On appeal from the Appellate Division of the Superior Court, whose opinion is reported in 4 N.J. Super. 385.
For reversal -- Chief Justice Vanderbilt, and Justices Case, Heher, Oliphant, Wachenfeld, Burling and Ackerson. For affirmance -- None. The opinion of the court was delivered by Heher, J. Oliphant, J., concurring in result.
[3 NJ Page 385] The question here is whether the respondent corporation, Collins-Doan Company, is subject to dissolution under R.S. 14:13-15. The issue was resolved in the affirmative by Judge Grimshaw in the Chancery Division of the Superior Court and in the negative by the Appellate Division of that court. Judge Donges dissented from the judgment of reversal. 1 N.J. Super. 441; 4 N.J. Super. 385. The case is here pursuant to Article VI, section V, paragraph 1
(a), 1 (b) of the Constitution of 1947 and Rule 1:2-1 (a), 1 (b) of this court.
The corporation was organized December 16, 1916, under the General Corporation Act of 1896. P.L. p. 277; Comp. Stat. 1910, p. 1592. The articles of incorporation declared that the primary object of the company was "to acquire and take over as a going concern" the commercial printing business then carried on in Jersey City by the appellant Israel Doan and the respondent Samuel B. Collins as co-partners under the firm name and style of Collins and Doan. The company was thereby authorized to issue 250 shares of capital stock of the par value of $100 each, consisting of 100 shares of preferred stock and 150 shares of common stock. There was provision for a cumulative dividend of 6% per annum on the preferred stock, payable semi-annually out of the surplus or net earnings before the payment of any dividend on the common stock. The preferred stockholders were given the usual priority on the liquidation or dissolution of the company; and there was a stipulation for the redemption of this class of stock "by vote of a majority of the whole board of directors," at any time after three years from issue, "at a price not less than par value." It was provided also that the holders of the preferred stock "shall have equal representation on the board of directors with the holders of the common stock." 105 shares of the common stock were issued to Collins; 100 shares of the preferred stock were issued to Doan; and five shares of the common stock were issued to Moe, a lawyer, for legal services rendered in "the organization of the company." Thus, the corporation commenced business with a capital fund of $21,000, represented by the property and assets of the partnership transferred and conveyed to the corporation in consideration of the issue of the stock.
The by-laws adopted December 20, 1916, provide for the election of two directors by the holders of the preferred stock "by a plurality vote," and two directors by the holders of the common stock, likewise "by a plurality vote." Moe has served as a director of the Company since its organization. In 1936, Doan transferred a portion of his preferred stock to the appellant
Morten, also a lawyer; and he was elected to the board of directors. More recently, Doan transferred some of his preferred stock to his wife, Mary G.; and Collins assigned 25 shares of the common stock to his son, Harvey A. The directorate now comprise Doan and Morten, elected by the preferred stockholders to afford that class the "representation" provided by the articles of incorporation and the by-laws, and Collins and Moe, chosen to "represent" the interests of the holders of the common stock.
But differences between these independent interests have resulted in a deadlock in the board of directors and in the stock ownership and a consequent failure of corporate function in the manner provided by the statute governing such entities. The plan devised to afford the holders of each class of stock an equal voice in the management of the corporate affairs has made for corporate inaction. While there have been annual elections of directors, the board has been chosen in conformity with the cited provisions of the articles of incorporation and the by-laws for equal representation in the Company's directorate of the holders of preferred and common stock, each class as a unit; and thus the disagreements, beginning in 1937, as to policy and management could not be resolved by corporate action. These controversies are now insoluble, so much so that Moe joins in the petition for dissolution of the corporation. Moe testified that he considered himself "morally obligated to vote in the same manner as Mr. Collins;" and he is convinced the differences are irreconcilable.
No dividends have been paid on the preferred stock since 1932. In 1937, dissension arose over the continued failure of such dividends and the use of corporate profits for the payment of increased salaries and commissions to Collins and his son and the disbursement of corporate funds without the sanction of the board of directors. On February 4, 1946, Collins, in the name of the corporation, took a lease on a building owned by his son at an annual rental of $4,200 and moved the Company's plant there, and then leased the vacated building owned by the Company at an annual rental of $3,600. The [3 NJ Page 388] making of the lease and the change of business situs were without the approval of the board of directors; indeed, without prior notice of Collins' intention to his associate directors. For want of directorial action, Collins has since 1937 operated the business as if it were his own property. There were no directors' meetings between 1938 and February 4, 1946, when the same executive officers were elected. But the deadlock continued; there was no other business transacted at that meeting. It is clear there was a continuance thereafter of the dissension which made corporate action utterly impossible. From 1937 on, there has been no corporate authority for the disbursements made by Collins of the Company's funds. The gross amount of the Company's printing business for the fiscal year preceding the taking of the testimony herein was $146,000. Collins was in charge of sales and his son had the general management of the business; but Collins testified that he had then been "on leave of absence" for three years and his son had the full management, all without directorial sanction. Asked if there was corporate authority for this action, he replied: "There was no business transacted by the board of directors; I had no authority; I just quit." He never again "associated" himself "actively" with the direction of corporate affairs, although he negotiated a lease with his son for the present business house. He admitted he did not consult his associate directors regarding the lease; he said: "It was something that had to be acted on quickly and I did it." When asked if he made an effort to communicate with his fellow directors respecting the proposed lease, he replied in the affirmative; but he then explained that he could not telephone to Doan "because he (Doan) has no 'phone." And he didn't write to Doan "because he doesn't answer his mail." He continued: "I have always used my judgment in the affairs of the corporation and I did so on that." Collins conceded that the Company's profits were sufficient to permit of the payment of dividends on the preferred stock; and there can be no doubt that the nonpayment of dividends was the primary cause of the stalemate. Moe termed it "a perennial reason for dissension."
In a word, the holders of the preferred stock are convinced that it was and is Collins' purpose so to manage the corporate affairs as to defeat their right to the cumulated dividends. But, whatever the motive, the result has been a failure of function of the directorate and the arrogation by Collins to himself of the management of the corporate business, exercised directly or through his son. Collins concedes that the differences are irreconcilable. Thus, dissension has rendered the directorate impotent; and the like equal division of interest and voting power among the stockholders put it beyond their power to cure this paralysis of function by the election of a directorate of an uneven number.
The act of incorporation is a compact between the corporation and the sovereignty whence its powers came, and as well between the corporation and its stockholders and between the stockholders inter se. The Trustees of Dartmouth College v. Woodward, 4 Wheat. 518, 4 L. Ed. 629 (1819); Home Building and Loan Association v. Blaisdell, 290 U.S. 398, 54 S. Ct. 231, 78 L. Ed. 413, 88 A.L.R. 1481 (1934). The duration of the franchise grant is ordinarily indeterminate; but where, as here, corporate function can no longer be had due to irreconcilable differences between two independent classes or groups of stockholders of equal voting power, the corporation is subject to dissolution in the interest of the public and the shareholders who may suffer injury. Dissolution does not constitute an impairment of the obligation of contracts made with creditors and others, for resort may be had to the property of the corporation in the mode provided by statute, or, if there be no adequate statutory remedy, by the processes of equity. A corporation does not have an absolute right to existence in perpetuity. The obligation of the contract between the sovereign power and the corporate entity is not so far-reaching; it is fundamental in ...