Jacobs, Eastwood and Bigelow. The opinion of the court was delivered by Bigelow, J.A.D.
This is an appeal from a final judgment of the Chancery Division enjoining the Franklin Capital Corporation and its two subsidiaries from putting into effect a plan of reorganization, -- using that term in a rather broad sense. The Capital Corporation owns all the capital stock of the Franklin Mortgage and Title Insurance Company and five-eighths of the common stock of the Franklin Washington Trust Company. During the past 20 years, the first two corporations have paid no dividends, and the last has paid none on its common stock. It has outstanding $500,000 of preferred stock held by the Reconstruction Finance Corporation, and can pay no common dividends until the preferred stock be retired. The plan, consummation of which has been restrained, provides that the Mortgage Company dissolve and, with the proceeds of its assets, that the Capital Corporation purchase new common stock of the Trust Company and so enable it to retire the preferred stock. The management hoped that thereupon the two surviving companies would resume the payment of dividends. The learned judge of the Chancery Division was of the opinion that what the plan proposes is in substance a merger of the Mortgage Company and the Trust Company, without authority of law, and furthermore that the plan is unfair to the Capital Corporation and inequitable. 6 N.J. Super. 579.
The business of the Mortgage Company falls into two branches, of which the minor one is insuring land titles. It has issued a large number of title policies in past years and
is subject thereon to a contingent liability. It also has built up a small title plant, worth perhaps $5,000. How much of an income it receives from this branch of the company's business does not appear, but there are intimations that this part of the income is inconsiderable. Part of the plan of reorganization involves the transfer of the title plant to the New Jersey Realty Title Insurance Company, and the payment to it of $25,000 in consideration whereof the New Jersey company would assume the Franklin company's liability on the title guarantees. Neither the latter company nor the Franklin Washington Trust Company would continue the title business. The New Jersey Realty Title Insurance Company is in no way connected with the Franklin Washington group. This part of the plan is not seriously attacked.
The other branch of the Mortgage Company's business consists in finding mortgage investments for insurance companies and other institutions and servicing the mortgages as agent of the investors. An important part of the reorganization plan provides for turning over this business to the Trust Company, without consideration, except that that company would buy at par all the mortgages held by the Mortgage Company and also the home office building of the Mortgage Company at a price set by an independent appraisal. Nothing is allowed for the "going concern value" or good will of the mortgage business.
The remaining assets of the Mortgage Company, as well as the consideration to be paid by the Trust Company -- perhaps $750,000 in all -- would be used first to satisfy liabilities of the Mortgage Company, and the balance, estimated at around $500,000, would pass on dissolution of the Mortgage Company to the Capital Corporation as sole stockholder. The Trust Company would then offer $500,000 of new stock to its stockholders pro rata , and the Capital Corporation would take its quota, $312,500, and as much of the rest of the issue as might be unsubscribed for. Lastly, the Trust Company would retire its preferred stock and so reach a position in which it would be allowed to pay dividends.
The respondents contend that the plan which we have outlined is within the condemnation of Riker v. United Drug Co. , 79 N.J. Eq. 580 (E. & A. 1912). In that suit, it appeared that the directors of the defendant, which was a corporation of New Jersey, had procured the organization of a company of the same name under the laws of Massachusetts. It was proposed that the New Jersey company would transfer all its assets to the Massachusetts company and would dissolve and that the Massachusetts company would assume the other company's debts and would pay for the property by issuing its own stock directly to the stockholders of the New Jersey company. Chief Justice Gummere said of the proposal:
"Manifestly, the prime purpose of the scheme outlined in this communication is not the winding up of the New Jersey corporation and the distribution of its assets, or the proceeds of the sale thereof, among its stockholders, but the absorption of that company by the Massachusetts corporation, the transfer not only of its assets but of its business, to that corporation, and the future carrying on of that business by the Massachusetts corporation under the name of the defendant company. The scheme, in its essence, whatever it may be in form, is not a plan for the reorganization of the New Jersey company, nor even for the winding up of its business and its dissolution within the meaning of the latter word as used by our Corporation Act, but is a scheme for its merger into or consolidation with the Massachusetts corporation."
The court applied the rule that recourse may not be had to statutory procedures in order to accomplish illegal or unauthorized corporate purposes. It characterized the scheme as a fraud on our statute, and held that it invaded the rights of the complainants as minority stockholders of the New Jersey company. Unless legal authority to do so is reserved to it, a corporation cannot, without the consent of all its stockholders, sell or even lease its assets and business as a whole and invest the stockholders' capital in other enterprises. Kean v. Johnson , 9 N.J. Eq. 401 (Ch. 1853). That was what was unlawfully attempted and was prohibited in Riker v. United Drug Co. Assuming for the moment that the plan now under review is in essence the same as the one that was the subject of the Riker suit, we may observe that there are here no nonassenting stockholders; no one's rights are invaded. The
complainants have stock in neither the Mortgage Company nor the Trust Company, but only in the Capital Corporation. That corporation, in addition to the shares of the other two companies, owns valuable real estate and a sizeable portfolio of "marketable stocks." From the plaintiffs' standpoint, the plan proposes that their company dispose of its investment in the Mortgage Company and increase its investment in the Trust Company. There is no ...