State v. Loft, Inc.

delivering the opinion of the court:

The petition of the relator, among other things, alleged that he owned more than four hundred (400) shares of the capital stock of the respondent corporation; that he had requested permission to examine its books, records and correspondence, but that such request had been refused.

It, also, alleged that his desire to examine such books, records and correspondence was for no sinister or ulterior motive.

In this connection, the petition further alleged that the relator desired to inspect such books and records:

1. For the purpose of determining the actual value of his stock in the respondent corporation.

3. For the purpose of acquainting himself with the expenditures made by that corporation since May 1, 1930.

4. For the purpose of determining what outstanding loan or loans had been made by that corporation since May 1, 1930.

The respondent contends, however:

1. That the relator has no right to inspect the books and records of the Loft Company because under the provisions of section 10 of its Charter and of section 11 of its By-Laws, that right depends entirely upon whether inspection is authorized by the board of directors of the corporation; and that no such permission was given in this case.

2. That the application of the relator is not for any proper purpose due to his financial interest in the corporation, but solely because of ill feeling toward the Guth management.

3. That its stock is not only listed on the New York Stock Exchange and that information as to its market value can, therefore, be readily ascertained from that source, but that the relator has, also, been furnished from time to time with financial statements showing the condition of the corporation from which the book value of its stock is a mere matter of mathematical calculation.

4. That all of the material information that could possibly be procured from the corporate books and records, with respect to the purchase of more than 71% of the stock of the Happiness Candy Company, has either appeared in the financial statements above referred to, or in other papers already sent the relator.

5. That where a stockholder seeks to enforce his common-law right to inspect the corporate books and records he must not only plead and prove a proper purpose, but must, also, plead and prove “a reason or cause rendering an examination opportune and proper.” In other words, it contends that it must appear from both pleading and proof that the stockholders’ “interests or rights áre likely to be seriously prejudiced and affected if the remedy (the right to inspect the corporate books) is not given” and that “it is necessary for him

At common law the writ of mandamus was not a writ of right, but would issue only when the facts, in the exercise of a sound judicial discretion, justified it. This rule has been repeatedly recognized in this State (State ex rel. Theile v. Cities Service Co., 1 W. W. Harr. [31 Del.] 514, 115 A. 773 , 22 A. L. R. 8 ; State ex rel. Brumley v. J. & M. Paper Co., 1 Boyce 379 , 77 A. 16 , 30 L. R. A. [N. S.] 290; McCoy v. State, 2 Marv. 544 , 36 A. 81 ; State v. Penn-Beaver Oil Co., 4 W. W. Harr. [34 Del.] 81, 143 A. 257 ; State ex rel. Linihan v. United Brokerage Co., 6 Boyce 570 , 101 A. 433 ), and has not been in any wise changed by chapter 213, vol. 34, Laws of Delaware.

The stockholders of a corporation are the equitable owners of its assets and in an application to inspect its books their rights and interests must be considered, but in order for the writ to issue, its purpose must be a proper one and not adverse to the interests of the corporation.

The right of the stockholder in this respect is, therefore, in no sense an absolute right, but merely a qualified right depending upon the facts of the particular case.

Where the motive or purpose of the examination is mere curiosity or where it is sought to be made for some indefinite, doubtful, uncertain, or mere vexatious purpose, or where it has no relation to the relator’s interest, as a stockholder, in the corporation, it would not be a proper purpose within this rule. State ex rel. Brumley v. J. & M. Paper Co., 1 Boyce 379 , 392, 77 A. 16 , 30 L. R. A. (N. S.) 290 . See, also, State ex rel. Cochran v. Penn-Beaver Oil Co., 4 W. W. Harr. (34 Del.) 81, 143 A. 257 ; State ex rel. Linihan v. United Brokerage Co., 6 Boyce 570 , 101 A. 433 ; State ex rel. National Bank of Del. v. J. & M. Paper Co., 4 Boyce 248 , 88 A. 449 ; State ex rel. De Julvecourt v. Pan American Co., 5 Penn. 391 , 61 A. 398 ; 63 A. 1118 ; Stale ex rel. Theile v. Cities Service Co., 1 W. W. Harr. (31 Del.) 514, 115 A. 773 , 22 A. L. R. 8 .

Further than that, as a general rule and unless there is something to indicate that such information was fraudulent or un

The respondent contends that even though the purpose of a stockholder, in desiring to examine the corporate books, is not an improper one, some particular exigency making the information sought necessary, for the protection of his interest as a stockholder, must also be both alleged and proved. In support of this contention it cites Varney v. Baker, 194 Mass. 239 , 241, 80 N. E. 524 , 10 Ann. Cas. 989; Shea v. Parker, 234 Mass. 592 , 594, 126 N. E. 47 ; Matter of Latimer v. Herzog Teleseme Co., 75 App. Div. 522 , 78 N. Y. S. 314 ; Mechem on Modern Law of Corporations, vol. 2, p. 894, § 1097.

Even if the authorities cited by it support that contention such a rule would seem to be inconsistent with the principles laid down by our Supreme Court in State ex rel. Brumley v. J. & M. Paper Co., 1 Boyce 379 , 77 A. 16 , 30 L. R. A. (N. S.) 290 , supra.

True, the respondent also contends that in principle not only the Brumley case, 1 Boyce 379 , 77 A. 16 , 30 L. R. A. (N. S.) 290 , supra, but, also, State ex rel. De Julvecourt v. Pan American Co., 5 Penn. 391 , 61 A. 398 , 63 A. 1118 ; State ex rel. National Bank of Del. v. J. & M. Paper Co., 4 Boyce 258 , 88 A. 449 ; State ex rel. Linihan v. United Brokerage Co., 6 Boyce 570 , 101 A. 433 ; State ex rel. Cochran v. Penn-Beaver Oil Co., 4 W. W. Harr. (34 Del.) 81, 143 A. 257 , and State ex rel. Rogers v. Sherman Oil Co., 1 W. W. Harr. (31 Del.) 570, 117 A. 122 , are to the same effect as the other cases cited by him.

As we have already pointed out, however, the common-law right of the stockholder to examine the corporate books and records is merely a conditional right depending, in most cases, upon whether it is for a proper purpose. Because of that fact, such purpose must not only be proved, but must, also, be alleged not by a

Whether the bare allegation that the relator desires to ascertain the value of his stock complies with this rule may be subject to some question even in view of the language used by the court in State ex rel. Brumley v. J. & M. Paper Co., 1 Boyce 379 , 77 A. 16 , 30 L. R. A. (N. S.) 290 .

In State ex rel. Cochran v. Penn-Beaver Oil Co., 4 W. W. Harr. (34 Del.) 81, 143 A. 257 , while the report of the case indicates that the petition alleged little more than that, an examination of the original petition discloses that other allegations as to the relator’s purpose appeared. These allegations were in substance that he had purchased his stock because of certain representations of the president of the respondent corporation, which he then believed to be true, but which he later had reason to believe were untrue; that he could get no information as to the affairs of the corporation from any of its officers; that no annual or other financial reports were ever made to the stockholders, and that he desired to inspect the corporate books to ascertain whether the representations made at the time of the purchase of his stock were true and how the facts disclosed from such investigation would affect the value of such stock.

But whatever the rule might be, if this were a preliminary motion to dismiss the petition, or to strike out some of its allegations, the evidence has been heard, and the case will be decided on its merits.

Differing from the old mode of procedure in mandamus cases and pursuant to the provisions of chapter 213, vol. 34, Laws of Delaware, the evidence in this case was heard by the court.

The relator’s request to inspecj the corporate books, and the refusal of such request was also proved. He further proved that prior to May, 1930, he had been president of The Loft Company; that at that time he had been succeeded as president of that corporation by Mr. Guth, who had previously been its vice-president; that while he was president of the respondent corporation, Mr. Guth had suggested the purchase of The Happiness Candy Company by that corporation; that he had investigated the affairs of that company so far as he was able to do so, not only statistically, but also as to the value of its leases and real estate holdings, with the idea of purchasing it for the Loft Company; that he had concluded from such examination that the Happiness Company would be of no value to the Loft Company, but that over seventy-one per cent of its capital stock had nevertheless been purchased by that company, after Mr. Guth became its president.

Very little other evidence was produced by the relator in his case in chief. On cross-examination of Mr. Miller it also appeared, however, that while he was president of the respondent corporation he had caused two hundred thousand dollars ($200,000) to be lent by that corporation to Mr. Carey, the son-in-law of Mr. Guth, and the note of Carey endorsed by Guth for that amount, together with fifty thousand shares of stock of The Loft Company as collateral security therefor had been delivered to that corporation. In connection with this evidence, he not only stated that he wished to ascertain from the corporate books whether there had been any other loans made, but also whether this loan was carried on such books as a quick asset.

It further appeared on cross-examination that Mr. Miller was a stock broker, and that there was strong personal feeling between him and Mr. Guth, growing out of the election of the latter to succeed him as president of the respondent corporation. In that examination, Mr. Miller also stated that he owned thirty-six hundred shares of the Loft Company stock when this petition was filed, and

He further stated that the market price of his stock had so sharply declined since he purchased it that in case of sale, he would have to suffer a loss of more than one hundred and fifty thousand dollars, and that his desire to examine the books of the respondent corporation was to determine the value of such stock and whether to buy more or to sell the stock already owned by him.

In support of its defense, the respondent produced and the court admitted its Charter and By-Laws. It appeared from these that the provisions of section 6 of paragraph 10 of the Charter and of section 11 of the By-Laws were as quoted in its answer. It admits that section 11 of the By-Laws, if it stood alone, and without any similar charter provision would be unreasonable and void. State ex rel. Brumley v. J. & M. Paper Co., 1 Boyce 379 , 77 A. 16 , 30 L. R. A. (N. S.) 290 ; Swift v. State ex rel. Richardson, 7 Houst. 338 , 6 A. 856 , 32 A. 143 , 40 Am. St. Rep. 127 . It contends, however, that a corporate charter composes a part of the contract between the corporation and its stockholders, and that the rights of the relator, in this case, are governed by section 6 of the Charter which prohibits any inspection of corporate books by a stockholder unless authorized by the board of directors. Notwithstanding this contention, it concedes that this court must necessarily be governed by State ex rel. Cochran v. Penn-Beaver Oil Co., 4 W. W. Harr. (34 Del.) 81, 143 A. 257 , in which the court in banc held that a similar charter provision was not binding on the stockholder, and that the question was merely raised in this court in order to preserve its rights in a higher court.

The respondent further showed that since Mr. Miller had been deposed as president of the corporation, no less than eleven suits relating to the affairs of the Loft Company, some of which were still pending, and. for which either Miller or Guth was directly or indirectly responsible, had been docketed. It also produced evidence to show that Miller had made some statements which might

The financial statements sent by the respondent to its stockholders after Mr. Guth became president of the corporation were four in number. The first showed the balance sheet as of April 30, 1930, and was apparently sent out June 7, 1930; the second showed the balance sheet as of June 30, 1930, and was apparently sent out July 28, 1930; the third showed the balance sheet as of December 31, 1930, and was apparently sent out February 24, 1931; and the fourth showed the balance sheet as of April 5, 1931, and was apparently sent out April 18, 1931.

The purchase of the Happiness Candy Company stock, and the reasons for such purchase, including the location of its fifty odd stores, was also announced in an advertisement in the pictorial part of the New York Times on Sunday, August 30, 1931, copies of which were sent to the stockholders of the Loft Company at the time. This purchase together with some of the advantages derived therefrom was also announced by Mr. Guth in the letter of February 24, 1931, attached to the financial statement of December 31, 1930. The purchase price of the Happiness Candy Company stock did not appear in the advertisement above referred to, but it appeared in the statement of December 31, 1930, that such purchase price was one million one hundred thousand dollars ($1,100,000). This also appeared- in the subsequent statement of April 5, 1931. The book value of such stock likewise appeared in that statement.

That notes to the extent of two hundred and fifty-five thousand five hundred and thirty-eight dollars ($255,538) for the balance of the purchase price of such stock were due April 2, 1931, also appeared in the statement of December 31, 1930. The fact that this item was not included in the statement of April 5, 1931, would also seem to indicate that these notes were paid at maturity.

True, the relator also intimates that it is his belief that the purchase of this stock must have been induced by some personal benefit to some one connected with the corporation in the way of a commission or otherwise, but there is no evidence whatever to support any such contention.

As already indicated, the recent earnings of the respondent company would seem to indicate that the Happiness Company was of some value to it but, however that may be, a mere difference of opinion as to the propriety of such a purchase, whether justified or not, would not be a ground for inspecting the corporate books.

Under the circumstances, we do not feel that we are justified in directing an examination of the respondent’s books and records in connection with the purchase of the stock of the Happiness Candy Company.

This disposes of what the relator concedes to be his main contention in the case.

The respondent corporation admits that it carried the CareyGuth note of $200,000 on its books as a quick asset, and that it so appeared on the copies of the financial statements sent out by it.

1. That while on January 1, 1930, the books of the corporation showed a surplus of $2,351,512.52, the statements showed that by April 5, 1931, it had been reduced to $1,327,388.34, though profits to the extent of $176,828.22 had been added to it during the same period.

2. That all of the statements prior to that of April 5, 1931, not only showed that the Carey note, on which Mr. Guth was responsible, was unpaid, both as to principal and interest, but, also, showed that such note was protected by the deposit of 50,000 shares of stock of the respondent company; whether, however, this collateral was still held by the Loft Company did not appear in that statement.

3. That during the presidency of Miller, the respondent corporation had purchased 52,500 shares of its capital stock, and while this item appeared as a corporate asset in some of the financial statements issued by the company, it did not appear in the statements of December 31, 1930, and April 5, 1931.

None of these facts were alleged in the petition as specific reasons for desiring to ascertain the value of the relator’s stock, but they have some bearing on that question, and will be considered by us.

The relator does not deny that the amount of the corporate surplus as shown by its books appeared in the various