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Good v. Lackawanna Leather Co.

Decided: July 27, 1967.

DONALD A. GOOD, WALLACE H. GOOD AND MARJEAN M. GOOD, PLAINTIFFS,
v.
LACKAWANNA LEATHER COMPANY, A NEW JERSEY CORPORATION, GOOD BROTHERS LEATHER COMPANY, A NEW JERSEY CORPORATION, CARL F. GOOD, ROSS L. DIMM, JR., GERARD K. LIND AND DALE MCKNIGHT, DEFENDANTS



Mintz, J.s.c.

Mintz

Plaintiffs Donald A. Good and Marjean M. Good are minority stockholders of defendants Good Bros. Leather Co. (hereinafter referred to as Good Bros.) and Lackawanna Leather Co. (hereinafter referred to as Lackawanna). They seek an appraisal of the value of their shares in accordance with N.J.S.A. 14:12-6 and 7 and N.J.S.A. 14:3-5. Alternatively, they seek an appraisal of their shares in both corporations in accordance with alleged common law rights. Plaintiffs specifically charge that (a) Good Bros. sold all or substantially all of its assets without the stockholder authorization required by N.J.S.A. 14:3-5; (b) Lackawanna and Good Bros. have been merged without the stockholder approval of either corporation required by N.J.S.A. 14:12-3, despite a rejection of the proposed merger by the majority of the stockholders of Good Bros., and (c) the common directors of Good Bros. and Lackawanna named as defendants in this proceeding conspired to sell Good Bros.' assets and merge the companies without complying with the statutory procedures, for the purpose of depriving plaintiffs of their statutory appraisal rights and should, accordingly, be held liable for punitive damages.

Defendant corporations have enjoyed a close relationship over the years. The predecessor to both corporations was a partnership between Herman B. Good and his brother Robert C. Good formed in 1896. This partnership engaged in various phases of the leather processing business. In 1903 the partners arranged for the incorporation of Lackawanna, which corporation chrome-tanned leather for the automobile trade. The plant was located in Hackettstown, N.J., where

it still exists. In 1914 Herman and Robert Good organized Good Bros. Inc., which established a plant in Newark. Herman B. Good was president and general manager. Robert's son, Donald S. Good, entered the employ of Lackawanna in about 1920, and upon the death of his father in 1944 became president of the company. Donald's son, Donald A. Good, is one of the plaintiffs in the within cause of action. Carl F. Good, one of the defendants, is the son of the late Herman B. Good.

Since 1957 Carl F. Good, Ross L. Dimm, Jr., Gerard K. Lind and Dale McKnight have been the majority shareholders and have controlled the boards of directors of both Good Bros. and Lackawanna. Carl F. Good is the president of Good Bros. and the chairman of the board of Lackawanna. Ross L. Dimm, Jr. is the president of Lackawanna and vice-president of Good Bros.

Almost since its inception Lackawanna has engaged in the business of finishing and selling fine leather for use by furniture and automobile manufacturers. It worked closely with Good Bros. purchasing much of its russet leather from it. Lackawanna was Good Bros.' principal customer for russet-tanned top grains. However, in 1956 Lackawanna acquired additional facilities in Hackettstown where it could accomplish the russet-tanning*fn1 of top grains cheaper than it would cost it to purchase the russet leather from Good Bros. Thus when in 1956 Lackawanna was able to russet-tan its own hides, Good Bros. went out of this phase of hide processing. The only tanning operations in which it thereafter engaged was on the splits, which it conducted for a period of approximately three years.

In 1956 Donald S. Good, who was then president of Lackawanna offered to buy the majority interest in that company. The offer was rejected by the majority stockholders. He thereupon resigned, as did the executive vice-president and several other key employees. They immediately went to work for the Good-McCree Leather Company, a competitor, in Hackettstown, of which plaintiff Donald A. Good was president. In the fall of 1956, as a consequence of these resignations, Carl F. Good was elected president of Lackawanna, Ross L. Dimm, Jr. executive vice-president and Dale McKnight vice-president in charge of sales. Lackawanna was in poor condition. Its building, machinery and equipment had received little maintenance. The credit of the company was limited. Its customer relations were impaired and it had no inventory.

In the 1950s "lime splitting," a technological advance in the industry, was adopted in various tanneries. Theretofore, tanneries were unable to produce all the russet leather which they required. They looked to beam house processors, such as Good Bros., to supplement their needs for russet leather. With the advent of lime splitting they were able, with their current facilities, to produce all the russet leather needed. Thus, this new process seriously affected Good Bros. business. Lackawanna, however, did not become a fully integrated plant. Sewage problems at its Hackettstown plant would not permit the beam house operation. Hence, Good Bros. remained a source of supply of beamed hides.

In the light of this situation the boards of directors of Lackawanna and Good Bros. considered merger proposals. In December 1957 a memorandum proposing the merger of Good Bros. and Lackawanna was circulated among the directors, assigning the following reasons for the merger:

"The largest and most important leather finishing companies now have their own tanning departments which can supply all of their needs and, therefore, Good is dependent upon Lackawanna for the disposal of a major portion of its products. Obviously it would not be wise for Lackawanna to be dependent upon its competitors for its

supply of partially processed hides. Under present conditions, probably neither Good nor Lackawanna could successfully operate independently of the other. Obviously, it is important for both companies and for the stockholders of both companies that the company producing the finished product and offering it in the competitive market be in the strongest position possible to meet its competition."

The merger memorandum recommended that about one-third of the machinery and tools of Good Bros. be disposed of at salvage value, the Newark property of Good Bros. be sold, and the beaming operations of the merged companies be moved to a new location. The memorandum also called for the exchange and distribution of 1.85 shares of Lackawanna for each share of Good Bros. It further indicated that if dissents were filed, the proposed merger would not be effectuated because the appraisal rights attaching to the shares of the dissenters would cause a cash drain upon the affected companies which they could ill afford.

A formal merger agreement was approved by the boards of directors of both Good Bros. and Lackawanna. On April 26, 1958 said merger agreement was submitted to the stockholders of Lackawanna, at which time a resolution adopting the agreement of merger was passed by the two-thirds vote of the stockholders, as required by N.J.S.A. 14:12-3. However, the shares held or controlled by plaintiffs comprising approximately 20% of the outstanding shares, were voted against the merger, thereby entitling them to receive the appraisal value of their stock.

On May 24, 1958 Carl F. Good, as president of both corporations, advised the stockholders as follows:

"This is to advise you that the proposed merger of Good Bros. Leather Co. into The Lackawanna Leather Company dated as of March 31, 1958, will not be consummated. The holders of 1345 1/2 shares of stock of The Lackawanna Leather Company and the holders of 75 shares of stock of Good Bros. Leather Co. have given the respective corporations written notice of their dissent. Consequently if the merger were consummated the surviving corporation would be obliged to purchase the share of these dissenting stockholders at the appraised market value of such shares * * *.

Accordingly, at the adjourned meeting of the stockholders of Good Bros. Leather * * * a vote on the merger will be taken, but the shares owned by members of the Board of Directors and their families will be voted to reject the proposed merger."

On June 7, 1958 the proposed merger was rejected by a majority of the stockholders of Good Bros. Plaintiffs allege, however, that defendants achieved the very objectives sought by the statutory merger plan notwithstanding the rejection, and thus actually accomplished a de facto merger as of about December 31, 1960. Plaintiffs also contend that by the end of 1961 Good Bros. sold substantially all of its assets without the stockholder authorization required by N.J.S.A. 14:3-5. It is asserted that the subsequent course of conduct on the part of the respective corporations confirms and establishes the de facto merger and alleged unauthorized sale of all the assets of Good Bros.

Plaintiffs point to the marked change and curtailment in the nature of Good Bros. operations after 1959. Good Bros. faltering business is evidenced by the fact that at the end of 1959 it had but one remaining customer, namely, Lackawanna for whom it beamed hides. The sales pattern also manifests a business decline. In 1958 its gross sales amounted to $1,291,524. Although in 1959 its gross sales increased to $2,192,395, this substantial increase was in some measure attributable to the sale in December of its entire hide inventory to Lackawanna, and a temporary increase in demand and price for its beamed products. However, in 1960 sales totalled only $260,544. In 1961 sales totalled $267,360, and in 1964 $306,893.

On December 1, 1960 Good Bros. sold its land, buildings and improvements in Newark to the Remis Trust Fund. At the same time it entered into a contract with H. Remis & Co. to perform such beaming operations as Good Bros. should require for a period of five years. Good Bros. tried to sell its beaming equipment to Remis but Remis would not purchase it. For the ...


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