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STEINBERG v. ADAMS

May 20, 1950

STEINBERG
v.
ADAMS et al. (POSNER, Intervenor). NEUWIRTH v. ADAMS et al.



The opinion of the court was delivered by: RIFKIND

Nine motions have been filed and argued in the two companion actions. I shall consider them in the order best calculated to simplify disposition.

I. Cross-Motions for Summary Judgment in the Steinberg Action.

 The Steinberg action is a stockholder's derivative action for the benefit of Thompson-Starrett Company, Inc. From the amended complaint it appears that the core of the controversy is the propriety of payments made by the corporation to defray the expenses incurred by two contesting parties in connection with an election of directors.

 Prior to, and in connection with, the annual meeting of Thompson-Starrett Company held on November 24, 1947, a contest developed between the incumbent directors, whom I shall identify collectively as the Management, and an insurgent group of stockholders. The contest was conducted by printed appeals for proxies addressed to the stockholders, and employment of proxy solicitors and other devices not unusual in such campaigns. Both parties to the context incurred substantial expenses: the Management $ 20,110.64, the insurgents $ 27,755.82.

 The insurgents won the contest and elected a new board of directors. In January 1948, according to the complaint, the new board caused the company to reimburse both the Management and the insurgents for these expenditures. *fn1"

 The affidavits disclose, without contradiction, that the action of the new board was reported to the stockholders and, at a meeting held after suit was commenced, the stockholders, by majority vote, ratified the action of the board.

 The complaint seeks judgment in favor of the corporation against directors, both defeated and elected, for the amount of the corporate funds thus expended.

 Both plaintiffs and fourteen defendants move for summary judgment on the ground that there is no genuine issue as to any material fact and that the moving parties respectively are entitled to judgment as a matter of law.

 The affidavits and arguments have developed one issue very sharply: whether the 1947 contest revolved about matters of corporate policy or merely concerned itself with the retention or displacement of the incumbent office holders and directors. Defendants emphasize that the division was one of policy, especially the relative merit of lump-sum contracts as contrasted with fixed fee contracts in the construction business. Plaintiffs, on the other hand, would have me deduce from reading the proxy material, that the struggle was purely for control of the corporation.

 The parties do not differ quite so sharply about the applicable rule of law. They are in apparent agreement that the 'ins' may spend corporate funds in a corporate election where the issue is over policy. The defendants maintain that corporate funds may, in such event, also be employed by the 'outs' if they win. This the plaintiffs deny.

 If the plaintiffs' view of the law is correct they would be entitled to judgment, at least, for the amount paid to the insurgents. Such judgment would, of course, run only against those defendants who were members of the board which authorized the payment. To support its view plaintiffs rely heavily on Lawyers' Advertising Co. v. Consolidated Ry., Lighting & Refrigerating Co., 1907, 187 N.Y. 395, 80 N.E. 199. In that case an advertising agency sought to recover from a corporation the cost of publishing newspaper notices at the instance of directors in connection with a meeting of stockholders. Unlike the instant case, the corporation resisted payment. The claim was rejected because the publication of the notices had not been authorized by the board of directors and because 'it could not have been lawfully authorized'. 187 N.Y.at page 400, 80 N.E.at page 201. The notices were in the form of an 'urgent solicitation that these proxies should be executed and returned for use by one faction in its contest, and we think there is no authority for imposing the expense of its publication upon the company.' 187 N.Y.at page 399, 80 N.E.at page 201.

 The instant case is concerned with a Delaware corporation and the law of that state determines the scope of the corporation's powers. Both parties, as I have indicated, agree that this case is governed by a less stringent rule. 'Where the controversy is concerned with a question of policy as distinguished from personnel of management and the stockholders are called upon to decide it, it would seem quite clear that the incumbent directors may with perfect propriety make such expenditures from the corporate treasury as are reasonably necessary to inform the stockholders of the considerations which the directors deem sufficient to support the wisdom of the policy advocated by them and under attack; and in the same communications which the directors address to the stockholders in support of their policy they may solicit proxies in its favor.' Hall v. Trans-Lux Daylight Picture Screen Corp., 1934, 20 Del.Ch. 78, 171 A. 226, 227. Hand v. Missouri-Kansas Pipe Line Co., D.C. Del. 1944, 54 F.Supp. 649; Empire Southern Gas Co. v. Gray, Del. Ch. 1946, 46 A.2d 741, 744; See Peel v. London and North Western R.R. Co., 1907, 1 Ch.Div. 5; In re Zickl, Sup. 1947, 73 N.Y.S.2d 181.

 None of these cases authorizes reimbursement of the successful insurgents. All were concerned with expenditures authorized and incurred by the incumbent board. No case has been called to may attention which, in a 'policy' controversy, either allowed or disallowed the reimbursement of an insurgent group for the expenses incurred by it in bringing about a change of management. My own choice is to draw no distinction between the 'ins' and the successful 'outs'. I see no reason why the stockholders should not be free to reimburse those whose expenditures succeeded in ridding a corporation of a policy frowned upon by a majority of the stockholders. Once we assert that incumbent directors may employ corporate funds in policy contests to advocate their views to the stockholders even if the stockholders ultimately reject their views, it seems permissible to me that those who advocate a contrary policy and succeed in securing approval from the stockholders should be able to receive reimbursement, at least where there is approval by both the board of directors and a majority of the stockholders. An analogy may be found in the reimbursement of the successful stockholder who brings a derivative action for the benefit of the corporation. There he is reimbursed regardless of the views of the stockholders.

 Assuming the contest in the instant case to have been concerned with 'policy', I would hold that plaintiffs are not entitled to judgment even for the expenditures incurred by ...


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