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Applestein v. United Board & Carton Corp.

Decided: March 15, 1960.


Kilkenny, J.s.c.


[60 NJSuper Page 336] The parties herein, by written stipulation, have submitted for determination, as upon motions and cross-motions for partial summary judgment, a single limited issue. That issue is whether the agreement of July 7, 1959 among United Board and Carton Corporation, hereinafter referred to as "United," Interstate Container

Corporation, hereinafter referred to as "Interstate," and Saul L. Epstein, hereinafter referred to as "Epstein," and the transaction set forth in the proxy solicitation statement, hereinafter called "proxy statement," dated September 22, 1959, amount to a merger, entitling dissenting stockholders of United to an appraisal of their stock, and is therefore invalid.

The issue is submitted on the pleadings, the several exhibits referred to in the stipulation, all relevant law of New York and New Jersey, and the briefs of the respective parties. All other issues in the case are expressly reserved.

The parties have agreed on the record that there are no genuine issues as to any material facts, which would preclude the grant of partial summary judgment under R.R. 4:58-3, as to the single, limited issue submitted. Therefore, we are not concerned with those cases in which summary judgment is denied, because genuine issues as to material facts would require a hearing to determine the facts. The court has adduced the following facts from the limited material submitted under the stipulation.

United is an active corporation of New Jersey, organized in 1912. Its business consists in the manufacture and sale of paperboard, folding boxes, corrugated containers and laminated board, in that relative order of importance. Its present authorized capital stock consists of 400,000 shares, of which 240,000 have already been issued and are held by a great number of stockholders, no one of whom holds in excess of 10% of the outstanding shares. There are 160,000 shares not yet issued. The United stock is publicly held, there being 1,086 shareholders of record as of September 22, 1959, and the stock is traded on the New York Stock Exchange. The book value of each share of stock, as indicated by the proxy statement, is approximately $31.97. The consolidated balance sheet of United and its wholly owned subsidiaries, as of May 31, 1958, shows total assets of $10,121,233, and total liabilities of $2,561,724, and a net total capital of $7,559,509. Its business is managed by the

usual staff of officers and a board of directors consisting of seven directors.

Interstate was incorporated under the laws of New York in 1939. It owns several operating subsidiaries located in various parts of the northeastern section of the United States. It is engaged primarily in the manufacture and sale of corrugated shipping containers, and also containers which have the dual use of carriers and point of purchase displays. The major portion of its business is corrugated containers. Its corrugated board, other than that consumed by its own container operations, is used by outside plants for the manufacture of corrugated containers and, in some instances, for display items. Interstate has issued and outstanding 1,250 shares, all of which are owned and controlled by a single stockholder, Epstein, who thereby owns and controls Interstate. The consolidated balance sheet of Interstate and its subsidiaries, as of October 31, 1958, shows that its total assets are $7,956,424, and its total liabilities are $6,318,371, leaving a net total capital of $1,638,053.

No contention has been made herein that the two corporations, United and Interstate, are not engaged in business "of the same or a similar nature," as required by R.S. 14:12-1 for a valid merger or consolidation. Hence, we need not examine in detail their chartered purposes to determine if a merger would be invalid because of noncompliance with that statutory requirement, as in the case of Imperial Trust Co. v. Magazine Repeating Razor Co. , 138 N.J. Eq. 20 (Ch. 1946).

United entered into a written agreement with Interstate and Epstein on July 7, 1959. In its language, it is not designated or referred to as a merger agreement, eo nomine. In fact, the word "merger" nowhere appears in that agreement. On the contrary, the agreement recites that it is an "exchange of Interstate stock for United Stock." Epstein agrees to assign and deliver to United his 1,250 shares of the common stock of Interstate solely in exchange for 160,000 as yet unissued shares of voting common stock (par value

$10) of United. Thus, by this so-called "exchange of stock" United would wholly own Interstate and its subsidiaries, and Epstein would thereupon own a 40% stock interest in United. Dollar-wise, on the basis of the book values of the two corporations hereinabove set forth, a combination of the assets and liabilities of United and Interstate would result in a net total capital of approximately $9,200,000, as against which there would be outstanding 400,000 shares, thereby reducing the present book value of each United share from about $31.97 to about $23, a shrinkage of about 28%. Epstein would contribute, book value-wise, the net total capital of Interstate in the amount of $1,638,053, for which he would receive a 40% interest in $9,200,000, the net total combined capital of United and Interstate, or about $3,680,000. The court is not basing its present decision upon the additional charge made by dissenting stockholders of United that the proposed agreement is basically unfair and inequitable. That is one of the reserved issues. The court recognizes that book values and real values are not necessarily the same thing, and, therefore, apparent inequities appearing from a comparison of the book values might be explained and justified.

The agreement of July 7, 1959 does not contemplate the continued future operation of Interstate, as a subsidiary corporation of United. Rather, it provides that United will take over all the outstanding stock of Interstate, that all of Interstate's "assets and liabilities will be recorded on the books of the Company (United)," and that Interstate will be dissolved. At the time of closing, Epstein has agreed to deliver the resignations of the officers and directors of Interstate and of its subsidiary corporations, so that, in effect, Interstate would have no officers, directors, or stockholders, other than United's. The agreement further stipulates that the by-laws of United shall be amended to increase the number of directors from 7 to 11. It provides for the filling of the additional directorships, it pre-ordains who will be the officers and new directors of United in the combined

enterprise, and even governs the salaries to be paid. Epstein would become the president and a director of United and, admittedly, would be in "effective control" of United. As stated in the proxy statement, "The transaction will be accounted for as a 'pooling of interests' of the two corporations."

The stipulation of the parties removed from the court's present consideration not only the issue of the basic equity or fairness of the agreement, but also the legal effect and validity of the pre-determination of directorships, officers, salaries, and other similar terms of the bargain between the parties. The fairness of a merger agreement generally presents a question of a factual nature, ordinarily reserved for final hearing. If the alleged injustice of the project were the sole objection, I would be hesitant to substitute preliminarily my judgment for that of a transcendent majority of the stockholders.

In notifying its stockholders of a meeting to be held on October 15, 1959, in its proxy statement United advised the stockholders that "the proposal to approve the issuance of the common stock of the company is being submitted to the vote of the stockholders solely because of the requirements of the New York Stock Exchange; and accordingly stockholders who vote against or who do not vote in favor of the proposal will not, in the opinion of Luttinger & Passannante, general counsel for the company, be entitled to any rights of appraisal of their stock." They were also advised that adoption of the proposal would require the affirmative vote of the holders of only a majority of the shares present at the meeting in person or by proxy, provided a majority of all shares outstanding and entitled to vote thereon was present at the meeting.

The attorneys for the respective parties herein have conceded in the record that the proposed corporate action would be invalid, if this court determines that it would constitute a merger of United and Interstate, entitling the dissenting stockholders of United to an appraisal of their stock. The

notice of the stockholders' meeting and the proxy statement did not indicate that the purpose of the meeting was to effect a merger , and failed to give notice to the shareholders of their right to dissent to the plan of merger, if it were one, and claim their appraisal rights under the statute, as inferentially required by R.S. 14:12-3. Obviously, the notice of the meeting and proxy statement stressed the contrary, by labelling the proposed corporate action "an exchange of Interstate stock for United stock" rather than a merger, by its emphasis upon the need for a majority vote only, instead of the required two-thirds vote for a merger under the statute, and by the express declaration that dissenting stockholders would not be entitled to any rights of appraisal of their stock.

The scheduled meeting of October 15, 1959 was restrained by my order on that date in the action brought by the plaintiff Beuerlein. That order was modified in the Beuerlein action on October 19, 1959, to lift the restraint on holding a meeting, but continuing the restraint as to any implementation of any resolutions adopted at any meeting subsequently held. We are not now concerned with the legal effect of a meeting held on October 23, 1959, which was held without any new written notice thereof to the stockholders. An oral announcement was made to those present on October 15, 1959, when this court's restraining order against holding any meeting was still in effect in the Beuerlein action, advising those stockholders that the scheduled meeting was postponed to October 23, 1959.

Despite the contrary representations by United to its stockholders in its proxy statement, United's present position is that the proposed corporate action in acquiring and absorbing Interstate is a merger. This is evidenced by its answer to the cross-claim of Interstate and Epstein against it for specific performance of the agreement of July 7, 1959. At the hearing of the motions United's attorney stated in the record that ...

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