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Faunce v. Boost Co.

Decided: September 26, 1951.


Haneman, J.s.c.


Plaintiffs herein seek to enjoin the consummation of a certain plan to alter the capital stock structure of the defendant Boost Company. This plan is embodied in resolutions adopted by the board of directors of the company and by the holders of more than two-thirds of the outstanding capital stock.

Defendant Boost Company was incorporated under the General Corporation Act of this State on May 15, 1915, with an authorized capital stock of 5,000 shares of the par value of $5 each. By amendment, the authority to issue such stock was increased on June 14, 1931, to 200,000 shares. Both the original stock and the stock authorized by said amendment possessed the usual voting power. No other type of stock was ever authorized by the certificate of incorporation until that contemplated by the proposed amendment to the certificate of incorporation, of which complaint is now made. There are now outstanding 5,492 1/2 shares of stock, of which 3,430 1/2 shares were owned by Benjamin R. Faunce at the time of his death on April 27, 1941. Said Benjamin R. Faunce bequeathed these shares of stock to Maude F. Faunce, his widow, in trust, to receive the dividends for life, and upon her death, directed that the stock be equally divided among his three sons, Randle, Lester and Paul.

The defendant Boost Company, at some time in the past, entered into an agreement, herein referred to as the royalty agreement, now held by the defendant Maude F. Faunce, under the terms of which she would receive 1 1/2 shares of stock for every share of stock issued to others. The consideration for this agreement was the assignment to the corporation of an alleged secret formula developed by said Benjamin R. Faunce.

It was apparently conceived by the stockholders that this agreement retarded or prevented the obtaining of additional capital which they required for expansion. Maude F. Faunce thereupon proposed to surrender the royalty agreement provided the corporate capital structure was so altered that there would be in existence two classes of stock, respectively designated

Class A common stock and Class B common stock, the Class A 15,000 shares without any voting power prior to dissolution of the company, and to be issued share for share in exchange for the stock now outstanding. Class B stock alone, until the event of dissolution, was to possess the voting power, and the entire authorized issue of 100 shares of Class B stock was to be given to Maude F. Faunce in exchange for the cancellation of the royalty agreement. Class B stock would not be entitled to share in any of the profits of the corporation nor, it would seem, in the assets upon dissolution.

At the time of the stockholders' meeting held to consider the adoption of the proposed amendment to the certificate of incorporation, Maude F. Faunce voted the stock held by her as trustee, and some additional stock held individually by her, and together with some other stockholders, 4,669 1/2 shares were voted in favor of the amendment. The plaintiffs and several other stockholders whose holdings totaled 512 shares voted against the adoption.

The sole question involved is the power of the holders of two-thirds of the stock to so change the capital structure as to take away from the plaintiffs their right to vote, which was granted to them by their initial purchase of the stock.

It must be conceded at the outset that under R.S. 14:8-1 the power and authority existed under the original incorporation to create stock "with full, limited or no voting powers." Under R.S. 14:11-1 et seq. , upon the adoption of a resolution by the board of directors seeking an amendment of the certificate of incorporation, and a two-thirds vote of each class of stockholders, the certificate of incorporation could be amended in a number of particulars, as specifically set forth in said section. However, there is no specific provision which permits a change of common stock with voting powers to a common stock with no voting powers. Defendants point to paragraph "r" of said section as their authority. This section reads as follows: "Make such other amendment, change or alteration as may be desired."

The certificate of incorporation, constitution and bylaws of the corporation constitute a contract between the corporation and its stockholders and the stockholders inter sese. Leeds v. Harrison , 7 N.J. Super. 558, 72 A. 2 d 371 (Ch. 1950), and cases there cited. See also Loewenthal v. Rubber Reclaiming Co. , 52 N.J. Eq. 440, 28 A. 454 (Ch. 1894).

Defendants argue that the statutory law in effect at the date of the formation of the corporation becomes a part of its charter, whether specifically referred to therein or not, and hence a part of said contract. This must be conceded. See General Investment Co. v. American Hide & Leather Co. , 97 N.J. Eq. ...

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