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Pilat v. Broach Systems Inc.

Decided: December 9, 1969.

PETER PILAT, PLAINTIFF,
v.
BROACH SYSTEMS, INC., A NEW JERSEY CORPORATION, DEFENDANT



Breslin, J.d.c. (temporarily assigned).

Breslin

The following facts are not in dispute. Plaintiff was a stockholder and a member of the board of directors of defendant Broach Systems, Inc., and also its vice-president from the time of the corporation's inception in 1967 until May 26, 1969. On July 28, 1969 he was removed as a director and on September 19 was discharged as an employee.

On June 3, 1969 plaintiff, through his attorney, made a written demand upon the corporation to inspect the corporate balance sheet, profit, loss and surplus statements, minutes of the shareholders' proceedings, the record of shareholders, and its books, records of account and minutes. The original purpose of the inspection was to ascertain the value of plaintiff's stockholdings in the corporation, but in his trial memorandum he indicated that he also wanted "to be certain whether or not there had been proper management of the corporate affairs and business." On June 18, 1969 plaintiff again requested the information set forth in the previous communication and made a formal demand for inspection pursuant to N.J.S.A. 14A:5-28. No response was forthcoming from defendant to either communication. On August 18, 1969 a complaint was filed in which plaintiff sought (1) an examination of the books and records of the corporation; (2) reinstatement as a director; (3) a declaration that the executive committee was illegal, and (4) an order restraining the corporation from removing its assets from New Jersey to Florida.

By letter dated October 1, 1969 defendant informed plaintiff that he would be allowed to examine the listed documents with the exception of the books, records and minutes of the corporation; that he was reinstated as a director, and that a special meeting of the board of directors would be held on October 6. At said meeting the board approved a proposed amendment to the certificate of incorporation authorizing the shareholders to remove a director without cause, as provided by N.J.S.A. 14A:6-6. On October 16 the amendment was adopted and plaintiff was thereupon removed as a director.

Plaintiff asserts that he is acting in good faith, in his own interest as a stockholder and in the best interests of the corporation, and essentially requests this court to rule that (1) he is entitled to inspect the corporate books and records, and (2) the statute enabling stockholders of a corporation to remove a director without cause is unconstitutional.

Defendant contends that plaintiff instituted this action only to harass the corporation and its management and to obtain personal gain; that plaintiff is not entitled to the requested inspection since he has not shown a proper purpose, and that N.J.S.A. 14A:6-6(1) is constitutional.

Other contentions raised by the parties will be treated later on in this opinion.

I

N.J.S.A. 14A:6-6 provides:

(1) One or more or all the directors of a corporation may be removed for cause by the shareholders by the affirmative vote of the majority of the votes cast by the holders of shares entitled to vote for the election of directors. If the certificate of incorporation so provides, one or all the directors may be removed without cause by like vote of the shareholders." [Emphasis added]

Here, plaintiff's first removal from his position on the board of directors was without cause, and since there was no provision existing at the time in defendant's certificate of incorporation authorizing such removal, the same was improper

and void. As previously noted, defendant then reinstated plaintiff to his former status, but amended its certificate to provide for removal without cause. Plaintiff enjoyed this renewed status for about two weeks, until the shareholders once again voted him out.

Defendant, by virtue of N.J.S.A. 14A:9-1 (allowing amendments to certificates of incorporation so long as the amendments contain only such provisions as could lawfully be contained in an original certificate filed at the time of making the amendment) and N.J.S.A. 14A:6-6, had the right to amend the certificate to provide for the removal of a director without cause. Although defendant was incorporated prior to the enactment of the present statute, it unquestionably had the right to adopt as its own the provisions of the new Corporation Act. Brundage v. New Jersey Zinc Co. , 48 N.J. 450 (1967). Still, the court is of the opinion that such an exercise could not work to affect plaintiff's existing rights as a director.

The precise question presented -- whether an amendment to a certificate, providing for the removal of a director without cause, as authorized by statute, enables the shareholders to remove a director without cause when the director had been elected prior to the amendment -- is novel in this jurisdiction, because before the enactment of N.J.S.A. 14A:6-6 New Jersey common law had held that a director could never be removed without ...


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