In re Drosnes , 187 A.D. 425 ( 1919 )

Shearn, J.:

The Film Amusement Company, Inc., was incorporated under the laws of the State of New York on January 25, 1913, and the purposes of the corporation as stated in the certificate are: “ To own, operate and conduct and manage a theatre or place of amusement; to own, manage, conduct or operate theatrical performances; to do a general theatrical business, either as principal, factor, agent or otherwise.” The capital stock of the corporation was $3,000 and was divided into thirty shares of the par value of $100 each. The petitioner owned ten shares and Nathan Doniger and Jacob Herskowitz each owned ten shares. The corporation since its organization operated a motion picture theatre called the Joyland Theatre at 2078-2080 Third avenue, borough of Manhattan, city of New York. In March, 1914, the company decided to rebuild the theatre and thereupon entered into a contract with the owner of the premises whereby the owner leased to the company the premises 2072-2080 Third avenue for a period of ten years at a rental of $5,000 plus taxes, assessments, water rates and insurance, with permission to the company to make alterations and rebuild the theatre. This the corporation did and the theatre as altered was completed in September, 1914. The premises as altered contained the theatre and three stores and the stores were rented out by the company. The petitioner’s husband, who had represented the petitioner since the incorporation of the company, was made manager of the theatre. More than a year later, differences arose between petitioner’s husband and Doniger and Herskowitz, the majority stockholders, regarding the management of the theatre. Doniger and Herskowitz thereupon proceeded to sell the company’s interest in the theatre and the petitioner objected and formally protested. In spite of the petitioner’s protests, a meeting of the directors was called to be held on the 20th day of November, 1915, “ For the purpose of considering the sale of the chattels and things owned by the company at the Joyland Theatre at 2078-2080 Third Avenue, in the Borough of Manhattan, City of New York, for the price of $4,500, payable $4,000 in cash and $500 in five promissory negotiable notes for $100 each, payable monthly beginning December 22, 1915, and also to lease the theatre building exclusive of the store therein at a rental of $500 per month; the tenant to pay the insurance premiums on the theatre building.” The meeting was held and a motion was made to make the sale as set forth in the notice of meeting. Doniger and Herskowitz, the majority stockholders, voted in favor of the motion, and the petitioner’s husband and duly authorized representative voted against the same. The motion was thereby carried and on the 22d day of November, 1915, the sale and transfer was actually made to the G. & G. Amusement Corporation, a company engaged in a business similar to that of the Film Amusement Company, Inc. At the time the transfer was made the company delivered to the purchaser a certificate stating that Doniger and Herskowitz owned two-thirds of the capital stock of the company.

Opposing the application of the non-assenting stockholder to have her stock appraised and purchased under the statute, the respondent first contends that the sale was not such as to entitle the petitioner to the statutory relief.

The respondent says: “ The company owned the same property as before November 20, 1915, all that had been done was to change the method of deriving its income from this property.” This is not correct because before November 20, 1915, the corporation owned all the personal property making up the equipment of the theatre and this was sold. While it is true that both before and after November 20, 1915, the corporation owned the lease, it is to be noted that it sold the theatre that it had erected upon the property. Before the transaction it owned a ground lease, the full equipment of a theatre and so long as the lease lasted it owned a theatre constructed by it on the premises. After the transaction it had no theatre and no equipment.

This corporation was not organized for the purpose of building and selling theatres or for the purpose of erecting buildings for the purpose of leasing same. Its puipose was to own, operate and conduct a theatre or place of amusement. This sale and transfer stripped the corporation of the only property it had which would enable it to carry out the purpose for which it was created, and the sale produced no money which could be used as capital to procure another theatre and carry on the business for which it was organized. This sale, to my mind, is one which clearly entitles the petitioner to the statutory relief, and is embraced in the category of cases described in Matter of Timmis (200 N. Y. 177, 181) as being the occasion for the enactment of the statute. In that case Judge Vann, after citing a number of cases, said:

“ These cases and those which intervened established the law that a corporation cannot sell all its property, or even a part thereof so integral as to be essential for the transaction or its ordinary business, because such a sale is wholly or. partly an act of self-destruction and a practical dissolution without compliance with law.

“The discussion of the subject in the various opinions suggested two evils: (1) The injustice to the bulk of the stockholders from want of power in- a corporation to sell its business or an essential part thereof to another corporation organized for the purpose, frequently from its own membership^ on terms deemed advantageous by the holders of a large majority of the stock. (2) The injustice to minority stockholders of requiring them to abandon, change or limit their business if the majority should have the power to direct such a sale. An incidental evil was the power of a dissenting stockholder to compel the majority to buy him out on his own terms in order to secure unanimous consent with no one left to question the transaction.”

It is an obvious injustice to one who has invested in a third of the capital stock of a corporation, organized for the express purpose of operating a theatre or place of amusement, to have the majority stockholders dispose of the only property it has which enables it to conduct a theatre and transform its business into that of a mere landlord or lessor of stores and theatres. In the one case there is the prospect and opportunity of large profits, growing out of the chance of acquiring plays that develop into great popular successes, while in the other the profits are absolutely limited to rents. So far as concerns the business for which this corporation" was organized to perform, after thus stripping itself of its assets it might as well have dissolved. But it is not proposed to dissolve it, but to hold the minority stockholders to their interest in the corporation and to such dividends as may be distributable from rentals. While the Stock Corporation Law permits a corporation upon the consent of two-thirds of its stockholders to dispose of a substantial part of its assets or even of all its assets, when it does so against the protest of the minority it must comply with the conditions prescribed by the statute and buy the minority stock at its appraised^, value. (See Consol. Laws, chap. 59 [Laws of 1909, chap. fill, §§ 16, 17.)

It is next contended by the respondent that, even if the sale was one that required the consent of two-thirds of the stockholders, the sale was ultra vires and void because the consent was not obtained at a stockholders’ meeting. This contention is advanced in face of the fact that, although the meeting was called a directors’ meeting, those who constituted the board either owned or represented every share of stock. Doniger and Herskowitz, two of the directors, owned two-thirds of the stock, and the third director was the husband of the petitioner, who owned the balance of the stock, and who had given her husband a power of attorney to represent her. So that while technically the meeting was that of the board of directors, those who met and acted were all stockholders or representatives of stockholders. But because the meeting of the stockholders was called a directors’ meeting, it is now claimed by those who put the transaction through that the sale, if governed by section 16 of the Stock Corporation Law, is void. The respondent is estopped from advancing this contention. ¡

The sale, at most, was merely voidable. It was neither malum in se nor malum prohibitum. The statute authorized a sale upon the consent of two-thirds of the stockholders. Such consent was given. As a matter of procedure, the consent was required to be obtained at a stockholders’ meeting called upon a specified notice. The object of this requirement is to give notice to dissenting stockholders, so that they will be in a position to protect their rights and apply for an appraisal of then stock within sixty days. It will hardly be contended that a purchaser in good faith, with the written consent of two-thirds of the stockholders, would get no title at all simply because the consent had not been obtained at a meeting duly called. On well-understood principles, the corporation and the assenting stockholders would be estopped from .claiming that the sale was ultra vires and void. (Kent v. Quicksilver Mining Co., 78 N. Y. 159, 185, 186; People v. Ballard, 134 id. 269, 295.) . In the Kent case the court said: “ In the application of the doctrine of ultra vires, it is to be borne in mind that it has two phases: one where the public is concerned; one where the question is between the corporate body and the stockholders in it, or between it and its stockholders, and third parties dealing with it and through it with them. When the public is concerned to restrain a. corporation within the limit of the power given to it by its charter, an assent by the stockholders to the use of unauthorized power by the corporate body will be of no avail. When it is a question of the right of a stockholder to restrain the corporate body within its express or incidental powers, the stockholder may in many cases be denied, on the ground of his express assent or his intelligent though tacit consent to the corporate action. If there be a departure from statutory direction, which is to be considered merely a breach of trust to be restrained by a stockholder, it is pertinent to consider what has been his conduct in regard thereto. A corporation may do acts which affect the public to its harm, inasmuch as they are per se illegal or are malum prohibitum. Then no assent of stockholders can validate them. It may do acts not thus illegal, though there is want of power to do them, which affect only the interests of the stockholders. They may be made good by the assent of the stockholders, so that strangers to the stockholders dealing in good faith with the corporation will be protected in a reliance upon those acts.”

This transaction was of no public concern; the claim of ultra vires is one merely between the stockholders. In such case the only defect being lack of notice to the dissenting stockholder, through obtaining the consent otherwise than at a stockholders’ meeting, the sale was not void, but was voidable. Certainly, then, the assenting stockholders, who although in control of the corporation failed to call a stockholders’ meeting, and who have been benefited by the sale consummated by them, and upon which they stand, are estopped from pleading ultra vires.

Neither should the petitioner, simply because she has a right to institute an action to set aside the sale, be compelled to resort to that remedy. She is not prosecuting an equitable action, but is pursuing a statutory right. Other than the assenting stockholders, the petitioner was the only one entitled to demand a stockholders’ meeting, called on notice. She elects to waive the meeting and notice and to adopt and stand on the sale. As the sale could only be made by resort to section 16 of the Stock Corporation Law and by obtaining the consent of two-thirds of the stockholders therein provided, it must be held that the sale was made upon the authority of that section. Accordingly, as was said by Judge Vann, in Matter of Timrnis (supra): “ As the appellant availed itself of the privilege conferred by the statute, it must comply with the condition prescribed for the exercise thereof.”

The order should be reversed, with ten dollars costs and disbursements, and the petition granted, with ten dollars costs and the costs of the proceeding.

Clarke, P. J., and Laughlin, J., concurred; Page and Merrell, JJ., dissented.