STEVENSON, V. C.
Bill for injunction by Jacob Rubino and others against the Pressed Steel Car Company. Application for preliminary injunction. Denied.
W. H. Corbin, for the motion.
R. V. Lindabury, opposed.
STEVENSON, V. C. (orally). In the case of Jacob Rubino and others, complainants, and the Pressed Steel Car Company and others, defendants, my conclusion is that this is not a proper case for a preliminary injunction. The bill, which I have examined since the argument with care, seems to be largely based upon the erroneous idea that the court of chancery will act as guardian over corporations, and even upon ex parte affidavits consider whether the board of directors have exercised their duties in a wise and prudent manner. That, of course, is an entirely erroneous conception of the relation of the court of chancery to corporations. Whether this venture in which this corporation is about to embark is a wise or prudent one, 'this court does not know, and cannot now inquire. It may turn out to be very profitable; it may turn out to be very unprofitable. A great deal in these papers seems to relate to the wisdom and prudence of this new enterprise. The question of the health of the community in which the manufacturing business—the new line of manufacturing business—is to be carried on is presented to the court; whether there are operatives there in sufficient abundance; whether the facilities for manufacture justify this new line of business. The complainant seems to apprehend that this court will hear arguments on all these matters. A large part of what was contained in his motion papers might have been left out. He fails to present anything, in my judgment, in regard to these matters which this court can consider. The sharp question to be determined is whether the defendant corporation, or these directors, rather, whether this board of directors are threatening to do any illegal act injurious to the complainant I cannot find any evidence that that is their intention. I cannot see that they have said or done anything which justifies the complainant in saying that, if this court does not intervene, they will do an illegal act, or an ultra vires act, injurious to the complainant. The counsel for the complainant has urged that the bargain which the directors contemplate making with the Messrs. McCord is unfair, inasmuch as it gives to the McCords a larger proportion of this stock than the company, or rather gives stock to the McCords at a lower price than that at which the defendant company takes its stock; but that is just like all the other matters to which I have referred,—that is a pure business transaction. I do not think it is entirely clear that the McCords get a proportionately larger share in view of what they contribute and of what the defendant company gets. But, assuming that they do, that is simply, like many of the other matters to which I have referred, a question of business. It may pay the company to allow this thing to be done. Allowing the McCords, under the circumstances, to have some extra compensation, may be necessary to enable this company to make a most advantageous business arrangement by which the company will get large profits directly from dividends, and also get large profits by having an enlarged output, and a new avenue for its products. This court cannot pass upon that question when it is conceded that the directors are acting in good faith, and are proceeding throughout this whole business with an eye single to the advantage of the company. The idea that this court will consider whether or not this bargain is unfair, in that the person with whom they are bargaining will be getting more than they are, cannot be entertained.
Now, then, coming right down to the charge of illegality, it is worth while to look for a moment at the powers of this corporation and of its board of directors, which— presumably, not intentionally—seem to be incorrectly set forth in the bill. The statement in the bill is a very meager one of the objects of the corporation, and it leaves the Impression upon the mind that the sole legal object of the corporation is the manufacture of pressed steel cars, or cars in which pressed steel is employed in a special way. There is nothing in the certificate of incorporation to justify that statement. It is true that the title is the Pressed Steel Car Company, but the objects which may be pursued by the corporation, in which its capital may be employed, are stated distinctly, in the usual manner, and they embrace a very wide variety of business. The purpose of such a broad statement is well recognized. Its object often is to prevent stockholders from raising nice questions as to the relation of the transactions of the directors to the corporate objects. But, nevertheless, although it may be that the actual purpose in the minds of the promoters of this company and its organizers was to make cars, and especially pressed steel cars, still, legally, they have a very much wider scope in which to act than that. They can buy ail sorts of property. They can build railroads outside of the state of New Jersey, buy mining lands, mine ores, and smelt ores, go into the lumber business, purchase, deal in, hold, and in any manner acquire stocks and bonds of corporations and vote on such stock; and there is no limitation upon the character of the stocks and bonds which they may so acquire. They can purchase, lease, hold, and convey real and personal property in any state or territory of the United States. When you come to look at the special provisions, like the one permitting the board of directors to wield all the powers of the corporation, there seemsto be the very minimum of opportunity left to any stockholder to complain that the board of directors are acting beyond their powers. The general scheme is that the board of directors shall exercise all the powers of the corporation, practically without control on the part of the stockholders. The seventh section of the certificate of incorporation provides, among other things, that the number of directors may be increased at any time by a vote of the board of directors, and, in case of any such increase, the board of directors shall have power to elect such additional directors. The board of directors also have the power, without the assent or vote of the stockholders, to make, alter, amend, and rescind the by-laws of the corporation, to fix the amount to be reserved as working capital, to authorize and to cause to be executed mortgages and liens upon the property of the corporation, and, from time to time, sell, assign, transfer, or otherwise dispose of any of the property of the corporation, or, by a two-thirds vote of the board, even all of the property of the corporation. Thus we have this somewhat recent provision permitting the directors to transfer all the property of the company, to destroy the business of the company, and transfer the rights of the stockholders from an interest in the business to an interest in the fund. The board of directors are also permitted to delegate their entire power, which seems to embrace the entire powers of the corporation, to an executive committee of three; and the board also are allowed to exclude stockholders from inspecting the books of the company except to such extent as they see fit. These provisions are all, of course, subject to any laws that we have on the subject, but they indicate the general scheme of this corporation, into which these complainants have embarked their capital. In very many respects it has the characteristics of a "blind pool." The board of directors have very wide powers to use the capital of the stockholders which is intrusted to them, all the power of the corporation seeming to be centered in the board, the stockholders having little more than the right to vote at the annual or other election of the board of directors.
Now, it is this sort of a corporation that this court is asked to convict of an ultra vires act or an illegal act, and that act consists in a business arrangement embracing contracts of one kind or another, by which, to use the language of the counsel for the complainant, a new corporation is promoted, whose stock this defendant corporation is to acquire. The defendant corporation acquires the stock—a very large proportion of the stock—of the new corporation, and also makes a contract by which it apparently, from time to time, will have, or at least contemplates having, large sales of its products, to the very great advantage of the present business of the corporation. Counsel for the complainant makes the point that this bargain is not a purchase of stock, an executory contract for the purchase of stock, but a sort of scheme for the promotion of a corporation. I cannot see that the distinction is of any practical value in this case. A corporation or individual may make a contract to buy property in existence, or may make a contract to buy property to be manufactured or otherwise produced, and all sorts of conditions may have to be arranged and provided for which will precede the manufacture of the articles. I see no impropriety in such a contract in a case like this, where the corporation and its board of directors have such wide powers, including the power to acquire in any manner the capital stock of other corporations, and the business in which they propose to be interested under the form of the new corporation is the manufacture of cars, the maintenance in a new field of what will in many respects constitute a department of their present business. The Pressed Steel Car Company, in carrying out this proposed deal with the Messrs. McCord, in fact will be expanding the very business in which it is now engaged.
It was suggested that the corporation, under this arrangement, is to pay out $550,000 in cash and receive $800,000 of stock, and that this would be an illegal transaction. I understood counsel for the complainant at first to say that he referred to this matter simply as bearing on the fairness of the deal between the defendant corporation and the Messrs. McCord, and, so far as the matter relates to that question, I have already disposed of it; but later I understood counsel intimated that the taking of $250,000 more stock than the amount of cash paid in made the transaction an ultra vires or illegal one, and injurious to the complainants. That was the most important matter, in my judgment, to be considered, and was the point on which I held the case under advisement after the conclusion of the argument. It do not think that the objection is a substantial one, or affords any reason for the issuing of a preliminary injunction. In the first place, as counsel for the defendant urged, it is not clear, as a matter, of fact, that the $800,000 of stock, when issued, under all the circumstances of this case, will not be paid-up stock. I am not going over the details. They were very carefully discussed on both sides. But, if, under the facts as they may exist when this stock is issued, and under the law of the place applicable to these facts, we must assume that there will be an overissue of stock, I cannot see that that affords any reason for the issuing of a preliminary injunction. The board of directors presumably know the effect of what they do. There is nothing criminal about such a transaction. The issuing of stock for more than the amount of money paid, or for more than the value of the property turned over to the corporation, is simply malum prohibitum, if itis malum of any kind. The old theories in regard to the status of the capital stock of a corporation have been very greatly modified of late years, and corporations engage in all sorts of business now, practically without restraint, and without limit upon the amount of money which they get together. The old idea that credit was given upon the basis of the capital stock of the corporation is largely discarded, and the fact is very generally recognized that credit is given on the basis of the difference between the assets and liabilities of the corporation. The relation of stockholders or proposed stockholders to the total amount of the capital stock of a corporation as advertised, and to the recitations in stock certificates, is not viewed exactly as it was formerly. These, however, are too large subjects to be discussed now. It may well be that in some states stock to the amount of $800,000 could be issued for $550,000 for cash without involving any illegality of any kind whatever, or subjecting any stockholder to any liability. Nevertheless I am asked to assume that this proposed issue of stock might include an overissue, and that such overissue would involve the defendant corporation in some liability. Even if this be true, at most the defendant corporation will merely have to respond for the benefit of creditors to the extent of $250,000. Well, that would mean the utter ruin of this enterprise, and, if the Pressed Steel Car Company withdraw from the wreck with a loss of only $250,000, it might be getting off cheap. If this enterprise is successful, the question will never be raised. I cannot see that the possibility of a failure of the enterprise justifies the stockholder in coming into court and asking for a preliminary injunction.
The Smelter Case, 62 N. J. Eq. 729, 48 Atl. 771, 1116, cited for the complainants, has no application to this case whatever. There the application was made by minority stockholders to restrain the board of directors from making a proposed overissue of stock,—an issue of stock beyond the value of the property which was to be turned over to the corporation. The court of errors held that the test was not the honest judgment of the board of directors upon this question of value, but that the test was the judgment of the court of chancery, and after that of the court of errors and appeals, upon this same question of value. The value of property, at least prior to its ascertainment by actual sale, is necessarily in large numbers of cases incapable of exact determination, and what in fact is determined is not value, but some one's judgment or opinion of value. The rule laid down by the court of errors pointing out whose opinion of value is conclusive when a proposed issue of stock for property purchased is under consideration is perfectly clear, but has no application to this present case, in the absence of any contest between stockholders of the corporation which proposes to issue the stock.
I do not recall that there is anything else of importance, or necessary to be said, to explain the views that I entertain in regard to this case. I think that the board of directors are not shown, in brief, to be threatening to do anything which they have not a perfect right to do, and therefore there is no reason why there should be an injunction.