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Lippmann v. Hydro-Space Technology Inc.

Decided: December 26, 1962.

DAVID LIPPMANN, RICHARD SCHWALB, MARIANNE P. STOLTENBERG, RAYMOND J. NOVOTNY, MORRIS GOLD, AND SARAH GOLD, PLAINTIFFS-APPELLANTS,
v.
HYDRO-SPACE TECHNOLOGY, INC., A BODY CORPORATE, N. DAVID FULTON, HARRY D. FELTENSTEIN, JR., LITHIUM CORPORATION OF AMERICA, INC., A BODY CORPORATE, FREMONT F. CLARKE, EUGENE BONDY, JR., ROBERT E. BOWMAN, AND LEONARD FISHER, DEFENDANTS-RESPONDENTS



Goldmann, Freund and Foley. The opinion of the court was delivered by Goldmann, S.j.a.d.

Goldmann

Plaintiffs appeal from a Chancery Division order and judgment which (1) denied their formal motion for discovery; (2) denied their request for adjournment of the hearing on the order to show cause they had earlier obtained; (3) discharged the order to show cause; (4) denied their oral motion for leave to amend the complaint, first made after the trial judge had announced his decision; (5) dismissed the complaint on defendants' motion, and (6) entered judgment in defendants' favor.

Lippmann, a recently discharged employee of defendant Hydro-Space Technology, Inc., joined by six others, instituted the present stockholders' action. Collectively they own less than 7/10ths of 1% of the issued and outstanding stock of Hydro-Space. The complaint, by counsel's own admission a very loosely drawn pleading, sought the appointment of a custodial receiver pendente lite , and eventually a permanent receiver for Hydro-Space. It charges at some length and with considerable repetition -- but in entirely conclusory terms and without particulars -- that defendant Lithium Corporation,

Inc., has through its officers "dominated" Hydro-Space and its board of directors and officers; that the company has been operated at a loss, for Lithium's benefit; that Hydro-Space issued a misleading stock prospectus and a misleading advertising brochure; that its affairs have been mismanaged and its assets wasted and misapplied, and that the company is not carrying out the purpose for which it was organized.

I.

Hydro-Space is a Delaware corporation, organized April 19, 1961 with an authorized capital of 950,000 shares of common stock. It acquired the assets of the Fulton-Irgon Division of Lithium on May 2, 1961 by paying for them with 550,000 shares. Lithium thus became the owner of all the issued and outstanding stock of Hydro-Space. It continued as sole stockholder until there was a public offering of 300,000 shares of Hydro-Space common. Of these, 155,000 were offered as an original issue by Hydro-Space, and 145,000 by Lithium as selling stockholder. As stated in the prospectus of July 19, 1961 filed with the Securities & Exchange Commission, copy annexed to the answering affidavit of defendant Fulton, president of Hydro-Space, Lithium would own 57.4% of the outstanding shares after the 300,000 shares offered were sold -- as they eventually were.

The records of Hydro-Space establish that plaintiffs acquired their shares in the company on various dates following publication of the prospectus, the earliest being August 9, 1961 and the latest November 14, 1961. The prospectus described in detail the nature of Hydro-Space's activities. Among other things, the company is engaged in the development, production and sale of specialized devices in the fields of rocketry and aviation as well as oceanographic research and underwater defense.

At the time plaintiffs instituted the present action Hydro-Space had been in existence and operating for less than a year. A certified audit attached to defendant Fulton's affidavit

shows that the company is solvent and its financial condition sound. As of December 31, 1961 it had current assets of $803,174 and current liabilities of only $47,026 -- a ratio of better than 17 to 1. Of the current assets $102,436 is in cash and $335,425 in short-term investments. Fulton in his answering affidavit alleges there had been no substantial change in the financial position of Hydro-Space since the audit.

The company had total net sales of $661,605 from April 1 to December 31, 1961. Although it would have shown a net loss of $36,605 for the nine months of its operation, inclusion of a non-recurring profit item of $40,600 resulted in net earnings of $3,995 for the period. Working capital as of December 31, 1961 had increased to $756,148, as compared with the pro forma working capital of $751,771 on April 1, 1961; and net worth had increased to $999,707 from $997,185.

Fulton's affidavit stated that the results of company operations for the first nine months were not unfavorable. He pointed out that the problems of creating a new company, engaged primarily in engineering and design, are substantial. There is strong competition from companies large and small; profit margins are generally limited, and operating profits can seldom be attained without substantial sales volume. However, the capital required is usually less than might be necessary for an integrated manufacturing operation with sales of the same magnitude, and the resulting return on invested capital may reach attractive proportions when a satisfactory sales volume is developed. In Fulton's opinion, Hydro-Space would not show a substantial profit -- taking into account the company's current expenditures for research -- until sales volume reached approximately $1,000,000 a year. He believed that sales for the period ending December 31, 1961 had been favorable. The company entered 1962 with a backlog of contracts amounting to $237,000, which represented more than three months of sales at the current level.

II.

The appointment of a statutory receiver for a corporation is governed by the provisions of our General Corporation Act. N.J.S.A. 14:14-3 authorizes the court to proceed in a summary manner for injunctive relief and the appointment of a receiver:

"When any corporation shall become insolvent or shall suspend its ordinary business for want of funds to carry on the same, or if its business has been and is being conducted at a great loss and greatly prejudicial to the interest of its creditors or stockholders, any creditor, or any stockholder who owns at least ten per centum (10%) of the capital stock of the corporation, may, in an action, apply to the Superior Court for injunctive relief and the appointment of a receiver or receivers or trustees.

The court upon such notice as it may direct, may proceed in a summary manner or otherwise.

If it shall appear to the court that the corporation has become insolvent and is not about to resume its business in a short time thereafter, or that its business has been and is being conducted at a great loss and greatly prejudicial to the interest of its creditors or stockholders, so that its business cannot be conducted with safety to the public and advantage to the stockholders, it may enjoin the corporation and its officers and agents from exercising any of its privileges or franchises and from collecting or receiving any debts, or paying out, selling, assigning or transferring any of its real or personal property whatsoever, except to a receiver appointed by the court, until the court shall otherwise order."

Plaintiffs admit that since they do not own 10% of the stock of Hydro-Space, they are not entitled to the ...


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