September, 1905, Volume XIII, No. 9, The American lawyer, edited by Frank Charles Smith, Lucien Brock Proctor, Heman Gerald Chapin, Richard Selden Harvey, page 372,
Life Insurance: Shall We Have State or Federal Supervision? by Samuel Bosworth Smith.
(An Address Delivered Before the Bar Association of Tennessee.)
Ordinarily the discussion of such a topic as Life Insurance might be considered hardly a fitting theme for a meeting of lawyers. Under existing circumstances, however, I hardly feel that any apology is due for the choice of my subject.
The airing of Equitable affairs has made life insurance a matter of almost universal interest and comment, while the fact that Senator Dryden, president of the great Prudential Insurance Company, has introduced a bill in the United States Senate in which it is sought to have interstate life insurance declared interstate commerce has been deemed of so much importance by some of the bar associations of our sister States that they have appointed special committees to look into the question and to report their conclusions to the bodies which appointed them.
It Is not my object to go into either an exhaustive nor a technical discussion of my topic, but only to briefly touch upon the proposition from three points of view:
1. The historical; discussing the attempts which have been made to bring about federal supervision;
2. The practical; is federal supervision greatly to be desired; and
3. The legal; is federal supervision one of the powers delegated to the national government?
State supervision of insurance originated in Massachusetts in 1855.
Following the erection of the Massachusetts department, the other States fell in line with their own theories as to the proper methods of inspection, regulation and taxation of these institutions, which were beginning to give some intimation of the growth to which they have in our day attained. Naturally, such inspection and regulation being a new idea, the rules and regulations of the different States differed widely, and the insurance companies, which had begun business in these States without supervision, began very soon to chafe under what they considered, and in many instances, rightfully considered, unjust and oppressive surveillance.
The first steps looking toward national supervision took the form of an address to Congress in 18G5 from some of the leading companies, asking for legislation looking to relief from oppressive supervision, legislation and taxation. In 1868 a bill was introduced in Congress, evidently suggested by the recently Invented National Banking Act, seeking to concede to insurance companies the privilege of incorporating as federal corporations, with privileges and immunities similar to those of the National banks. (1)
(1) The statement as to the nature of this bill of 1SGS was taken from an address of Senator Dryden, before the writer had been able to secure a copy of the bill, and is not strictly accurate. However, for the purposes of this paper, the discrepancy is not material.
Naturally, as the peculiar reason for the existence of National banks applied to National banks, and National banks alone, the bill to create National insurance companies found an early grave.
During the early seventies, and even down into the eighties, the life of the insurance company was hard. Th9 business was comparatively in Its infancy; each insurance financier that "was developed had his theories and ideas ror reducing the cost to the policyholder and the returns to the stockholder, and failures were many and severe. These failures were easily attributed to vicious State legislation, and every fellow who did not succeed, as well as every one who did succeed in maintaining his company, but failed to give to the policyholder as much as he had promised, cried loud and long against the crime of State supervision.
It was easy, and It is easy, to say that results -would be better if things over which we have no control were changed.
The Supreme Court, however, in 1868, soon after the introduction of this first bill, handed down its opinion in the case of Paul v. Virginia, holding that insurance was not commerce, and this seemed so decisive of the question Ihat no further attempt at federal legislation "was made until 1892. when Mr. John M. Pattison, president of the Union Central Life Insurance Company, and member of Congress from Ohio, introduced a bill having in view the object of the bill of 1868— the federal supervision of insurance. But he approached the subject in an entirely different way, and his bill is the real foundation for the bills which have been subsequently introduced. By the terms of the Pattison measure all interstate insurance was to be made interstate commerce. A national commissioner of insurance was to be appointed; a national bureau of insurance was quite elaborately planned. State supervision for business in the home State of the company was to be retained, but for all interstate business national supervision was to be exclusive. This bill also faUed, Congress having had up to the present time the grace to follow the opinion of the United States Supreme Court, and having, therefore, declined to pass a bill which, under repeated decisions of that court, would be unconstitutional.
The proposition next appears in a bill introduced, by request,'in 1898, by Senator Piatt, of Connecticut. This bill followed the Pattison bill in its main lines; declared interstate insurance interstate commerce and erected an insurance division of the Treasury Department. This bill departed from those which had gone before it in one radical particular, in that it provided that the solvency of the company should be tested by the laws of the State of its organization. This act, like its predecessors, failed of passage, and the subject again lay dormant in the halls of Congress until the last session.
In December, 1904, Mr. Morrell Introduced into the House a bill providing, in a few words, that the Bureau of Corporations of the Department of Commerce and Labor should prescribe and enforce suitable regulations for the transaction of the business of insurance, in all cases where such business shall include a contract or agreement between citizens of different States, such regulations to be subject to modification, alteration or repeal by Congress at any time and to be enforced under such penalties only as Congress shall from time to time prescribe. The bill further provided for the appointment, by the Secretary of Commerce and Labor, of a Superintendent of Insurance, to be subordinate to the Commissioner of Corporations, at a salary of $3,000 a year. This bill does not seem to have been seriously pushed, and in February, 1905, a bill was introduced in the Senate, by Mr. Dryden, president of the Prudential Insurance Company, which undoubtedly embodies the ideas of the great insurance companies on the subject of supervision. This bill takes the toga of an amendment to the^act_to establish the Department of Commerce and Labor. It provides, in as few words as possible, that there shall be in the Bureau of Corporations an officer called the Superintendent of Insurance, in charge of the bureau to be called the division of insurance, who shall be appointed by the President for a terra of four years. Mr. Dryden then, by a sweep of the pen provides, "That policies of insurance are hereby deemed articles of commerce and instrumentalities thereof," that "The delivery by said corporations of said contracts of insurance from the State, Territory or country of the locality to citizens, corporations or other pesons located in other States, Territories or nations, the transmission by the insured from such other States, Territories or nations of the premiums or other valuable consideration for said policies to the home office of the company, in the State, Territory or nation of the locality if and when said locality is situated in another State, nation or Territory, and the transmission by said insurance company from the home office to the insured in other States, Territories or foreign nations than that of the locality, oT any sums of money which from time to time shall become due to the insured on said contracts of insurance, are hereby declared and deemed to be transactions in interstate or foreign commerce as the case may be."
In the broadest way the bill proceeds to give to the Superintendent of Insurance, subject only to the approval of the Secretary of the Department of Commerce, the power to fix fees, establish rules and regulations for and to pass upon the solvency of all companies engaged in interstate insurance.
These various bills very fairly express the general advance of the demands of the ereat insurance companies. If constitutional, there was no grave objection to the bill of 1808. Its object was simply to give the right to insurance companies to incorporate as federal institutions. Its passage would not have prevented State insurance companies any more than the National Banking Act prohibited State banks.
Passing over the twenty-four years from 1808 to the Pattison bill of 1892 we see a great change. In the Pattison bill the privilege of the State charter with the immunity from
State taxation and regulation is sought. This bill was the creation of the life insurance president of 1892, and while broad in its scope It was still quite specific in its detaUs, and under its terms it was at last possible to forecast what the regulations of the National Insurance Commissioner would be.
The Platt bill of 1898 was not framed by a president of an insurance company, but by a gentleman who had been for many years deeply interested in insurance as a science and in federal supervision as a hobby. This bill in many of its provisions was crude, but it had one fundamental point of fairness—it required the national department to take the law of the State of the corporation as the law by which it should be judged by the federal commissioner. Under this provision the insurance company which had organized and iaunched itself under conditions and laws with which it was familiar had the assurance of the protection of Ute sftuic laws and conditions and the change fromState to the federal control would have meant simply the change in an official, not in the law.
At the time the Piatt bill was framed this clause seemed altogether above criticism. Since that time the country has been flooded with interstate trust companies from New Jersey, and we can see now a danger in such a clause, which was not then appreciated, as under it a dishonest commonwealth might make itself the mother and foster mother of every bastard wild-cat insurance scheme which might enter the brain of frenzied financiers, and the federal department being bound by the State law and the States in general being bound to admit all interstate companies there would be no method provided for killing the financial fraud.
Coming to the Dryden bill—the bill of the Prudential Insurance Company—what have we? We have State supervision eliminated; we have a political official who is given carte blanche to fix rules and regulations to suit himself, or to suit his owners, as the case may be; we have the power given to this political individual to provide arbitrary tests of solvency for the benefit of a few companies; we have a man who can fix the basis on which interest on the reserve shall be compounded, and, therefore, who will have the practical power of fixing the rates; we have a politician who, to all intents and purposes, would be legislature and supremo court In all practical questions touching the conduct of the insurance company. And the rulings of this man would "be binding upon the States. His rulings might be absolutely adverse to the great Massachusetts Insurance Department and to the laws of Massachusetts, the recognized standard of strict insurance inspection in this country; yet Massachusetts would be helpless; they might override every Idea of the department of Tennessee, which ranks second in the United States, which has had long and varied experience under competent heads; they might force upon Tennessee companies which our legislation and our department had rigidly excluded; might shut from our doors that form of company which we would most desire, yet our will, our judgment, would be as naught before the dictum of one who might be but a political henchman.
And, looking at the whole scheme fairly and squarely, where would be the real advantage, to the public, of federal supervision; of creating insurance interstate commerce; of taking from the States the power of regulation, taxation and control? Has federal supervision proven so successful; State control such a failure, that there can be but one side to the question? Take our National banks. It is a matter of common remark that the bank examiner never finds anything the matter until the bank is insolvent.
Despite the boasted strength of the National banks, twenty-six failed in the fiscal year of 1903-1904; six resumed business; twenty were insolvent. In the past decade 142 National banks failed, nearly 3 per cent of the total now in being. I speak only of the failures, not of liquidations. In the past fifteen years 2C9 National banks have failed, or about 5 per cent of the total now in existence.
Looking to the old-time life insurance companies, with their State supervision, we fail to find one failure in the past ten years; we find but one since 1890.
As there are something over a hundred such companies now in business, we find less than 1 per cent of failures in fifteen years, as against 5 per cent of National bank failures during the same period.
Has the success of the Interstate Commerce Commission been such as to invite its extension over business in general?
If the ordinary citizen be asked his opinion as to the greatest problem of the country and of the hour, the chances are strong that his answer will be "the trusts." No one questions the will of the great insurance interests to create an insurance trust, should the opportunity present itself. L'p to date It has never been possible to complete the formation of such a trust, though rumor has had it for a long time that there exists a "community of interests" arrangement among certain of the great companies. So long as there is State supervision and State regulation, such trust is impossible. Make insurance interstate commerce and such a result is inevitable. This may sound like demagogy, but looking over the industrial field it will be found that every trust is engaged in interstate commerce and is able to sustain itself because of a necessary and beneficent clause in the National Constitution; that in those industries and pursuits; in the great financial enterprises which do not come under the commerce clause of the Federal Constitution, there is not a twist; there never was a trust and there never will be a trust unless and until State lines are obliterated.
Looking at the pressure now being brought for the centralizing of all regulation in one department, one is reminded of a little recent history. Most of us have read of and remember that master stroke of finance by which a small body of men was to control in perpetuum a great insurance company and a great trust company, with practically not a dollar in e'ther concern. The plan was to largely increase the stock tf the trust company, and to put it on the market at a very high figure. This stock, together with the stock of the trust company already outstanding, and which was owned by the controlling stockholders and directors of the insurance company, was to be bought by the insurance company. The Insurance company's d'rectors thus were to make a handsome trade in their stock and as directors of the insurance company they would control the trust company; to whicn tney were to elect themselves directors. The trust company now having a large surplus by reason of its sale to the insurance company, would be in pressing need of finding an investment What could be more advantageous than the controlling stock in the Insurance company, which could be bought from the directors of the trust company and of the insurance company if enough were paid for it? This purchase being made the trust company would own the control of the insurance company and would through its directors elect the directors o; the insurance company and vice versa. By this simple, though unique, plan, the directors in these two massive corporations would sell out their own holdings at enormous profits, and still retain for all time the absolute control of both corporations. This was, in rough and in brief, the scheme. This well laid plan was scorched by the Insurance Commissioner o: Massachusetts, although the insurance company in question was domiciled in New Jersey. At the next senatorial election after the Massachusetts department had been so rude as to interfere with so neat a plan of high finance, the president of this same insurance company is elected to the United States Senate, and has hardly well warmed his seat before introducing a bill which is intended to take from the Massachusetts Commissioner and from all other commissioners the power of interfering with the plans of any of the "Big Four" of life insurance.
The States are learning that it does not pay to be toj severe upon the foreign insurance companies. If they are too severe, the companies can withdraw from the States, and this remedy has more than once been resorted to.
It is true that taxation is too high—entirely too high. It is also true that, as a rule, the consumer pays the tax. Yet, even from this standpoint, the burden upon the individual policyholders is not great. If we assume—and the assumption is a radical one in most instances—that the policyholder would get the benefit of every cent of tax saved by eliminating State taxation, the saving upon his premium could In no case be over 2 per cent, i which is as nothing if the "State supervision can possibly avoid evils which might arise under a one-man administration.
If the Equitable tangle be pointed as an example of weakness in State supervision, a moment's thought 'will demonstrate that this argument is really for, not against, the State idea. It is true that monumental graft has apparently gone on under the closed eyes of the New York Insurance Department. It is equally true that Superintendent Hendricks Is a man of quite the calibre one might expect to find In the national superintendent's office. It has been rumored for a long time that the New York Insurance Department was owned by the great corporations of that State. It is believed to be true that Hendricks' last report on the Equitable wa.^ not given to the world until it had been edited by the Republican machine, and particularly by Odell. To-day Higgins is claiming that Odell has used this method of weakening the Governor's position. At this writing it seems that District Attorney Jerome has at last succeeded in procuring a copy of the testimony taken in the Equitable investigation, thougti he succeeded only after pressure of public opinion was brought to bear on the Insurance Department. All this and much more is doubtless true. But the Insurance Departments of the other States are vigilantly watching developments; the chosen men at the head of some fifty departments are seeking distinction in protecting the interests of the policyholders of their States. What has hapepned in this instance in Albany has happened and will happen again In Washington. If Albany flickers, half a hundred independent departments are entitled to a "look in" and an investigation; shouKl Washington fail this is the end of it. If Chairman Paul Morton, of the Equitable, is being protected by the Republican machine in New York, Vice-President Paul Morton, of the rebating Santa Fe, was none the less well protected by the administration at Washington. The corporation or the individual who has nothing to hide invites publicity; the eyes of the State departments are dreaded only by those who have something to hide. Foreign inspection is dreaded by many concerns because they have no pull from the foreign inspector. Let bim remain. The dread of him must do more good than his cost can do harm.
This bringi us to the legal question: Would federal supervision of insurance be a constitutional exercise of the rational power?
The negative would seem to be, in the light or the decisions, the only possible answer to thifl question. The clause of the Constitution, and the only clause, under which it is claimed that federal jurisdiction might be invoked, is the commerce clause. "The Congress shall have power to regulate commerce with foreign nations, and among the several States, and with the Indian tribes." It is not necessary to go into a dissertation as to what is Interstate commerce, as our courts have definitely -decided that insurance cannot be such commerce. The leading case upon this point seems to leave nothing unsaid. Decided in 1868 in an able opinion by Mr. Just'ce Field, Paul v. Virginia (a), has been many times followed; never departed from. A well-known writer upon the "Federal Power Over Commerce," has thus d'gested and commented upon this famous case:
"The next attempt to extent the meaning of the term commerce, is found in the case of Paul v. Virginia. The State of Virginia passed a law requiring all insurance companies not incorporated in the State to take out a license before doing business. To obta'n this license, certain taxes and other conditions were imposed. The act was a discrimination in favor of home insurance companies. One Paul, an agent of several New York companies, neglected to conform Io the conditions necessary to obtain a license from the State, but nevertheless persisted in acting as the companies' agent. He was indicted and fined in the State courts, and appealed to the Supreme Court of the United States. One of the grounds for the appeal was that the law of Virginia intrenched on the power of Congress to regulate commerce. This brought the following question before the court: Is one engaged in interstate business who is within the State an agent of a corporation organized under the laws of another State, soliciting insurance on the buildings within the State? Paul was an agent for a corporation. It is a well-settled rule of international law, that a corporation can have no existt nee in a foreign country, except by the express or implied permission of the laws of that country. In this respect tht different States of the Union are like distinct nations. A corporation organized in one State can exercise Its corpw ate power in another only by the comity of the latter. There are, however, two exceptions to this statement: First, where. ( the corporation has been vested by the federal government. / w ith the execution of one of its express or implied powers. Second, where the corporation is engaged in interstate business. Thus, Mr. Justice Field, in his opinion in the case under discussion, said: "There is nothing in the fact that the insurance companies of New York were corporations to impa'r the force of the argument of counsel,, that being engaged in interstate commerce they had the right to do business in any State of the Union." But the learned judge goes on to say: "The defect of the argument lies in the character of their business. Issuing a policy of insurance is not a transaction of commerce. . . . They are like other personal contracts between the parties which are completed by their signature, and the transfer of the consideration. Such contracts are not interstate transaction, though the parties may be domiciled in different States. The policies do not take effect—are not executed contracts, until delivered by the agent in Virginia. . . . They do not constitute a part of the commerce between the States any more than the contract for the purchase and sale of goods in Virginia by a citizen of New York whilst in Virginia would constitute a portion of such commerce." In determining whether a particular contract forms a transaction of interstate commerce, -u e must not look at the domicile of the parties, or where the contract is made, but where it is to be performed. It is the jierformance which is the intercourse; the contract is simply the preparation of that performance. It cannot be "disputed, for instance, but that a contract by A., of Pennsylvania, to leave C, of San Francisco, one thousand dollars, in his, A.'s, will, would be determined by the laws of Pennsylvania. Only those contracts in whose performance interstate business fa transacted, are under the control of Congress. A contract of insurance, while made by a corporation of one State and a citizen of another, was to be performed by paying money in the State of Maryland if a house in that State was destroyed by fire. The loaning or payment of money in itself cannot be a transaction in interstate commerce, for it always must be paid at a particular place. The decision in Paul v. Virginia has received the repeated approval of the court which pronounced it. The soliciting of insurance on property in the State cannot ever be interstate business or commerce." (b).
As stated, the decision in Paul v. Virginia has Been several times affirmed and approved by the court which rendered it (c), and has been followed in numberless other decisions, both State and Federal.
A similar opinion was expressed by the House of Lords in the case of Citizens' Insurance Company v. Parsons. The question in this case concerned the validity of a regulation of insurance business by the Province of Quebec, whicu, by the provisions of the British North American Act, Is without jurisdiction over interprovincial regulation of trade and commerce. The court says that the business of insurance "when carried on for the sake of profit, may, no doubt, in some sense of the word, be called trade, but contracts of indemnity made by insurers can scarcely be considered trading contracts, nor were insurers who made them held to be 'traders' under the English bankruptcy laws." (d).
There is also a long line of decisions excluding from interstate commerce transactions involving, as does insurance, the matter of contracts.
"In Nathan v. Louisiana it was said that a broker dealing in foreign bills of exchange was not engaged in commerce, but, like the shipbuilder, was engaged in supplying an instrument of commerce." (e).
"The business of a commercial agency in procuring and furnishing information of the standing of merchants is not commerce, and a tax thereon is not in conflict with the commerce clause. Nor is the business of a building and loan association; nor of loaning money; nor in dealing in foreign lands; nor in conducting a manufacturing establ'shment in another State." (f).
It is conceded by those who are pushing the idea of federal supervision that Paul v. Virginia seems to dispose oi the question, and that adversely to the right of sucn supervision. But these advocates seek to make a distinction between the Supreme Court holding as an abstract proposition that insurance is not interstate commerce, and the probable action of the same court in passing upon a congressional bill declaring it to be such commerce.
Mr. Dryden, in an address delivered in 1904, adopts the language of that well-known advocate of national supervision,
(b) Lewis Federal Power Over Commerce Sec. 9.
(c) See Ducat v. Chicago, 10 Wall. 410; Home Insurance Company v. Morse, 20 Wall. 445; Doyle v. Insurance Company, 94 U. S. 535.
(d) Prentice and Egan Commerce Clause, p. 47; Insurance Co. v. Parsons, 7 L. R. App. Case III.; Parsons v. Insurance Co., 4 Ap. Case, App. 103.
(e) 8 How. 73. And see cases cited In Prentice & Egan, p. 46.
(f) Prentice and Egan, p. 55. And cases cited.
Wednesday, June 13, 2012
The Benefits of Planned Panics---Straight From the Horse's Mouth
The First Fifty Years of the Equitable Life Assurance Society of the United States, 1909,
From: The First Fifty Years of the Equitable Life Assurance Society of the United States, 1859-1909, [June, 1909] Paul Morton, President,
CHARTER FILED MAY 10, 1859
CERTIFICATE OF AUTHORITY ISSUED JULY 25, 1859
CERTIFICATE FILED JULY 26, 1859, Whereupon the Society was "duly authorized to commence the business of insurance as provided in its Charter."
OFFICE OPENED JULY 28, 1859, On which day the first policy was issued.
[page 26] On the afternoon of the same day [July 26, 1859] the following notice appeared in the New York Evening Post:
[page 32] On December 1rst, [1859] the office of the Society was transferred to the new building, just completed, at 92 Broadway, where four rooms were occupied.
The first directors' meeting in the new office was held on January 11th, 1860. This was also the first "Annual Meeting," and the President, in his Report to the Board said:
[page 45] THE EQUITABLE BUILDING
The business of the society increased so rapidly that it outgrew its second office at No. 92 Broadway in a very few years. Additional space was obtained by leasing portions of Nos. 94 and 96 Broadway, but the new accommodation soon proved inadequate, and on December 16, 1865, when the Society was less than six years old, at a special meeting of the Board, a committee was appointed to consider the expediency of putting up a building. This committee recommended the immediate purchase of a site, and the erection of a building.
It was not until September 16th, 1867, however, that the purchase of all the land for the original Equitable Building was consummated.
At the Annual Meeting of the Board held on January 15th, 1868, authority was given for the construction of the building in accordance with the plans of Messrs. Gilman and Kendall, with George B. Post as consulting architect in matters of construction.
The original building, which occupied the southeast corner of Broadway and Cedar Street, was completed and thrown open on May 1st, 1870. From time to time thereafter it was enlarged, and the whole structure was completely remodeled and its height increased by several stories in 1887, under the direction of the distinguished architect George B. Post.
The entire block is now owned by the Society, and is considered the most valuable plot of real estate, controlled by a single owner, in the City of New York.
Near the close of the year 1868 the Society announced a new policy. This policy was a "deferred-dividend" contract.
[page 49] The Equitable Building was erected long before modern steel construction had beeen introduced, and was conspicuous for its massive walls and broad foundations. Hence it served as an object lesson---the stability of the structure seeming to typify the future strength and magnitude of the Society.
[page 50] OTHER BUILDINGS
In addition to the Equitable Building on Broadway the Society owns another building in New York, which is occupied by a large part of its working force, and is also used for filing cabinets, card-indexes and the storage of its books and vouchers. The Society also owns office buildings in Boston and St. Louis.*
[*The income from the latter investment becoming inadequate, the Society leased it to responsible parties for ninety-nine years, at a rental which will yield an income of $50,000 per annum----a satisfactory return. The lessees, moreover, have agreed to make improvements which will enhance the value of the property and the security of the transaction.]
[page 54] The year 1873 was marked by one of the severest financial panics ever experienced in this Country. It resulted from over-expansion, wasteful living, and an inflated currency. The failure of Jay Cooke, promoter of the Northern Pacific R.R. was followed by many disasters. The New York Stock Exchange was closed for ten days, and the whole country suffered. Severe depression resulted, and continued for several years. In 1881 the crops were poor, and in 1882 the crisis in France had a disturbing influence. The United States successfully resisted these adverse influences until 1884, when, as we shall see later on, the Society was called upon to weather a second financial tornado.
But to return to the Panic of 1873: There were many failures in quick succession among banks and business firms, and so widespread were the losses that confidence almost ceased to exist. Hardly any of the great financial institutions were thought to be certainly safe. But the strength of well-established and soundly conducted life insurance companies became clearly manifest. The strain upon other financial institutions brought into strong relief the special advantages enjoyed by life insurance companies during such periods of excitement and disaster. Not one of the well-established companies was even embarrassed. The market value of their assets declined, but as they were in receipt of cash incomes in excess of their disbursements it was not necessary for them to sacrifice any of their investments.
[page 85] A SECOND PANIC
The second severe panic encountered by the Society culminated during this anniversary year [1884]. It was precipitated by the failure of Grant and Ward, followed by that of A. S. Hatch, president of the Stock Exchange, and that of many other bankers and brokers. The Marine Bank and the Metropolitan Bank closed their doors, and many other financial institutions were ruined or seriously crippled. But, "It's an ill wind that blows nobody any good," and the Society made a number of good investments at very low figures, one of them of extraordinary value. This was the building owned and occupied by the Metropolitan bank, on the corner of Broadway and Pine Street adjoining the Equitable's property; for the intervening lots had been acquired, and the enlargement of the Equitable Building was already projected.*
[page 86] [*In this connection President Hyde made the following prediction: "The opportunity of purchasing the Metropolitan Bank Building at a reasonable price was one not to be lost; for such an opportunity only presented itself in consequence of an unexpected and unforeseen combination of circumstances . The wisdom and full importance of this action can only be thoroughly appreciated by looking into the future, and contemplating the further growth of the Society, and the continuing extension of its business."]
The depression which followed the panic of 1884 reached its lowest point in 1886.
On May 1st, 1887, the Society took possession of the new rooms added to its offices in the enlarged building, which was completed during the following year.
[page 87] The Depression of 1890 and the Panic of 1893.
Another period of financial disturbance was encountered in 1890. The stringency in the money market became so alarming that the Government was forced to purchase bonds and to anticipate the payment of interest in order to furnish relief. Late in the year the report that a great English banking house was in financial difficulties created alarm on both sides of the Atlantic and resulted in serious financial disturbances and heavy business depression which lasted during the two following years and culminated in the memorable panic of 1893. During this panic the Reading Railroad was seriously embarrassed; the Cordage Trust collapsed; thirteen Stock Exchange houses failed, and there were fifteen thousand commercial failures.
[But hey---who's keeping score?]
[page 88] Times were hard, but nevertheless the Equitable continued to advance, showing a steady increase in business and financial strength. This is illustrated by the following extract
[page 92] President McKinley was shot on September 6th, 1901, while attending the World's Fair at Buffalo, and died eight days later. The tragedy caused profound agitation, and again a panic was feared,
[page 93] It so happened that at that time the management of great corporations of every kind had fallen under a torrent of criticism, and at length attention was turned to the great life insurance companies. This led to the appointment b the New York Legislature of an investigating committee composed of members of the Senate and Assembly. This committee was charged with the duty of examining the companies, studying life insurance methods, and offering amendments to the insurance laws of the State.
[page 94] If this committee had not been restricted to an examination of the insurance companies and their administration, it would have become apparent that the evils complained of were not peculiar to life insurance. On the contrary, it would have been seen that most of them had originated in financial and legislative circles , had extended to railroad corporations and industrial combinations, and had finally involved insurance companies. But as the committee was forced to abandon any line of investigation as soon as it passed outside the life insurance field, many of the facts developed were misinterpreted for a time by those who failed to look beneath the surface. Moreover, this misapprehension was intensified by sensational and extravagant articles published in certain of the newspapers. The effect was unfortunate; the policyholders of many strong companies became apprehensive, and great numbers who were timid or misinformed surrendered their policies ,to the injury of the companies and to their own serious detriment.
[page 104] Moreover, towards the close of the year, [1907] irregularities in the management of a group of banks, and great stringency in the money market, created widespread apprehension. Runs on prominent trust companies and banks followed; the Knickerbocker Trust Company was forced to close its doors temporarily, and a number of failures ensued.
[page 105] Those who had not seen the great panics of 1873 and 1893 called this the "Panic of 1907." And it really deserved the title, although the crisis that threatened was averted, and recovery was rapid. Nevertheless, values were seriously affected, and it became almost impossible to borrow money on the best securities, even at exorbitant rates of interest.
Again the Society did public service, ,furnishing financial relief to thousands of people throughout the country by making loans to a large number of its policyholders at 5 per cent. interest, on the sole security of their policies.
Over $9,000,000 was thus advanced during the last quarter of the year. In addition to this, many loans which matured at that time and which under normal conditions would have been repaid to the Society, were renewed.
This money stringency extended into 1908, and large sums were advanced by the Society during that year also. In the first quarter (in addition to the many old loans renewed) new loans aggregating over $5,000,000 were made to policyholders.
These loans ranged from a few dollars in the smaller cases to sums above $50,000 in the largest cases. They were made to all sorts and conditions of men, from laborers and small retail merchants, to prominent financiers, at a time when business men, and particularly manufacturers with pay-rolls, found it almost impossible to secure sufficient funds from their banks to meet current obligations.
It is not to be inferred from all this that the Society advocates the mortgaging of policies ----the borrowing of money by husbands and fathers from wives and children. The fact that a policy may be used as collateral security for a loan enables a man at times to save a policy which might otherwise be lost, or to bridge over [page 106] some temporary period of financial peril; but in general the Society fully endorses what Mr. Cleveland has said on this subject:
Several excerpts from this official corporate history of the Equitable Life Assurance Society, published in 1909 on the 50th anniversary of its founding, seem to make unintentional references to an interrelated secret history of the company at odds with the reverential self-identity they took pains to publicize.
Coincidences point to the Equitable's engaging in speculative real estate ventures beginning well before its official chartering by a special act of the New York State legislature in 1859, and continuing for over half a century, with a particular nadir being the redevelopment of its home office block at 120 Broadway in 1913, with a massive structure whose construction resulted in the enactment of New York City's first restrictive zoning laws limiting the height and scale of future structures. The near-constant building activity was of a type specifically prohibited in Equitable's charter as a life assurance company to engage in.
But moreover, these real estate ventures seem to have been conducted within a framework of market manipulations, financial "panics" provoked by economic "stringencies," and cyclical depressions occurring over the five decades, perhaps even including the planned assassinations of Presidents Lincoln, Garfield and McKinley for the stimulus effect anticipated on trading in securities. That the Equitable consistently came up a winner in these profitable games of real-world Monopoly and one-upmanship suggests the organization stood somewhere near the epicenter of long-range, foreknowledged human activity.
From: The First Fifty Years of the Equitable Life Assurance Society of the United States, 1859-1909, [June, 1909] Paul Morton, President,
CHARTER FILED MAY 10, 1859
CERTIFICATE OF AUTHORITY ISSUED JULY 25, 1859
CERTIFICATE FILED JULY 26, 1859, Whereupon the Society was "duly authorized to commence the business of insurance as provided in its Charter."
OFFICE OPENED JULY 28, 1859, On which day the first policy was issued.
[page 26] On the afternoon of the same day [July 26, 1859] the following notice appeared in the New York Evening Post:
"The Equitable Life Assurance Society of the United States has completed the preliminaries of its organization, and by announcement in to-day's paper informs the public of its readiness to commence underwriting.[page 29] The great panic of 1857 was still fresh in the minds of business men.
"This company has been built upon a sure foundation, as indeed the names of its directors sufficiently indicate. The Office of the Company for the present is at 98 Broadway, but will soon be removed to the new building No. 92 Broadway."
[page 32] On December 1rst, [1859] the office of the Society was transferred to the new building, just completed, at 92 Broadway, where four rooms were occupied.
The first directors' meeting in the new office was held on January 11th, 1860. This was also the first "Annual Meeting," and the President, in his Report to the Board said:
"A contract was made for these apartments before the demolition of the building which occupied the site, at a rent far below what they would have commanded at any time since its completion. The lease was made with the estate of the late John Suydam for ten years at $2,500, and this lease will doubtless be considered by the Board as of greatly increasing value."[Did they illegally enter into a lease in advance of their incorporation?]
[page 45] THE EQUITABLE BUILDING
The business of the society increased so rapidly that it outgrew its second office at No. 92 Broadway in a very few years. Additional space was obtained by leasing portions of Nos. 94 and 96 Broadway, but the new accommodation soon proved inadequate, and on December 16, 1865, when the Society was less than six years old, at a special meeting of the Board, a committee was appointed to consider the expediency of putting up a building. This committee recommended the immediate purchase of a site, and the erection of a building.
It was not until September 16th, 1867, however, that the purchase of all the land for the original Equitable Building was consummated.
At the Annual Meeting of the Board held on January 15th, 1868, authority was given for the construction of the building in accordance with the plans of Messrs. Gilman and Kendall, with George B. Post as consulting architect in matters of construction.
The original building, which occupied the southeast corner of Broadway and Cedar Street, was completed and thrown open on May 1st, 1870. From time to time thereafter it was enlarged, and the whole structure was completely remodeled and its height increased by several stories in 1887, under the direction of the distinguished architect George B. Post.
[Is the following the best image the best the building-proud corporation could come up with?]
The entire block is now owned by the Society, and is considered the most valuable plot of real estate, controlled by a single owner, in the City of New York.
Near the close of the year 1868 the Society announced a new policy. This policy was a "deferred-dividend" contract.
[page 49] The Equitable Building was erected long before modern steel construction had beeen introduced, and was conspicuous for its massive walls and broad foundations. Hence it served as an object lesson---the stability of the structure seeming to typify the future strength and magnitude of the Society.
[page 50] OTHER BUILDINGS
In addition to the Equitable Building on Broadway the Society owns another building in New York, which is occupied by a large part of its working force, and is also used for filing cabinets, card-indexes and the storage of its books and vouchers. The Society also owns office buildings in Boston and St. Louis.*
[*The income from the latter investment becoming inadequate, the Society leased it to responsible parties for ninety-nine years, at a rental which will yield an income of $50,000 per annum----a satisfactory return. The lessees, moreover, have agreed to make improvements which will enhance the value of the property and the security of the transaction.]
[page 54] The year 1873 was marked by one of the severest financial panics ever experienced in this Country. It resulted from over-expansion, wasteful living, and an inflated currency. The failure of Jay Cooke, promoter of the Northern Pacific R.R. was followed by many disasters. The New York Stock Exchange was closed for ten days, and the whole country suffered. Severe depression resulted, and continued for several years. In 1881 the crops were poor, and in 1882 the crisis in France had a disturbing influence. The United States successfully resisted these adverse influences until 1884, when, as we shall see later on, the Society was called upon to weather a second financial tornado.
But to return to the Panic of 1873: There were many failures in quick succession among banks and business firms, and so widespread were the losses that confidence almost ceased to exist. Hardly any of the great financial institutions were thought to be certainly safe. But the strength of well-established and soundly conducted life insurance companies became clearly manifest. The strain upon other financial institutions brought into strong relief the special advantages enjoyed by life insurance companies during such periods of excitement and disaster. Not one of the well-established companies was even embarrassed. The market value of their assets declined, but as they were in receipt of cash incomes in excess of their disbursements it was not necessary for them to sacrifice any of their investments.
[page 85] A SECOND PANIC
The second severe panic encountered by the Society culminated during this anniversary year [1884]. It was precipitated by the failure of Grant and Ward, followed by that of A. S. Hatch, president of the Stock Exchange, and that of many other bankers and brokers. The Marine Bank and the Metropolitan Bank closed their doors, and many other financial institutions were ruined or seriously crippled. But, "It's an ill wind that blows nobody any good," and the Society made a number of good investments at very low figures, one of them of extraordinary value. This was the building owned and occupied by the Metropolitan bank, on the corner of Broadway and Pine Street adjoining the Equitable's property; for the intervening lots had been acquired, and the enlargement of the Equitable Building was already projected.*
[page 86] [*In this connection President Hyde made the following prediction: "The opportunity of purchasing the Metropolitan Bank Building at a reasonable price was one not to be lost; for such an opportunity only presented itself in consequence of an unexpected and unforeseen combination of circumstances . The wisdom and full importance of this action can only be thoroughly appreciated by looking into the future, and contemplating the further growth of the Society, and the continuing extension of its business."]
[So, when wide market forces had driven confidence to its lowest ebb, Hyde & Company were privately planning the erection of the most grandiose headquarters building ever built up until that time in Manhattan. Was it any coincidence that the Metropolitan was one two banks so weakened that it would fail? Covet not your neighbor's Broadway frontage for a Delmonico's, sayeth the Lord!]During that trying period the Society met the difficulties that confronted it with the same efficiency that had characterized its management during the panic of 1873; and while market values were rapidly tumbling, the fact that the insurance offered by strong life insurance companies is always unshrinkable---worth at such times, as at all others, 100 cents on the dollar----was made clearly manifest.
The depression which followed the panic of 1884 reached its lowest point in 1886.
On May 1st, 1887, the Society took possession of the new rooms added to its offices in the enlarged building, which was completed during the following year.
[page 87] The Depression of 1890 and the Panic of 1893.
Another period of financial disturbance was encountered in 1890. The stringency in the money market became so alarming that the Government was forced to purchase bonds and to anticipate the payment of interest in order to furnish relief. Late in the year the report that a great English banking house was in financial difficulties created alarm on both sides of the Atlantic and resulted in serious financial disturbances and heavy business depression which lasted during the two following years and culminated in the memorable panic of 1893. During this panic the Reading Railroad was seriously embarrassed; the Cordage Trust collapsed; thirteen Stock Exchange houses failed, and there were fifteen thousand commercial failures.
[But hey---who's keeping score?]
[page 88] Times were hard, but nevertheless the Equitable continued to advance, showing a steady increase in business and financial strength. This is illustrated by the following extract
"The Society presents as the result of its transactions for 1893 advancement in every point affecting growth and material prosperity, and this during a period of commercial depression more severe than has been experienced within this generation----a period of such general stagnation of business and shrinkage in the valuations of all securities that only those pursuing the most conservative methods have passed through it unscathed."As soon as the influence of the Panic of 1893 had worn off, a long period of financial prosperity ensued, and the Society's growth in magnitude and strength was continuous.
[page 92] President McKinley was shot on September 6th, 1901, while attending the World's Fair at Buffalo, and died eight days later. The tragedy caused profound agitation, and again a panic was feared,
[page 93] It so happened that at that time the management of great corporations of every kind had fallen under a torrent of criticism, and at length attention was turned to the great life insurance companies. This led to the appointment b the New York Legislature of an investigating committee composed of members of the Senate and Assembly. This committee was charged with the duty of examining the companies, studying life insurance methods, and offering amendments to the insurance laws of the State.
[page 94] If this committee had not been restricted to an examination of the insurance companies and their administration, it would have become apparent that the evils complained of were not peculiar to life insurance. On the contrary, it would have been seen that most of them had originated in financial and legislative circles , had extended to railroad corporations and industrial combinations, and had finally involved insurance companies. But as the committee was forced to abandon any line of investigation as soon as it passed outside the life insurance field, many of the facts developed were misinterpreted for a time by those who failed to look beneath the surface. Moreover, this misapprehension was intensified by sensational and extravagant articles published in certain of the newspapers. The effect was unfortunate; the policyholders of many strong companies became apprehensive, and great numbers who were timid or misinformed surrendered their policies ,to the injury of the companies and to their own serious detriment.
[page 104] Moreover, towards the close of the year, [1907] irregularities in the management of a group of banks, and great stringency in the money market, created widespread apprehension. Runs on prominent trust companies and banks followed; the Knickerbocker Trust Company was forced to close its doors temporarily, and a number of failures ensued.
[page 105] Those who had not seen the great panics of 1873 and 1893 called this the "Panic of 1907." And it really deserved the title, although the crisis that threatened was averted, and recovery was rapid. Nevertheless, values were seriously affected, and it became almost impossible to borrow money on the best securities, even at exorbitant rates of interest.
Again the Society did public service, ,furnishing financial relief to thousands of people throughout the country by making loans to a large number of its policyholders at 5 per cent. interest, on the sole security of their policies.
Over $9,000,000 was thus advanced during the last quarter of the year. In addition to this, many loans which matured at that time and which under normal conditions would have been repaid to the Society, were renewed.
This money stringency extended into 1908, and large sums were advanced by the Society during that year also. In the first quarter (in addition to the many old loans renewed) new loans aggregating over $5,000,000 were made to policyholders.
These loans ranged from a few dollars in the smaller cases to sums above $50,000 in the largest cases. They were made to all sorts and conditions of men, from laborers and small retail merchants, to prominent financiers, at a time when business men, and particularly manufacturers with pay-rolls, found it almost impossible to secure sufficient funds from their banks to meet current obligations.
It is not to be inferred from all this that the Society advocates the mortgaging of policies ----the borrowing of money by husbands and fathers from wives and children. The fact that a policy may be used as collateral security for a loan enables a man at times to save a policy which might otherwise be lost, or to bridge over [page 106] some temporary period of financial peril; but in general the Society fully endorses what Mr. Cleveland has said on this subject:
"A policy was made to hold. This loan system is not good. Let every policyholder think twice before he gives way to the temptation of borrowing on his policy. Sometimes it cannot be avoided; but often it can, if a man thinks twice. There is many a way to tide over a tight place without letting your policy get out of your hands."But in spite of the depression following the panic, and the excitement incident to a presidential election, the year 1908 proved far better for life insurance than 1907. This is illustrated by the Society's experience. Its new business, which had shown a decline in 1906, amounted to $73,279,540 in 1907, and exhibited an increase of nearly 25 per cent. in 1908, aggregating $91,262,101 for that year. Moreover, the expenses were less than for the previous year, notwithstanding the larger amount of insurance written. On the other hand, the terminations were nearly five millions less than in 1907.
Colby v. Equitable & Morse v. Equitable.
1908, COLBY v. EQUITABLE TRUST CO. New York supplement: Volume 108 - Page 980
COLBY v. EQUITABLE TRUST CO. OF NEW YORK et al. (Supreme Court, Appellate Division, First Department. February 14. 1908.)
1. Banks And Banking—Trust Companies—Special Charters—Consolidation.
Under Banking Law. Laws 1892, p. 1913, c. 089, § 103, providing that trust companies incorporated by special laws shall possess the powers of trust companies incorporated under the general laws, and shall be subject to such provisions of the banking law as are not inconsistent with the special laws, companies created by special acts in 1808 and 1871 (Laws 18U8, p. 1807, c. 800, and Laws 1871, p. 1304, c. 004), and empowered by subsequent special acts (Laws 1873, p. 1209, c. 845, and Laws 1S96. p. 1111, c. 839) to execute trusts, are subject to the provisions of the banking law, and a merger of such specially chartered companies is authorized by sections 34-38, c. 582, pp. 221-224, Laws 1895, permitting merger of trust companies, though such merger was unlawful wlien such specially chartered companies were formed.
2. Corporations—Alteration Of Charter.
The state cannot confiscate the property of a corporation or deprive it of its vested property rights, but may change or destroy the corporation.
[Ed. Note.—For cases in point, see Cent. Dig. vol. 12, Corporations, { 128.]
3. Banks And Banking—Trust Companies—Consolidation.
Under the reserved power of the state to alter or repeal corporate charters (Const, art. 8, § 1, Rev. St. [1st Ed.] pt 1, c. 18, tit 3, § 8), the enactment of Banking Law, Laws 1895, pp. 221-224, e. 382, §§ 34-38. authorizing the merger of trust companies, is a valid exercise of legislative power, as applied to specially chartered trust companies existing at the time of its enactment.
4. Corporations—Rights Of Stockholders As To Corporation.
A court of equity will not interfere In the management of a corporation on the complaint of a minority stockholder unless it Is based on some illegal or unauthorized act of the majority to his prejudice.
[Ed. Note.—For cases in point, see Cent. Dig. vol. 12, Corporations, f| 605-073.]
5. Same—Consolidation—Merger Agreement—Corporations Having Directors In Common.
A merger agreement between corporations having officers and directors In common will be scrutinized with care for the purpose of ascertaining whether it is fair to stockholders or not, but such an intermingling of interests does not necessarily render the agreement void or so manifestly unjust that a court of equity will enjoin its execution when ratified by the requisite number of stockholders.
6. Same—Fairness Of Agreement As To Stockholders.
A merger agreement providing for the exchange of two shares of stock in a company earning annually 25 per cent, of each share, with much uncertainty as to its future earnings, for one share in a company which . can reasonably be expected to earn annually 48 per cent, on each share, cannot be said to be so unconscionable and unfair to stockholders in ;he former company as to justify a court of equity in restraining the carrying out of the proposed merger, especially when the agreement is approved by a majority of the stockholders of the company.
7. Same—Good Will.
A merger agreement Is not necessarily unfair to stockholders because no allowance is made therein for the good will of the company whose assets are to be transferred to the merged company.
[Ed. Note.—For cases in point, see Cent. Dig. vol. 12, Corporations, H 2330-2337.]
8. Same—Dissolution—Injunction.
A stockholder cannot enjoin the liquidation of a corporation where the proceedings are taken in good faith, in accordance with the statute, with the approval of a majority of the stockholders.
9. Same—Rights Of Stockholders As To Corporation.
Every stockholder of a corporation holds his stock subject to the execution of all the powers conferred by law upon the corporation, and he must abide by the decision of the directors or stockholders upon all matters which the law commits to their control and determination.
10. Same—Consolidation.
A stockholder cannot enjoin the execution of a proposed merger agreement which is intra vires, and approved by a majority of the stockholders, unless fraud or oppression or unfairness is shown.
[Ed. Note.—For cases in point, see Cent. Dig. vol. 12, Corporations, g{ 2343-2347.}
11. Appeal And Error—Injunction Pendente Lite.
On appeal from an order granting an injunction pendente lite, the order will not be affirmed for the purpose of preserving the status quo until after the trial of the action, where there is no dispute as to the facts alleged in support of the injunction, and the legal questions involved can be as well determined on the appeal as at the close of the trial.
Appeal from Special Term, New York County.
Action by Bainbridge Colby, a stockholder of the Equitable Trust • Company of New York, on his own behalf and on behalf of other stockholders, against said Equitable Trust Company of New York and another. From an order (55 Misc. Rep. 355, 106 N. Y. Supp. 801) granting an injunction during the pendency of the action, defendants appeal.
Argued before PATTERSON, P. J., and McLAUGHUN, LAUGHLIN, CLARKE, and SCOTT, JJ.
Charles F. Brown, for appellants.
William M. Ivins, for respondent.
McLAUGHLIN, J. The plaintiff, a stockholder of the Equitable Trust Company of New York, brings this action in equity on his own behalf and on behalf of all other stockholders of that corporation to enjoin its proposed merger with the defendant, the Mercantile Trust Company, mainly upon the ground that such merger is illegal and unfair to the plaintiff. After the commencement of the action, upon notice, he applied for and obtained an order restraining the defendants and their officers and agents, during the pendency of the action, from taking any further steps towards carrying out the proposed merger. The defendants appeal from this order.
The proposed merger is attempted under sections 34—38 of the banking law (chapter 689, p. 1842, Laws 1892; chapter 382, pp. 221-224, Laws 1895, as amended). Section 34 provides that:
"Any two or more corporations, other than savings banks, organized under any one article of this chapter, or organized under the laws of this state for the purposes, or either of them, mentioned in any one article of this chapter, are hereby authorized to merge one or more of said corporations into another in the manner following. * * *"
The contention that the proposed merger is illegal is based substantially upon two propositions:
First, (a) That neither the Equitable Trust Company, nor the Mercantile Trust Company, was "organized under any one article of this chapter"; (b) that neither of them were "organized under the laws of this state for the purposes, or either of them, mentioned in any one article of this chapter." The Equitable Trust Company was incorporated under chapter 604, p.1304, Laws 1871, under the name of the "Traders' Deposit Company," with powers, among other things, to receive upon deposit money, certificates, and evidences of debt or value, and contracts, and to take the management, custody, and charge of the same, and to advance moneys, securities, and credits upon the same at such rates of interest—not exceeding the legal rate—and upon such terms and conditions as may be agreed upon by the parties. In 1896 (chapter 839, p. 1111, Laws 1896), the Legislature further authorized it "to have all the rights, powers and privileges conferred upon trust companies by section one hundred and fifty-six of an act entitled 'An act in relation to banking corporations' and known as the banking law." The name of the corporation was changed in 1895 (Laws 1895, p. 328, c. 557), and again by special act of the Legislature was changed in 1902 (chapter 290, p. 845) to the Equitable Trust Company of New "York. The Mercantile Trust Company was incorporated by special act of the Legislature in 1868 (chapter 806, p. 1807) under the name of "Fire-Proof Warehousing Company." Its powers were thereafter increased by special acts, and in 1873 its name was changed (chapter 845, p. 1267) to the "Mercantile Trust Company," and it was empowered "to accept and execute all such trusts of every description as may be committed to it by any person or persons whatsoever, or by any corporations." Neither of the defendants was organized under any one article of the banking act—each having been organized by special act of the Legislature—but that they come fairly within the provisions of that act, and are subject thereto, cannot be seriously doubted when section 163 (chapter 689, p. 1913, Laws 1892) is read in connection with and other sections. This section provides that:
"Every trust company Incorporated by a special law shall possess the powers of trust companies Incorporated under this chapter and shall be subject to such provisions of this chapter as are not inconsistent with the special laws relating to such specially chartered company."
In Venner v. Farmers' Loan & Trust Co., 54 App. Div. 271, 66 N. Y. Supp. 773, affirmed 176 N. Y. 549, 68 N. E. 1125, it was held that under this section a company incorporated by special act in 1822 with no banking privileges, but which has subsequently acquired power to execute trusts, was subject to the provisions of the banking law, and might receive deposits, though such power was expressly withheld in its original charter.
Second. That the Legislature had no power to sanction the merger of corporations against the protest of minority stockholders unless such merger were lawful when the corporations were formed. But the Legislature has the right at any time it sees fit to alter, suspend, and repeal the charters of corporations. Rev. St. (1st Ed.) pt. 1, c, 18, tit. 3, § 8. This right is reserved to the Legislature by the Constitution. Article 8, § 1, Const. The Legislature, of course, cannot confiscate property, but it is under its fist that the corporation comes into existence; and the power which creates may thereafter change or destroy. People ex rel. Cooper Union v. Gass, 190 N. Y. 323, 83 N. E. 64; Mayor v. Twenty-Third St. Ry. Co., 113 N. Y. 311, 21 N. E. 60; Lord v. Equitable Life Assur. Soc., 109 App. Div. 252, 96 N. Y. Supp. 10. The extent and effect of the legislative reservation of the right to alter or repeal corporate charters was discussed in Hinckley v. Schwarzschild & S. Co., 107 App. Div. 470, 95 N. Y. Supp. 357. There the plaintiff sought to restrain the defendant corporation from issuing preferred stock and subordinating the existing stock to the payment of capital and dividends thereon. At the time the defendant was organized, unless provided for in the certificates of incorporation, preferred stock could be issued only with the unanimous consent of the stockholders. Under chapter 354, p. 961, Laws 1901, power was given a corporation to issue preferred stock upon consent of the holders of two-thirds of the stock, and defendant sought to issue preferred stock in accordance with this statute. The court held that the act was a valid exercise of legislative power, applied to corporations existing at the time of its passage, and that a minority stockholder could not prevent the issue of such stock. In so far as the right of a corporation to exist is concerned, as well as over the exercise of such powers as can only be exercised by it as an existing corporation, the state has absolute control under its reserve power. People v. O'Brien, 111 N. Y. 1, 18 N. E. 692, 2 L.' R. A. 255, 7 Am. St. Rep. 684. It cannot, however, confiscate the property of the corporation, or deprive it of its vested property rights. Rochester & C. Turnpike R. Co. v. Joel, 41 App. Div. 43, 58 N. Y. Supp. 346.
Here the merger of the Equitable Trust Company, if the merger be permitted to take place, will result in the extinction of that corporation, and the transfer of its assets to the new corporation, but its property is not confiscated, nor is the corporation deprived of vested property rights. The property is sold to the merged corporation upon the terms provided in the merger agreement, and ample provision is made under the statute authorizing the merger by which any stockholder who is unwilling to assent to the terms can obtain the value of his stock in cash. The act provides that any stockholder who does not agree to the terms of the merger agreement may object to it and demand payment of his stock, and, if not paid, he may apply to the Supreme Court for the appointment of three appraisers to fix and determine the value of his stock, and the expenses of such determination have to be borne by the corporation itself. When the plaintiff became interested in the Equitable Trust Company, he di:I so with full knowledge of the fact that the statute commits to the majority stockholders the right to select its officers, dictate its policy, and control its management. If the acts of the majority do not meet with his approval, he has no legal ground of complaint, unless he can show facts which, in effect, amount to a fraud against him, or bad faith on the part of the majority. A court of equity will interfere in the management of a corporation at the solicitation of a minority stockholder only when his complaint is based upon some illegal or unauthorized act of the majority, to his prejudice. This question is quite fully discussed in Gamble v. Queens Co. Water Co., 123 N. Y. 91, 25 N. E. 201, 9 L. R. A. 527. Judge Peckham, delivering the opinion of the court, said:
"It is not, however, every question of mere administration or of policy in which there is a difference of opinion among the shareholders that enables the minority to claim that the action of the majority is oppressive, and which justifies the minority in coming to a court of equity to obtain relief. Generally the rule must be that in such cases the will of the majority shall govern. The court would not be justified in interfering even in doubtful cases, where the action of the majority might be susceptible of different constructions. To warrant the interposition of the court in favor of the minority shareholders in a corporation or joint-stock association, as against the contemplated action of the majority, where such action is within the corporate powers, a case must be made out which plainly shows that such action is so far opposed to the true interests of the corporation itself as to lead to the clear inference that no one thus acting could have been influenced by any honest desire to secure such interests, but that he must have acted with an intent to subserve some outside purpose, regardless of the consequences to the company and in a manner inconsistent with its interests. Otherwise the court might be called upon to balance probabilities of profitable results to arise from the carrying out of the one or the other of different plans proposed by or on behalf of different shareholders in a corporation, and to decree the adoption of that line of policy which seemed to it to promise the best results, or at least to enjoin the carrying out of the opposite policy. This is no business for any court to follow."
But in any view can it be fairly said that the proposed merger is a fraud upon or oppressive to the minority stockholders of the Equitable Company? The learned justice at Special Term refused to find, as appears from his opinion, that the act of the majority was fraudulent or in bad faith, but he did find that it was "unfair to the interest of the plaintiff." I have been unable to reach the conclusion that it is unfair to the plaintiff. Certainly it is not so clear that it is unfair that a court of equity would be justified in interfering with the proposed action of a large majority of the stockholders of that company. The material facts are undisputed; the only dispute between the parties being inferences to be drawn therefrom. It appears that about 65 per cent, of the stock of the Mercantile Company and about 49 per cent, of the stock of the Equitable Company is held by the Equitable Life Assurance Society of the United States: that of the 20 directors who signed the merger agreement on behalf of the Equitable Company 9 are also directors of the Mercantile Company; and that several of the officers and directors of the Equitable Society are also directors of the Mercantile Company. With such an intermingling of interests it is not only proper, but necessary, to scrutinize the proposed merger agreement with care for the purpose of ascertaining whether it is fair to the plaintiff or not, but in doing so it must be borne in mind that it does not necessarily follow because there is such an intermingling of interests that the proposed agreement is void or so manifestly unjust as would justify a court of equity in interfering. Continental Ins. Co. v. N. Y. & H. R. Co., 187 N. Y. 225, 79 N. E. 1026; Burden v. Burden, 159 N. Y. 287, 54 N. E. 17. The proposed agreement is tentative only. The corporations are not bound in anyway until it is adopted and ratified by two-thirds of the stockholders. It is, at most, a plan to be submitted to the stockholders for their action; and for this reason many of the authorities cited on the respondent's brief, in which directors have made contracts in which they have a personal interest, have no application.
The capital stock of the Mercantile Company is $2,000,000; its surplus about $7,000,000—making the book value of each share approximately $452. The capital stock of the Equitable Companv is $3,000,000; its surplus about $10,000,000—making the book value of its shares approximately $440. In estimating the value for the merger, the directors deducted $5 per share as the estimated cost of liquidation, making the book value of the Equitable Company's stock $435 per share. Under the terms of the merger agreement, the capital stock of the Mercantile Company is to be increased to $3,000,000; its stockholders retaining thejr present holdings. The stockholders of the Equitable Company, upon surrendering their stock, are to receive, at their option, either $435 in cash for each share, or one share of the Mercantile stock for each two shares of the Equitable stock; provision having been made to insure the retirement for cash of sufficient stock, so that the new stock issued shall not exceed $1,000,000. It will require $4,350,000 to retire the old stock, so that the Equitable Company will contribute to the merged company about $9,000,000, substantially the same amount which the Mercantile Company now has. The book value of the new company's shares will then be approximately $600.
A superficial examination of the proposed merger would seem to indicate it was unfair to the Equitable stockholders. The two companies contribute substantially the same amount of capital, and yet the Equitable stockholders will get in return for each two shares of their stock, whose book value is about $870, one share of stock of the new company, whose book value will be about $600, while the Mercantile stockholders will get two-thirds of the stock of the new company, and the shares they now hold will be increased in book value from $452 to $600. This apparent unfairness, however, disappears when the condition and earning capacity of the two companies are critically examined. The Mercantile Company earns annually about 12 per cent, on the book value of its shares—that is, about 51 per cent, on each share—while the equitable company earns less than 6 per cent, on its book value, or about 25 per cent, on each share. A further fact which is not disputed, and which in determining the value of the shares is a very pertinent subject of inquiry, is that the Equitable Company has suffered quite seriously from recent business conditions. Its relations with the Equitable Life Assurance Society are not now, and, it is not difficult to see, will not in the future, be nearly so profitable as formerly, and its earning capacity thereby is and will be largely diminished. The directors estimate the annual earnings of the new company, taking the annual earnings of the Mercantile Company and adding thereto the estimated earnings at 4 per cent, on the $9,000,000 to be obtained from the Equitable Company, as approximately $1,500,000; that is, about 8 per cent, on the book value of its stock, or 48 per cent, on each share. The exchange of two shares of stock in a company earning 25 per cent, on each share, with much uncertainty as to its future earning power, for one share in a company which can reasonably be expected to earn 48 per cent, on each share, cannot be said to be such an unconscionable proposition as to justify a court of equity in interfering, and especially when the plan is approved by a very large majority of the stockholders of the Equitable Company. It is true, as pointed out by the learned justice sitting at Special Term, that the foregoing estimate figures the earnings upon the Equitable contribution at only 4 per cent. Whereas that corporation is now earning nearly 6 per cent.; but for reasons already suggested it is extremely doubtful whether the earnings of the Equitable Company will, if the merger does not take place, be more than 4 per cent., but, if that fact be assumed, then the shares in the new company will be more valuable than as now estimated. If the new company can earn upon its capital anything like the per cent, which the Mercantile Company is now earning, the net earnings per share of the new company will be more than twice as much as the present earnings of the Equitable Company. It may be assumed that the proposed merger will be of benefit to the stockholders of the Mercantile Company. Indeed, the main contention of respondent's counsel seems to be the great advantage which will accrue to the Mercantile stockholders rather than injustice which the stockholders of the Equitable will suffer.
It is argued that no allowance is made for the good will of the Equitable Company and that this is an asset taken from the Equitable stockholders without compensation. Good will is unquestionably an asset, but its value is a variable and uncertain quantity. It may exist to-day and disappear to-morrow. In case of a dissolution, either forced or voluntary, it adds but little, if anything, to the assets of the dissolved corporation. In this connection it may not be out of place to call attention to the fact that it does not seem to be seriously claimed that if the Equitable Company were to be dissolved, and its property distributed among its stockholders, they would realize more than $435 a share. If a large majority of the stockholders of the Equitable Company deemed it for their respective interests to liquidate the company, and proceedings in good faith were about to be taken in accordance with the statute for that purpose, no one, I take it, would seriously contend that a court of equity ought to interfere and prevent such liquidation. Windmuller v. Standard Distilling & Distributing Co. (C. C.) 114 Fed. 491; 4 Thompson on Corporations, § 4443.
After a careful consideration of the record, I do not think it can be said the proposed agreement is unfair to the plaintiff. It has been approved, as the statute requires, by the state superintendent of banks, and the fact is not disputed that the holders of over 27,000 shares of the Equitable Company's stock out of a total of 30,000 shares have signified their assent and approval of the merger. The Equitable Life Assurance Society holds some 15,000 of these shares, but it appears that other holders of 12,914 shares have signified their intention to vote for the merger, while only the plaintiff, who holds 300 shares, and one other stockholder who holds 6 shares, have signified their disapproval. No director of the Equitable has opposed the merger. It is resisted by the holders of barely 1 per cent, of the stock, while the holders of over 90 per cent, have signified their approval. Every stockholder of a corporation holds his stock subject to the execution of all the powers conferred by law upon the corporation, and he must abide by the decision of the directors or stockholders, as the case may be, upon all matters which the law commits to their determination and control. Morawetz on Corporations (2d Ed.) §§ 413-417; Cook on Corporations (5th Ed.) § 684.
The Legislature has seen fit, in the exercise of the powers conferred upon it, to provide the conditions upon which existing trust companies may merge. I "know of no principle which justifies a court of equity in interfering with a large majority of the stockholders proceeding strictly in accordance with the statute simply because some of the minority stockholders think the proposed agreement is unsatisfactory or unfair. That question must necessarily under the statute be determined by the stockholders themselves, and, once their decision has been made, in the absence of fraud or bad faith, or of facts clearly showing that the proposed acts will be oppressive or unfair to the corporation, the court cannot and ought not to interfere. If it did so, it would, in effect, repeal the statute and subject the control of the majority to the will of the minority.
Finally, it is urged that the order should be affirmed so as to preserve the status quo until after the trial of the action; that, if it is reversed, any relief to which the trial might determine the plaintiff entitled would be unavailing. There would be force in this suggestion if there were any material dispute as to the facts; but there is not. This is recognized in the brief presented by the respondent's counsel, in which he states:
"Both defendants admit In their answers and affidavits all the material facts alleged by the plaintiff In support of the injunction. * * * They differ with the plaintiff only in his conclusion that the plan is Iniquitous and unconscionable, and contend that it is fair and just But that Is obviously a question of construction for the court. * * *"
It is not even suggested that there was any deception or concealment in arranging for the merger; on the contrary, it appears that the directors of the Equitable Company acted openly and full information was given to its stockholders. The only question presented is whether the merger agreement by its terms and from the interrelation of the parties in interest is so unfair and unconscionable as regards the plaintiff and other minority stockholders that a court of equity should interfere and prevent its consummation. The facts are fully set out in the record; and, there being no dispute as to such facts, the legal questions involved can be as well passed upon now as at the close of the trial. These facts in my opinion do not show that the proposed merger is illegal, unfair, or unjust to the plaintiff, or that there is any ground whatever to justify a court of equity in exercising its equitable powers to prevent a large majority of the stockholders of a corporation doing precisely what the statute in express terms says they may do.
If I am right in this conclusion, then it follows that the order appealed from must be reversed, with $10 costs and disbursements, and the motion to continue the injunction denied, with $10 costs. All concur.
MORSE v. EQUITABLE LIFE ASSUR. SOCIETY OF UNITED STATES
et al.
(Supreme Court, Appellate Division, First Department. February 14, 1906.)
1. Words And Phrases—"invest."
Invest, as used In connection with money or capital, means to give money for some other property; to lay out money for some other kind of property, usually of a permanent nature, literally, to clothe money in some thing; to lay out money in some permanent form so as to produce an Income; to lay out money or capital in business with the view of obtaining an Income or profit; to place money so that it will yield a profit.
[Ed. Note.—For other definitions, see Words and Phrases, vol. 4, pp. 3755-3758.]
2. Insurance—Investments By Life Insurance Companies.
The carrying out of a proposed merger agreement by which stockholders may surrender their shares and receive in exchange therefor the shares of the merged company, so far as such merger affects a life insurance company owning shares in the constituent companies upon expenditures of money, made when not prohibited by law, does not offend against the provisions of Insurance Law, § 100, as amended by Laws 1906, p. 797, c. 326, providing that life Insurance companies shall not invest In any shares of the stock of any corporation other than a municipal corporation.
3. Corporations—Consolidation—Rights Of Stockholders.
A stockholder cannot enjoin the execution of a proposed merger agreement between corporations which is intra vires, unless fraud or oppression or. unfairness is shown.
[Ed. Note.—For cases in point, see Cent. Dig. vol. 12, Corporations. 5 2346.]
Appeal from Special Term.
Action by Charles W. Morse, a stockholder of the Equitable Life Assurance Society of the United States, on his own behalf and on behalf of other stockholders, against said Equitable Life Assurance Society of the United States and others. From an order granting an injunction during the pendency of the action, defendants appeal. Reversed.
Argued before PATTERSON, P. J., and McLAUGHLIN, LAUGHLIN, CLARKE, and SCOTT, JJ.
Charles F. Brown (Paul D. Cravath, Allan McCulloh, Carl A. De Gersdorff, on the brief), for appellants.
Louis Marshall (Thomas D. Adams, on the brief), for respondent.
CLARKE, J. This is an appeal from an order granting an injunction pendente lite in an action in equity brought to enjoin and restrain the Equitable Life Assurance Society of the United States, its directors, officers, agents, and attorneys, from voting at any meeting of the stockholders of the defendant the Equitable Trust Company of New York, or of the defendant the Mercantile Trust Company, in favor of approving an agreement of merger, dated June 13, 1907, between said trust companies; from exchanging the capital stock of the Equitable Trust Company held by the insurance company for shares of stock of the Mercantile Trust Company; and restraining the said trust companies, and their, and each of their, directors, officers. agents, and attorneys, from carrying out the aforesaid agreement of merger. The said merger agreement and the questions arising thereunder have been considered in Colby v. Equitable Trust Company (handed down herewith) 108 N. Y. Supp. 978, and no further consideration of the questions there passed upon is necessary in this opinion. We therefore consider solely the questions peculiar to this case.
The capital stock of the Equitable Life Assurance Society is $100,•000, divided into 1,000 shares of the par value of $100 each, the annual dividends thereon being limited by law to 7 per cent. The plaintiff owns 15 shares of said capital stock. The charter of the societyprovides that the earnings and receipts over and above the dividends, losses, and expenses shall be accumulated, and that the insurance business of the company shall be conducted upon the mutual plan. The assets of the company in excess of its capital stock, according to its last report, amounts to upwards of $434,000,000, of which $68,720,333 is surplus. A majority of its directors are elected by policy holders, and not by the stockholders. The insurance company owns 14,500 shares of the capital stock of the defendant Equitable Trust Company, being 67 per cent, thereof, and 12,941 shares of the capital stock of the Mercantile Trust Company, being about 49 per cent, thereof. One of the grounds upon which the injunction was prayed is that the Equitable Life Assurance Society has no right, under section 100 of the insurance law of the state of New York, amended by chapter 326, p. 797, Laws 1906, to exchange its stock in the Equitable Trust Company of New York for stock of the merged company under the merger agreement. Said section provides as follows:
"Investments. No domestic life Insurance corporation, whether Incorporated by special act or under a general law, shall alter the first day of June, 1906, Invest In or loan upon any shares of stock of any .corporation, other than a municipal corporation, nor, excepting government, state or municipal securities, shall it invest in, or loan upon, any bonds or obligations which shall not be secured by adequate collateral security or where more than onethird of the total value of the collateral security therefor shall consist of shares of stock. Every such corporation which on the first day of June, 1906, shall own any shares of stock other than public stocks of municipal corporations, whenever the same shall have been acquired, or any bonds or obligations of the kinds above described where said bonds or obligations shall have been acquired after the first day of March, 1906, shall dispose of the said shares of stock and of said bonds and obligations witbin five years from the thirty-first day of December, 1906, and in each year prior to the expiration of said five years shall make such reduction of Its holdings of said securities as may be approved in writing by the superintendent of insurance. No investment or loan shall be made by any such life insurance corporation unless the same shall first have been authorized by the board of directors or by a committee thereof charged with the duty of supervising such investment or loan. No such corporation shall subscribe to or participate in any underwriting of the purchase or sale of securities or property, or enter into any transaction for such purchase or sale on account of said corporation jointly with any other person, firm or corporation; nor shall any such corporation enter into any agreement to withhold from sale any of its property, but the disposition of Its property shall be at all times within the control of its board of directors. Any such corporation, in addition to other investments allowed by law, may invest any of its funds in any duly authorized bonds or evidences of debt of any city, county, town, village, school district, municipality or other civil division of any state, and may loan upon the security of improved and unencumbered real property In any state worth fifty per centum more than the amount loaned thereon."
The insurance company has now a considerable amount of money invested in certain shares of the capital stock of the Equitable Trust Company and the Mercantile Trust Company. It is provided by the terms of the proposed merger that the holders of the capital stock of the Equitable Trust Company shall surrender their stock by delivering the certificates therefor, duly indorsed in blank for transfer, and each stockholder shall be entitled to receive at his option either one share of the capital stock of the merged company for each two shares of the stock of the Equitable Trust Company so surrendered, or $435 in cash for each share so surrendered; that the holders ol the present outstanding capital stock of the Mercantile Trust Company shall be entitled to retain one share in the merged company for each share of such present stock, and to receive new certificates therefor upon surrender to the merged company of the present certificates for cancellation. If the insurance company surrenders its shares of the Equitable Trust Company stock at the ratio of two to one, and receives shares of the merged company therefor, and surrenders its shares in the Mercantile Trust Company and receives share for share therefor of the merged company, will that transaction violate the provision of the statute cited, supra, that "no domestic life insurance corporation shall invest in any shares of stock of any corporation other than a municipal corporation"? It is, of course, conceded if this were an original transaction, if the insurance company should agree to buy and pay for out of its funds shares of stock in the merged corporation to be formed by this agreement, that it would violate the provisions of the statute in fact and in intent. The insurance company owns, however, upon expenditures of money heretofore made, when not prohibited by law, shares of stock in the two constituent companies. It has the right, under the statute, to continue to hold such shares as were acquired prior to the 1st of June, 1906, for five years from the 1st day of December, 1906, subject only to the requirement that it shall make in each year of said five years such reduction of its holdings of said securities as may be approved in writing by the superintendent of insurance. During that period its ownership of said stock is perfect. Its title is as good, its privileges, responsibilities, and duties the same as that of any other holder of shares in said companies. It has the right to vote upon its shares in every election and upon every proposition lawfully submitted to the stockholders of the said companies, including the right to vote upon a proposition for merger, required by law to be submitted by the directors to the stockholders, and which can only be accomplished by the consent of the holders of two-thirds of said stock. So long as it is the owner, it is vested with all the rights of ownership. The Century Dictionary defines the word "invest" as follows:.
"To employ for some profitable use; convert Into some other form of wealth, usually of a more or less permanent nature, as In the purchase of property or shares, or In loans secured by mortgages, etc.; said of money or capital; followed by In; as, to Invest one's means In lands or houses or In bank stock, government bonds, etc.; to Invest large sums In books."
"Investment" in the same dictionary is denned:
"An Investing of money or capital; expenditure for profits or future benefits; a placing or conversion of capital in a way Intended to secure income or profit from its employment; as, an investment In active business, or in stocks, land, or the like; to make safe investment of one's principal."
In 23 Cyc. 348, "invest" is denned as follows:
"As used In connection with money or capital, to give money for some other property; to lay out money for some other kind of property, usually of a permanent nature; literally, to clothe money in some thing; to lay out money in., some permanent form so as to produce an income; to lay out money or capital in business with the view of obtaining an income or profit; to place money so that it will yield a profit."
Under this proposed merger no money is to be paid out or clothed in securities or transferred from cash to stock. The investment has long since been made; the money has long since been "placed so that it will yield a profit," "given for some other property," "laid out in a permanent form so as to produce an income." There is to be a mere exchange of shares of stock in two separate companies for shares of stock in one company which is to be the result of the merging of the two separate companies, the merged company to take over and carry on the powers, rights, and privileges of the two separate companies. Instead of the laying out of capital, the parting with money for a security, there will be a considerable transformation of securities into cash by that provision which permits the company to receive $435 per share for those shares of the Equitable Trust Company which it does not desire to exchange for shares in the merged company at the ratio provided. The president of the insurance company states under oath:
"I know of no way by which the society can realize as much upon its holdings as by availing Itself of the proposed merger, which Insures a cash price -of $439 for each share of stock which is not exchanged for stock of the merged company. In my judgment that price is considerably in excess of the probable liquidation value of the stock. * • * If for any reason the proposed merger should prove impracticable, my own Judgment, as representing the Equitable Life Assurance Society, would be in favor of liquidating the Equitable Trust Company so as to return to its stockholders its capital and surplus, less the expense of liquidation."
It seems to me clear that the proposed transaction, so far as it affects the Equitable Life Assurance Society, does not offend against the provisions of section 100 of the insurance law, as amended by chapter 326, p. 797, Laws 1906. If I am right, the proposed action of the directors in voting the shares owned by the insurance company is not ultra vires; and, as the learned court at Special Term in the Colby Case distinctly held that the scheme of merger was not fraudulent, this case falls within the doctrine that a stockholder cannot
"In actions by stockholders which assail the acts of their directors or trustees courts will not interfere unless the powers have been Illegally or unconscientiously executed, or unless it be made to appear that the acts were fraudulent or collusive and destructive of the rights of the stockholders."
Where we consider the nature and character, the assets, surplus and capital stock of this insurance company, it is difficult to perceive in what possible way the proposed merger can be destructive of the rights of this plaintiff who owns 15 shares of its stock upon which the dividends are limited by law to 7 per cent, per annum.
For these reasons, in addition to those expressed in the opinion in the Colby Case, the order appealed from should be reversed and the injunction vacated, with costs and disbursements to the appellants. All concur.
Reports of cases heard and determined in the Appellate Division ..., Volume 124
Bainbridge Colby, Respondent, v. The Equitable Trust Company Of New York and The Mercantile Trust Company, Appellants.
Corporation — merger of trust companies having special charters — rights of minority stockholders — when merger agreement not inequitable — temporary injunction of merger denied.
By virtue of section 1G3 of the Ranking Law, providing that trust companies incorporated under special laws shall possess the powers of trust companies incorporated under the Banking Law and shall be subject to the provisions of that law so far as they are not inconsistent with the special charter, the Equitable Trust Company of New York and the Mercantile Trust Company, respectively incorporated under various special acts and possessing similar powers, are entitled to merge pursuant to the provisions of sections 34 and 38 of the Banking Law.
The Legislature, under the power to repeal or amend corporate charters reserved by the Constitution, may authorize the merger of corporations if there be no confiscation of their property.
A merger which results in the extinction of the merged corporation, and the transfer of its assets to the other corporation, does not confiscate its property or deprive it of vested property rights, for under the statute a stockholder unwilling to assent to the terms of the merger agreement may obtain the value of his stock in cash.
A stockholder is charged with knowledge that the statute gives majority stockholders the right to elect the officers of the corporation, to dictate its policyf and to control its management, and if the acts of the majority do not meet with his approval he has no legal ground of complaint, unless he can show acts which in effect amount to a fraud against him or to bad faith on the part of the majority. A court of equity will interfere in the management of a corporation at the. solicitation of a minority stockholder only when his complaint is based upon some illegal or unauthorized act of the majority to his prejudice.
When it appears that a large number of the directors and officers of a trust company who signed an agreement to merge with another company are also directors and officers in the latter, there is such an intermingling of interest that the court will scrutinize the proposed agreement with care in order to ascertain whether it lie fair to minority stockholders; but the mere intermingling of interest does not of itself make the agreement void or so manifestly unjust as to warrant a court of equity in interfering.
A merger agreement providing for an exchange of two shares of stock in a com pany which although earning twenty-live per cent on each share, lists mucli uncertainty as to its future earning power, for one share of stock in the other company which cim reasonably be expected to earn forty eight per cent on each share, canuot be said to be so unconscionable as to justify a court of equity in interfering at the suit of a minority stockholder, especially when the agreement has been approved by a large majority of stockholders and by the Supt. Superintendent of Banks.
On such merger it is not necessary to make allowance for the good will of the company which transfers its assets, if, in case of dissolution, forced or voluntary, it would add nothing to the assets of the corporation.
A stockholder holds his stock subject to the execution of all the powers conferred by law upon the corporation, and he must abide by the decision of the directors or stockholders, as the ease may be, upon all matters which the law commits to their determination and control.
A court of equity will not interfere with a proposed merger of corporations authorized by a largo majority of tho stockholders in good faith and in accordance with the statute, simply because some of the minority think the proposed agreement is unsatisfactory or unfair.
When there is no material dispute as to tho result of such proposed merger and the legal questions involved can be passed upon as well on a motion for an injunction pendente lite as at the close of the trial, the determination of the questions need not be deferred.
Appeal by the defendants, The Equitable Trust Company of New York and another, from an order of the Supreme Court, made at the New York Special Term and entered in the office of the clerk of the county of New York on the 3d day of July, 1907, granting an injunction pendente lite.
Charles F. Bimon, for the appellants.
William M. Ivins, for the respondent.
Mclaughlix, J.:
Tho plaintiff, a stockholder of the Equitable Trust Company of New York, brings this action in equity on his own behalf and on behalf of all other stockholders of that corporation to enjoin its proposed merger with the defendant, The Mercantile Trust Company, mainly upon the ground that such merger is illegal and unfair to the plaintiff.
After the commencement of tho action, upon notice, he applied for and obtained an order restraining the defendants and their officers and agents, during the pendency of the action, from taking any further steps towards' carrying out the proposed merger. The defendants appeal from this order.
The proposed merger is attempted under sections 34 to 38 of the Banking Law (Laws of 1892, chap. 689, added hy Laws of 1895, chap. 382, and amd. by Laws of 1900, chap. 199). Section 34 provides that "Any two or more corporations, other than savings banks, organized under any one article of this chapter, or organized under the laws of this State for the purposes, or either of them, mentioned in any one article of this chapter, are hereby authorized to merge one or more of said corporations into another in the manner following * * *." The contention that the proposed merger is illegal is based substantially upon two propositions: First, (a) That neither the Equitable Trust Company nor the Mercantile Trust Company was "organized under any one article of this chapter ;" (b) that neither of them was "organized under the laws of this State for the purposes, or either of them, mentioned in any one article of this chapter." The Equitable Trust Company was incorporated under chapter 604 of the Laws of 1871, under the name of the "Traders' Deposit Company," with powers, among other things, to receive upon deposit money, certificates and evidences of deht or value and contracts, and to take the management, custody and charge of the same and to advance moneys, securities and credits upon the same at such rates of interest, not exceeding the legal rate, and upon such terms and conditions as may be agreed upon by the parties. In 1896 (Chap. 839 of that year) the Legislature further authorized it "to have all the rights, powers and privileges conferred upon trust companies by section one hundred and fifty-six of an act entitled 'An act in relation to banking corporations,' and known as the Banking Law." The name of the corporation was changed in 1895 (Laws of li>95, chap. 557), and again, by special act of the Legislature, was changed in 1902 (Chap. 290) to the Equitable Trust Company of New York. The Mercantile Trust Company was incorporated by special act of the Legislature in 1868 (Chap. 806) under the name of " Fire Proof Warehousing Company." Its powers were thereafter increased by special acts,* [ *See Laws of 1869, chap. 185; Laws of 1870, chap. 121, and Laws of 1880, chap. 425.—[rep. ] and in 1873 its name was changed (Chap. 845) to "The Mercantile Trust Company," and it was empowered "to accept and execute all such trusts of every description as may he committed to it by any person or persons whatsoever, or by any corporations.'' Neitherof the defendants was organized under any one article of the Banking Law — each having been organized by special act of the Legislature — but that they come fairly within the provisions of that act and are subject thereto cannot be seriously doubted when section 163 (Laws of 1892, chap. 689) is read in connection with the other sections. This section provides that: "Every trust company incorporated by a special law shall possess the powers of trust companies incorporated under this chapter and shall be subject to such provisions of this chapter as are not inconsistent with the special laws relating to such specially chartered company." In Tenner v. Fanner)? Loan & Trust Co. (54 App. Div. 271 ; affd., 176 N. Y. 549) it was held that under this section a company incorporated by special act in 1822 with no banking privileges, but which has subsequently acquired power to execute trusts, was subject to the provisions of the Banking Law and might receive deposits, though such power was expressly withheld in its original charter.
Second. That the Legislature had no power to sanction the A merger of corporations against the protest of minority stockholders nnless such merger were lawful when the corporations were formed. But the Legislature has the right at any time it sees fit to alter, suspend and repeal the charters of corporations. (1 R. S. 600 [R. S. pt. 1, chap. 18, tit. 3], § 8; rep. by Gen. Corp. Law [Laws of 1890, chap. 563], §§ 23, 26, as amd. by Laws of 1892, chap. 6S7, § 34. See Gen. Corp. Law [Laws of 1892, chap. 687], § 40, added by Laws of 1895, chap. 672.) The right is reserved to the Legislature by the Constitution. (Art. 8, § 1.) The Legislature, of course, cannot confiscate property, but it is under its fiat that the corporation comes into existence and the power which creates may thereafter change or destroy. {People ex rel. Cooper Union v. Gass, 190 N. Y. 323; Mayor, etc., v.Twenty-third St. Ii. Co., 113 id. 311; Lord v. Equitable Life Assur. Soc, 109 App. Div. 252.) The extent and effect of the legislative reservation of the right to alter or repeal corporate charters was discussed in Hinckley v. Schioarzschild cB S. Co. (107 App. Div. 470). There the plaintiff sought to restrain the defendant corporation from issuing preferred stock and subordinating the existing stock to the payment of capital and dividends thereon. At the time the defendant was organized, unless provided for in the certificates of incorporation, preferred stock could he issued only with the unanimous consent of the stockholders. Under chapter 354 of the Laws of 1901 (aindg. Stock Corp. Law [Laws of 1892, chap. CSS], § 47) power was given a corporation to issue preferred stock upon consent of the holders of two-thirds of the stock and defendant sought to issue preferred stock in accordance with this statute. Tiie court held that the act was a valid exercise of legislative power, applied to corporations existing at the time of its passage, and that a minority stockholder could not prevent the issue of such stock. In so far as the right of a corporation to exut is concerned, as well as over the exercise of such powers as can only be exercised by it as an existing corporation, the State has absolute control under its reserve power. (People v. O'Brien, 111 N. Y. 1.) It cannot, however, confiscate the property of the corporation or deprive it of its vested property rights. (Rochester
Here, the merger of the Equitable Trust Company — if the merger be permitted to take placo — will result in the extinction of that corporation and the transfer of its assets to the new corporation but its property is not confiscated, nor is the corporation deprived of vested property rights. The property is sold to the merged corporation upon the terms provided in the merger agreement and ample provision is made under the statute authorizing the merger by which any stockholder who is unwilling to assent to the terms can obtain the value of his stock in cash. The act provides that any stockholder who does not agree to the terms of the merger agreement may object to it and demand payment for his stock and, if not paid, he may apply to the Supreme Court for the appointment of three appraisers to fix and determine the value of his stock and the expenses of such determination have to be borne by the corporation itself. When the plaintiff became interested in the Equitable Trust Company he did so with full knowledge of the fact that the statute commits to the majority stockholders the right to select its officers, dictate its policy, and control its management. If the acts of the majority do not meet with his approval he has no legal ground of complaint unless ho can show facts which, in effect amount to a fraud against him, or bad faith on the part of the majority. A court of equity will interfere in the management of *" a corporation at the solicitation of a minority stockholder only when his complaint is based upon some illegal or unauthorized act of the majority to his prejudice. This question is quite fully discussed in Gamble v. Queens Count// Water Co. (123 N. Y. 91). Judge Peck- Ham, delivering the opinion of the court, said: "It is not, however, every question of mere administration or of policy in which there is a difference of opinion among the shareholders that enables the minority to claim that the action of the majority is oppressive, and which justifies the minority in coming to a court of equity to obtain relief. Generally, the rule must be that in such cases the will of the majority shall govern. The court would not he justified in interfering even in doubtful cases, where the action of the majority might bo susceptible of different constructions. To warrant the interposition of the court in favor of the minority shareholders in a corporation or joint-stock association, as against the contemplated action of the majority, where such action is within the corporate powers, a case must be made out which plainly shows that such action is so far opposed to the true interests of the corporation itself as to lead to the clear inference that no one thus acting could have been influenced by any honest desire to secure such interests, hut that he must have acted with an intent to subserve some outside purpose, regardless of the consequences to the company and in a manner inconsistent with its interests. Otherwise the court might be called upon to balance probabilities of profitable results to arise from the carrying out of the one or the other of different plans proposed by or on behalf of different shareholders in a corporation, and to decree the adoption of that line of policy which seemed to it to promise the best results, or at least to enjoin the carrying out of the opposite policy. This is no business for any court to follow." But in any view can it be fairly said that the proposed merger is a fraud upon or oppressive to the minority stockholders of the Equitable Company? The learned justice at Special Term refused to find, as appears from his opinion, that the act of the majority was fraudulent or in bad faith, but he did find that it was " unfair to the interests of the plaintiff." (55 Misc. Rep. 355.) I have been unable to reach the conclusion that it is unfair to the plaintiff. Certainly it is not so clear that it is unfair that a court of equity would he justified in interfering with the proposed action of a large majority of the stockholders of that company. The material facts are undisputed, the only dispute between the parties being inferences to be drawn therefrom. It appears that about sixty-five per cent of the stock of the Mercantile Company and about forty-nine per cent of the stock of the Equitable Company is held by the Equitable Life Assurance Society of the United States; that of the twenty directors who signed the merger agreement on behalf of the Equitable Company nine are also directors of the Mercantile Company and that several of the officers and directors of the Equitable Society are also directors of the Mercantile Company. AVith such an intermingling of interests it is not only proper but necessary to scrutinize the proposed merger agreement with care for the purpose of / ascertaining whether it is fair to the plaintiff or not, but in doing j so it must be borne in mind that it does not necessarily follow' because there is such an intermingling of interests that the proposed agreement is void or so manifestly unjust as would justify a court of equity in interfering. (Continental Ins. Co. v. If. JT. c£. 77. R. R. Co., 187 N. Y. 225; Burden v. Burden, 159 id. 287.) The proposed agreement is tentative oidy. The corporations are not bound in any way until it is adopted and ratified by the holders of two-thirds of the stock. It is at most a plan to be submitted to the stockholders for their action and for this reason many of the authorities cited on the respondent's brief, in which directors have made contracts in which they have a personal interest, have no application. The capital stock of the Mercantile Company is $2,000,000; its surplus about $7,000,000, making the book value of each share approximately $452. The capital stock of the Equitable Company is $3,000,000; its surplus about $10,000,000, making the book value of its shares approximately $440. In estimating the value for the merger, the directors deducted $5 per share as the estimated cost of liquidation, making the book value of the Equitable Company's stock $435 per share. Under the terms of the merger agreement, the capital stock of the Mercantile Company is to be increased to $3,000,000, its stockholders retaining their present holdings. The stockholders of the Equitable Company, upon surrendering their stock, are to receive, at their option, either $435 in cash for each share, or one share of the Mercantile stock for each * two shares of the Equitable stock, provision having been made to insure the retirement for cash of sufficient stock so that the new stock issued shall not exceed $1,000,000. It will require $4,350,000 to retire the old stock, so that the Equitable Company will contribute to the merged company about $9,000,000, substantially the same amount which the Mercantile Company now has. The book value of the new company's shares will then be approximately $600.
A superficial examination of the proposed merger would seem to indicate it was unfair to the Equitable stockholders. The two companies contribute substantially the same amount of capital, and yet the Equitable stockholders will get in return for each two shares of their stock — whose book value is about $870 — one share of stock of the new company — whose book value will be about $600 — while the Mercantile stockholders will get two-thirds of the stock of the new company, and the shares they now hold will be increased in hook value from $452 to $600. This apparent unfairness, how- * ever, disappears when the condition and earning capacity of the two companies are critically examined. The Mercantile Company earns aunually about twelve per cent on the book value of its shares — that is about fifty-one per cent on each share — while the P^quitable Company earns less than six per cent on its book value or about twenty-five per cent on each share. A further fact which is not ^ disputed, and which in determining the value of the shares is a very pertinent subject of inquiry, is that the Equitable Company has suffered quite seriously from recent business conditions. Its relations with the Equitable Life Assurance Society are not now and, it is not difficult to see, will not ill the future be nearly so profitable as formerly, and its earning capacity thereby is and will be largely diminished. The directors estimate the annual earnings "f the new company — taking the annual earnings of the Mercantile Company and adding thereto the estimated earnings at four per cent on the $9,000,000 to be obtained from the Equitable Company— as approximately $1,500,000 — that is, about eight per cent, on the book value of its stock, or forty-eight per cent on each shun i. The exchange of two shares of stock in a company earning twen ty-' five per cent on each share, with much uncertainty as to its future earning power, for one share in a company which can reasonably be expected to earn forty-eight per cent on each share, cannot be said to be such an unconscionable proposition as to justify a court of equity in interfering and especially when the plan is approved by a very large majority of the stockholders of the Equitable Company. It is true, as pointed out by the learned justice sitting at Special Term, that the foregoing estimate figures the earnings upon the Equitable contribution at only four per cent, whereas that corporation is now earning nearly six per cent, but for reasons already suggested it is extremely doubtful whether the earnings of the Equitable Company will — if the merger does not take place — be more than four per cent, but if that fact be assumed, then the shares in the new company will be more valuable than as now estimated. If the new company can earn upon its capital anything like the per cent which the Mercantile Company is now earning, the net earnings per share of the new company will be more than twice as much as the present earnings of the Equitable Company. It may be assumed that the proposed merger will be of benefit to the stockholders of the Mercantile Company. Indeed, the main contention of respondent's counsel seems to be the great advantage winch will accrue to the Mercantile stockholders rather than the injustice which the stockholders of the Equitable will suffer.
It is argued that no allowance is made for the good will of the Equitable Company and that this is an asset taken from the Equitable stockholders without compensation. Good will is unquestionably an asset, but its value is a variable and uncertain quantity. It may exist to-day and disappear to-morrow. In case of a dissolution — either forced or voluntary — it adds but little, if anything, to the assets of the dissolved corporation. In this connection it may not bo out of place to call attention to the fact that it does not seem to be seriously claimed that if the Equitable Company were to be dissolved, and its property distributed among its stockholders, they would realize more than $435 a share. If a large majority of the stockholders of the Equitable Company deemed it for their respective interests to liquidate the company and proceedings in good faith re about to be taken in accordance with the statute for that nr, no one, I take it, would seriously contend that a court of equity to interfere and prevent such liquidation. (Windniuller v. ret App. Div.]
Standard Distilling c& Distributing Co., 114 Fed. Rep. 491; Thomp. Corp. § 4443.)
After a careful consideration of tlie record, I do not think it can l>e said the proposed agreement is unfair to the plaintiff. It has Iwen approved, as the statute requires, by the State Superintendent of Banks, and the fact is not disputed that the holders of over 27,000 shares of the Equitable Company's stock out of a total of 30,000 shares have signified their assent and approval of tlie merger. Tlie Epiitable Life Assurance Society holds some 15,000 of these shares, but it appears that other holders of 12,914 shares have signified their intention to vote for the merger, while only the plaintiff, who holds 300 shares, and one other stockholder, who holds 6 shares, have sig- nitied their disapproval. xS'o director of the Equitable has opposed the merger. It is resisted by the holders of barely one per cent of the stock, while the holders of over ninety per cent have signified their approval. Every stockholder of a corporation holds his stock subject to the execution of r.ll the powers conferred by law upi n tlie corporation and he must abide by the decision of the directors or stockholders, as the case may be, upon all matters which the law commits to their determination and control. (Morawetz Corp. [2d ed.] 413-417; Cook Corp. [5th ed.] § 684.) The Legislature has seen fit, in the exercise of the powers conferred upon it, to provide the conditions upon which existing trust companies may merge. I know of no principle Which justifies a court of equity in interfering with a large majority of the stockholders proceeding strictly in accordance with the statute simply because some of the minority stockholders think the proposed agreement is unsatisfactory or unfair. That question must necessarily under the statute be deter- * mined by the stockholders themselves, and once their decision has l*en made, in the absence of fraud or bad faith or of facts clearly showing that the proposed acts will bo oppressive or unfair to the corporation, the court cannot and ought not to interfere. If it did so, it would in effect repeal the statute and subject the control of the majority to the will of the minority.
Finally it is urged that the order should be affirmed so as to preserve the status quo until after the trial of the action; that if it is reversed, any relief to which the trial might determine the plaintiff entitled would be unavailing. There would be force in this suggestion if thero were any material dispute as to the facts, but there is not. This is recognized in the brief presented by the respondent's counsel, in which he states: "Both defendants admit in their answers and affidavits all the material facts alleged by plaintiff in support of the injunction. * * * They differ with plaintiff only in his conclusion that the plan is iniquitous and unconscionable, and contend that it is fair and just. But that is obviously a question of construction for the court. * * *" It is not even suggested that there was any deception or concealment in arranging for the merger; on the contrary, it appears that the directors of the Equitable Coi..pany acted openly and full information was given to its stockholders. The only question presented is whether the merger agreement by its terms and from the interrelation of the parties in interest is so unfair and unconscionable as regards the plaintiff and other minority stockholders that a court of equity should interfere and prevent its consummation. The facts are fully set out in the record and there being no dispute as to such facts, the legal questions involved can be as well passed upon now as at the close of the trial. These facts, in my opinion, do not show that the proposed merger is illegal, unfair, or unjust to the plaintiff, or that there is any ground whatever to justify a court of equity in exercising its equitable powers to prevent a large majority of the stockholders of a corporation doing precisely what the statute in express terms says they may do.
If I am right in this conclusion, then it follows that the order appealed from must be reversed, with ten dollars costs and disbursements, and the motion to continue the injunction denied, with ten dollars costs.
Patterson, P. J., Laughlin, Clarke and ScoTr, JJ., concurred.
Order reversed, with ten dollars costs and disbursements, and motion denied, with ten dollars costs.
App. Div.]
COLBY v. EQUITABLE TRUST CO. OF NEW YORK et al. (Supreme Court, Appellate Division, First Department. February 14. 1908.)
1. Banks And Banking—Trust Companies—Special Charters—Consolidation.
Under Banking Law. Laws 1892, p. 1913, c. 089, § 103, providing that trust companies incorporated by special laws shall possess the powers of trust companies incorporated under the general laws, and shall be subject to such provisions of the banking law as are not inconsistent with the special laws, companies created by special acts in 1808 and 1871 (Laws 18U8, p. 1807, c. 800, and Laws 1871, p. 1304, c. 004), and empowered by subsequent special acts (Laws 1873, p. 1209, c. 845, and Laws 1S96. p. 1111, c. 839) to execute trusts, are subject to the provisions of the banking law, and a merger of such specially chartered companies is authorized by sections 34-38, c. 582, pp. 221-224, Laws 1895, permitting merger of trust companies, though such merger was unlawful wlien such specially chartered companies were formed.
2. Corporations—Alteration Of Charter.
The state cannot confiscate the property of a corporation or deprive it of its vested property rights, but may change or destroy the corporation.
[Ed. Note.—For cases in point, see Cent. Dig. vol. 12, Corporations, { 128.]
3. Banks And Banking—Trust Companies—Consolidation.
Under the reserved power of the state to alter or repeal corporate charters (Const, art. 8, § 1, Rev. St. [1st Ed.] pt 1, c. 18, tit 3, § 8), the enactment of Banking Law, Laws 1895, pp. 221-224, e. 382, §§ 34-38. authorizing the merger of trust companies, is a valid exercise of legislative power, as applied to specially chartered trust companies existing at the time of its enactment.
4. Corporations—Rights Of Stockholders As To Corporation.
A court of equity will not interfere In the management of a corporation on the complaint of a minority stockholder unless it Is based on some illegal or unauthorized act of the majority to his prejudice.
[Ed. Note.—For cases in point, see Cent. Dig. vol. 12, Corporations, f| 605-073.]
5. Same—Consolidation—Merger Agreement—Corporations Having Directors In Common.
A merger agreement between corporations having officers and directors In common will be scrutinized with care for the purpose of ascertaining whether it is fair to stockholders or not, but such an intermingling of interests does not necessarily render the agreement void or so manifestly unjust that a court of equity will enjoin its execution when ratified by the requisite number of stockholders.
6. Same—Fairness Of Agreement As To Stockholders.
A merger agreement providing for the exchange of two shares of stock in a company earning annually 25 per cent, of each share, with much uncertainty as to its future earnings, for one share in a company which . can reasonably be expected to earn annually 48 per cent, on each share, cannot be said to be so unconscionable and unfair to stockholders in ;he former company as to justify a court of equity in restraining the carrying out of the proposed merger, especially when the agreement is approved by a majority of the stockholders of the company.
7. Same—Good Will.
A merger agreement Is not necessarily unfair to stockholders because no allowance is made therein for the good will of the company whose assets are to be transferred to the merged company.
[Ed. Note.—For cases in point, see Cent. Dig. vol. 12, Corporations, H 2330-2337.]
8. Same—Dissolution—Injunction.
A stockholder cannot enjoin the liquidation of a corporation where the proceedings are taken in good faith, in accordance with the statute, with the approval of a majority of the stockholders.
9. Same—Rights Of Stockholders As To Corporation.
Every stockholder of a corporation holds his stock subject to the execution of all the powers conferred by law upon the corporation, and he must abide by the decision of the directors or stockholders upon all matters which the law commits to their control and determination.
10. Same—Consolidation.
A stockholder cannot enjoin the execution of a proposed merger agreement which is intra vires, and approved by a majority of the stockholders, unless fraud or oppression or unfairness is shown.
[Ed. Note.—For cases in point, see Cent. Dig. vol. 12, Corporations, g{ 2343-2347.}
11. Appeal And Error—Injunction Pendente Lite.
On appeal from an order granting an injunction pendente lite, the order will not be affirmed for the purpose of preserving the status quo until after the trial of the action, where there is no dispute as to the facts alleged in support of the injunction, and the legal questions involved can be as well determined on the appeal as at the close of the trial.
Appeal from Special Term, New York County.
Action by Bainbridge Colby, a stockholder of the Equitable Trust • Company of New York, on his own behalf and on behalf of other stockholders, against said Equitable Trust Company of New York and another. From an order (55 Misc. Rep. 355, 106 N. Y. Supp. 801) granting an injunction during the pendency of the action, defendants appeal.
Argued before PATTERSON, P. J., and McLAUGHUN, LAUGHLIN, CLARKE, and SCOTT, JJ.
Charles F. Brown, for appellants.
William M. Ivins, for respondent.
McLAUGHLIN, J. The plaintiff, a stockholder of the Equitable Trust Company of New York, brings this action in equity on his own behalf and on behalf of all other stockholders of that corporation to enjoin its proposed merger with the defendant, the Mercantile Trust Company, mainly upon the ground that such merger is illegal and unfair to the plaintiff. After the commencement of the action, upon notice, he applied for and obtained an order restraining the defendants and their officers and agents, during the pendency of the action, from taking any further steps towards carrying out the proposed merger. The defendants appeal from this order.
The proposed merger is attempted under sections 34—38 of the banking law (chapter 689, p. 1842, Laws 1892; chapter 382, pp. 221-224, Laws 1895, as amended). Section 34 provides that:
"Any two or more corporations, other than savings banks, organized under any one article of this chapter, or organized under the laws of this state for the purposes, or either of them, mentioned in any one article of this chapter, are hereby authorized to merge one or more of said corporations into another in the manner following. * * *"
The contention that the proposed merger is illegal is based substantially upon two propositions:
First, (a) That neither the Equitable Trust Company, nor the Mercantile Trust Company, was "organized under any one article of this chapter"; (b) that neither of them were "organized under the laws of this state for the purposes, or either of them, mentioned in any one article of this chapter." The Equitable Trust Company was incorporated under chapter 604, p.1304, Laws 1871, under the name of the "Traders' Deposit Company," with powers, among other things, to receive upon deposit money, certificates, and evidences of debt or value, and contracts, and to take the management, custody, and charge of the same, and to advance moneys, securities, and credits upon the same at such rates of interest—not exceeding the legal rate—and upon such terms and conditions as may be agreed upon by the parties. In 1896 (chapter 839, p. 1111, Laws 1896), the Legislature further authorized it "to have all the rights, powers and privileges conferred upon trust companies by section one hundred and fifty-six of an act entitled 'An act in relation to banking corporations' and known as the banking law." The name of the corporation was changed in 1895 (Laws 1895, p. 328, c. 557), and again by special act of the Legislature was changed in 1902 (chapter 290, p. 845) to the Equitable Trust Company of New "York. The Mercantile Trust Company was incorporated by special act of the Legislature in 1868 (chapter 806, p. 1807) under the name of "Fire-Proof Warehousing Company." Its powers were thereafter increased by special acts, and in 1873 its name was changed (chapter 845, p. 1267) to the "Mercantile Trust Company," and it was empowered "to accept and execute all such trusts of every description as may be committed to it by any person or persons whatsoever, or by any corporations." Neither of the defendants was organized under any one article of the banking act—each having been organized by special act of the Legislature—but that they come fairly within the provisions of that act, and are subject thereto, cannot be seriously doubted when section 163 (chapter 689, p. 1913, Laws 1892) is read in connection with and other sections. This section provides that:
"Every trust company Incorporated by a special law shall possess the powers of trust companies Incorporated under this chapter and shall be subject to such provisions of this chapter as are not inconsistent with the special laws relating to such specially chartered company."
In Venner v. Farmers' Loan & Trust Co., 54 App. Div. 271, 66 N. Y. Supp. 773, affirmed 176 N. Y. 549, 68 N. E. 1125, it was held that under this section a company incorporated by special act in 1822 with no banking privileges, but which has subsequently acquired power to execute trusts, was subject to the provisions of the banking law, and might receive deposits, though such power was expressly withheld in its original charter.
Second. That the Legislature had no power to sanction the merger of corporations against the protest of minority stockholders unless such merger were lawful when the corporations were formed. But the Legislature has the right at any time it sees fit to alter, suspend, and repeal the charters of corporations. Rev. St. (1st Ed.) pt. 1, c, 18, tit. 3, § 8. This right is reserved to the Legislature by the Constitution. Article 8, § 1, Const. The Legislature, of course, cannot confiscate property, but it is under its fist that the corporation comes into existence; and the power which creates may thereafter change or destroy. People ex rel. Cooper Union v. Gass, 190 N. Y. 323, 83 N. E. 64; Mayor v. Twenty-Third St. Ry. Co., 113 N. Y. 311, 21 N. E. 60; Lord v. Equitable Life Assur. Soc., 109 App. Div. 252, 96 N. Y. Supp. 10. The extent and effect of the legislative reservation of the right to alter or repeal corporate charters was discussed in Hinckley v. Schwarzschild & S. Co., 107 App. Div. 470, 95 N. Y. Supp. 357. There the plaintiff sought to restrain the defendant corporation from issuing preferred stock and subordinating the existing stock to the payment of capital and dividends thereon. At the time the defendant was organized, unless provided for in the certificates of incorporation, preferred stock could be issued only with the unanimous consent of the stockholders. Under chapter 354, p. 961, Laws 1901, power was given a corporation to issue preferred stock upon consent of the holders of two-thirds of the stock, and defendant sought to issue preferred stock in accordance with this statute. The court held that the act was a valid exercise of legislative power, applied to corporations existing at the time of its passage, and that a minority stockholder could not prevent the issue of such stock. In so far as the right of a corporation to exist is concerned, as well as over the exercise of such powers as can only be exercised by it as an existing corporation, the state has absolute control under its reserve power. People v. O'Brien, 111 N. Y. 1, 18 N. E. 692, 2 L.' R. A. 255, 7 Am. St. Rep. 684. It cannot, however, confiscate the property of the corporation, or deprive it of its vested property rights. Rochester & C. Turnpike R. Co. v. Joel, 41 App. Div. 43, 58 N. Y. Supp. 346.
Here the merger of the Equitable Trust Company, if the merger be permitted to take place, will result in the extinction of that corporation, and the transfer of its assets to the new corporation, but its property is not confiscated, nor is the corporation deprived of vested property rights. The property is sold to the merged corporation upon the terms provided in the merger agreement, and ample provision is made under the statute authorizing the merger by which any stockholder who is unwilling to assent to the terms can obtain the value of his stock in cash. The act provides that any stockholder who does not agree to the terms of the merger agreement may object to it and demand payment of his stock, and, if not paid, he may apply to the Supreme Court for the appointment of three appraisers to fix and determine the value of his stock, and the expenses of such determination have to be borne by the corporation itself. When the plaintiff became interested in the Equitable Trust Company, he di:I so with full knowledge of the fact that the statute commits to the majority stockholders the right to select its officers, dictate its policy, and control its management. If the acts of the majority do not meet with his approval, he has no legal ground of complaint, unless he can show facts which, in effect, amount to a fraud against him, or bad faith on the part of the majority. A court of equity will interfere in the management of a corporation at the solicitation of a minority stockholder only when his complaint is based upon some illegal or unauthorized act of the majority, to his prejudice. This question is quite fully discussed in Gamble v. Queens Co. Water Co., 123 N. Y. 91, 25 N. E. 201, 9 L. R. A. 527. Judge Peckham, delivering the opinion of the court, said:
"It is not, however, every question of mere administration or of policy in which there is a difference of opinion among the shareholders that enables the minority to claim that the action of the majority is oppressive, and which justifies the minority in coming to a court of equity to obtain relief. Generally the rule must be that in such cases the will of the majority shall govern. The court would not be justified in interfering even in doubtful cases, where the action of the majority might be susceptible of different constructions. To warrant the interposition of the court in favor of the minority shareholders in a corporation or joint-stock association, as against the contemplated action of the majority, where such action is within the corporate powers, a case must be made out which plainly shows that such action is so far opposed to the true interests of the corporation itself as to lead to the clear inference that no one thus acting could have been influenced by any honest desire to secure such interests, but that he must have acted with an intent to subserve some outside purpose, regardless of the consequences to the company and in a manner inconsistent with its interests. Otherwise the court might be called upon to balance probabilities of profitable results to arise from the carrying out of the one or the other of different plans proposed by or on behalf of different shareholders in a corporation, and to decree the adoption of that line of policy which seemed to it to promise the best results, or at least to enjoin the carrying out of the opposite policy. This is no business for any court to follow."
But in any view can it be fairly said that the proposed merger is a fraud upon or oppressive to the minority stockholders of the Equitable Company? The learned justice at Special Term refused to find, as appears from his opinion, that the act of the majority was fraudulent or in bad faith, but he did find that it was "unfair to the interest of the plaintiff." I have been unable to reach the conclusion that it is unfair to the plaintiff. Certainly it is not so clear that it is unfair that a court of equity would be justified in interfering with the proposed action of a large majority of the stockholders of that company. The material facts are undisputed; the only dispute between the parties being inferences to be drawn therefrom. It appears that about 65 per cent, of the stock of the Mercantile Company and about 49 per cent, of the stock of the Equitable Company is held by the Equitable Life Assurance Society of the United States: that of the 20 directors who signed the merger agreement on behalf of the Equitable Company 9 are also directors of the Mercantile Company; and that several of the officers and directors of the Equitable Society are also directors of the Mercantile Company. With such an intermingling of interests it is not only proper, but necessary, to scrutinize the proposed merger agreement with care for the purpose of ascertaining whether it is fair to the plaintiff or not, but in doing so it must be borne in mind that it does not necessarily follow because there is such an intermingling of interests that the proposed agreement is void or so manifestly unjust as would justify a court of equity in interfering. Continental Ins. Co. v. N. Y. & H. R. Co., 187 N. Y. 225, 79 N. E. 1026; Burden v. Burden, 159 N. Y. 287, 54 N. E. 17. The proposed agreement is tentative only. The corporations are not bound in anyway until it is adopted and ratified by two-thirds of the stockholders. It is, at most, a plan to be submitted to the stockholders for their action; and for this reason many of the authorities cited on the respondent's brief, in which directors have made contracts in which they have a personal interest, have no application.
The capital stock of the Mercantile Company is $2,000,000; its surplus about $7,000,000—making the book value of each share approximately $452. The capital stock of the Equitable Companv is $3,000,000; its surplus about $10,000,000—making the book value of its shares approximately $440. In estimating the value for the merger, the directors deducted $5 per share as the estimated cost of liquidation, making the book value of the Equitable Company's stock $435 per share. Under the terms of the merger agreement, the capital stock of the Mercantile Company is to be increased to $3,000,000; its stockholders retaining thejr present holdings. The stockholders of the Equitable Company, upon surrendering their stock, are to receive, at their option, either $435 in cash for each share, or one share of the Mercantile stock for each two shares of the Equitable stock; provision having been made to insure the retirement for cash of sufficient stock, so that the new stock issued shall not exceed $1,000,000. It will require $4,350,000 to retire the old stock, so that the Equitable Company will contribute to the merged company about $9,000,000, substantially the same amount which the Mercantile Company now has. The book value of the new company's shares will then be approximately $600.
A superficial examination of the proposed merger would seem to indicate it was unfair to the Equitable stockholders. The two companies contribute substantially the same amount of capital, and yet the Equitable stockholders will get in return for each two shares of their stock, whose book value is about $870, one share of stock of the new company, whose book value will be about $600, while the Mercantile stockholders will get two-thirds of the stock of the new company, and the shares they now hold will be increased in book value from $452 to $600. This apparent unfairness, however, disappears when the condition and earning capacity of the two companies are critically examined. The Mercantile Company earns annually about 12 per cent, on the book value of its shares—that is, about 51 per cent, on each share—while the equitable company earns less than 6 per cent, on its book value, or about 25 per cent, on each share. A further fact which is not disputed, and which in determining the value of the shares is a very pertinent subject of inquiry, is that the Equitable Company has suffered quite seriously from recent business conditions. Its relations with the Equitable Life Assurance Society are not now, and, it is not difficult to see, will not in the future, be nearly so profitable as formerly, and its earning capacity thereby is and will be largely diminished. The directors estimate the annual earnings of the new company, taking the annual earnings of the Mercantile Company and adding thereto the estimated earnings at 4 per cent, on the $9,000,000 to be obtained from the Equitable Company, as approximately $1,500,000; that is, about 8 per cent, on the book value of its stock, or 48 per cent, on each share. The exchange of two shares of stock in a company earning 25 per cent, on each share, with much uncertainty as to its future earning power, for one share in a company which can reasonably be expected to earn 48 per cent, on each share, cannot be said to be such an unconscionable proposition as to justify a court of equity in interfering, and especially when the plan is approved by a very large majority of the stockholders of the Equitable Company. It is true, as pointed out by the learned justice sitting at Special Term, that the foregoing estimate figures the earnings upon the Equitable contribution at only 4 per cent. Whereas that corporation is now earning nearly 6 per cent.; but for reasons already suggested it is extremely doubtful whether the earnings of the Equitable Company will, if the merger does not take place, be more than 4 per cent., but, if that fact be assumed, then the shares in the new company will be more valuable than as now estimated. If the new company can earn upon its capital anything like the per cent, which the Mercantile Company is now earning, the net earnings per share of the new company will be more than twice as much as the present earnings of the Equitable Company. It may be assumed that the proposed merger will be of benefit to the stockholders of the Mercantile Company. Indeed, the main contention of respondent's counsel seems to be the great advantage which will accrue to the Mercantile stockholders rather than injustice which the stockholders of the Equitable will suffer.
It is argued that no allowance is made for the good will of the Equitable Company and that this is an asset taken from the Equitable stockholders without compensation. Good will is unquestionably an asset, but its value is a variable and uncertain quantity. It may exist to-day and disappear to-morrow. In case of a dissolution, either forced or voluntary, it adds but little, if anything, to the assets of the dissolved corporation. In this connection it may not be out of place to call attention to the fact that it does not seem to be seriously claimed that if the Equitable Company were to be dissolved, and its property distributed among its stockholders, they would realize more than $435 a share. If a large majority of the stockholders of the Equitable Company deemed it for their respective interests to liquidate the company, and proceedings in good faith were about to be taken in accordance with the statute for that purpose, no one, I take it, would seriously contend that a court of equity ought to interfere and prevent such liquidation. Windmuller v. Standard Distilling & Distributing Co. (C. C.) 114 Fed. 491; 4 Thompson on Corporations, § 4443.
After a careful consideration of the record, I do not think it can be said the proposed agreement is unfair to the plaintiff. It has been approved, as the statute requires, by the state superintendent of banks, and the fact is not disputed that the holders of over 27,000 shares of the Equitable Company's stock out of a total of 30,000 shares have signified their assent and approval of the merger. The Equitable Life Assurance Society holds some 15,000 of these shares, but it appears that other holders of 12,914 shares have signified their intention to vote for the merger, while only the plaintiff, who holds 300 shares, and one other stockholder who holds 6 shares, have signified their disapproval. No director of the Equitable has opposed the merger. It is resisted by the holders of barely 1 per cent, of the stock, while the holders of over 90 per cent, have signified their approval. Every stockholder of a corporation holds his stock subject to the execution of all the powers conferred by law upon the corporation, and he must abide by the decision of the directors or stockholders, as the case may be, upon all matters which the law commits to their determination and control. Morawetz on Corporations (2d Ed.) §§ 413-417; Cook on Corporations (5th Ed.) § 684.
The Legislature has seen fit, in the exercise of the powers conferred upon it, to provide the conditions upon which existing trust companies may merge. I "know of no principle which justifies a court of equity in interfering with a large majority of the stockholders proceeding strictly in accordance with the statute simply because some of the minority stockholders think the proposed agreement is unsatisfactory or unfair. That question must necessarily under the statute be determined by the stockholders themselves, and, once their decision has been made, in the absence of fraud or bad faith, or of facts clearly showing that the proposed acts will be oppressive or unfair to the corporation, the court cannot and ought not to interfere. If it did so, it would, in effect, repeal the statute and subject the control of the majority to the will of the minority.
Finally, it is urged that the order should be affirmed so as to preserve the status quo until after the trial of the action; that, if it is reversed, any relief to which the trial might determine the plaintiff entitled would be unavailing. There would be force in this suggestion if there were any material dispute as to the facts; but there is not. This is recognized in the brief presented by the respondent's counsel, in which he states:
"Both defendants admit In their answers and affidavits all the material facts alleged by the plaintiff In support of the injunction. * * * They differ with the plaintiff only in his conclusion that the plan is Iniquitous and unconscionable, and contend that it is fair and just But that Is obviously a question of construction for the court. * * *"
It is not even suggested that there was any deception or concealment in arranging for the merger; on the contrary, it appears that the directors of the Equitable Company acted openly and full information was given to its stockholders. The only question presented is whether the merger agreement by its terms and from the interrelation of the parties in interest is so unfair and unconscionable as regards the plaintiff and other minority stockholders that a court of equity should interfere and prevent its consummation. The facts are fully set out in the record; and, there being no dispute as to such facts, the legal questions involved can be as well passed upon now as at the close of the trial. These facts in my opinion do not show that the proposed merger is illegal, unfair, or unjust to the plaintiff, or that there is any ground whatever to justify a court of equity in exercising its equitable powers to prevent a large majority of the stockholders of a corporation doing precisely what the statute in express terms says they may do.
If I am right in this conclusion, then it follows that the order appealed from must be reversed, with $10 costs and disbursements, and the motion to continue the injunction denied, with $10 costs. All concur.
MORSE v. EQUITABLE LIFE ASSUR. SOCIETY OF UNITED STATES
et al.
(Supreme Court, Appellate Division, First Department. February 14, 1906.)
1. Words And Phrases—"invest."
Invest, as used In connection with money or capital, means to give money for some other property; to lay out money for some other kind of property, usually of a permanent nature, literally, to clothe money in some thing; to lay out money in some permanent form so as to produce an Income; to lay out money or capital in business with the view of obtaining an Income or profit; to place money so that it will yield a profit.
[Ed. Note.—For other definitions, see Words and Phrases, vol. 4, pp. 3755-3758.]
2. Insurance—Investments By Life Insurance Companies.
The carrying out of a proposed merger agreement by which stockholders may surrender their shares and receive in exchange therefor the shares of the merged company, so far as such merger affects a life insurance company owning shares in the constituent companies upon expenditures of money, made when not prohibited by law, does not offend against the provisions of Insurance Law, § 100, as amended by Laws 1906, p. 797, c. 326, providing that life Insurance companies shall not invest In any shares of the stock of any corporation other than a municipal corporation.
3. Corporations—Consolidation—Rights Of Stockholders.
A stockholder cannot enjoin the execution of a proposed merger agreement between corporations which is intra vires, unless fraud or oppression or. unfairness is shown.
[Ed. Note.—For cases in point, see Cent. Dig. vol. 12, Corporations. 5 2346.]
Appeal from Special Term.
Action by Charles W. Morse, a stockholder of the Equitable Life Assurance Society of the United States, on his own behalf and on behalf of other stockholders, against said Equitable Life Assurance Society of the United States and others. From an order granting an injunction during the pendency of the action, defendants appeal. Reversed.
Argued before PATTERSON, P. J., and McLAUGHLIN, LAUGHLIN, CLARKE, and SCOTT, JJ.
Charles F. Brown (Paul D. Cravath, Allan McCulloh, Carl A. De Gersdorff, on the brief), for appellants.
Louis Marshall (Thomas D. Adams, on the brief), for respondent.
CLARKE, J. This is an appeal from an order granting an injunction pendente lite in an action in equity brought to enjoin and restrain the Equitable Life Assurance Society of the United States, its directors, officers, agents, and attorneys, from voting at any meeting of the stockholders of the defendant the Equitable Trust Company of New York, or of the defendant the Mercantile Trust Company, in favor of approving an agreement of merger, dated June 13, 1907, between said trust companies; from exchanging the capital stock of the Equitable Trust Company held by the insurance company for shares of stock of the Mercantile Trust Company; and restraining the said trust companies, and their, and each of their, directors, officers. agents, and attorneys, from carrying out the aforesaid agreement of merger. The said merger agreement and the questions arising thereunder have been considered in Colby v. Equitable Trust Company (handed down herewith) 108 N. Y. Supp. 978, and no further consideration of the questions there passed upon is necessary in this opinion. We therefore consider solely the questions peculiar to this case.
The capital stock of the Equitable Life Assurance Society is $100,•000, divided into 1,000 shares of the par value of $100 each, the annual dividends thereon being limited by law to 7 per cent. The plaintiff owns 15 shares of said capital stock. The charter of the societyprovides that the earnings and receipts over and above the dividends, losses, and expenses shall be accumulated, and that the insurance business of the company shall be conducted upon the mutual plan. The assets of the company in excess of its capital stock, according to its last report, amounts to upwards of $434,000,000, of which $68,720,333 is surplus. A majority of its directors are elected by policy holders, and not by the stockholders. The insurance company owns 14,500 shares of the capital stock of the defendant Equitable Trust Company, being 67 per cent, thereof, and 12,941 shares of the capital stock of the Mercantile Trust Company, being about 49 per cent, thereof. One of the grounds upon which the injunction was prayed is that the Equitable Life Assurance Society has no right, under section 100 of the insurance law of the state of New York, amended by chapter 326, p. 797, Laws 1906, to exchange its stock in the Equitable Trust Company of New York for stock of the merged company under the merger agreement. Said section provides as follows:
"Investments. No domestic life Insurance corporation, whether Incorporated by special act or under a general law, shall alter the first day of June, 1906, Invest In or loan upon any shares of stock of any .corporation, other than a municipal corporation, nor, excepting government, state or municipal securities, shall it invest in, or loan upon, any bonds or obligations which shall not be secured by adequate collateral security or where more than onethird of the total value of the collateral security therefor shall consist of shares of stock. Every such corporation which on the first day of June, 1906, shall own any shares of stock other than public stocks of municipal corporations, whenever the same shall have been acquired, or any bonds or obligations of the kinds above described where said bonds or obligations shall have been acquired after the first day of March, 1906, shall dispose of the said shares of stock and of said bonds and obligations witbin five years from the thirty-first day of December, 1906, and in each year prior to the expiration of said five years shall make such reduction of Its holdings of said securities as may be approved in writing by the superintendent of insurance. No investment or loan shall be made by any such life insurance corporation unless the same shall first have been authorized by the board of directors or by a committee thereof charged with the duty of supervising such investment or loan. No such corporation shall subscribe to or participate in any underwriting of the purchase or sale of securities or property, or enter into any transaction for such purchase or sale on account of said corporation jointly with any other person, firm or corporation; nor shall any such corporation enter into any agreement to withhold from sale any of its property, but the disposition of Its property shall be at all times within the control of its board of directors. Any such corporation, in addition to other investments allowed by law, may invest any of its funds in any duly authorized bonds or evidences of debt of any city, county, town, village, school district, municipality or other civil division of any state, and may loan upon the security of improved and unencumbered real property In any state worth fifty per centum more than the amount loaned thereon."
The insurance company has now a considerable amount of money invested in certain shares of the capital stock of the Equitable Trust Company and the Mercantile Trust Company. It is provided by the terms of the proposed merger that the holders of the capital stock of the Equitable Trust Company shall surrender their stock by delivering the certificates therefor, duly indorsed in blank for transfer, and each stockholder shall be entitled to receive at his option either one share of the capital stock of the merged company for each two shares of the stock of the Equitable Trust Company so surrendered, or $435 in cash for each share so surrendered; that the holders ol the present outstanding capital stock of the Mercantile Trust Company shall be entitled to retain one share in the merged company for each share of such present stock, and to receive new certificates therefor upon surrender to the merged company of the present certificates for cancellation. If the insurance company surrenders its shares of the Equitable Trust Company stock at the ratio of two to one, and receives shares of the merged company therefor, and surrenders its shares in the Mercantile Trust Company and receives share for share therefor of the merged company, will that transaction violate the provision of the statute cited, supra, that "no domestic life insurance corporation shall invest in any shares of stock of any corporation other than a municipal corporation"? It is, of course, conceded if this were an original transaction, if the insurance company should agree to buy and pay for out of its funds shares of stock in the merged corporation to be formed by this agreement, that it would violate the provisions of the statute in fact and in intent. The insurance company owns, however, upon expenditures of money heretofore made, when not prohibited by law, shares of stock in the two constituent companies. It has the right, under the statute, to continue to hold such shares as were acquired prior to the 1st of June, 1906, for five years from the 1st day of December, 1906, subject only to the requirement that it shall make in each year of said five years such reduction of its holdings of said securities as may be approved in writing by the superintendent of insurance. During that period its ownership of said stock is perfect. Its title is as good, its privileges, responsibilities, and duties the same as that of any other holder of shares in said companies. It has the right to vote upon its shares in every election and upon every proposition lawfully submitted to the stockholders of the said companies, including the right to vote upon a proposition for merger, required by law to be submitted by the directors to the stockholders, and which can only be accomplished by the consent of the holders of two-thirds of said stock. So long as it is the owner, it is vested with all the rights of ownership. The Century Dictionary defines the word "invest" as follows:.
"To employ for some profitable use; convert Into some other form of wealth, usually of a more or less permanent nature, as In the purchase of property or shares, or In loans secured by mortgages, etc.; said of money or capital; followed by In; as, to Invest one's means In lands or houses or In bank stock, government bonds, etc.; to Invest large sums In books."
"Investment" in the same dictionary is denned:
"An Investing of money or capital; expenditure for profits or future benefits; a placing or conversion of capital in a way Intended to secure income or profit from its employment; as, an investment In active business, or in stocks, land, or the like; to make safe investment of one's principal."
In 23 Cyc. 348, "invest" is denned as follows:
"As used In connection with money or capital, to give money for some other property; to lay out money for some other kind of property, usually of a permanent nature; literally, to clothe money in some thing; to lay out money in., some permanent form so as to produce an income; to lay out money or capital in business with the view of obtaining an income or profit; to place money so that it will yield a profit."
Under this proposed merger no money is to be paid out or clothed in securities or transferred from cash to stock. The investment has long since been made; the money has long since been "placed so that it will yield a profit," "given for some other property," "laid out in a permanent form so as to produce an income." There is to be a mere exchange of shares of stock in two separate companies for shares of stock in one company which is to be the result of the merging of the two separate companies, the merged company to take over and carry on the powers, rights, and privileges of the two separate companies. Instead of the laying out of capital, the parting with money for a security, there will be a considerable transformation of securities into cash by that provision which permits the company to receive $435 per share for those shares of the Equitable Trust Company which it does not desire to exchange for shares in the merged company at the ratio provided. The president of the insurance company states under oath:
"I know of no way by which the society can realize as much upon its holdings as by availing Itself of the proposed merger, which Insures a cash price -of $439 for each share of stock which is not exchanged for stock of the merged company. In my judgment that price is considerably in excess of the probable liquidation value of the stock. * • * If for any reason the proposed merger should prove impracticable, my own Judgment, as representing the Equitable Life Assurance Society, would be in favor of liquidating the Equitable Trust Company so as to return to its stockholders its capital and surplus, less the expense of liquidation."
It seems to me clear that the proposed transaction, so far as it affects the Equitable Life Assurance Society, does not offend against the provisions of section 100 of the insurance law, as amended by chapter 326, p. 797, Laws 1906. If I am right, the proposed action of the directors in voting the shares owned by the insurance company is not ultra vires; and, as the learned court at Special Term in the Colby Case distinctly held that the scheme of merger was not fraudulent, this case falls within the doctrine that a stockholder cannot
"In actions by stockholders which assail the acts of their directors or trustees courts will not interfere unless the powers have been Illegally or unconscientiously executed, or unless it be made to appear that the acts were fraudulent or collusive and destructive of the rights of the stockholders."
Where we consider the nature and character, the assets, surplus and capital stock of this insurance company, it is difficult to perceive in what possible way the proposed merger can be destructive of the rights of this plaintiff who owns 15 shares of its stock upon which the dividends are limited by law to 7 per cent, per annum.
For these reasons, in addition to those expressed in the opinion in the Colby Case, the order appealed from should be reversed and the injunction vacated, with costs and disbursements to the appellants. All concur.
Reports of cases heard and determined in the Appellate Division ..., Volume 124
Bainbridge Colby, Respondent, v. The Equitable Trust Company Of New York and The Mercantile Trust Company, Appellants.
Corporation — merger of trust companies having special charters — rights of minority stockholders — when merger agreement not inequitable — temporary injunction of merger denied.
By virtue of section 1G3 of the Ranking Law, providing that trust companies incorporated under special laws shall possess the powers of trust companies incorporated under the Banking Law and shall be subject to the provisions of that law so far as they are not inconsistent with the special charter, the Equitable Trust Company of New York and the Mercantile Trust Company, respectively incorporated under various special acts and possessing similar powers, are entitled to merge pursuant to the provisions of sections 34 and 38 of the Banking Law.
The Legislature, under the power to repeal or amend corporate charters reserved by the Constitution, may authorize the merger of corporations if there be no confiscation of their property.
A merger which results in the extinction of the merged corporation, and the transfer of its assets to the other corporation, does not confiscate its property or deprive it of vested property rights, for under the statute a stockholder unwilling to assent to the terms of the merger agreement may obtain the value of his stock in cash.
A stockholder is charged with knowledge that the statute gives majority stockholders the right to elect the officers of the corporation, to dictate its policyf and to control its management, and if the acts of the majority do not meet with his approval he has no legal ground of complaint, unless he can show acts which in effect amount to a fraud against him or to bad faith on the part of the majority. A court of equity will interfere in the management of a corporation at the. solicitation of a minority stockholder only when his complaint is based upon some illegal or unauthorized act of the majority to his prejudice.
When it appears that a large number of the directors and officers of a trust company who signed an agreement to merge with another company are also directors and officers in the latter, there is such an intermingling of interest that the court will scrutinize the proposed agreement with care in order to ascertain whether it lie fair to minority stockholders; but the mere intermingling of interest does not of itself make the agreement void or so manifestly unjust as to warrant a court of equity in interfering.
A merger agreement providing for an exchange of two shares of stock in a com pany which although earning twenty-live per cent on each share, lists mucli uncertainty as to its future earning power, for one share of stock in the other company which cim reasonably be expected to earn forty eight per cent on each share, canuot be said to be so unconscionable as to justify a court of equity in interfering at the suit of a minority stockholder, especially when the agreement has been approved by a large majority of stockholders and by the Supt. Superintendent of Banks.
On such merger it is not necessary to make allowance for the good will of the company which transfers its assets, if, in case of dissolution, forced or voluntary, it would add nothing to the assets of the corporation.
A stockholder holds his stock subject to the execution of all the powers conferred by law upon the corporation, and he must abide by the decision of the directors or stockholders, as the ease may be, upon all matters which the law commits to their determination and control.
A court of equity will not interfere with a proposed merger of corporations authorized by a largo majority of tho stockholders in good faith and in accordance with the statute, simply because some of the minority think the proposed agreement is unsatisfactory or unfair.
When there is no material dispute as to tho result of such proposed merger and the legal questions involved can be passed upon as well on a motion for an injunction pendente lite as at the close of the trial, the determination of the questions need not be deferred.
Appeal by the defendants, The Equitable Trust Company of New York and another, from an order of the Supreme Court, made at the New York Special Term and entered in the office of the clerk of the county of New York on the 3d day of July, 1907, granting an injunction pendente lite.
Charles F. Bimon, for the appellants.
William M. Ivins, for the respondent.
Mclaughlix, J.:
Tho plaintiff, a stockholder of the Equitable Trust Company of New York, brings this action in equity on his own behalf and on behalf of all other stockholders of that corporation to enjoin its proposed merger with the defendant, The Mercantile Trust Company, mainly upon the ground that such merger is illegal and unfair to the plaintiff.
After the commencement of tho action, upon notice, he applied for and obtained an order restraining the defendants and their officers and agents, during the pendency of the action, from taking any further steps towards' carrying out the proposed merger. The defendants appeal from this order.
The proposed merger is attempted under sections 34 to 38 of the Banking Law (Laws of 1892, chap. 689, added hy Laws of 1895, chap. 382, and amd. by Laws of 1900, chap. 199). Section 34 provides that "Any two or more corporations, other than savings banks, organized under any one article of this chapter, or organized under the laws of this State for the purposes, or either of them, mentioned in any one article of this chapter, are hereby authorized to merge one or more of said corporations into another in the manner following * * *." The contention that the proposed merger is illegal is based substantially upon two propositions: First, (a) That neither the Equitable Trust Company nor the Mercantile Trust Company was "organized under any one article of this chapter ;" (b) that neither of them was "organized under the laws of this State for the purposes, or either of them, mentioned in any one article of this chapter." The Equitable Trust Company was incorporated under chapter 604 of the Laws of 1871, under the name of the "Traders' Deposit Company," with powers, among other things, to receive upon deposit money, certificates and evidences of deht or value and contracts, and to take the management, custody and charge of the same and to advance moneys, securities and credits upon the same at such rates of interest, not exceeding the legal rate, and upon such terms and conditions as may be agreed upon by the parties. In 1896 (Chap. 839 of that year) the Legislature further authorized it "to have all the rights, powers and privileges conferred upon trust companies by section one hundred and fifty-six of an act entitled 'An act in relation to banking corporations,' and known as the Banking Law." The name of the corporation was changed in 1895 (Laws of li>95, chap. 557), and again, by special act of the Legislature, was changed in 1902 (Chap. 290) to the Equitable Trust Company of New York. The Mercantile Trust Company was incorporated by special act of the Legislature in 1868 (Chap. 806) under the name of " Fire Proof Warehousing Company." Its powers were thereafter increased by special acts,* [ *See Laws of 1869, chap. 185; Laws of 1870, chap. 121, and Laws of 1880, chap. 425.—[rep. ] and in 1873 its name was changed (Chap. 845) to "The Mercantile Trust Company," and it was empowered "to accept and execute all such trusts of every description as may he committed to it by any person or persons whatsoever, or by any corporations.'' Neitherof the defendants was organized under any one article of the Banking Law — each having been organized by special act of the Legislature — but that they come fairly within the provisions of that act and are subject thereto cannot be seriously doubted when section 163 (Laws of 1892, chap. 689) is read in connection with the other sections. This section provides that: "Every trust company incorporated by a special law shall possess the powers of trust companies incorporated under this chapter and shall be subject to such provisions of this chapter as are not inconsistent with the special laws relating to such specially chartered company." In Tenner v. Fanner)? Loan & Trust Co. (54 App. Div. 271 ; affd., 176 N. Y. 549) it was held that under this section a company incorporated by special act in 1822 with no banking privileges, but which has subsequently acquired power to execute trusts, was subject to the provisions of the Banking Law and might receive deposits, though such power was expressly withheld in its original charter.
Second. That the Legislature had no power to sanction the A merger of corporations against the protest of minority stockholders nnless such merger were lawful when the corporations were formed. But the Legislature has the right at any time it sees fit to alter, suspend and repeal the charters of corporations. (1 R. S. 600 [R. S. pt. 1, chap. 18, tit. 3], § 8; rep. by Gen. Corp. Law [Laws of 1890, chap. 563], §§ 23, 26, as amd. by Laws of 1892, chap. 6S7, § 34. See Gen. Corp. Law [Laws of 1892, chap. 687], § 40, added by Laws of 1895, chap. 672.) The right is reserved to the Legislature by the Constitution. (Art. 8, § 1.) The Legislature, of course, cannot confiscate property, but it is under its fiat that the corporation comes into existence and the power which creates may thereafter change or destroy. {People ex rel. Cooper Union v. Gass, 190 N. Y. 323; Mayor, etc., v.Twenty-third St. Ii. Co., 113 id. 311; Lord v. Equitable Life Assur. Soc, 109 App. Div. 252.) The extent and effect of the legislative reservation of the right to alter or repeal corporate charters was discussed in Hinckley v. Schioarzschild cB S. Co. (107 App. Div. 470). There the plaintiff sought to restrain the defendant corporation from issuing preferred stock and subordinating the existing stock to the payment of capital and dividends thereon. At the time the defendant was organized, unless provided for in the certificates of incorporation, preferred stock could he issued only with the unanimous consent of the stockholders. Under chapter 354 of the Laws of 1901 (aindg. Stock Corp. Law [Laws of 1892, chap. CSS], § 47) power was given a corporation to issue preferred stock upon consent of the holders of two-thirds of the stock and defendant sought to issue preferred stock in accordance with this statute. Tiie court held that the act was a valid exercise of legislative power, applied to corporations existing at the time of its passage, and that a minority stockholder could not prevent the issue of such stock. In so far as the right of a corporation to exut is concerned, as well as over the exercise of such powers as can only be exercised by it as an existing corporation, the State has absolute control under its reserve power. (People v. O'Brien, 111 N. Y. 1.) It cannot, however, confiscate the property of the corporation or deprive it of its vested property rights. (Rochester
Here, the merger of the Equitable Trust Company — if the merger be permitted to take placo — will result in the extinction of that corporation and the transfer of its assets to the new corporation but its property is not confiscated, nor is the corporation deprived of vested property rights. The property is sold to the merged corporation upon the terms provided in the merger agreement and ample provision is made under the statute authorizing the merger by which any stockholder who is unwilling to assent to the terms can obtain the value of his stock in cash. The act provides that any stockholder who does not agree to the terms of the merger agreement may object to it and demand payment for his stock and, if not paid, he may apply to the Supreme Court for the appointment of three appraisers to fix and determine the value of his stock and the expenses of such determination have to be borne by the corporation itself. When the plaintiff became interested in the Equitable Trust Company he did so with full knowledge of the fact that the statute commits to the majority stockholders the right to select its officers, dictate its policy, and control its management. If the acts of the majority do not meet with his approval he has no legal ground of complaint unless ho can show facts which, in effect amount to a fraud against him, or bad faith on the part of the majority. A court of equity will interfere in the management of *" a corporation at the solicitation of a minority stockholder only when his complaint is based upon some illegal or unauthorized act of the majority to his prejudice. This question is quite fully discussed in Gamble v. Queens Count// Water Co. (123 N. Y. 91). Judge Peck- Ham, delivering the opinion of the court, said: "It is not, however, every question of mere administration or of policy in which there is a difference of opinion among the shareholders that enables the minority to claim that the action of the majority is oppressive, and which justifies the minority in coming to a court of equity to obtain relief. Generally, the rule must be that in such cases the will of the majority shall govern. The court would not he justified in interfering even in doubtful cases, where the action of the majority might bo susceptible of different constructions. To warrant the interposition of the court in favor of the minority shareholders in a corporation or joint-stock association, as against the contemplated action of the majority, where such action is within the corporate powers, a case must be made out which plainly shows that such action is so far opposed to the true interests of the corporation itself as to lead to the clear inference that no one thus acting could have been influenced by any honest desire to secure such interests, hut that he must have acted with an intent to subserve some outside purpose, regardless of the consequences to the company and in a manner inconsistent with its interests. Otherwise the court might be called upon to balance probabilities of profitable results to arise from the carrying out of the one or the other of different plans proposed by or on behalf of different shareholders in a corporation, and to decree the adoption of that line of policy which seemed to it to promise the best results, or at least to enjoin the carrying out of the opposite policy. This is no business for any court to follow." But in any view can it be fairly said that the proposed merger is a fraud upon or oppressive to the minority stockholders of the Equitable Company? The learned justice at Special Term refused to find, as appears from his opinion, that the act of the majority was fraudulent or in bad faith, but he did find that it was " unfair to the interests of the plaintiff." (55 Misc. Rep. 355.) I have been unable to reach the conclusion that it is unfair to the plaintiff. Certainly it is not so clear that it is unfair that a court of equity would he justified in interfering with the proposed action of a large majority of the stockholders of that company. The material facts are undisputed, the only dispute between the parties being inferences to be drawn therefrom. It appears that about sixty-five per cent of the stock of the Mercantile Company and about forty-nine per cent of the stock of the Equitable Company is held by the Equitable Life Assurance Society of the United States; that of the twenty directors who signed the merger agreement on behalf of the Equitable Company nine are also directors of the Mercantile Company and that several of the officers and directors of the Equitable Society are also directors of the Mercantile Company. AVith such an intermingling of interests it is not only proper but necessary to scrutinize the proposed merger agreement with care for the purpose of / ascertaining whether it is fair to the plaintiff or not, but in doing j so it must be borne in mind that it does not necessarily follow' because there is such an intermingling of interests that the proposed agreement is void or so manifestly unjust as would justify a court of equity in interfering. (Continental Ins. Co. v. If. JT. c£. 77. R. R. Co., 187 N. Y. 225; Burden v. Burden, 159 id. 287.) The proposed agreement is tentative oidy. The corporations are not bound in any way until it is adopted and ratified by the holders of two-thirds of the stock. It is at most a plan to be submitted to the stockholders for their action and for this reason many of the authorities cited on the respondent's brief, in which directors have made contracts in which they have a personal interest, have no application. The capital stock of the Mercantile Company is $2,000,000; its surplus about $7,000,000, making the book value of each share approximately $452. The capital stock of the Equitable Company is $3,000,000; its surplus about $10,000,000, making the book value of its shares approximately $440. In estimating the value for the merger, the directors deducted $5 per share as the estimated cost of liquidation, making the book value of the Equitable Company's stock $435 per share. Under the terms of the merger agreement, the capital stock of the Mercantile Company is to be increased to $3,000,000, its stockholders retaining their present holdings. The stockholders of the Equitable Company, upon surrendering their stock, are to receive, at their option, either $435 in cash for each share, or one share of the Mercantile stock for each * two shares of the Equitable stock, provision having been made to insure the retirement for cash of sufficient stock so that the new stock issued shall not exceed $1,000,000. It will require $4,350,000 to retire the old stock, so that the Equitable Company will contribute to the merged company about $9,000,000, substantially the same amount which the Mercantile Company now has. The book value of the new company's shares will then be approximately $600.
A superficial examination of the proposed merger would seem to indicate it was unfair to the Equitable stockholders. The two companies contribute substantially the same amount of capital, and yet the Equitable stockholders will get in return for each two shares of their stock — whose book value is about $870 — one share of stock of the new company — whose book value will be about $600 — while the Mercantile stockholders will get two-thirds of the stock of the new company, and the shares they now hold will be increased in hook value from $452 to $600. This apparent unfairness, how- * ever, disappears when the condition and earning capacity of the two companies are critically examined. The Mercantile Company earns aunually about twelve per cent on the book value of its shares — that is about fifty-one per cent on each share — while the P^quitable Company earns less than six per cent on its book value or about twenty-five per cent on each share. A further fact which is not ^ disputed, and which in determining the value of the shares is a very pertinent subject of inquiry, is that the Equitable Company has suffered quite seriously from recent business conditions. Its relations with the Equitable Life Assurance Society are not now and, it is not difficult to see, will not ill the future be nearly so profitable as formerly, and its earning capacity thereby is and will be largely diminished. The directors estimate the annual earnings "f the new company — taking the annual earnings of the Mercantile Company and adding thereto the estimated earnings at four per cent on the $9,000,000 to be obtained from the Equitable Company— as approximately $1,500,000 — that is, about eight per cent, on the book value of its stock, or forty-eight per cent on each shun i. The exchange of two shares of stock in a company earning twen ty-' five per cent on each share, with much uncertainty as to its future earning power, for one share in a company which can reasonably be expected to earn forty-eight per cent on each share, cannot be said to be such an unconscionable proposition as to justify a court of equity in interfering and especially when the plan is approved by a very large majority of the stockholders of the Equitable Company. It is true, as pointed out by the learned justice sitting at Special Term, that the foregoing estimate figures the earnings upon the Equitable contribution at only four per cent, whereas that corporation is now earning nearly six per cent, but for reasons already suggested it is extremely doubtful whether the earnings of the Equitable Company will — if the merger does not take place — be more than four per cent, but if that fact be assumed, then the shares in the new company will be more valuable than as now estimated. If the new company can earn upon its capital anything like the per cent which the Mercantile Company is now earning, the net earnings per share of the new company will be more than twice as much as the present earnings of the Equitable Company. It may be assumed that the proposed merger will be of benefit to the stockholders of the Mercantile Company. Indeed, the main contention of respondent's counsel seems to be the great advantage winch will accrue to the Mercantile stockholders rather than the injustice which the stockholders of the Equitable will suffer.
It is argued that no allowance is made for the good will of the Equitable Company and that this is an asset taken from the Equitable stockholders without compensation. Good will is unquestionably an asset, but its value is a variable and uncertain quantity. It may exist to-day and disappear to-morrow. In case of a dissolution — either forced or voluntary — it adds but little, if anything, to the assets of the dissolved corporation. In this connection it may not bo out of place to call attention to the fact that it does not seem to be seriously claimed that if the Equitable Company were to be dissolved, and its property distributed among its stockholders, they would realize more than $435 a share. If a large majority of the stockholders of the Equitable Company deemed it for their respective interests to liquidate the company and proceedings in good faith re about to be taken in accordance with the statute for that nr, no one, I take it, would seriously contend that a court of equity to interfere and prevent such liquidation. (Windniuller v. ret App. Div.]
Standard Distilling c& Distributing Co., 114 Fed. Rep. 491; Thomp. Corp. § 4443.)
After a careful consideration of tlie record, I do not think it can l>e said the proposed agreement is unfair to the plaintiff. It has Iwen approved, as the statute requires, by the State Superintendent of Banks, and the fact is not disputed that the holders of over 27,000 shares of the Equitable Company's stock out of a total of 30,000 shares have signified their assent and approval of tlie merger. Tlie Epiitable Life Assurance Society holds some 15,000 of these shares, but it appears that other holders of 12,914 shares have signified their intention to vote for the merger, while only the plaintiff, who holds 300 shares, and one other stockholder, who holds 6 shares, have sig- nitied their disapproval. xS'o director of the Equitable has opposed the merger. It is resisted by the holders of barely one per cent of the stock, while the holders of over ninety per cent have signified their approval. Every stockholder of a corporation holds his stock subject to the execution of r.ll the powers conferred by law upi n tlie corporation and he must abide by the decision of the directors or stockholders, as the case may be, upon all matters which the law commits to their determination and control. (Morawetz Corp. [2d ed.] 413-417; Cook Corp. [5th ed.] § 684.) The Legislature has seen fit, in the exercise of the powers conferred upon it, to provide the conditions upon which existing trust companies may merge. I know of no principle Which justifies a court of equity in interfering with a large majority of the stockholders proceeding strictly in accordance with the statute simply because some of the minority stockholders think the proposed agreement is unsatisfactory or unfair. That question must necessarily under the statute be deter- * mined by the stockholders themselves, and once their decision has l*en made, in the absence of fraud or bad faith or of facts clearly showing that the proposed acts will bo oppressive or unfair to the corporation, the court cannot and ought not to interfere. If it did so, it would in effect repeal the statute and subject the control of the majority to the will of the minority.
Finally it is urged that the order should be affirmed so as to preserve the status quo until after the trial of the action; that if it is reversed, any relief to which the trial might determine the plaintiff entitled would be unavailing. There would be force in this suggestion if thero were any material dispute as to the facts, but there is not. This is recognized in the brief presented by the respondent's counsel, in which he states: "Both defendants admit in their answers and affidavits all the material facts alleged by plaintiff in support of the injunction. * * * They differ with plaintiff only in his conclusion that the plan is iniquitous and unconscionable, and contend that it is fair and just. But that is obviously a question of construction for the court. * * *" It is not even suggested that there was any deception or concealment in arranging for the merger; on the contrary, it appears that the directors of the Equitable Coi..pany acted openly and full information was given to its stockholders. The only question presented is whether the merger agreement by its terms and from the interrelation of the parties in interest is so unfair and unconscionable as regards the plaintiff and other minority stockholders that a court of equity should interfere and prevent its consummation. The facts are fully set out in the record and there being no dispute as to such facts, the legal questions involved can be as well passed upon now as at the close of the trial. These facts, in my opinion, do not show that the proposed merger is illegal, unfair, or unjust to the plaintiff, or that there is any ground whatever to justify a court of equity in exercising its equitable powers to prevent a large majority of the stockholders of a corporation doing precisely what the statute in express terms says they may do.
If I am right in this conclusion, then it follows that the order appealed from must be reversed, with ten dollars costs and disbursements, and the motion to continue the injunction denied, with ten dollars costs.
Patterson, P. J., Laughlin, Clarke and ScoTr, JJ., concurred.
Order reversed, with ten dollars costs and disbursements, and motion denied, with ten dollars costs.
App. Div.]
Subscribe to:
Posts (Atom)