[6 NJSuper Page 581] The plaintiffs, stockholders in the Franklin Capital Corporation, filed their complaint in a class action to declare void and to enjoin the execution of certain proposed transactions hereinafter outlined between the Franklin Capital Corporation, Franklin Mortgage and Title Insurance Company and Franklin Washington Trust Company. The defendants have filed answers and depositions have been taken. Additionally, a petition has been filed on behalf of seventy other stockholders of Franklin Capital Corporation to intervene in the suit on the basis of the pleadings and other papers filed and submitted by the plaintiffs. While the order allowing intervention has not formally been entered, the matter
will be treated as though it had been. The material facts are not in substantial dispute.
In the interest of brevity, the Franklin Capital Corporation will hereinafter be referred to as the Capital Company; the Franklin Mortgage and Title Insurance Company, as the Mortgage Company; and the Franklin Washington Trust Company, as the Bank.
The Capital Company owns all of the stock of the Mortgage Company and the directors of both companies are identical. The Capital Company owns 63 per cent of the common voting stock of the Bank and two directors of the former are on the board of the latter. Clifford F. MacEvoy, individually and through other corporations, is the largest stockholder and is the moving spirit of the three corporations. He is president of the Capital Company and chairman of the Boards of Directors of the Mortgage Company and of the Bank. The two plaintiffs are the holders of 22,000 shares of stock of the Capital Company; they own no stock in the Bank. The intervenors are also stockholders of the Capital Company.
The business of the Mortgage Company is thus described by Mr. MacEvoy in a letter dated September 23, 1949, addressed to the stockholders of the Capital Company: "The insurance of titles on real estate and the representation of large life insurance companies and other institutional investors in mortgage loans. Its services in the latter field include the representation of these companies in the finding of mortgages, their placement, and, upon their placement, the servicing of such mortgages on behalf of the investors." The assets of the Mortgage Company are in excess of $750,000, consisting of cash of approximately $350,000, $300,000 in first mortgage loans and United States Government bonds, and the balance in real estate and personal property. As of November 1, 1949, after providing for the payment of liabilities including outstanding capital stock of $300,000, the Company had an earned surplus of approximately $190,000 and paid-in surplus of $100,000. The Company has been operating at a profit. The mortgages which it services for institutional investors amount in the aggregate to approximately $16,000,000,
for which it receives servicing fees ranging from 1/2 to 1 per cent. Nevertheless, no value is placed on these servicing contracts.
It is not necessary to go into detail regarding the assets of the Bank. For the purpose of this opinion, it will suffice to state that the Bank has outstanding an issue of 62,500 shares of $8 par value 3 per cent Preferred Stock, totalling $500,000. All but seven shares of the issue are held by the Reconstruction Finance Corporation. Annual dividends amount to $15,000. The Bank has accumulated a sum of $106,503.25 as a retirement fund for the Preferred Stock. The outstanding common capital stock of the Bank consists of 48,000 shares of $8 par value, of which the Capital Company owns 30,037. No dividends have been, nor can be, paid upon the common stock while the Preferred Stock held by the Reconstruction Finance Corporation is outstanding. Mr. MacEvoy testified: "The Bank, regardless of how much money it was making within reason couldn't pay any dividends because there was a provision that if you had outstanding stock owed to the R.F.C. that you couldn't pay dividends."
In his letter to stockholders of the Capital Company, Mr. MacEvoy further stated that the Bank "has been assisting the Mortgage Company in its mortgage business in that it has been temporarily taking and placing the mortgages against written agreements for purchase by the large life insurance companies and other institutional investors" and "in addition and for its own account, has built up a substantial investment in mortgages which it itself services. As can be seen from the above, there is a great duplication of activity by each of the companies."
The defendants desired to accomplish the following objects: to discontinue the title insurance business of the Mortgage Company, to retire the Preferred Stock issue of the Bank, to create "a unified institution with resulting savings and efficiency in the conduct of the business by a single entity which is now being carried on separately by each of the companies," and "to enable the Bank to commence * * * the payment of dividends to its (Common) stockholders at a rate approximating
5% on the par value of the old and new issue." To attain these objectives, the directors adopted the following plan: -- The Mortgage Company would transfer its title insurance plant and business to another title company and pay the sum of $10,000, for which the title company would assume the contingent liability of the Mortgage Company under its outstanding title policies; the Mortgage Company to be dissolved and its assets consisting of the mortgages and bonds to be purchased by the Bank at par. The Bank would take over the servicing of the mortgage portfolios without any payment therefor. The key personnel of the Mortgage Company would be employed by the Bank. The Bank would amend its certificate of incorporation to provide for the issuance of 72,000 shares of additional common stock at a par value of $8 per share, to be offered to its stockholders in the ratio of 1 1/2 shares for each existing share. The Bank contemplated the sale of the new issue of stock in order to obtain cash with which to retire the Preferred Stock held by the Reconstruction Finance Corporation and to acquire the assets of the Mortgage Company. The Capital Company agreed to exercise its full subscription right to purchase 40,055 shares of the new issue and, further, to purchase all shares not acquired by the other stockholders. For the purchase, the Capital Company proposed to use the cash of the Mortgage Company which, as sole stockholder, it would have obtained in the "dissolution" of the Mortgage Company. In ...