Pierce Butler

“ By consenting that the directors should be 'eligible' to share in a plan avowedly for the benefit of employees, the stockholders did not consent that they should be the chief beneficiaries of their own unrestrained munificence, or that they should add any new bounties to the unrevealed stock allotments and bonuses which the directors had previously enjoyed in secrecy. ”

“ As the tobacco company, in addition to its registered office, has property, operates directly or through subsidiary branch factories in New Jersey and carries on business there and in other states and countries, it may not be deemed to have been organized in that state as a mere matter of convenience for the purpose of carrying on all its business in another state or be deemed in New York to be a local concern. ”

“ Before the decree can be enforced it must be obtained and the litigation must be brought to a successful conclusion. That involves the production in court of the necessary evidence. Of the parties to this case none but the American Tobacco Company is amenable to process in New Jersey; all are amenable in the Southern District of New York. In New York, petitioner can compel them and others connected with the corporation to attend as witnesses; all can be ordered to make complete discovery; and petitioner can compel the production at the trial of the records of both corporate defendants. ”

“ Viewing the suit as one to reclaim the shares received by the directors in breach of their fiduciary duties to the corporation and the shareholders, I find no adequate reason for the refusal to exercise jurisdiction, and this though a different conclusion might be thought to be necessary if relief were to be given upon grounds affecting the validity of the issue as a whole. ”

“ Respondent, the American Tobacco Company, organized under the laws of New Jersey, is a large and prosperous corporation, engaged in the manufacture and distribution of cigarettes and other forms of tobacco. It has upwards of 40,000 stockholders. At the commencement of this suit it had a board of sixteen directors, including a president, five vice presidents, a secretary and a treasurer, all actively engaged in its management. ”

“ Such a maneuver cannot rightly be regarded as a compliance with the plain language of the statute, which requires the directors first to formulate a plan for stock allotment and declare it advisable, and then to submit it to the stockholders for their approval. If it were, it would be difficult to suggest any conceivable purpose of the statute which could not be thwarted by a similar procedure.
The respondents stand in no better position, even if we assume that the proposal submitted to the stockholders was a formulated plan, within the meaning of the New Jersey statute. ”

“ If the proposal to the stockholders is regarded as a plan, so far as ordinary employees are concerned, as it plainly does not embrace authority to the directors to confer such extravagant benefits upon themselves, the result is the same, as to the stock allotted to the directors. ”

“ Extension of corporate activities, distribution of corporate personnel, stockholders and directors through many states, and the diffusion of corporate ownership, separated from corporate management, make the integrity of the conduct of large business corporations increasingly a matter of national rather than local concern (cf. A. A. Berle, Jr. and Gardiner C. Means, The Modern Corporation and Private Property (1932) ) , to which the federal courts should be quick to respond when their jurisdiction is rightly invoked. ”

“ Hence, if stockholders' suits, such as the present, are to be maintained with any hope of success, the practical necessities of making parties, securing evidence, obtaining the production of documents and relief by injunction against individual wrongdoers, justify, if they do not compel, their prosecution in the particular jurisdiction where necessary parties and witnesses may be found, rather than in the place of the technical corporate domicile. ”

“ Of the shares allotted to directors as contrasted with those allotted to other employees, most are owned by the defendants sued. Whatever shares belong to others will be untouched by the decree. With all the procedural complexities possible hereafter if jurisdiction be declined, the hazard of inconsistent judgments affecting the directors inter se will not avail without more to halt the processes of justice and the award of such relief as the court is competent to give against those subject to its power. ”

“ If federal courts are to continue the general practice of deciding novel questions of state law whenever there are necessary or convenient grounds for the disposition of cases pending before them, there are peculiarly cogent reasons why there should be no departure from the practice in cases like the present. ”

“ The legality of the corporate proceedings which resulted in the issuance of this stock is peculiarly a matter for determination in the first instance by the New Jersey courts. It may be noted that the American Tobacco Company is not a local enterprise. ”

“ Its provisions have never been construed by the New Jersey courts and they or their like are not familiar in the statute law governing corporations organized in other states. And other New Jersey statutes among which are chapter 195, Laws of 1917, and chapter 318, section 16, Laws of 1926, are claimed by plaintiff to have an important bearing upon this case. But the courts of that state have had no occasion to consider the interrelation, if any, between them and chapter 175 pursuant to which the stock in question purports to have been issued to employees. ”

“ All the shares allotted were sold at $25 for cash to the trust company. The trust company allowed each allottee to subscribe at the same price. At that time it was worth $112. The agreement stated that this was by way of additional compensation for service to be rendered between January 31 and December 31, 1931; that until the end of the year no allottee could take up his stock; that he was entitled to have dividends applied on the purchase price; and that, if he should terminate his employment before the end of the year, the trustees were to decide whether he should have his allotment. ”

“ Thus called upon in this suit to account for their stewardship and to justify their action, the defendants, the respondents here, place their whole reliance upon a statute of New Jersey in conformity with which, they contend, they secured, in advance, the authorization of the stockholders to make the challenged allotments of stock. ”

“ No employee or person actively engaged in the conduct of the business of the corporation or its subsidiaries shall be deemed ineligible to its benefits by reason of being also a director of the corporation or of any of its subsidiaries or of holding any office therein. ”

“ To surmount these difficulties, respondents point to the fact that a representative of petitioner stated at the stockholders' meeting that favorable action on the proposal might result in the issuance of a large amount of stock to employees, including officers and directors, without adequate consideration, and that this did not induce the stockholders to express their disapproval. ”

“ It was free in the exercise of a sound discretion to decline to pass upon the merits of the controversy and to relegate plaintiff to an appropriate forum. Langnes v. Green, 282 U.S. 531, 535, 541, 51 S.Ct. 243, 75 L.Ed. 520; Heine v. New York Life Ins. Co. (C.C.A.) 50 F. (2d) 382. Obviously no definite rule of general application can be formulated by which it may be determined under what circumstances a court will assume jurisdiction of stockholders' suits relating to the conduct of internal affairs of foreign corporations. ”

“ If it be taken as sufficient, the shareholders who voted for it are not chargeable with notice that fiduciary powers would later be perverted by the award to the fiduciary of extraordinary benefits. Consent will not protect if reason and moderation are not made to mark the boundaries of what is done under its shelter. ”

“ That chapter as construed below is repugnant to the contract clause of the Federal Constitution (Const. art. 1, § 10) . The decision that the plaintiff failed to comply with Equity Rule 27 is contrary to chapter 175. Chapter 195, New Jersey Laws 1917, does not permit the issue of stock to employees for services to be rendered. The decree of the District Court declining to exercise jurisdiction is contrary to decisions of this court and in conflict with the decision of the Circuit Court of Appeals for the Seventh Circuit in Williamson v. ”