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the beginning, it was permitted to stand without objection for ten years and a half. That during that period the stockholders, by resolution, ratified it; that they are now estopped from questioning it; and that in any event they are barred by laches and by lapse of time.

[4] The defense of ratification may easily be disposed of. In 1905 and subsequently at the annual meetings of the stockholders, the following resolution was passed: "Resolved that the stockholders hereby ratify and approve all the acts of the directors in the management of the company's business and the conduct of its officers and their action generally down to and including the present time."

lution, the preference was to extend to prin- | nor Havemeyer was, in point of fact, the cipal as well as interest. It is true that the owner. It is argued, however, that, concedcontrolling power was to be Havemeyer, but ing that the transaction was unlawful in the very fact that he held the common stock was a guaranty that the company's interest would be attended to, and that the competition with the American Company would not be destructive. That their expectations were justified by the event appears from the fact that, within four years after the organization, Havemeyer received in dividends on the common stock $2,500,000; that for 12 years there has been no default in the payment of the dividends on the preferred stock; and that the company now has a surplus. If I had merely to pass upon the wisdom or unwisdom of the transaction, from the standpoint of benefit to the old stockholders, I should not hesitate to conclude that the bargain was a good one. The agreement that Post for Havemeyer was to have com- It might, perhaps, be open to question mon stock was of course known to the pro- whether, properly interpreted, this resolution moters of the arrangement, but the amount could be held to include the acts of the of it was not announced, even to them, un-stockholders and directors in organizing the til after the options were signed. The op- company and issuing its stock, but, assuming tions, as I have said, do not mention com- that it could, it is evident that it was withmon stock. Post says that he suggested to out effect. Stockholders cannot ratify their Havemeyer that the issue should be $5,000,- own ultra vires acts; neither can they ratify 000, but that Havemeyer objected and said the ultra vires acts of their directors unless he wanted it fixed at $10,000,000, and that they are intra vires the corporation. They that fixed it. The announcement of the cannot make lawful acts which the statute amount was first made on June 2d, the day has declared to be unlawful. Breslin v. of the organization meeting. Plainly Have- Fries-Breslin Co., 70 N. J. Law, 283, 58 Atl. meyer fixed it at that sum because he want- 313; Siegman v. Electric Vehicle Co., 72 N. ed control. J. Eq. 409, 65 Atl. 910.

6. It is said that there was some discus- [5] In considering the question of laches, sion at the stockholders' and directors' meet- we must revert to the options. Article 3 ings of the value of the combined plants tak- stipulated that "the purchasers will, after en as a unit from Post as seller. It was, two-thirds or more of such stockholders (i. at best, perfunctory, for evidently every-e., the stockholders of the three old comthing but the amount of the common stock panies), in par value, shall have become parhad been settled beforehand, and the ques- ties thereto, upon notice to that effect, protion of amount was not settled by the di- ceed to take the necessary steps for the orrectors, but by Havemeyer. They would ganization of a new or the use of an existing no doubt, have settled it at $5,000,000, as corporation under the laws of the state of Post suggested, had Havemeyer so directed. New Jersey with a capital, of which ten It is incontestable that Havemeyer acquir- million dollars shall consist of preferred ed the $10,000,000 of common stock with-stock (with the right to vote); the preferout tangible consideration moving from him- ence being for cumulative dividends at the self, either money or property. He received rate of six per cent." etc. This article conit only because he was president of a pow-templates the issue of common stock, but erful competitor, able, through his acts and only by implication. As the company was to influence, as was thought, to make the new organization a paying concern. He did not bind himself to exert this influence, but the directors relied upon his self interest.

be organized under New Jersey law, and as that law requires (section 18 of the corporation act) that "at no time shall the total amount of the preferred stock issued and It is plain that the transaction could have outstanding exceed two-thirds of the capital been enjoined in fieri. It could also have stock paid for in cash or property," it was been attacked with success, after the stock a necessary part of the scheme, if it was to had been issued, for the reason that there be a legal scheme, that the common stock inhered in it the actual fraud referred to would not be less than $5,000,000 (the prein section 49 of the corporation act. That ferred stock having been fixed at $10,000,fraud consisted, as I have shown, in issu-000), and that it would be paid for in money ing the stock for a consideration that was or property, dollar for dollar.

neither money nor property, and in covering When, therefore, the preferred stockholdup the gift by a seeming sale, at a consciousers were informed by the certificate of incor

thorized capital was $20,000,000, divided into | stock was $10,000,000, it might have been 200,000 shares, of which 100,000 were to be taken to mean that common stock to the shares of common stock, and, when they read amount of $10,000,000 had been subscribed on their stock certificates that the common for as the law required-not necessarily paid stock was $10,000,000, they would naturally in, but standing there as an obligation of have supposed that the common stock had the subscribers to respond to assessments been issued for the equivalent which the law whenever called for. The subscriptions would prescribed. Neither of these papers gave be genuine assets. them any notice or information to the contrary. Those of the stockholders who were incorporators and directors knew the facts, for they were parties to the organization, but, with one or two exceptions, none of the others knew or were informed of them. I think I do not overstate the case when I say that the fact that the stock had been given to Mr. Havemeyer was kept secret. Up to the time of his death, Mr. Post stood on the books as its sole owner. Neither by circular, announcement at any stockholders' meeting, nor in other ways were the body of the stockholders informed of the circumstances. Post, their president and trustee, did not see fit to make any explanation or disclosure.

It is further said that the reports filed annually with the State Board of Assessment would have disclosed the fact. Among the questions asked and answered in the first report (and in the others they are very similar) were the following: "(1) What is the amount of your capital stock authorized? $20,000,000. (2) Into how many shares is it divided? 100,000 common; 100,000 preferred. (3) How many shares are fully paid, either in cash or by property purchased? 199,785. (4) How many shares are partially paid? None. (5) What is the amount of your capital stock issued? $19,978,500. Now if we assume, what I do not understand to be the law, that these reports are, through filing merely, constructive notice of their contents to every stockholder, they fail to give him any notice of any fraudulent act. They do not show that stock to the amount of $19,978,500 (which includes the McCahan stock purchase, to which I have not heretofore found it necessary to allude) was issued contrary to law. On the contrary, taken in connection with the book entries to which I have referred, they suggest that the common stock had been fully paid, in money or property, in the manner prescribed by law. I fail to find that [6] But it is said that the persons who any fact which came to the notice of the held the proxies knew and the stockholders stockholders, or which they may be presumare affected by their knowledge. This knowl-ed to have known, was of a character to put edge was the very knowledge which the proxies, their directors and trustees, were with holding from them. The proxies merely authorized the persons named in them to vote for directors, and in the transaction of such other business as might otherwise properly come before the meeting. How so limited an authority could affect them with knowledge -more especially as it is not pretended that the facts were stated at any stockholders' meeting-I cannot understand.

This is conceded, but it is said that the stockholders knew facts which should have put them upon inquiry, and that, if they had made the inquiry, they would have learned the truth. What facts did they know? They knew what the option agreement told them, but it told them nothing about the common stock. When they exchanged the old certificates for the new at B. H. Howell Son & Co.'s office, that office gave them no additional information. When they were asked to sign proxies, the proxies gave them none.

them on inquiry. There being on their part no knowledge, and on the part of Havemeyer no change of position to his detriment, there can be no laches and therefore no estoppel.

[7] Is, then, lapse of time a bar? Havemeyer and his estate, so far from being, worse off to-day because of his ownership of the stock, are better off. He has received dividends in money to the amount of $2,500,000, and has paid out nothing. There is no inequity, therefore, in holding that the stock, Then it is said that, if they had looked at void in its origin, has continued void for a the books, which were open to them, they period of 11 years and is now void in the would have learned the facts. The first en- hands of the original holder and his chiltry, made under date of June 1, 1900, shows dren. Nothing is better settled than that that the sum paid for the stock of the three mere lapse of time does not operate as a bar, companies was $8,250,000. This, so far from in a matter exclusively cognizable in equity, indicating a purchase for $18,250,000, indi- unless the time be much longer than that. cates the contrary. It shows a purchase for Says Pomeroy (Eq. Jur. vol. 2, § 917): “No the sum for which they really were pur- lapse of time, no delay in bringing a suit, chased. Then we find further on an item however long, will defeat the remedy provid"assets (entered by order president and treased the injured party was, during all this inurer) $10,000,000." This was a misleading terval, ignorant of the fraud. The duty to entry. If it really stood for anything, it stood for "Havemeyer's anticipated influence," but to a stockholder looking at the books, and remembering that on his stock certificate it was written that the authorized common

commence proceedings can arise only upon his discovery of the fraud, and the possible effect of his laches will begin to operate only from that time."

But the case presents this rather singular

situation: The defendants are Post, Have- December, 1901—that is, a year and a half meyer's children, and the company itself. The stock stands and has always stood on the company's books in the name of Post. For whom does he hold it? He is, according to his evidence, trustee for Havemeyer; but, as president and director, he is also, in a sense, trustee for the stockholders. Havemeyer's children have filed a cross-bill asking that the company and its officers be directed to transfer the stock to them.

He

He

after the organization--Havemeyer handed him a paper (Exhibit D, p. 125, of printed record) in which, among other things, it was stated that Havemeyer and Palmer had issued certain certificates, and among them one for 5,000 shares to Post. This is the evidence: "Q. What did Mr. Havemeyer say when he gave it to you-when he gave you this declaration that he held 5,000 shares? A. He said that I had been very satisfactory; I had attended to the business, and I hadn't had any salary; under the agreement I wasn't to have any, but I was to do the commission business. would put aside this stock for me. sealed it up in an envelope and said, 'You put that away and in five years we will ad just it.' * ** Q. Did Mr. Havemeyer pay you anything for your services in this matter in which you were acting for him? A. He did in 1901 give me the stock, but it was not in payment for those services. The payment for the services, as I understand it, was the contract with B. H. Howell Son & Co., for a period of five years, was the consideration that I received for my firm in connection with the organization of this company. Q. That is for the services you did in connection with the organiIt zation you were compensated by the Howell contract? A. That is the way I understood it at that time."

Under the case of Volney v. Nixon, supra, no relief can be granted to the Havemeyers. They necessarily stand in the position of asking the court to give them the same kind of relief that was refused in that leading case. If their title does not admit of legal vindication, and if Post himself disclaims beneficial ownership (except as to a small proportion of the shares, as to which I will speak hereafter), the objection that the court should not now interfere, because of lapse of time, seems considerably weakened. A very important part of the transaction (looked at from the Havemeyer standpoint) has not been completely consummated.

[8] I shall briefly notice one or two other points strongly insisted upon by defendants' counsel, but arising out of a view of the evidence that is entirely inadmissible. is said that, inasmuch as the transaction was single, the court cannot now divide it cannot sustain it in part by holding the issue of preferred stock good, and reject it in part by holding the issue of common stock bad-the general rule being, in the words of Emery, V. C., in Sivin v. Mutual Match Co., 72 N. J. Eq. 579, 66 Atl. 921: "That stockholders in the same default or participating in an alleged illegality or fraud are estopped from obtaining a decree even in right of the company."

It is evident that the rule here invoked is inapplicable. It is only by regarding the form and not the substance of the matter that the argument has any plausibility. The argument fails altogether to take into account the provisions of the option agreement, which Post was bound to give effect to. It is based, too, upon the assumption that Post had something to sell. As we have seen, he had nothing. If he had been the actual owner of the stock of the three companies and had, as owner, sold it partly for preferred, and partly for common, stock, the case would have been quite different. But the stockholders of the old companies were the owners, and they got only that which, under the options, they were entitled to, while Post, for Havemeyer, got that to which he had no legal right.

On this evidence it seems clear that Post neither received nor was entitled to any of the stock for his services as promoter; that he got his compensation for promotion out of the B. H. Howell Son & Co. contract, which gave him the commission business of the new company. Under these circumstances, Post, 'as Havemeyer's subsequent donee, does not stand on any higher plane than Havemeyer himself.

I now come to the question of dividends. In 1903 the company declared a 10 per cent. and in 1905 a 15 per cent. dividend upon the common stock. The bill prays that the executors of Mr. Havemeyer be decreed to repay the money. If the original issue was void as against the company, it would seem necessarily to follow that there was nothing on which to base the payment of the dividends, and that they could have been recovered in an action at law for money had and received at any time within six years after their payment. In the Easton National Bank Case, already referred to, the Court of Errors said that no bill was needed to set aside a transaction involving a fraudulent issue of stock; that it was void ab initio; and that the appropriate relief could be given on that assumption. [9] I have hitherto in the course of this The dividends now in question, two in numdiscussion treated the common stock as beber, were declared and paid more than six ing wholly Havemeyer's. Post says that Havemeyer made it plain to him at the out

years before the filing of the bill.

[10] They could not have been recovered

set v. Veghte, 44 N. J. Law, 509), and the question is, Can they now be recovered in this court, the general rule being that, where the jurisdiction is concurrent, in this respect as in many others, equity follows the law. Kane v. Bloodgood, 7 Johns. Ch. (N. Y.) 90, 11 Am. Dec. 417.

ed justified it in making to its owners dividends of exactly the same amount as were actually made on the $10,000,000 of stock, for it would have represented exactly the same property as the 100,000 shares would have done, if they all had been lawfully issued.

[11, 12] It is a matter of importance to The preferred stockholders having received get at the exact situation. The certificate of all the distributable earnings they were entiincorporation states that Post, Mollenhauer, tled to under the options and stock certifHowell, Cory, and Bunker each subscribed icates, the common stockholders would have for 200 shares of the common stock; that is, been entitled to the rest; and so the objecto $100,000 of stock in the aggregate. On tion to the dividends (unanimously concurred June 2, 1900, stock certificates were actually in) would seem to relate rather to the false issued to the subscribers for the amount assumption implied in the resolution than subscribed. The certificates of Mollenhauer, to the ultimate right. Whether, in view of Howell, Cory, and Bunker were almost imme- the resolutions of ratification, the decision diately assigned to Post, and were a few of the Court of Errors in Breslin v. Friesdays afterward (June 8th) included in the Breslin Co., 70 N. J. Law, 274, 58 Atl. 313, receipt given to him by John E. Parsons, Mr. would prevent a present recovery of the divHavemeyer's counsel. Mr. Post says, some- idends, if they had been declared within what obscurely (page 433): "The first sub- six years before the commencement of this scriptions for common stock were made in suit, I need not decide. What I am now connection with the incorporation. When the concerned with is the question whether Post vote was about to be made in regard to is- or Havemeyer, as to these dividends, stands suing it all to me for the other stock, it toward the preferred stockholders as truswas decided to have the directors qualify by tees, unable to take advantage of the bar of preferred stock." This may have been said the statute. Havemeyer received the diviin conversation among some of the directors, dends on 95,000 shares of stock and Post but there was no corporate resolution regard-upon 5,000. Havemeyer was neither a diing it. All that is shown by the minutes is rector nor officer. As equitable owner of that, in the course of the directors' meeting, the 1,000 shares originally subscribed, he "the following subscription list was received sustained no relationship of trust either to and accepted and ordered to be entered in the company or its stockholders. United the minutes." Then the minutes recite an States Steel Co. v. Hodge, 64 N. J. Eq. 807, undertaking on the part of each of the in- 813, 54 Atl. 1, 60 L. R. A. 742; Lillard v. corporators to subscribe for 10 shares of the Oil Co., 70 N. J. Eq. 205, 56 Atl. 254, 5S preferred stock. It is not said that they took | Atl. 188. He died in 1907. His estate has this stock in substitution for the common- presumably been administered according to stock subscription.

the directions of his will. He and his executors have for seven years held the div idends, not as trustees, but adversely. He would have been entitled to them under a resolution properly framed. There seems therefore to be no equity in holding him bound to refund the money, after the bar of the statute has attached at law.

The fact is undisputed that they organized in their character of common stockholders. On no other basis could the organization have been effected. All that appears is that, at the directors' meeting held after the stockholders' meeting had adjourned, they made an additional subscription for preferred stock. And the reason is obvious. Havemeyer want- As to Post the case is not quite so strong. ed all the common stock, and, as to the di- He was president and director. Whether the rectors, they did not care whether they sat relationship of a director of a manufacturing in the board by reason of a common stock company to his stockholders (Thompson on qualification or a preferred stock qualifica- Corp. vol. 3, § 4128) is similar to that of tion. What I desire to emphasize is that, the managers of a savings bank to their conceding that the so-called sale of the stocks depositors (Williams v. McKay, 40 N. J. Eq. of the old companies to the new was fraudu- 189, 53 Am. Rep. 775) or the directors of a lent and void and that Havemeyer acquired building loan association to their stockholdno title thereunder, there was still a law-ers, so called (French v. Armstrong, 82 Atl. ful issue of common stock to the amount of 101), need not be decided. If the law be $100,000. This stock stands, in my view, as that, notwithstanding that he is not clothed having never been paid for. But it was, not- with the legal title, he is, in general, subject withstanding, stock properly subscribed, law- to the liability of the trustee of an express fully issued, still outstanding, and now sub- trust, and cannot claim the benefit of the ject to assessment. It seems inevitably to statute for that reason, the principle should follow that, whatever may have been or may not be carried to an extreme. The statute be the status of the other stock, there could declares that the directors of every corporahave been a dividend declared on this stock tion shall, "after reserving over and above in the years 1903 and 1904, and there would its capital stock paid in as a working capi

same

In Easton National Bank v. American Brick & Tile Company, 70 N. J. Eq. 722, 64 Atl. 1095, the Court of Errors found as a fact conscious or intentional overvaluation. They said that the transaction was not only voidable but void, and yet they held that the stock which had been issued as full paid was liable to assessment to satisfy the demands of creditors.

as shall have been fixed by the stockholders, | profit in the form of shares that represent declare a dividend among its stockholders of neither money nor property and exceed the the whole of its accumulated profits, exceed- reasonable services and expenses of the proing the amount so reserved, and pay the moter, while he is liable to refund the shares to such stockholders on demand." or the proceeds of the sale of them, "he is While the directors are vested with a discre- also liable under the statute as for unpaid tionary power with regard to the time and subscriptions." manner of making distribution of these profits, they may not improperly withhold them. Laurel Springs Land Co. v. Fongeray, 50 N. J. Eq. 757, 26 Atl. 886; Stevens v. U. S. Steel Corp., 68 N. J. Eq. 373, 59 Atl. 905. Such being the law, and Post having at least a qualified interest to share in the earnings and having, with the unanimous consent of the directors, received his fair proportion of them, and the statute having run against him in the law courts where he might have been sued, it would seem that equity should not deny him that measure of protection which he would receive there. As to this money, the position of its recipient has almost necessarily changed.

It must be remembered, too, that this is a suit by the preferred stockholders of a solvent and going concern, not the suit of a receiver seeking to recover, for the benefit of creditors, a trust fund wrongfully depleted. These stockholders at the beginning agreed that the surplus earnings should, after their shares were allotted to them, go to the common stockholders-I say "agreed," for the law under which the corporation was organized required the presence of common stockholders and gave to these stockholders a right of participation in the surplus such as I have mentioned. There is no question of impairment. If there had been no common stock lawfully issued, or if that which had been issued had been held by persons other than Post or Havemeyer, a very different question might have arisen.

[13] I now come to the question of relief. What, under the decisions, is the present status of the stock unlawfully issued to Post for Havemeyer? There are several decisions of the Court of Errors, bearing on this question.

In Knickerbocker Inp. Co. v. Board of Assessors, 74 N. J. Law, 583, 65 Atl. 913, 7 L. R. A. (N. S.) 885, it was held that, whether stock is issued for value or not, the subscription fixes the basis of the tax. The court found as a fact that there was not a bona fide value; nothing but a semblance of it. They nevertheless held that the company was taxable on the entire

amount of stock issued.

In See v. Heppenheimer, 69 N. J. Eq. 36, 61 Atl. 843-a case not unlike the present in several of its leading features-stock issued at a conscious overvaluation was held by Vice Chancellor Pitney to be assessable in favor of creditors.

In Bigelow v. Old Dominion Copper Co., 74 N. J. Eq. 502, 71 Atl. 153, Chancellor Pit

In the last-cited case it had been contended that no assessment could be made while the contract stood intact. This was on the theory that the transaction was only voidable, and that a bill must first be filed to avoid it. In answer to this contention, Pitney, Ch., speaking for the court, said: "In our view this whole difficulty is imaginary. Assuming the case showed a contract between the company and its stockholders that the stock certificates should be issued as full paid and as for property purchased, and that this contract was in fact of such a character and made under such circumstances that it contravened the prohibition of the corporation act, it was not merely voidable but void. It had as little effect for any purpose as the contract that was before this court in Volney v. Nixon, 68 N. J. Eq. 605 [60 Atl. 189], and could not be laid hold of by either party as a ground of action or ground of defense. No bill or other original proceeding was necessary to procure an adjudication of its nullity, and the court, on the petition originally filed by the receiver for the purpose of enforcing the liability of the stockholders for the unpaid portion of their subscriptions, upon ascertaining the fact that rendered the so-called contract void, was at liberty to treat it as affording no obstacle to the relief prayed by the receiver."

Now it might be suggested that the court was inconsistent in holding that, although the subscription agreement was absolutely void, the issue of stock founded upon it was so far valid as to afford a basis of taxation and a basis of assessment for the benefit of creditors. On the other hand, it might be said that, while the contract, pursuant to which the stock was issued, was void, the implied agreement springing out of the acceptance of the stock certificate was enforceable on the theory of Handley v. Stutz, 139 U. S. 427, 11 Sup. Ct. 530, 35 L. Ed. 227, viz., that the acceptance of a certificate is sufficient evidence of an agreement to pay its par value. But this, as it seems to me, would be contrary to Volney v. Nixon, 68 N. J. Eq. 605, 60 Atl. 189, where it was held

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