents in this city and adjacent tc&vns to the International Gas Company, but when it is shown that the latter company straightway took the whole of this consideration money and purchased with it from Mr. Weiderifeldt 12,500 ■shares of the Citizens Gas Light Company’s stock, of the par value of $250,000 at 200, although the market price on the New York Stock Exchange at that time was only 91, I can not believe, and do not believe,'that such a bargain was made in good faith, but that it must have been carried '•out by virtue of some preconcerted arrangement with I.

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The only pretence attempted to be set up for this absurd bargain is that the International Gas Company were desirous of buying some stock in the Citizens Gas Light Company as an investment, and it is alleged that an attempt on the part of the International Gas Company to go into the stock market and buy 12,500 shares out of a capital of 75,000 shares would have put the stock up from its then selling price of 91 to above 200. No evidence is adduced before me to support any such theory, nor is Mr. Weidenfeldt called as a witness to explain a transaction that, under all the circumstances, and considering the situation of the parties to it, seems to me to call loudly for an explanation. It does appear that, almost immediately after the so-called investment by the International Company in the stock of the Citizens Gas Light Company, the International Company was a borrower in the “ street,’’ and was pledging this very stock, together with other assets, as collateral security for money borrowed by it. Under such circumstances, as I say, the transaction does not impress me as being an honest one, and I can not escape the conclusion that this purchase by the Citizens Gas Light Company was a fraud upon its stockholders.

Under no circumstances should the value of this patent right as an asset of the Citizens. Gas Light Company be placed at a higher sum than $250,000; that being about an equivalent of what the International Gas Company actually realized from its sale. This gives us a total of $1,942,000 as the value, of the property, franchises and rights of the Citizens Gas Light Company, and the estimate, in my judgment, is a most liberal one. From this $1,942,000 is to be deducted $500,000 of debts, being the outstanding mortgage for which the bonds have been issued, which leaves $1,442,000 as the aggregate value of the property, franchises and rights of the Citizens Gas .Light Company. Adding this to the $230,000 valuation of the property, franchises and rights, of the Union Gas

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Light Company, as above set forth, we have a total valuation of $1,672,000, which I regard as being an estimate of the most liberal character..

The capital of the proposed consolidated company is sought to befixed at a sum of $2,000,000. This is $328,000 larger in amount than the fair aggregate value of the property, rights and franchises of both corporations, and it is, therefore, a violation of the statutory provisions respecting consolidation, and, in my judgment affords ample ground for the interference of this court at the instance of the plaintiff or any other stockholder.

The- learned counsel for the defendants claims that the provisions of section 14 of chapter 567 of the Laws of 1890, afford the plaintiff all the remedy which he is entitled to for any injustice which he may believe will be done to him by the proposed consolidation. That section provides that any stockholder objecting to consolidation may apply to the supreme court for the appointment of appraisers to appraise the value of his stock, and that when appraised, and on payment of such appraised value by the new corporation, his rights as a stockholder shall cease.

I am of the opinion that this is not the sole remedy that the plaintiff has for any injustice which he may deem is sought to be perpetrated. This is one way provided by the statute for giving him relief; but there is no intimation in the statute that this is the sole relief which plaintiff is entitled to, nor is there any intimation that the regular, usual and ordinary equitable powers of the courts are sought to be interfered with or limited by this provision of the statute, or that the provisions of the statute are to be substituted for the equitable powers of the court.

In view of the foregoing facts, I am of the opinion that the plaintiff is entitled to judgment permanently enjoining the proposed consolidation of said Union Gas Light Company and said Citizens Gas Light Company,

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and that he is also entitled to recover costs of the defendant, the Union Gas Light Company.