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AMES v. VOIT

March 2, 1951

AMES
v.
VOIT et al.



The opinion of the court was delivered by: LEIBELL

This is a motion by the defendant corporation, The Mengel Company, to require the plaintiff to give security in the sum of $ 5,000 on the grounds that he is in effect bringing a derivative action in favor of the defendant corporation and against the individual defendant, Alvin A. Voit, and should post security under Section 61-b of the New York General Corporation Law, Mc.K. Unconsol. Laws, c. 23.

Section 61-b provides:

 'Sec. 61-b. Security for expenses

 'In any action instituted or maintained in the right of any foreign or domestic corporation by the holder or holders of less than five per centum of the outstanding shares of any class of such corporation's stock or voting trust certificates, unless the shares or voting trust certificates held by such holder or holders have a market value in excess of fifty thousand dollars, the corporation in whose right such action is brought shall be entitled at any stage of the proceedings before final judgment to require the plaintiff or plaintiffs to give security for the reasonable expenses, including attorney's fees, which may be incurred by it in connection with such action and by the other parties defendant in connection therewith for which it may become subject pursuant to section sixty-four of this chapter, to which the corporation shall have recourse in such amount as the court having jurisdiction shall determine upon the termination of such action. The amount of such security may thereafter from time to time be increased or decreased in the discretion of the court having jurisdiction of such action upon showing that the security provided has or may become inadequate or is excessive. Added L. 1944, c. 668; amended L. 1945, c. 869, Sec. 3, eff. April 18, 1945.'

 The secretary of the defendant corporation asserts that plaintiff owns only 50 shares of the corporation's 571,624 shares of common stock outstanding; that the stock was issued to her on March 9, 1949 and the highest price it has reached on the New York Stock Exchange is less than $ 18 a share.

 After the motion for security was made, the plaintiff served an amended complaint in which she states that she 'brings this action respectively on behalf of herself and all other stockholders of The Mengel Company similarly situated'. She alleges that she has owned her stock since July 31, 1947. The amended complaint charges that the corporation in October 1949 permitted the individual defendant, Voit, to exercise an option to purchase 10,000 shares of the corporation's stock at $ 10 a share in a manner contrary to the option expressly authorized by the stockholders at a special meeting held on February 27, 1945; that the terms of the option called for its exercise by December 31, 1949 and contemplated the payment of cash for the stock; that in effect the October 1949 action was a new option; that two-thirds of the stockholders present at a meeting are required to authorize such an option; and that no such meeting was held.

 The amended complaint alleges:

 '6. On the 21st day of October, 1949, the Board of Directors of the Corporation authorized the issuance of the 10,000 shares of stock to the defendant Voit for a purchase price of $ 100,000.00 payable by a demand promissory note in that amount bearing 3% interest payable semi-annually it being specifically provided however, that 'the corporation was to have no recourse against the maker of the note except to the extent of the stock deposited as collateral security therefore.'

 '7. On the 26th day of October, 1949, the defendant Voit attempted to exercise his option to purchase 10,000 shares of the common stock of the corporation by giving as payment therefore, a note for $ 100,000.00 payable on demand with interest at 3% per annum payable semi-annually. Said note was secured by the 10,000 shares of the Corporation common stock which was purchased by the defendant Voit with the privilege of withdrawing the collateral from time to time by making payments on the principal at the rate of $ 10.00 cash with each share withdrawn. The note further provided that 'the Corporation shall look solely to the collateral placed for the payment of this note.' The note further provided that the dividends on the shares held as security were to be applied first towards the payment of interest and second towards the payment of principal.

 '8. The purported exercise of said option was illegal, invalid, null and void in that

 '(a) there was a failure to pay for said stock in accordance with the terms of the option or in any other way that constitutes payment and in addition there was a failure by Alvin A. Voit or anyone on his behalf to obligate themselves to pay for said stock at some future date;

 '(b) the consent of 2/3 of the stockholders present at the meeting of February 27, 1945 was obtained on the premise that said option could only be exercised by payment for the stock in cash on or before December 21, 1949 and said stock has not been paid for as of the date hereof;

 '(c) the Charter of the corporation provides that the consent of 2/3 of the stockholders must be obtained as a condition prerequisite to the issuance of unissued stock. Said stock had remained unissued as and until the 26th day of October, 1949 and 2/3 of the stockholders of the Corporation have not at any meeting called for that purpose or in any other manner authorized a transfer of the stock without payment of consideration, or upon the terms set forth in paragraphs 6 and 7 of this complaint;

 '(d) that the governmental approval of the solicitation material was given upon the premise that the option would be exercised by payment in ...


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