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A.P. Smith Manufacturing Co. v. Barlow

Decided: June 25, 1953.

THE A.P. SMITH MANUFACTURING COMPANY, PLAINTIFF-RESPONDENT,
v.
RUTH F. BARLOW, WILLIAM B. CAMPBELL, WILLIAM M. BRENN, EUGENE M. SMITH AND JOSEPH P. HALPIN, INDIVIDUALLY AND AS REPRESENTATIVES OF THE HOLDERS OF THE PREFERRED AND COMMON SHARES OF THE A.P. SMITH MANUFACTURING COMPANY, DEFENDANTS-APPELLANTS, AND THEODORE D. PARSONS, ATTORNEY-GENERAL OF NEW JERSEY, DEFENDANT-RESPONDENT



For affirmance -- Chief Justice Vanderbilt, and Justices Heher, Oliphant, Wachenfeld, Burling and Jacobs. For reversal -- None. The opinion of the court was delivered by Jacobs, J.

Jacobs

[13 NJ Page 146] The Chancery Division, in a well-reasoned opinion by Judge Stein, determined that a donation by the

plaintiff The A.P. Smith Manufacturing Company to Princeton University was intra vires. Because of the public importance of the issues presented, the appeal duly taken to the Appellate Division has been certified directly to this court under Rule 1:5-1(a).

The company was incorporated in 1896 and is engaged in the manufacture and sale of valves, fire hydrants and special equipment, mainly for water and gas industries. Its plant is located in East Orange and Bloomfield and it has approximately 300 employees. Over the years the company has contributed regularly to the local community chest and on occasions to Upsala College in East Orange and Newark University, now part of Rutgers, the State University. On July 24, 1951 the board of directors adopted a resolution which set forth that it was in the corporation's best interests to join with others in the 1951 Annual Giving to Princeton University, and appropriated the sum of $1,500 to be transferred by the corporation's treasurer to the university as a contribution towards its maintenance. When this action was questioned by stockholders the corporation instituted a declaratory judgment action in the Chancery Division and trial was had in due course.

Mr. Hubert F. O'Brien, the president of the company, testified that he considered the contribution to be a sound investment, that the public expects corporations to aid philanthropic and benevolent institutions, that they obtain good will in the community by so doing, and that their charitable donations create favorable environment for their business operations. In addition, he expressed the thought that in contributing to liberal arts institutions, corporations were furthering their self-interest in assuring the free flow of properly trained personnel for administrative and other corporate employment. Mr. Frank W. Abrams, chairman of the board of the Standard Oil Company of New Jersey, testified that corporations are expected to acknowledge their public responsibilities in support of the essential elements of our free enterprise system. He indicated that it was not "good business" to disappoint "this reasonable and justified

public expectation," nor was it good business for corporations "to take substantial benefits from their membership in the economic community while avoiding the normally accepted obligations of citizenship in the social community." Mr. Irving S. Olds, former chairman of the board of the United States Steel Corporation, pointed out that corporations have a self-interest in the maintenance of liberal education as the bulwark of good government. He stated that "Capitalism and free enterprise owe their survival in no small degree to the existence of our private, independent universities" and that if American business does not aid in their maintenance it is not "properly protecting the long-range interest of its stockholders, its employees and its customers." Similarly, Dr. Harold W. Dodds, President of Princeton University, suggested that if private institutions of higher learning were replaced by governmental institutions our society would be vastly different and private enterprise in other fields would fade out rather promptly. Further on he stated that "democratic society will not long endure if it does not nourish within itself strong centers of non-governmental fountains of knowledge, opinions of all sorts not governmentally or politically originated. If the time comes when all these centers are absorbed into government, then freedom as we know it, I submit, is at an end."

The objecting stockholders have not disputed any of the foregoing testimony nor the showing of great need by Princeton and other private institutions of higher learning and the important public service being rendered by them for democratic government and industry alike. Similarly, they have acknowledged that for over two decades there has been state legislation on our books which expresses a strong public policy in favor of corporate contributions such as that being questioned by them. Nevertheless, they have taken the position that (1) the plaintiff's certificate of incorporation does not expressly authorize the contribution and under common-law principles the company does not possess any implied or incidental power to make it, and (2) the New Jersey statutes which expressly authorize the contribution

may not constitutionally be applied to the plaintiff, a corporation created long before their enactment. See R.S. 14:3-13; R.S. 14:3-13.1 et seq.

In his discussion of the early history of business corporations Professor Williston refers to a 1702 publication where the author stated flatly that "The general intent and end of all civil incorporations is for better government." And he points out that the early corporate charters, particularly their recitals, furnish additional support for the notion that the corporate object was the public one of managing and ordering the trade as well as the private one of profit for the members. See 3 Select Essays on Anglo-American Legal History 201 (1909); 1 Fletcher, Corporations (rev. ed. 1931), 6. See also Currie's Administrators v. The Mutual Assurance Society, 4 Hen. & M. 315, 347 (Va. Sup. Ct. App. 1809), where Judge Roane referred to the English corporate charters and expressed the view that acts of incorporation ought never to be passed "but in consideration of services to be rendered to the public." However, with later economic and social developments and the free availability of the corporate device for all trades, the end of private profit became generally accepted as the controlling one in all businesses other than those classed broadly as public utilities. Cf. Dodd, For Whom Are Corporate Managers Trustees ?, 45 Harv. L. Rev. 1145, 1148 (1932). As a concomitant the common-law rule developed that those who managed the corporation could not disburse any corporate funds for philanthropic or other worthy public cause unless the expenditure would benefit the corporation. Hutton v. West Cork Railway Company, 23 Ch. D. 654 (1883); Dodge v. Ford Motor Co., 204 Mich. 459, 170 N.W. 668, 3 A.L.R. 413 (Sup. Ct. 1919). Ballantine, Corporations (rev. ed. 1946), 228; 6A Fletcher, supra, 667. During the 19th Century when corporations were relatively few and small and did not dominate the country's wealth, the common-law rule did not significantly interfere with the public interest. But the 20th Century has presented a different climate. Berle and Means, The Modern Corporation and Private

Property (1948). Control of economic wealth has passed largely from individual entrepreneurs to dominating corporations, and calls upon the corporations for reasonable philanthropic donations have come to be made with increased public support. In many instances such contributions have been sustained by the courts within the common-law doctrine upon liberal findings that the donations tended reasonably to promote the corporate objectives. See Cousens, How Far Corporations May Contribute to Charity, 35 Va. L. Rev. 401 (1949).

Thus, in the leading case of Evans v. Brunner, Mond & Company, Ltd. [1921] 1 Ch. 359, the court held that it was within the incidental power of a chemical company to grant $: 100,000 to universities or other scientific institutions selected by the directors "for the furtherance of scientific education and research." The testimony indicated that the company desired to encourage and assist men who would devote their time and abilities to scientific study and research generally, a class of men for whom the company was constantly on the lookout. This benefit was not considered by the court to be so remote as to bring it outside the common-law rule. Similarly, in Armstrong Cork Co. v. H.A. Meldrum Co., 285 F. 58 (D.C.W.D.N.Y. 1922), the court sustained contributions made by the corporation to the University of Buffalo and Canisius College. In the course of its opinion the court quoted the familiar comment from Steinway v. Steinway & Sons, 17 Misc. 43, 40 N.Y.S. 718 (Sup. Ct. 1896), to the effect that as industrial conditions change business methods must change with them and acts become permissible which theretofore were considered beyond the corporate powers; and on the issue as to whether the corporation had received any corporate benefit it said:

"It was also considered, in making the subscriptions or donations, that the company would receive advertisement of substantial value, including the good will of many influential citizens and of its patrons, who were interested in the success of the development of these branches of education, and, on the other hand, suffer a loss of prestige if the contributions were not ...


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