# Solimine v. Hollander

> New Jersey Court of Chancery · November 8, 1940 · 128 N.J. Eq. 228

URL: https://www.frixlaw.com/law-library/cases/3568745

## Case

- **Full name:** Joseph Solimine v. Michael Hollander
- **Court:** New Jersey Court of Chancery
- **Decided:** November 8, 1940
- **Citations:** 128 N.J. Eq. 228; 16 A.2d 203; 1940 N.J. Ch. LEXIS 12
- **Precedential status:** Published
- **Opinion:** Opinion of the court
- **Judges:** STEIN, V.C.
- **Cited by:** 33 later opinions in the Frix Law Library

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## Opinion text

The complainant, Joseph Solimine, as the owner and holder of 100 shares of the common capital stock of the defendant A. Hollander Son, Inc., a Delaware corporation (hereinafter termed "American company") brought this accounting suit for the benefit of said company against nine individuals, eight of whom are now directors of the company and one of whom (Herman A. Fenning) was until September, 1938, a director of said company. Drawn into the litigation by several of the charges made in the original bill and certain charges subsequently made in complainant's amended bill of complaint and in the supplemental complaint filed by an intervening stockholder is the Canadian company known as A. Hollander Son, Ltd. That company will hereinafter be referred to either as "Limited" or the "Canadian company."
The total stock issued by the American company and outstanding at the time the bill was filed in this cause amounted to 209,700 shares of common stock held by 1,064 stockholders. *Page 231
Complainant's 100 shares had been purchased by him at $8-1/8 per share about eleven months before the filing of his bill and his holding constitutes less than one-twentieth of one per cent. of the outstanding stock.
The individual defendants filed their answers denying the wrongdoing alleged against them in complainant's bill, denying further that the corporate defendant had suffered any losses in consequence of any of their acts and alleging affirmatively that the action was not brought in good faith or under the honest belief that the wrongs complained of had in fact been committed. The answers further asserted that the action had been brought for the sole purpose of vexing and harassing the defendant company and its officers and directors. The answers further set up that the defendants had, as directors of said company, always acted with fidelity to their positions of trust. The answer of the American company presented a neutral attitude with respect to the controversy. That answer invited inquiry into the matters of complaint and called upon the complainant to establish the truth of his bill, so that the company itself could have and enjoy for itself and its stockholders the benefits and fruits of such accounting and other relief as the complainant for himself and all other stockholders could rightfully and equitably establish.
After the defendants had answered the bill of complaint, a stockholder owning 100 shares petitioned the court for leave to intervene as a co-complainant and to file supplemental, additional or other pleadings and for an examination of the company's books, records and accounts. Such leave was granted, after which the intervening stockholder filed a supplemental complaint charging the commission of additional wrongs by the directors and officers of the American company. The supplemental complaint contained charges that A. Hollander Son, Ltd., the Canadian company, with knowledge of the wrongdoing alleged against the individual directors of the American company, had accepted and retained the benefits of that wrongdoing, such benefits consisting of the use of "secret processes, recipes, formulae, information and working methods" which, it is charged, were and are the exclusive property of the American company. *Page 232
The supplemental complaint also made other specific charges of wrongdoing and alleged that as a result of the conduct of the defendants, Limited made, received and retained profits which should be decreed to be the property of the American company. Limited was thereupon added as a party defendant and voluntarily submitted to the jurisdiction of this court by filing an answer denying the allegations of the intervenor's supplemental complaint.
Pursuant to Chancery rule 32, the intervenor applied for an order to compel the American company to furnish him a list of the names and addresses of the stockholders. This application was resisted under the claim that misuse might be made of the list.
Research has disclosed no reported opinion dealing with this rule, although rule 32 has been included within the rules of this court since 1892. It is essential that a complainant in a stockholder's suit comply with its requirements.
The rule apparently was adopted as a result of the case of Ellerman v. Chicago Junction Railways, c., Co., 49 N.J. Eq. 217 ; 23 Atl. Rep. 287 , decided in 1891, and its companion case, Willoughby v. Chicago Junction Railways, c., Co., 50 N.J. Eq. 656 ; 25 Atl. Rep. 277 , decided in 1892. In the latter case the court, in discussing the res judicata effect of a decision in one stockholder's suit upon the rights of other stockholders similarly situated, said (at p. 661 ):
"The practice has long been recognized of permitting suit to be brought by a few as the representatives of a numerous class, on behalf of themselves and all others of the class, when there is a common interest or a common right which the suit seeks to protect, and against a few as representating a numerous class subject to a common liability which the suit seeks to enforce. Story Eq. Pl. § 97.
"`In most, if not in all, cases of this sort, the decree obtained upon such a bill will ordinarily be held binding upon all other persons standing in the same predicament, the court taking care that sufficient persons are before it, honestly, fairly and fully to ascertain and try the general right in contest.' Story Eq. Pl. § 120." *Page 233
In the later decision in Goodbody v. Delaney, 80 N.J. Eq. 417 ,
it was pointed out that the only recourse which a stockholder had when another stockholder had already instituted a representative action in behalf of the corporation was to unite under the invitation of the complainant in aiding the prosecution of the first suit. Rule 32 is the means established for the accomplishment of this purpose.
The practice adopted by the court in the stockholders' derivative suit of Wallen v. Duro-Test Corp. (Chancery Docket 124/54) was followed and an order was entered directing the American company forthwith to furnish and deliver to a designated special master of this court a list containing the names and addresses of the company's stockholders and the master was directed to mail to each stockholder a notice of the pendency, nature and object of the suit in broadest details and of the time and place designated for the final hearing thereof.
Although the notice was sent to 1,064 stockholders, only two, Morton Rosenberg and Joseph Polish, sought and were by order permitted to intervene and file additional pleadings. Rosenberg was the holder of 500 shares purchased by him in December of 1938 and Polish owned 200 shares, 100 of which he bought in April of 1937 and the other 100 in January of 1939. No such pleadings were ever filed by the intervenors, Rosenberg and Polish, although they appeared by counsel at the final hearing and aided complainant in the presentation of his proofs. The stock owned by complainant and the intervenors aggregated 900 shares, or less than one-half of one per cent. of the total outstanding stock. The final hearing occupied sixteen consecutive days. The record, including depositions taken by defendants both in Canada and in New York, covers about 1,600 pages of testimony and more than 2,500 pages of exhibits.
Before presenting the facts upon which the parties have been in contest, it is necessary to dispose of a preliminary question that has arisen with respect to the defendant Albert J. Feldman. It is undisputed that in September of 1938 he became a director of A. Hollander Son, Inc., and was then appointed its secretary but that prior to that time he *Page 234
had been neither an officer nor a director of the company. All the acts charged against the directors of the company occurred prior to the time when Feldman became a director and officer and no evidence has been offered to show that he in any manner participated in those acts. Clearly no liability can be imposed upon a director of a company for acts committed and completed by his co-directors prior to his coming into office. The bill of complaint should be dismissed against him without reference to the various transactions which are questioned in this suit both by the complainant and the intervening stockholders. There appears no valid reason why in the posture of the proofs at the conclusion of the case he should be retained as a defendant in the cause. There will be a decree dismissing the bill in respect to the defendant Feldman.
The proofs offered in this case by the complainant and by the defendants are virtually uncontroverted. Complainant's case rests substantially upon the testimony of the defendant Michael Hollander and the company's accountant A.H. Puder (both of whom were called by complainant as his witnesses) and upon documentary evidence. None of the proofs offered by the defendants was rebutted or otherwise controverted, except only with respect to the translation of the so-called "Polish Government Bonds," where two experts called by the respective parties differed from each other in their translations of those bonds. That conflict will be later discussed when the Eitingon Schild Fur Corporation transaction is considered.
On the third day of the submission of proofs before me, I informed counsel for both sides that owing to my other court engagements it would not be possible for me to continue sitting after the following day. Counsel desired to continue the examination of witnesses and suggested that a master be appointed to sit for the purpose of receiving the proofs. With the consent of counsel for both sides, I designated a master agreeable to both sides and informed counsel that all objections to testimony would be passed on by me at the conclusion of the case. Thereafter, the master sat until the proofs were all in and all objections to testimony were noted in the record *Page 235
and reserved for argument before me. Such argument was had and my rulings on objections are contained in a separate memorandum.
It should here also be noted that in the course of the final hearing the defendants objected to evidence offered with respect to a transaction with Eitingon Schild Fur Corporation on the ground that the transaction was not within the scope of the bill of complaint. The proofs were admitted subject to a later amendment to conform the bill of complaint to the proof. This was the course pursued with respect to evidence offered on other transactions not then within the scope of the pleading. In view of the serious charges against the directors, the widest latitude in the matter of evidence was permitted and the defendants consented to this unlimited investigation. The pleadings were thereafter amended.
A statement of the origin and development of the American company is important to an understanding of the issues in this case. That company is engaged in the business of dressing and dyeing furs and pelts. Although organized under the laws of the State of Delaware in 1919 its principal place of business, offices and plants are in the city of Newark. The company's business is essentially that of rendering labor or service to its customers. It receives from those customers the latter's furs or pelts in a raw state and converts the raw skin into a finished product ready for incorporation into fur garments. The company has rarely engaged in merchandising furs, although by its charter it has since 1919 been authorized "to purchase and sell fabrics, skins and furs * * *" and "to deal and trade in goods, wares, merchandise and personal property of any and every class and description and wherever situate * * *."
The business was founded more than fifty years ago by Adolph Hollander, now deceased. In 1895 he was joined therein by his son, Harry Hollander, also now deceased. Thereafter the business was conducted by the two as a partnership under the firm name of "A. Hollander Son." A few years later another son, Michael Hollander — one of the defendants herein — joined the firm. Benjamin W. Hollander, also a son of Adolph, entered the firm in 1903 and Albert *Page 236
Hollander joined the partnership in 1907. Albert was a son-in-law of Adolph. The partnership business was carried on by Adolph and his three sons and son-in-law from 1907 until 1918, except that the son Harry died in 1914.
In 1918 the father Adolph Hollander withdrew from the firm and his interest therein was absorbed by the remaining partners, Michael, Albert and Benjamin W. Hollander. These three continued as co-partners until June 27th, 1919, when they organized under the laws of Delaware the corporation known as "A. Hollander
Son, Inc.," the company for whose benefit this suit is brought. All the assets of the co-partnership including its plants, equipment, business and good will were transferred by the three partners to the new company in exchange for its entire capital stock. From 1919 until 1925 the three Hollanders owned substantially all the issued and outstanding stock of the American company. This ownership continued until the consummation of a transaction between them and Merrill, Lynch Co., a firm of New York bankers.
On October 7th, 1925, Michael, Benjamin W. and Albert Hollander entered into a written agreement with the firm of Merrill, Lynch Co., whereby they agreed that within forty days thereafter they would recapitalize the American company so that it would have an authorized, issued and outstanding common stock of 200,000 shares of no par value, which stock would then be fully paid for and non-assessable. By that agreement the Hollanders bound themselves to sell and deliver to Merrill, Lynch Co. and that firm agreed to buy 30,000 shares of such new common stock at $24 per share or a total purchase price of $720,000. The agreement also granted to the purchaser an option to buy all or any part of an additional 20,000 shares of such stock at the same price, such option to be exercisable up to October 7th, 1926. The agreement contained statements showing the financial condition of the company as of August 31st, 1925, and it was agreed that at the time the shares of stock would be delivered to the purchaser the company was to be in as good financial condition and was to have a net worth at least as great as that shown in a proposed balance sheet attached to the agreement *Page 237
as an exhibit. The agreement further provided that certain securities and property shown on an attached schedule and amounting to approximately $800,000 were not to be included amongst the assets of the recapitalized company but that those securities were to be withdrawn from the corporate ownership. That agreement was carried out. The charter of the Delaware company was amended so as to authorize the issuance of the contemplated 200,000 new shares of common stock of no par value, the whole outstanding stock previously outstanding was surrendered and canceled and in place thereof there were issued to the three Hollanders the 200,000 shares, of which number they sold and delivered 30,000 shares to Merrill, Lynch Co., in accordance with the agreement above referred to. The purchaser also exercised the option for the additional 20,000 shares, so that in all the Hollanders sold and delivered to Merrill, Lynch
Co., 50,000 shares of the 200,000 share issue, reserving and retaining for themselves the remaining 150,000 shares. The stock of the company was then listed for trading on the New York Curb Exchange and about a year later was transferred for trading purposes to the New York Stock Exchange, where it has since remained a listed security. The 50,000 shares purchased by Merrill, Lynch Co. were in turn sold by that firm to the buying public, such sale being under both a prospectus and an advertisement published by Merrill, Lynch Co., containing the statement that in the first instance the stock had been placed privately and that Merrill, Lynch Co. had purchased the stock in reliance upon the financial statements expressed respectively in the prospectus and in the public advertisement thereof.
Due to the sales made by Merrill, Lynch Co. to the public since 1925 and to sales made since that time by the three Hollanders, the public at the present time owns approximately sixty-five per cent. of the issued and outstanding stock. About 75,000 shares or approximately thirty-five per cent. of the outstanding stock is owned by the three Hollanders and members of their immediate families.
The agreement with Merrill, Lynch Co. provided that the three Hollanders would enter into contracts with the company whereby each of said individuals would agree to *Page 238
serve the company for a period of five years from January 1st, 1926, in stipulated executive capacities and for stipulated salaries.
The agreement with Merrill, Lynch Co. further contained a provision to the effect that the employment contracts with each of the three Hollanders should provide that during the period of five years from and after January 1st, 1926, the employed Hollander will not engage in or permit his name to be used or employed in any way in any business in the United States of America competitive with that of the company (A. Hollander
Son, Inc., the American corporation) either directly or indirectly, through stock ownership or otherwise. Since January 1st, 1926, Michael Hollander has acted continuously as president of the American company, Albert Hollander as its vice-president and Benjamin W. Hollander as its treasurer.
Until 1930 the American company had not directly or indirectly engaged in fur dressing and dyeing outside of the United States of America. In 1930 it for the first time extended its business beyond the United States when it took an eighty-seven and one-half stock interest in a subsidiary company organized and known as A. Hollander Son Societe Anonyme, a French company. Since 1930 the French company has engaged in the business of dressing and dyeing furs in France. In 1937 the American company, through its wholly owned subsidiary, Competent Fur Dressers, Inc. (a Delaware corporation), purchased at a cost of approximately $10,500, all the physical assets, business and good will theretofore owned by Competent Fur Dressers, Inc., of New York, which had for several years done a small amount of business in England. It also appears from the testimony, nowhere contradicted, that the American company has never done any business in the Dominion of Canada and that due to tariff impositions there has never been any competition between the fur dressers and dyers of this country and those operating in Canada. This fact is of considerable importance in connection with the claim made by complainant that the acquisition of a Canadian business by Michael, Albert and Benjamin W. Hollander was an act violative of their duty to the American company. *Page 239
I. THE ACQUISITION OF THE CANADIAN BUSINESS.
The amended bill of complaint charges that the defendants Michael Hollander, Benjamin W. Hollander and Albert Hollander as controlling officers and directors of the American company violated their fiduciary obligation in that they failed to disclose to the stockholders of that company an option to purchase the shares of Limited (the Canadian company) for $50,000 granted to them in 1922 by Adolph Hollander, their father, the owner of all of the shares of the Canadian company, and failed to disclose that said option provided that the defendants Michael Hollander, Benjamin W. Hollander and Albert Hollander might purchase said shares of the Canadian company for their own use or for the use of A. Hollander Son, Inc. (the American company); that this was done notwithstanding the fact that the business of the Canadian company was a profitable one and within the proper and legitimate scope of the American company; that in 1927 in violation of their duties as such officers and directors the said defendants, without disclosure to the American company or its directors or stockholders and without affording an opportunity to the American company to exercise said option and thereby acquire the stock of the Canadian company, although the American company was financially able so to do, exercised said option of purchase in their own behalf and for the sole purpose of enriching themselves at the expense of and to the detriment of the American company and its stockholders. Earlier in the amended bill it is charged that the said defendants wrongfully appropriated to themselves the business opportunities, offers and interests which were peculiarly within the scope and purview of the corporate business of the American company and which it was the duty of said defendants to acquire for the American company and that the said defendants wrongfully and fraudulently utilized the assets and funds and employed the facilities and personnel of the American company in the appropriation and development of such business opportunities, offers and interests, to *Page 240
the detriment of the American company and to the gain and profit of said individual defendants. In essence the charge is, and it is so argued in complainant's briefs, that the opportunity to acquire the Canadian business was one which properly belonged to the American company and was unlawfully usurped by the defendants, Michael, Albert and Benjamin W. Hollander. The defendants answered to the merits and denied the claim of corporate opportunity. The answer is elaborate and it will serve no useful purpose to summarize it here.
The proof developed the following facts concerning the acquisition of the Canadian stock. In 1916 the four partners constituting the then firm of A. Hollander Son decided to venture into the fur dressing and dyeing business in Canada. In December of that year they secured a charter from the Dominion of Canada for a new company to which was given the name A. Hollander Son, Ltd. This corporation preceded in point of time the American company as a corporate entity. The stated object was to carry on in Canada the business of dressing and dyeing all kinds of fur skins. The charter permitted a capital of $100,000 to be evidenced by 1,000 shares of $100 each. The entire authorized capital (excepting one qualifying share to the company's Canadian counsel) was issued to the four Hollanders. Immediately thereafter that company rented a factory in Montreal and engaged as its technical head one George Payeur who had for a number of years been a fur dresser and dyer who had had considerable practical experience with dressing and dyeing formulae, some of which formulae he had himself created or developed and others of which he had received from his father. The Montreal factory was fully equipped by Payeur. No employes were brought up from the city of Newark or from any of the other factories operated by the American partnership. The Canadian employes assembled by Payeur in Canada were broken in by him and trained to process furs according to his own methods. It is also of considerable importance to note that when the Canadian company commenced its operations Payeur's own formulae, which were contained in a formula book, covered almost every kind of *Page 241
fur. This formula book was in 1917 turned over by Payeur to the Canadian company. Thereafter and for a period of about twenty years and until incapacitated by illness, Payeur was the active superintendent of all the work done in the Montreal factory, that work being done under his personal supervision and in the main under his own formulae. During those twenty years Payeur continued to experiment and his additional developments both in formulae and in method were put into operation in Canada and added to that company's formula books. Those books remained with the company when Payeur was later pensioned.
During the first two years of its operations the Canadian company was fairly successful. In 1918 when the father, Adolph, retired from the American firm of A. Hollander Son he desired to become the sole owner of the Canadian business. Accordingly, that year he bought out the stock interests in the Canadian company of his sons and son-in-law and continued to own all the stock of that company until 1922. During that period of four years he radically changed the character of the business of Limited. He virtually ceased all dressing and dyeing operations and allowed the company to engage almost exclusively in the business of buying and selling furs. The result of this change was disastrous. During those four years the company lost both money and prestige. By 1922 it was nothing but a mere shell, its entire surplus having been dissipated and its invested capital of $100,000 impaired.
With the business in this condition Adolph desired to get out from under and he requested his sons and son-in-law to buy him out. This they were willing to do only upon certain conditions, one of the principal of which was that the purchase price should be placed in trust for the use and benefit of Philip Hollander and Monroe Hollander, grandsons of Adolph (children of the deceased son Harry Hollander, the first partner in the business). Adolph was agreeable to this providing he would personally be secured with an annuity of $100 per week for the remainder of his natural life.
Accordingly an agreement was entered into on December 28th, 1922, between Adolph as the seller and the three Hollanders *Page 242
as the purchasers. It recites Adolph's desire to give up the management of the Canadian company and to dispose of his stock and his request that his sons and son-in-law take over and manage the business and his desire that later they purchase that business either for themselves or for A. Hollander Son, Inc., or that they sell the same to any other person for the best price obtainable. At this time the American company was owned entirely by Michael, Albert and Benjamin. The agreement then declares that the basic consideration for the making of it is the blood relationship between the parties thereto. Adolph bound himself to transfer forthwith to the three Hollanders the legal title to the Canadian stock and to obtain the resignations of all its officers and directors. In consideration of the transfer of that stock the three Hollanders bound themselves to pay to their father an annuity of $100 a week commencing the first week in January, 1923, and continuing during his lifetime. The agreement then declares that although the legal title to the stock was put into the names of the three Hollanders they should hold that stock in trust for certain uses and purposes, the pertinent one being the following:
"At any time hereafter the parties of the second part (Michael, Albert and Benjamin) may acquire the full legal and equitable title to the said shares of stock by declaring unto the party of the first part (Adolph) that they have set aside and are holding in trust the sum of fifty thousand dollars in lawful money of the United States of America in place and stead of said shares of stock and subject to the trusts and uses hereinafter provided for; and upon making such declaration in writing and delivering the same unto the party of the first part, they shall instantly become the full, legal and equitable owners of the said shares of stock unencumbered the (sic) the trusts herein place (sic) thereon."
Contemplating that the three Hollanders might not desire personally to become the absolute owners of said stock, the agreement provides that they might sell the stock to any other person or they might transfer the stock to the beneficiaries of the trust, Philip and Monroe Hollander, but that such transfer or sale should not abrogate or diminish their liability to pay to Adolph his annuity for life. It further provided that if the three Hollanders should at any time after *Page 243
1922 decide to become the absolute owners of the Canadian stock, then they should retain the trust fund of $50,000 in their own possession and keep the income thereof as reimbursement in whole or in part for the annuity paid to Adolph but that on the death of Adolph the fund itself should be paid to the beneficiaries Philip and Monroe. It was also provided that if the three Hollanders sell the business to any person for a sum exceeding $50,000, then the excess should be retained by them as their own money. The agreement also recites that Adolph revealed to the three Hollanders the true financial condition of the Canadian company by a statement of its debts and liabilities which latter the three Hollanders bound themselves to pay either personally or through the Canadian company, including in such assumption the guarantees and endorsements made by Adolph personally. This agreement concludes with a statement that the trust thereby created shall be irrevocable.
The agreement of 1922 was performed between the parties. All the stock of the Canadian company was in 1922 transferred to the three Hollanders, each receiving 333-1/3 shares. They became immediately directors and officers of that company and have continued as such ever since. From 1922 to the present time the business of that company has been conducted by a general manager, who in turn is subject to supervision by the three Hollanders. For the period of almost eleven years from January, 1922, until September 27th, 1932 (the date when Adolph Hollander died) the three Hollanders personally paid to their father the stipulated annuity of $100 per week.
Under the new management of the three Hollanders the Canadian company immediately showed improvement in business and profit. The proofs showed this was due to the discontinuance of the merchandising activities of the Canadian company and to confining its business to the dressing and dyeing of skins. In 1923 it showed a net operating profit of about $10,000, in 1924 about $20,000 and in 1925 about $33,000. Not, however, until 1927 did the three Hollanders finally serve upon their father a declaration that they were holding in trust the sum of $50,000 in place and stead of *Page 244
the shares of the Canadian stock and that by virtue of the agreement of December, 1922, and of said notice full, legal and equitable title to said shares was vested in them. The fact that this notice was not served until 1927 has been made the basis of complainant's charge that the option and opportunity to acquire the Canadian stock came to the three Hollanders in 1927 and at a time when the American company was no longer privately owned by them but was already a publicly owned company. Before dealing with this issue it is necessary to state what occurred with reference to the Canadian option at the time the sale to Merrill, Lynch Co. was negotiated and effectuated in 1925.
The sale of 50,000 shares of the stock of the American company to Merrill, Lynch Co. was predicated upon a certain fiscal condition of the American company, guaranteed by the agreement between the parties to be in effect at the time the sale was to be consummated. Identified assets amounting to approximately $800,000 and shown on a schedule attached to the Merrill, Lynch agreement were to be withdrawn from the company's holdings. The option received by the three Hollanders from their father in 1922, under which option they might acquire the absolute ownership of the Canadian stock, was not an asset shown on the financial statements nor reflected in the price agreed to be paid by the purchaser, the Merrill, Lynch firm. The fact that the Canadian business was not to be included is not left to speculation or inference. The testimony establishes that when the Merrill, Lynch transaction was being negotiated with Mr. Charles Merrill of that firm, Mr. Michael Hollander informed him of the Canadian option, the nature thereof and that the option was held by the three Hollanders personally. Mr. Merrill took the position that he was not interested in any foreign enterprise and that Merrill, Lynch Co. did not want the Canadian business to be included in the deal. Thus the purchaser of the 50,000 shares was fully informed of the fact that the three principal officers of the American company personally held an option agreement under which they could at any time personally acquire the ownership of the Canadian business by acquiring the final and absolute ownership of the *Page 245
Canadian stock. Whether or not the three Hollanders as sellers and Merrill, Lynch Co. as purchaser might have come to an agreement concerning the additional price for the Canadian business is of no importance in the case. The fact remains that the Canadian business was expressly ruled out of the 1925 Merrill, Lynch transaction. That fact is of importance in establishing disclosure on the part of the three Hollanders to and acquiescence by the purchaser, Merrill, Lynch Co.
Complainant contends that the opportunity to acquire the Canadian business presented itself to the three Hollanders in 1927 when it was embraced by the service of the aforementioned notice upon Adolph Hollander and the opportunity was one that properly belonged to the American company for the following reasons:
(1) That the opportunity was a corporate opportunity because it was related to the same line of business as that in which the American company was engaged and within its reasonable needs for expansion or that the opportunity was one in which that company had an interest or reasonable expectancy.
(2) That the three Hollanders were prohibited from acquiring the Canadian business because by so doing they would injure or hinder the business of the American company.
(3) That the opportunity belonged to the American company because in the acquisition or development of that opportunity the assets and facilities of the American company were employed.
It is claimed by complainant that the three elements above stated need not co-exist and that it is sufficient if any one of them is found to be present. Without recognizing that to be the rule of law, the proofs indicate that none of the three elements exists.
In the case of Loft, Inc. , v. Guth ( Delaware, 1938 ), 2 Atl. Rep. 2d 225 (at p. 239 ); affirmed, 5 Atl. Rep.
2d 503 , relied upon by complainant, the Chancellor stated the rule of corporate opportunity as follows:
"The defendants state as a proposition of law that `where a business opportunity comes to an officer or director in his *Page 246
individual capacity rather than in his official capacity as an officer and director, and the opportunity is one which, because of the nature of the enterprise, is not essential to his corporation, and is one in which the corporation has no interest or expectancy, the officer or director is entitled to treat the opportunity as his own, and the corporation has no interest in it.' The proposition, as stated, is in the main acceptable. In support of it, the defendants cite the cases of Colorado and Utah Coal Co. v. Harris Co., 97 Colo. 309 ; 49 Pac. Rep. 2d 429; Lagarde v. Anniston Lime and Stone Co., 126 Ala. 496 ; 28 So. Rep. 199 ; Pioneer Oil and Gas Co. v. Anderson, 168 Miss. 334 ; 151 So. Rep. 161 ; Railroad Co. v. Stubbs, 77 Me. 594 ; 2 Atl. Rep. 9 ; Lancaster Loose Leaf Tobacco Co. v. Robinson, 199 Ky. 313 ; 250 S.W. Rep. 997 . While these cases support the proposition for which they are cited, they also recognize its converse as equally established. The complainant contends that it is not the proposition but its converse that is applicable under the facts of the instant case. As indicated in Pioneer Oil and Gas Co. v. Anderson, supra , cited by the defendants, whether a given case falls within the proposition or within its converse, it is impossible to determine by any hard and fast rule. Each case is classified by its own individual facts.
"An examination of the cases cited by the defendants will disclose that in all of them the fundamental fact of good faith was found in favor of the director or officer who was charged with dereliction. In one or more of them it will also appear that the corporation was unable for one reason or another to acquire the property, or the matter of its acquisition was not of practical but of merely theoretical interest to it, or that the accused officer made no use whatever of his corporation's funds, or that the so-called expectancy which the defendant director embraced was not in the line of the corporation's business."
It is clear from an analysis of the two opinions in the Loft Case , as well as of the numerous authorities cited therein, that a finding of "corporate opportunity" will be denied (a) wherever the fundamental fact of good faith is determined in favor of the director or officer charged with usurping the *Page 247
corporate opportunity, or (b) where the company is unable to avail itself of the opportunity, or (c) where availing itself of the opportunity is not essential to the company's business, or (d) where the accused fiduciary does not exploit the opportunity by the employment of his company's resources, or
(e) where by embracing the opportunity personally the director or officer is not brought into direct competition with his company and its business. It will be observed that all of the foregoing elements are stated disjunctively and it would therefore seem that the absence of any one of them is sufficient to defeat such claim of corporate opportunity as is made in this case. However, in this case all of these circumstances are absent.
That the opportunity to acquire the Canadian stock came to the three Hollanders in their individual capacity admits of no reasonable dispute. The option agreement of 1922 ran to them personally and was induced mainly, if not solely, by the blood relationship which existed between the grantor of the option and themselves. The agreement so states. Underlying that agreement and permeating all its provisions is the father's desire to secure for himself a life annuity and the sons' desire to create a trust fund for their nephews, his grandsons. Nowhere in the agreement appears any suggestion that the opportunity to buy the Canadian stock was intended for the benefit of the American company. The two references to that company do not indicate any intention on the part of the grantor to furnish to it any right or opportunity. The first reference to Adolph's desire that the stock be acquired by the three Hollanders or their company must be interpreted in the light of the fact that from the viewpoint of a layman the three persons and the company were then, in 1922, one and the same interest. The second reference to the company was merely intended to cover a situation arising if the three Hollanders sold the stock, neither to themselves nor their wholly owned company, but to some third person. The very provision in the agreement enabling the three Hollanders personally to acquire the absolute ownership of the stock by the service of a mere declaration is inconsistent with any notion that by the agreement of 1922 any of the *Page 248
parties thereto intended to afford to or create for the American company any right with respect to the Canadian holdings. Furthermore, the provision of the agreement whereby the three Hollanders bound themselves to pay to their father a life annuity of $100 a week, and this without regard to the outcome of the Canadian enterprise, and also to pay the Canadian company's liabilities and the guarantees and endorsements of Adolph Hollander personally, is wholly in conflict with the idea that the transaction evidenced by the 1922 agreement was intended for the benefit of the American company. It is doubtful whether an agreement of the character made between Adolph and his sons in 1922 would have been tolerated by any corporation other than one in which the sons were the sole parties in interest. Had that agreement been made by Adolph with the American company at a time when the American company was already a public company, its repudiation might well have been accomplished by any dissatisfied stockholder, for the transaction was improvident. The Canadian company was then in a state of collapse, possessed of no good will and burdened with liabilities. Whether or not rehabilitation could be achieved was uncertain and the venture was one involving the chance of continued and increasing losses. The court therefore concludes from the facts and proofs presented that the option and opportunity presented by the 1922 agreement came to the three Hollanders in their personal and individual capacities. The same result would be reached if the 1922 agreement in express terms ran in favor of the American company, for that company and the three Hollanders were then one and the same interest. Had that been the agreement, it would still have been within the right of the individual Hollanders at any time before other stockholding interests appeared in the company to have withdrawn and eliminated the Canadian business as a corporate asset, even as in connection with the Merrill, Lynch transaction there were withdrawn and eliminated $800,000 of corporate securities and properties.
Complainants insist that the opportunity to acquire the Canadian stock must be regarded as having presented itself in 1927, when, as they claim, it was embraced by the option *Page 249
then being exercised. The reason for this position is very apparent, for in 1922, when the option agreement was secured, there could be no possible conflict on the part of the three Hollanders between self-interest and duty to the American company. They and their company were one and the same. However, by 1927 other interests had arisen through the sale of the stock to Merrill, Lynch Co. and by them to the public.
In the Loft Case , it was contended that the right of Guth (Loft's president) to appropriate a certain business opportunity for himself depended upon circumstances present when the opportunity arose, and this without regard to events subsequently occurring. The Supreme Court of Delaware so held, saying:
"Leaving aside the manner of the offer of the opportunity, certain other matters are to be considered in determining whether the opportunity, in the circumstances, belonged to Loft; and in this we agree that Guth's right to appropriate the Pepsi-Cola opportunity to himself depends upon the circumstances existing at the time it presented itself to him without regard to subsequent events, and that due weight should be given to character of the opportunity which Megargel envisioned and brought to Guth's door."
Complainants argue that the effect of the agreement of 1922 was to present to the three Hollanders the opportunity to acquire the Canadian stock "every day, every hour, every moment of the time between 1922 and 1927" and that "the moment at which Michael Hollander, Benjamin Hollander and Albert Hollander exercised the option and took unto themselves A. Hollander Son, Ltd., was as much a moment of presentment of the opportunity to them as was the moment when Adolph Hollander gave them the option in 1922." They argue, further, that if in 1922 Adolph had made an offer which the three Hollanders turned down and then in 1927 renewed the offer, its acceptance then by the individuals would constitute a breach of fiduciary duty. The difficulty with this argument is that it overlooks the actual facts. The option furnished by the 1922 agreement and the trusts thereby created were irrevocable not alone by force of law but by the expressed intention of the parties. That option was in *Page 250
itself a species of property which became irrevocably vested in the three Hollanders in 1922, the continuing consideration for which they paid weekly to Adolph. The formal notice served in 1927 was merely the next logical step in the transaction and was but a continuation of the 1922 transaction and in furtherance of it. The notice operated only to convert the trust res from Canadian stock to a fixed sum of money. The argument that the 1922 irrevocable option was self-renewing each day and each hour and therefore constituted a new option in 1927 is not, therefore, tenable. It was the 1922 option alone that was involved in the 1927 notice. In the Loft Case the company's president, Guth, embraced an opportunity presented to him for the first time in 1931, when he was president of the Loft Corporation. In the suit to declare that opportunity as belonging to his company Guth contended that the 1931 opportunity was but a continuation of a negotiation begun by him in 1928 when he had yet no connection with the Loft Company. The Chancellor found that fact to the contrary and that finding was accepted by the Appellate Court. The Loft Case rests on that all important fact. The principle of law implicit in and arising from that finding is controlling here. It is clear that if in the Loft Case the 1931 opportunity had been a continuation of a negotiation commenced at a time when there was no fiduciary duty due from Guth, the result would have been different and Guth would have been permitted to retain the opportunity embraced by him. Else there would have been no point to the court's finding of fact in the Loft Case that the opportunity presented itself for the first time when he was already the president of the Loft Company. The evidence here demonstrates the following: (a) the opportunity to acquire the Canadian shares of stock came to the three Hollanders in 1922 when they secured from their father the option agreement in evidence and when they bound themselves to the payment of his annuity and to the performance of the other obligations imposed upon them by the terms of that agreement; (b) in 1922 those three individuals became the legal owners of all the Canadian stock but that that ownership was charged with the trusts expressed in the 1922 agreement and that their notice given in 1927 was merely evidence of their *Page 251
election to substitute the stipulated sum of $50,000 as the trust res in the place of the shares of stock; and (c) that the notice in 1927 was merely a continuation of the 1922 transaction evidenced by the agreement made in that year. These findings necessarily lead to the conclusion that the right of the three Hollanders to acquire the Canadian stock is determinable as of December, 1922, without regard to events subsequently occurring and without reference to the fact that in 1925 the privately owned American company became publicly owned by the sale of 50,000 shares of its stock to Merrill, Lynch Co. and the subsequent resales by that firm to the public. In 1922 the three Hollanders owned the American company and in acquiring for themselves, individually, the Canadian stock or the option for such acquisition, there was no conflict between duty and self-interest. They were, therefore, under no duty in 1922 or at any time thereafter to offer to the American company the opportunity of purchasing the Canadian stock.
The court is not concerned with the fact that the $50,000 intended to be set up as a trust fund in lieu of the Canadian shares of stock was not actually set up as such. The only ones who might have complained of that circumstance are the beneficiaries of that trust, Philip and Monroe Hollander. No one else has an interest in that question. Those beneficiaries by formal agreement waived the failure to set up the trust fund and accepted instead the personal obligation of the three Hollanders, secured collaterally by the Canadian shares of stock. The stockholders cannot be heard to complain on this score.
An examination of the cases cited leads to the conclusion that the claim of "corporate opportunity" is best tested by the rules expressed by the text writers. In 14A Corp. Jur. § 1883 the rule is well stated as follows:
"Whether in any case an officer of a corporation is in duty bound to purchase property for the corporation, or to refrain from purchasing property for himself, depends upon whether the corporation has an interest, actual or in expectancy, in the property, or whether the purchase of the property by the officer or director may hinder or defeat the plans and purposes of the corporation in the carrying on or development of the legitimate business for which it was created. * * *" *Page 252
Again, in section 1890 of the same treatise, it is said:
"When acting in good faith, a director or officer is not precluded from engaging in distinct enterprises of the same general class of business as the corporation is engaged in; but he may not enter into an opposition business of such a nature as to cripple or injure the corporation. * * *"
There is one other rule that might here be stated, one invoked by complainant and drawn from the decision of the Loft Case and those kindred to it. A director or officer of a corporation cannot use corporate assets to acquire, finance or develop his own individual business project or venture and insist that either the venture or the profits thereof are his own property. When such diversion or misappropriation of corporate assets is established, the aggrieved principal may elect either to recover the diverted assets or enforce a constructive trust with respect to the venture and its resulting profits. This rule is not peculiar to the liability of directors and officers but underlies all fiduciary responsibility.
The foregoing rules, respecting which there is almost complete unanimity in the cases, were summarized by the Appellate Court in the Loft Case when it said:
"It is true that when a business opportunity comes to a corporate officer or director in his individual capacity rather than in his official capacity, and the opportunity is one which, because of the nature of the enterprise, is not essential to his corporation, and is one in which it has no interest or expectancy, the officer or director is entitled to treat the opportunity as his own, and the corporation has no interest in it, if, of course, the officer or director has not wrongfully embarked the corporation's resources therein."
Tested by the several stated rules, complainant has failed to show that the opportunity to acquire the Canadian business through the acquisition of the Canadian stock was an opportunity rightfully belonging to the American company and one which the three Hollanders were not free personally to embrace. The facts clearly demonstrate that the opportunity came to them in their individual capacities and was merely an opportunity to reacquire a business founded by them even *Page 253
before the American company was organized and in which business they had relinquished in 1918 to their father their three-fourths interest. What the parties did in 1922 was in a sense a revision of their 1918 deal. The earlier transaction was one in which Adolph bought out the interests of his sons and son-in-law; the later transaction in 1922 was one in which they bought out the interests of their father and father-in-law.
Nor was the opportunity one essential to the American company. The business of that company and its predecessor partnership had been operated within the confines of the United States so successfully that long before 1922 the American company had become the leader in this country and the largest concern of its kind in the world. This position of pre-eminence was achieved despite the fact that the American company and its predecessor partnership had never prosecuted its business in Canada or in any other foreign country. Extension of its business into foreign territory may have been desirable but certainly was not essential to its business or continued prosperity. It may well be that the establishment of branches in South America, Europe, Australia, New Zealand and other parts of the world would have been desirable as measures of expansion but it surely cannot be claimed that that was so essential to the company's business that those other fields were forbidden to the individual enterprise of the company's directors. It is not within the right of a company so to pre-empt for itself all possible fields not contemplated by its existing business and into which other fields it might never thereafter venture. The opportunity to acquire a likeness in any of those foreign countries was not in 1922 or even in 1927 essential to the protection of the company's American business. The situation may have been different with respect to France after 1930 (when the French company was organized) or with respect to England after 1937 (when the Competent Fur Dressers business was acquired) but neither of these developments had yet come to pass by 1922 or 1927 and there is no proof before me that such expansion was ever contemplated prior to the years in which it occurred. If the company could pre-empt Canada, it could pre-empt *Page 254
every part of the civilized world in which furs are processed. A somewhat similar question arose in the case of Colorado and Utah Coal Co. v. Harris, 97 Col. 309 ; 49 Pac. Rep. 2d 429.
There the complainant company sought to have declared a trust upon coal lands which the company's president had acquired for himself. The company claimed that because of his fiduciary position its president had obtained knowledge of the peculiar value of those coal lands, that this knowledge had been furnished at the expense of the company and that Harris, as president and director, had committed a breach of duty in failing to give the company an opportunity of acquiring the coal lands for its own corporate purposes. The bill was dismissed and on appeal it was held that before the company could establish a trust it was first obliged to establish an interest, actual or in expectancy, in the coal lands. The Appellate Court held that the complainant company could not create a virtual monopoly of extensive fields of enterprise into which its officers and directors would forever be precluded from entering. The court said:
"Harris, as such representative, could embark upon no business which would cripple or injure his principal or acquire interests adverse to it if thereby he would hinder or defeat the very purpose of its organization. But, if he had no duty to act or contract for it with respect to the property in question, he was at liberty to act for himself. Bisbee v. Midland L.P. Co.
( C.C.A. ), 19 Fed. Rep. 2d 24, 28.
"There being here no existing right, plaintiff must, and does, rely upon expectancy. * * *
"These parties are operating in a territory containing coal deposits of vast, we might almost say of unlimited, extent. Such is the condition of this record as to force the conclusion that, if plaintiff had an interest in expectancy in the property in question, it had a virtual monopoly of extensive fields into which its officers and directors were forever precluded from entering. We find in the authorities, and in reason, no support for such an extension of the doctrine of expectancy. If Harris had no duty to acquire for, or offer to, his company the property in dispute, and we think there is ample evidence to support the trial court's conclusion to the contrary, he had *Page 255
a right to acquire it for himself. Carper v. Frost Oil Co., 72 Col. 345 , 348 ; 211 Pac. Rep. 370 .
"Even had Harris gained all his knowledge through his connection with plaintiff, and even had plaintiff been, in a general way `negotiating for and endeavoring to purchase' the interests involved, something more is required to establish the essential expectancy and bar Harris from acquiring individually. Lagarde v. Anniston Lime and Stone Co., 126 Ala. 496 ; 28 So. Rep. 199 ; Zeckendorf v. Steinfeld, 12 Ariz. 245 ; 100 Pac. Rep. 784 .
"For plaintiff to prove its expectancy, which was the very crux of its case, we think it was bound to establish, not only that the properties in question possessed value to it, but that it had a practical, not a mere theoretical, use therefor * * *."
The uncontroverted testimony before me establishes that when the three Hollanders concluded their sale of stock to Merrill, Lynch Co. in 1925, they entered into employment contracts with the American company wherein they covenanted that for five years ensuing the 1st day of January, 1926, they would not engage in any business in the United States of America competitive with that of the employing company, and that this restriction was designedly confined to the United States so that they would be left free to prosecute their Canadian business. The proofs are to the effect that the territorial limits expressed in the covenant were put in as a result of the information and knowledge that Merrill, Lynch Co. had concerning the Canadian business, the operation thereof by the three Hollanders and their outstanding option to acquire personally that business by the purchase of the Canadian stock. The exaction of the restrictive covenant corroborates the exclusion of the Canadian company from the 1925 transaction.
The subsequent and continued growth and success of the Canadian enterprise cannot now be pointed to as a reason why it would have been very beneficial to the American company and its stockholders had the Canadian business been absorbed into the American company at the time of the Merrill, Lynch transaction. The company's right to the Canadian opportunity is determinable as of the time the opportunity first *Page 256
presented itself in 1922, without reference to the changing conditions of time. In 1922 the Canadian company was a failure. In 1925 it made a net operating profit of about $33,000, in which year the American company made a net profit (after reserve for taxes) of over $800,000. The Canadian business was not considered desirable. It certainly was not then essential and has not been essential down to the present time. The almost uninterrupted record of large profits made by the American company since 1925 shows how well it has fared without the Canadian business and how nonessential that business has been to the American company's success. That record is so impressive that it merits statement here. The total net profit made by the American company from 1925 to and including 1938 was $4,463,228.78, out of which it paid dividends to its stockholders in the aggregate sum of $3,382,758.65.
Nor was the Canadian business one in which the American company had any interest or expectancy. It was no party to the option agreement of 1922 nor was that agreement taken for its benefit. The right of the three Hollanders to sell that business to their own company was a right in them which they might or might not exercise as they themselves saw fit. That right was no different than their right to sell the Canadian stock to an utter stranger. It was a right but not a duty.
There is nothing in the case from which can possibly be spelled out an existing right in the American company either at the time the option was secured in 1922 or at the time it was exercised in 1927. Cases where the company has been held to be possessed of an existing right are such as Lagarde v. Anniston Lime and Stone Co., supra , where the directors secured for themselves two interests, in one of which their company already possessed rights under a lease and contract of purchase. In the case at bar the American company possessed no right which it could have enforced either against Adolph Hollander, the grantor, or the three Hollanders as the grantees of the option. Nor did the American company have any expectancy with respect to the Canadian business. In the Lagarde Case such expectancy was defined as one "growing out of an existing right." Although the Lagarde *Page 257 Case was criticised in the Loft decision, I am constrained to regard the Lagarde Case as correctly decided and in accordance with sound principles of equity. Applying that case to the facts here, it is plain that there was no expectancy in the American company, for there was no existing right out of which that expectancy could grow. If, however, the expectancy is one not necessarily dependent upon an existing right, the result would be no different. The American company had no right to expect that if the Canadian business were to be sold by Adolph Hollander it would be sold to itself and no one else. There was no such relationship in 1922 between the American company and Adolph Hollander as furnished to the American company any moral or legal claim to be preferred as the purchaser of the Canadian business. Applying to the facts in this case the principles of law, the American company did not in 1922 or anytime thereafter possess any expectancy with respect to the ownership of the Canadian business or the shares of stock.
The complainants argue that by acquiring the Canadian business the three Hollanders hindered or injured the American company and were brought into competition with it. The facts demonstrate that the American company and the Canadian company never competed with each other. Each serviced its own separate field of opportunity without overlapping or encroachment. In point of competition, the respective fields of activity of the two companies were remote, for the proofs showed that the tariff barriers between the United States and Canada are in this field of business economically insuperable. This accounts for the fact that there has been no competition between Canadian fur dressers and dyers and those in the United States. Therefore, the purchase by the three Hollanders of the Canadian business did not create or produce the slightest competition with the American company. Nor did that purchase alter or expand the conditions prevailing at the time of the purchase. From 1917 forward, Limited has pursued its Canadian business. The purchase of its stock by the three Hollanders did not inaugurate its business or create a new situation; it merely accomplished a change in the ownership of the stock. Nor did that stock *Page 258
purchase create a situation where the interests of the two companies might thereafter clash. The testimony is clear that Limited never once thereafter invaded the American company's field of endeavor but that, on the contrary, in 1930 the American company extended its business into France, where Limited was already doing some little business, and in 1937 extended its business into England, where Limited had been doing some business under the advantages flowing from the United Kingdom Trade Agreement of 1932 by which the Dominion of Canada enjoyed preferential tariffs at the hands of her mother country. It is also unbelievable that the individual Hollanders would have created a situation or permitted one to arise where their vast holdings in the tremendously larger American company would have been injured or jeopardized by competition from their Canadian company in which, though they owned 100 per cent. of its stock, their financial stake was relatively unimportant. Even to-day their holdings in the American company amount to 75,000 shares or thirty-five per cent. of the American company. That holding is to them of far greater value and productivity than their 100 per cent. ownership of the Canadian company. A comparison between the profit records of the two companies demonstrates this beyond all question. The acquisition of the Canadian stock by Michael, Albert and Benjamin Hollander did not bring either company in competition with the other and had no adverse effect upon the business or interests of the American company.
It is charged by the complainants that the Canadian business was developed by the three Hollanders by the employment of the funds, resources and facilities of the American company. If this were the fact, a constructive trust would be decreed in favor of the American company that the Canadian shares of stock are the property of the former. The claim, however, is wholly unsupported by proof and is based upon a misconception of the facts concerning an arrangement between the two companies for mutual aid and assistance. Those facts are as follows:
The arrangement originated in 1917, when the Canadian company was organized and several years before the American *Page 259
company came into existence. From that time forward there existed between the Canadian company on the one hand and the American company and its predecessor partnership on the other a free and unrestricted flow of technical information and assistance. This arrangement was never evidenced by any formal written agreement but has been mutually observed for almost a quarter of a century. That reciprocal arrangement contemplated, and in practice consisted of, the exchange of formulae and working methods for the processing of furs, price information concerning chemicals and, occasionally, technical assistance in correcting production problems. Under that arrangement any formulae or other information possessed by either company was made available to the other upon demand. Only during the four years, between 1918 and 1922, when Adolph Hollander caused the Canadian company to engage principally in merchandising, was the practice of interchange of information abated. During those years the Canadian company had little or no need for technical information and had little to offer, because during those years it had virtually ceased to be a fur dressing and dyeing concern. However, when the three Hollanders acquired the 1922 option and immediately resumed the management of the Canadian business, the policy and practice of mutual interchange of information and help between the two companies was resumed and has been continued uninterruptedly to the present time.
Some of the formulae and working methods of the American company were the result of experimentation in its own plants. Some were acquired under license agreements or purchase, others by the purchase of other fur processing concerns, and many as a result of arrangements between the American company and foreign non-competing companies for exchange of formulae and trade information. The arrangement between the American and Canadian companies was not unique. The American company had similar arrangements with the firm of Wachtel and the firm of Arnhold, both being fur processing concerns in Germany, in neither of which foreign concerns were any of the individual Hollanders financially interested. Under those arrangements the German *Page 260
concerns were furnished with any and all formulae, working methods and trade information belonging to the American company and this without the payment of any license fee or royalty. The consideration for that information and aid was the opportunity and right of the American company to receive whenever it so requested any of the formulae, methods or information possessed by those foreign concerns. This reciprocal arrangement with the Wachtel and Arnhold firms endured for about twenty years and was interrupted only a year ago by the outbreak of the present European conflict. Like arrangements were made between the American company and four other concerns in New Zealand and in Australia, evidenced by agreements which have been in effect since 1934. Those agreements call not only for mutual information and instruction but also provide for a nominal royalty to the American company, the amount being approximately $2,500 a year. The thing to be noted is that the American company had no hesitancy about furnishing even its secret formulae and working methods to concerns in Germany, New Zealand and Australia in exchange for the opportunity of securing from those foreign concerns the latter's formulae, methods and trade information. The explanation, furnished by the testimony, for these arrangements is that the information thus obtained from the foreign concerns is of incalculable importance and value to the business and success of the American company, while the information furnished to those foreign concerns results in no disadvantage to the American company, since the parties to those reciprocal arrangements do not compete with each other. The wisdom of such business policies the court will not pass upon but undoubtedly the practice would not have been persisted in for so long if it carried with it jeopardy to the American company or if it failed to produce for that company considerable advantage. Many witnesses testified to the great benefits derived by the American company from these arrangements, which testimony stands uncontroverted. The importance of the testimony concerning the interchange of information with the German, Australian and New Zealand concerns lies in the fact that those arrangements establish a general business custom *Page 261
or policy and the testimony demonstrates that the like arrangement with the Canadian company was not one peculiar to it or the product of favor.
A great deal of evidence respecting the interchange of information between the American and Canadian companies was supplied by the defendants. By this proof it is established that the Canadian company took relatively little of value but conferred tremendous benefit upon the American company. Such preponderance of benefit in favor of the American company is hardly necessary in order to persuade me that the arrangement was fairly and honestly entered into and that the arrangement was not a subterfuge for the diversion of valuable assets and property from the American company to the Canadian company. If such arrangement be grounded in honesty and fair dealing, it matters not which of the parties to the arrangement may at any given time enjoy the greater benefits under it. It is conceivable that under such an arrangement the scales would fluctuate and that at various times one or another of the parties to the arrangement might enjoy the greater amount of advantage. Yet, it cannot be overlooked, what has been demonstrated in this case, that much of the success of the American company is due to the help and information furnished by the Canadian company and the latter's working personnel. The Canadian, Payeur, who was shown to be a technician of wide experience and creative skill, testified that the Canadian company furnished to the American company about four times as much information and help as it received. This interchange of information does not nor need lend itself to mathematical appraisal. Certain it is, however, from the proofs adduced, that the American company received over the years considerably more information and help than it ever furnished to the Canadian company. While the two companies emphasized in their business the conversion of muskrat into what is known in the trade as "Hudson Seal," that being the principal product of each company, there were considerable points of difference between their enterprises. The American company has been a specialist in its field, working on but few types of skins and making its profits through volume production, *Page 262
while on the other hand the Canadian company has been engaged in general dressing and dyeing and processing all kinds of skins. The American company conducts its production work in various departments, spread through various plants in Newark and other cities, while Limited's dressing and dyeing is all done under one roof. Because of these differences the Canadian company has been the training school for many of the important key men of the American company. The testimony establishes that for various periods of time they received their training in Montreal under the tutelage of George Payeur, Sr., and that after such instruction they returned to the American plants, assuming charge of their respective departments. All such instruction and training was furnished by the Canadian company gratuitously.
The proofs establish that in each of the two companies the so-called "Light Goods or Fancy Colors" Department has meant little by way of profit. The American Company consistently lost money in its fancy goods department until it acquired from the Canadian company gratuitously the latter's process for mink blend on muskrat; the Canadian company succeeded in making a little profit in its fancy goods department. It is clear that with a single exception, hereinafter set forth, the American company assisted the Canadian company with corrective information only with respect to the latter's fancy goods production. On the other hand, the Canadian company's assistance to the American company related chiefly to the latter's Hudson Seal production. This alone would seem to indicate that such help as the American company received was in direct relation to its most important item of production while the help that the Canadian company received related to its fairly unimportant fancy goods production.
On several occasions the Canadian company saved the day for the American company in the latter's production of Hudson Seal. In 1925 serious trouble developed in the plants of the American company in the processing of the muskrat. The difficulty was so grave that the company was about to discontinue that item. Mr. Payeur was requisitioned from Montreal and he spent several weeks at the Newark plant showing the workingmen there just how that type of "rat" *Page 263
(Western Canadian rat) was handled in Montreal. As a result of this help the difficulty was promptly eliminated and the American company proceeded to process that year between 600,000 and 700,000 Western Canadian "rats." The trouble thus encountered was not peculiar to the American company; similar trouble was experienced by all its American competitors who, however, were not able to overcome the difficulty. Due to the aid so furnished by the Canadian company the American company promptly met the emergency, an emergency which had cropped up at the peak of the production season. It is important to note that the method brought by Payeur from Montreal and imparted by him to the men at the Newark plants was radically different from the one theretofore employed in those plants. The net result of this help was that the American company was enabled that year to do about $300,000 of business in the Western Canadian "rat" without a reappearance of the difficulty. That problem never again presented itself.
In 1933 the Canadian company made a complete change in its method or system of handling the muskrat. In 1935 the American company again ran into some new and serious difficulty with the muskrat, and again at the very peak of its season. The American customers were dissatisfied and complained of the article. Mr. Payeur was at once summoned from Canada and he immediately installed in the Newark plant the entire Canadian method of handling the muskrat which he had inaugurated in Montreal two years earlier. That method, too, was radically different from the one then in use in Newark. By this substitution the American company avoided claims for damages and produced an article which proved acceptable in the trade. The new method proved so satisfactory that the American company gave it the trade name of "Vita Hair." The American company is still using the name and method.
In 1939 the Canadian company made some changes to the Vita Hair process. Thereupon Mr. Weiser of the American company went to Montreal to study these changes. Finding them satisfactory he brought them back to Newark and installed them in the Newark plant. These changes accomplished *Page 264
both an improvement in the quality of the article and an economy in time of production, a labor saving of approximately two cents a skin to the American company or an average annual saving of $60,000.
Only once did the Canadian company require help on its muskrat article. In 1937 some production difficulty developed in Montreal which was solved by one of the American dyers going to Montreal and suggesting points of correction.
Complaint is made that the Canadian company was permitted to employ a secret process, known as "Hollanderizing" for the cleaning of fur garments and also to employ the trade name of "Hollanderizing." The evidence demonstrates that the process was not a secret one and in substance is known to all furriers. Even if it were a trade secret, the furnishing thereof to the Canadian company was well within the scope and spirit of the arrangement between the two companies for the interchange of all technical formulae, processes and information. While it is true that the American company adopted the name "Hollanderizing" about a year before the Canadian company adopted the same trade name, there is nothing serious in it. The Canadian company had rightfully used the name "Hollander" since 1917 and coining that name into the trade name "Hollanderizing" can hardly be regarded as a trespass. Certainly not in view of the fact that fur garments are not sent from either country to the other for the purpose of being cleaned.
There is evidence, also, of occasional assistance given by each company to the other in connection with the Hollanderizing process. Here, too, the advantage has been with the American company. Certain changes suggested and furnished by the Canadian company have resulted in a saving to the American company of $12,000 for each annual garment-cleaning season. No service of comparable value has ever been furnished to the Canadian "Hollanderizing" business. Canada's Hollanderizing business has been conducted at a consistent loss.
In 1938, one of the American company's key men went to Montreal for the purpose of experimenting there with a Persian lamb formula obtained by him the preceding year *Page 265
from the Wachtel firm in Germany. In these experiments he was assisted by George Payeur, Jr., one of Limited's employes. The result of those experiments was a new Persian lamb formula combining within itself various parts of the German formula and the one then owned and used by the Canadian company. That final formula was brought down to the American company's plant at Middletown, New York, and put into operation. It at once resulted in a very large saving in production cost and also made for economy of factory space. Under that new formula there resulted a saving of $50,000 a year in chemicals, $7,500 a year in sawdust, $40,000 a year in labor and $4,000 a year in light, heat and power, notwithstanding a substantial increase in volume of skins processed. That new formula has meant to the American company an annual saving of more than $100,000. Furthermore, the new formula was brought from Canada at a time when the Middletown plant was facing an emergency. The Persian skins had been processed defectively and damage claims in large sums were mounting. The installation of the new formula terminated the trouble and enabled the company not only to put a stop to its flood of losses but also to regain its prestige in the trade.
In 1939 the Canadian company furnished to the American company the process of blending raccoon coats so that the latter would resemble silver fox. That item was installed in the Newark factories by Canadian employes who came from Montreal and instructed the American employes in the practical use thereof.
Perhaps the most important contribution made by the Canadian company to the American company was in 1938, when the former furnished to the latter a formula and method for mink blending on muskrat. That item had never before been produced in any of the factories of the American company but had been worked on by the Canadian company. The item was perfected in Montreal by Feldman and Payeur, two employes of the Canadian company. In 1938, Feldman and one of his assistants came to the Newark plant and there imparted to the representatives of the American company the formula and method and actually put it into practical *Page 266
operation. They also instructed and trained the American company's men and workers in the use of the new system. That article alone has meant to the American company a profit of about $300,000 for the year 1939. From the figures in evidence it would seem that the American company has within the space of little more than a year taken virtual command of the entire American market for mink blend muskrats. At the time of final hearing, the American company's business for the first four months of 1940 in mink blend muskrat was about six to one as compared with its like business for the corresponding period of the preceding year. It is of no little importance that due to the mink blend formula and method furnished by the Canadian company the American company was able in 1939 to show for the first time a substantial profit in its Fancy Goods Department. This contribution alone appears to have been of far greater meaning and value than all the information and assistance ever rendered by the American company to Limited.
There is no support in the evidence for the claim that manpower was diverted from the American company to the Canadian company. It is true that on occasion the American company would help out by sending one or another of its men to Montreal to be of some assistance there. Those occasions are not shown to have been many or the period of assistance of long duration. On the other hand, the evidence shows that the Canadian company sent its master dyer, Payeur, and various others of its practical men to the American company's plants to help eliminate production difficulties, to install new methods, to instruct American employes and to render other services of importance. Figures of time spent are available only for the years from 1937 to 1939. It is impossible, nor is it necessary, to determine which company furnished to the other more men and more hours of assistance. Particularly is this true because most of those American employes who occasionally went to Montreal went there to secure information or receive training for the benefit of the American company. Measuring, however, the exchange of personal service by the value of the information exchanged, it is very clear that the American company received and *Page 267
utilized many items of tremendous utility and value, while the Canadian company received but few items and these of no great economic return. The many exhibits relating to the flow of formulae between the two companies show that over the period of many years during which the reciprocal arrangement between the two companies has been in effect, the American company received from the Canadian company more than ten times as many formulae as were furnished by it to the Canadian company.
On the score of machinery furnished by the American company to the Canadian company, the latter was always at a disadvantage. It was proved that the American company made a practice of selling its old and discarded machinery to the Canadian company and charging therefor good prices. That machinery was paid for by the Canadian company at the invoice prices but rarely without complaint. Many, if not most, of the machines sold and shipped to the Canadian company were in such condition that the latter was obliged to make substantial outlay for repairs and reconstruction. There is no evidence that any of the machinery was under-priced or was not paid for in due course. The correspondence in evidence is illuminating that on the machinery transactions the Canadian company enjoyed neither favor nor advantage.
The chemicals purchased through the American company were invoiced to the Canadian company at cost and were paid for in due course. On the other hand, the Canadian company was enabled to buy certain chemicals in Canada at prices lower than what was being paid for those chemicals by the American company. Limited made those purchases for the American company, paying therefor with its own funds and merely charging the American company on the basis of cost. Thus there were mutual running accounts between the two companies which were periodically settled by payment. There can be no cause of complaint on this point.
The representatives of the two companies would occasionally exchange information concerning cost of chemicals, dyestuffs, sawdust, machinery and almost everything used in production. These occasional check-ups proved to the mutual advantage of the two companies and frequently resulted in *Page 268
each company being able to secure a lower price for its purchase of chemicals and supplies. This is a matter of business with which the court has no concern.
Before leaving these facts, it should be mentioned that the Canadian company has for years serviced the business of the French company in Canada, making no charge for that service. It consisted of submitting samples for the French company, quoting the latter's prices and looking after its deliveries. The Canadian company's salesmen also attended to collecting accounts for the French company and settling its occasional disputes with its Canadian customers. The expenses involved in this service, such as cables to France and other items, have been borne by the Canadian company without reimbursement. In addition to the foregoing, the Canadian salesmen also serviced the American company by furnishing to it names of American buyers attending the Canadian fur auction sales. The purpose of this was to enable the American company's salesmen to follow up the prospects and secure for the American company the processing of the raw skins bought in Canada and imported into this country. All of these services are rendered to the American company gratuitously.
It might also here be mentioned that many of the formulae and much of the information requisitioned by the Australian and New Zealand concerns under their agreements with the American company for exchange of information are furnished by the Canadian company, although the latter does not participate in the $2,500 annual royalty payable to the American company by the Australian and New Zealand concerns. Such formulae and information are furnished by the Canadian company gratuitously and only because it is regarded as part of the long standing reciprocal arrangement between the Canadian company and the American company. Limited's facilities for furnishing that service to the foreign concerns have been better than those of the American company because of Limited's wider experience in all kinds of furs. This and many other instances demonstrate the meticulous attitude adopted by the American directors in their dealings between America and Canada. All transactions *Page 269
in which Limited could have legitimately shared in the profits were resolved wholly in favor of the American company.
Complainant endeavors to have such of the various services, above enumerated, as were rendered by the American company to the Canadian company construed as acts of diversion of the assets, resources and facilities of the American company. This argument would have force only if the American company had received no consideration therefor. The contrary is the fact. The American company has received manifold recompense for all the information and other assistance rendered by it to the Canadian company. On the whole, the American company has taken under the reciprocal arrangement appreciably more than it furnished and it is vastly the gainer thereby. The reciprocal feature of the arrangement between the two companies and the benefits gained thereunder by the American company fully justified such aid and assistance as the testimony in this case shows was rendered by the American company to the Canadian company. The arrangement obtaining between the two companies for over twenty years was entered into bona fide and has during the intervening years been observed in good faith and with all honesty of purpose.
There is evidence that within recent years the Canadian company in advertising its products in the Canadian press simulated several of the trade-marks and one slogan used by the American company in its advertising literature. It was also proved that in 1938 the Canadian company adopted and used in its Hollanderizing business a tag identical with that used by the American company in its Hollanderizing business. Noticeable, however, is the fact that in all its advertising matter (excepting the tag) the Canadian company clearly and distinctly used its own corporate name with appropriate prominence to the word "Ltd." While the simulation is undoubtedly a form of plagiarism, there is no ground for complaint at the suit of any stockholder of the American company. No injury could possibly have resulted to the American company for the arrogation by Limited of several trade names and a trade slogan. Inasmuch as each company *Page 270
serves a separate and distinct territory, there could not possibly result any confusion amongst or deception upon the trade or the ultimate consumers. No profits were diverted from the American company and the objectionable use of a few of its trade-marks and one of its slogans has been without injury to it. Counsel for the defendants attempts to justify that use as something within the scope of the arrangement for mutual assistance, but with this the court cannot agree. Yet, however objectionable the use of the trade-marks and slogan might have been, it furnishes no ground to any stockholder of the American company to lay claim to the business and profits of the Canadian enterprise. The use of the few trade-marks and the slogan since 1937 was not the basis upon which the Canadian company's business and success of the last twenty years were built. It has not even been shown that the several trade-marks and the slogan have been of any value to the Canadian company. It would seem that whatever value resulted from the Canadian advertising flowed from the use of the name "Hollander, Ltd.," which in Canada identifies the Canadian fur dressing and dyeing concern. Limited's right to the use of that name has not been nor can be questioned.
We are now brought to the subject of what are said to have been loans made by the American company to Limited. Whether these were or were not loans is one of the disputes calling for decision. Complainant contends that they must be regarded as loans because the amounts thereof were charged to Limited in an account with Limited appearing on the books of the American company. Complainant's evidence relating to these alleged loans consisted of defendants' answer to an interrogatory put by the complainant. The interrogatory asked whether the American company had loaned any money to Limited at the time of and subsequent to the incorporation of Limited. The answer to the interrogatory stated that the American company was not in existence when Limited was incorporated. (Inferentially the answer was that no money was loaned at the time Limited was incorporated because the American company was not yet in existence.) The fuller answer, however, stated that between 1929 *Page 271
and 1937, the American company made cash advances to or on behalf of A. Hollander Son, Ltd., charging the latter with the amount of such advances, all of which were repaid. Defendants' answer to another interrogatory furnished the following record of such advances to or in behalf of Limited:
Date of Amount of Date of Advance Advance Repayment
Jan. 21, 1929 $1,000 June 24, 1929 Dec. 3, 1930 20,000 Dec. 29, 1930 Sept. 30, 1931 10,000 Dec. 30, 1932 Sept. 22, 1931 26,000 Dec. 26, 1933 Mar. 29 , 1933 7,500 Dec. 24, 1934 Jan. 31, 1934 2,000 Dec. 26, 1934 Jan. 8, 1934 10,000 Dec. 26, 1934 Dec. 26, 1935 2,500 Dec. 21, 1936 Mar. 3 , 1937 15,000 Dec. 28, 1938
It is not disputed that reimbursement for all of the foregoing was made by Limited. The contest is over the question of interest, the complainant contending that interest should have been paid on these advances. The defense is that these advances were not loans and that none of the items shown was for money passing from the American company to Limited but that all the items were merely debit entries on the books of the American company in connection with transactions intended and occurring solely for the benefit of the American company. Defendants claim that these advances did not represent moneys for which Limited ever became indebted and that therefore there can be no valid claim for interest without the presence and support of a legal debt.
The defendants were not able to furnish any details concerning any of the advances other than the last two. The first seven entries remain unexplained except as it is testified that none of the advances were for the benefit of Limited and that all of them were for the benefit of the American company. The testimony is to the effect that Limited always had ample bank credit and never required any money from the American company for the operation of its business or for the purchase of securities. This explanation carries with it conviction for two reasons. The two explained items show *Page 272
that they represented not moneys loaned or advanced to or for Limited but moneys paid out by the American company for its own benefit and merely charged to Limited. Furthermore, a comparison between the table of advances and the schedule of Limited's profits from 1925 forward plainly indicates the improbability of Limited having needed or received the relatively small advances debited against it. For example, it is inconceivable that the Canadian company, which during 1928 made a net operating profit (after income tax deduction) of $108,000, should in January of 1929 have had to borrow $1,000 and that it should have retained that money for five months in 1929, during which latter year it made a net operating profit of $84,000. The evidence was that Limited paid no dividend until 1930 and that at the end of 1929 the net accumulated profits for the preceding period of seven years amounted to over $400,000. A company in that condition is not very likely to seek a loan of $1,000. From an examination of each advance in the light of Limited's profits for the related or preceding year, it is clear that the testimony that Limited did not need the money and did not borrow it merits credence. Then why the debits? The explanation is to be found in the character of the last two items, that of March 3d 1937, for $15,000 and that of December 26th, 1935, for $2,500.
The $15,000 item is illuminating, for it shows the readiness of the three Hollanders to make personal sacrifice and accept personal loss for the benefit of the American company. That $15,000 debit arose under the following circumstances. Herskovitz, a customer of the American company, offered it 100,000 muskrat skins for processing upon condition that he receive a quotation of five cents per skin below the price established by the American company. This would have meant a concession of $5,000. Mr. Michael Hollander refused to lower the fixed price of the American company but in order to get the business for the American company he arranged with Herskovitz that the latter should buy in the open market 1,000 shares of the American company's stock and that the Canadian company would guarantee Herskovitz against any loss. The customer, however, declined to advance the $15,000 *Page 273
required as the necessary margin on the stock purchase. The American company furnished that $15,000 and charged it on its books as a cash debit to the account of Limited, the latter not even being the conduit for the transmission of those funds. The following year Limited paid to the American company that $15,000, although it had never received a dollar of it and although it never processed a single skin out of the 100,000 muskrats delivered by Herskovitz to the American company for processing. On that delivery the American company made a substantial profit. This is only part of the story. The shares of stock purchased by Herskovitz dropped in value and eventually were taken over by Limited at a cost in excess of $28,000 and at a loss to Limited of $22,000.
The $2,500 item is quite of the same character. Mr. Leber, counsel for the American company, went to Europe in 1935 to adjust a contract between the American company and Lindner
Merkel of Germany. Counsel's bill for that service was $5,000. The secretary of the Hollander company thought the bill should be reduced by $2,500, but the president thought differently. The matter was solved by the American company paying Mr. Leber's bill in full and charging $2,500 thereof to Limited. That charge was paid by Limited although it had no interest in the services rendered by Mr. Leber and although neither he nor his firm had rendered any professional service to Limited since 1916. Here again a charge was made against Limited and paid by it for something which was neither a loan nor an advance for its benefit.
There are a number of other instances furnished by the evidence where in order to induce business for the benefit of the American company Mr. Michael Hollander guaranteed its customers against loss on their stock purchases and subsequently saddled those losses upon the Canadian company. In view of the illustrations furnished and the entire conduct and testimony of the witness on the stand, the court accepts his statement that none of the seven other advances represented moneys loaned to Limited or advanced for its benefit and that all the nine debits relate to transactions intended to benefit only the American company. It need only be added *Page 274
that if the seven items, which have been satisfactorily explained by example, had remained unexplained, no interest thereon would be chargeable against the Canadian company. An allowance of interest against it would necessarily have to be upon equitable terms and one of those terms would be that of equitable set-off for the moneys that it had paid on the two known items for the benefit of the American company. The interest, if allowed on the seven items, would be comparatively insignificant and would leave the American company equitably indebted in a very large sum to Limited. The claim for interest is disallowed. That claim is also rejected as a factor in the claim of corporate opportunity. Even if all the seven advances concerning which details are lacking had in fact been loans, it is undisputed that the first of such advances was made in 1929, long after the Canadian company's business had grown and developed into one of successful operation and profit yield. Those advances, even if they had been ordinary loans, could not be and were not the means by which the Canadian business was established or developed, for such establishment and development were accomplished and completed facts long before the first of those advances was made. Therefore, there can be no application to the facts of this case of the principle advanced by complainant that where a director acquires or develops a business with the resources of his company a constructive trust arises. Considering, too, the many substantial advantages enjoyed by the American company from the aid furnished to it by Limited because of the relationship of the parties, it would have been but moderate recompense for the American company to have accommodated Limited with short-term loans without interest, had these in fact been loans. A wise policy would have dictated such accommodation to a company which had proved to be such a valuable source of assistance. Under the circumstances here present, a charge of interest would have been unconscionable.
Finally, the arrangement between the American and Canadian companies for the interchange of technical assistance and information must be regarded as a transaction between two companies having common directors. The Canadian company *Page 275
has four directors, three of whom (the three Hollanders) are also directors of the American company, the latter having eight directors. As to transactions between a company and its own directors and as to transactions between two companies having one or more common directors, this court said, in Helfman v. American Light and Traction Co., 121 N.J. Eq. 1 (at p. 16 ); 187 Atl. Rep. 540 :
"Under ordinary circumstances, a director who deals with his corporation has the burden of sustaining the fairness of the transaction when it is attacked by the corporation , because the director is a trustee for the corporation and his dealings with his cestui que trust are regarded with suspicion. A contract, therefore, made between a corporation and a director of such corporation is voidable at the option of the corporation. Such option, however, belongs to the corporation and is not exercisable by a minority stockholder unless the contract is ultra vires , fraudulent or oppressive. See Mitchell v. United Box Board and Paper Co., supra; Endicott v. Marvel, 81 N.J. Eq. 378 , 382 , 383 ; 87 Atl. Rep. 230 ; Lillard v. Oil, Paint and Drug Co., 70 N.J. Eq. 197 (at p. 205 ); 56 Atl. Rep. 254 ; United States Steel Corp. v. Hodge, supra; Colgate v. United States Leather Co., 73 N.J. Eq. 72 ; 67 Atl. Rep. 657 ; Bingham v. Savings Investment and Trust Co., 101 N.J. Eq. 413 ; 138 Atl. Rep. 659 ; affirmed, 102 N.J. Eq. 302 ; 140 Atl. Rep. 321 ; General Investment Co. v. American Hide and Leather Co., 97 N.J. Eq. 230 ; 127 Atl. Rep. 659 ; Stephany v. Marsden, supra.
"The rule that a contract between a director and his corporation is voidable at the option of the corporation has not, however, been applied to contracts between corporations having one or more common directors. Robotham v. Prudential Insurance Co., supra; Pierce v. Old Dominion, c., Smelting Co. et al., 67 N.J. Eq. 399 ; 58 Atl. Rep. 319 ; Hyams v. Old Dominion Copper Mining and Smelting Co., 82 N.J. Eq. 507 ; 89 Atl. Rep. 37 ; affirmed, 83 N.J. Eq. 705 ; 92 Atl. Rep. 588 ; Marcy v. Guanajuato Development Co. et al., 228 Fed. Rep. 150; General Investment Co. v. American Hide and Leather Co., supra."
Complainant contends that the mere presence of directors *Page 276
on both sides of a transaction renders the transaction voidable at the instance of any dissenting stockholder. That is not the law. The rule, as gathered from the cases, is to the effect that the dissenting stockholder has no arbitrary right to avoid the transaction but has the right to subject it to the scrutiny of the court, in which event there is cast upon the company or the directors concerned the burden of showing that the transaction is fair and entirely free from fraud. Robotham v. Prudential Insurance Co., 64 N.J. Eq. 673 ; 53 Atl. Rep. 842 ; Marcy v. Guanajuato Development Co., supra.
The directors here have sustained that burden. They proved that the transaction under consideration was honestly conceived and carried out and has at all times been fair and untainted by fraud.
Adverting to the claim of corporate opportunity, above considered, the defendants have pleaded acquiescence and laches. It has already been stated that in 1925, Merrill, Lynch Co. knew all about the Canadian option and the operation of the Canadian business by the three Hollanders. Merrill, Lynch Co. as the purchaser of 50,000 shares and the three Hollanders as the holders of the remaining 150,000 shares then constituted the entire body of stockholders. They all knew of the Canadian option and, of course, acquiesced therein. All present stockholders are possessed of derivative holdings and trace their title to the original holders of the 200,000 shares in 1925. The present stockholders are, therefore, bound by the acquiescence of their predecessors in title and are estopped from advancing the claim of corporate opportunity. Wallen v. Duro-Test Corp.
(unreported, see Chancery Docket Book 124, page 54); Trimble v. American Sugar Refining Co., 61 N.J. Eq. 340 ; 48 Atl. Rep. 912 .
In the Duro-Test Case Vice-Chancellor Fielder said:
"Duro-Test was then a closed corporation in which neither complainant nor any member of the public was financially interested. The stockholders of Duro-Test having all assented to the several transactions with full knowledge of the facts, could not be heard to complain thereof as individuals or on behalf of the corporation ( Arnold v. Searing, 73 N.J. Eq. 262 ; Whitfield v. Kern, 122 N.J. Eq. 332 ) and it would *Page 277
seem that complainant, having acquired his stock direct from Bilofsky as hereinafter stated, would be bound by Bilofsky's assent to and approval of the transactions. Trimble v. American Sugar Refining Co., 61 N.J. Eq. 340 ; Hodge v. U.S. Steel Co., 64 N.J. Eq. 90 ; Goodnow v. American Writing Paper Co., 72 N.J. Eq. 645 ; affirmed, 73 N.J. Eq. 692 ."
In the Trimble Case, supra , Vice-Chancellor Pitney said:
"With this preliminary observation, I further remark that the bill does not state at what time complainant acquired the 100 shares of stock which he holds, and it is common knowledge that the stock of this company, and many others of the same class, is daily dealt in on the Exchange. For aught that appears, he may have acquired it a very short time before the filing of the bill, from a holder who had acquiesced in everything that the company had done up to that time and in the policy the carrying out of which the complainant seeks to enjoin. That such acquiescence would bar the original holders of the shares now held by the complainant, if he knew of it, is perfectly well settled. It is necessary, on this point, only to refer to the case of Rabe Cross v. Dunlap, 6 Dick. Ch. Rep. 40. And it seems to me that where a person holding so small a fraction of the capital stock as the complainant represents here asks to interfere with a particular phase of the management of the corporation, which is presumably satisfactory to all the other stockholders, he ought to show affirmatively that neither he nor his predecessor in title has acquiesced in the policy of which he now complains, for I think he would be bound by the acquiescence of his predecessor in title."
The complainant and the other stockholders are here bound by the acquiescence in 1925 of their predecessors, the three Hollanders and Merrill, Lynch Co., and are estopped from making the claim of corporate opportunity. This makes it unnecessary to discuss the defense of laches.
II. THE JOSEPH HOLLANDER TRANSACTION.
There are only two claims made with reference to this transaction. The first appears in the intervenor's supplemental *Page 278
complaint in which it is charged that the individual defendants caused A. Hollander Son, Inc., to purchase from their friends or relatives property, although the same was known to the defendants to be unnecessary, and caused the company to pay for such property sums vastly in excess of its fair value and that this was done so that their friends and relatives might profit at the expense and out of the treasury of the company. The other claim is made in complainant's brief in which it is asserted that certain advantages flowed to the Canadian company from a lease made between Joseph Hollander et al., and the Perfection Fur Dressing Dyeing Co., Inc. The first of these contentions stands completely unsupported by any proof in the case other than proof of the fact that a transaction did occur between Joseph Hollander on the one side and A. Hollander Son, Inc., on the other side and that there is a family relationship between Joseph Hollander and Michael, Albert and Benjamin W. Hollander. With respect to the second claim relating to the aforementioned lease, complainant introduced proof from which is sought to be drawn the conclusion that the lease and other features of the transaction with Joseph Hollander were designed to furnish an improper advantage to the Canadian company and that the underlying purpose was to furnish to the Canadian company an opportunity of buying at an inadequately low price property worth a good deal more, property which in the nature of the transaction should have been reserved for the American company.
These two matters call for a brief statement of the facts. Joseph Hollander, who recently died, was an uncle of the three individual Hollanders and had for a great many years been engaged in Newark in the business of dressing and dyeing furs. From about 1918 forward, he conducted his business under the corporate name of Joseph Hollander, Inc. In 1934, A. Hollander Son, Inc., brought suit in this court against Joseph Hollander and his said company, claiming that the latter were competing unfairly in the manner in which they were using the name "Hollander." The relief that was sought was to restrain the defendants there from using any name whereof the name "Hollander" would be a *Page 279
part or, in the alternative, that the defendants be enjoined from using the name "Hollander" in such manner as to deceive ultimate consumers as to the identity and origin of their products. The matter came on before me on an application for a preliminary injunction and the suit was both prosecuted and resisted vigorously and with considerable bitterness. The proofs and briefs were voluminous and the appearances many. A preliminary injunction was allowed which was immediately made the subject of an appeal to the Court of Errors and Appeals. That court modified the restraint in some respects so that pending final hearing the defendants in that suit were restrained from using the corporate and trade name in such form or manner as might tend to confuse the buying public or ultimate consumer as to the identity of the respective products of the complainant and the defendants in the suit and the defendants were also restrained from advertising in any way their products to the buying public or ultimate consumer. As the cause was about to come on for final hearing negotiations were opened between the parties with a view to the settlement of the litigation. Conferences covering many months were had between counsel for the parties and these eventually resulted in an agreement by which A. Hollander Son, Inc. (the American company) bought out the business, good will, machinery and equipment of the Joseph Hollander company. The agreement, which is here in evidence, recites that the stockholders of the Joseph Hollander company feared the result of the oncoming trial. In that agreement is expressed their opinion that if that litigation resulted in a permanent injunction restraining the Joseph Hollander company from using the name "Hollander" or even if the litigation resulted in such restraint as forbade that company from using that name except accompanied by language clearly indicating that its products were not those of A. Hollander
Son, Inc., the effect on the business of the Joseph Hollander company would be exceedingly injurious. Thus, the defendants in that suit admitted that their continued use of the name "Hollander" without explanatory or informative words was essential to their business. On the other hand, the complainant in that suit was not without its *Page 280
own fears. The defendants claimed an oral license of long standing and rested also upon acquiescence and laches for a period of over sixteen years. It is not possible to say in retrospect where the proofs and the equities would have preponderated but certainly the situation was then a serious one for both companies. If the complainant had prevailed the effect undoubtedly would have been to diminish considerably the business of the Joseph Hollander company. If, on the other hand, complainant had failed to prove its grievance or if relief on account of that grievance were held to be barred either by ascquiescence or laches, complainant's business would have suffered immeasurably by that competition which complainant claimed was both unfair and most damaging. In this juncture of risk the parties composed their long litigation by the Joseph Hollander company selling out to the complainant company and going out of business. By this disposition there was eliminated from the field the only other concern in the United States engaged in the same line and bearing the name "Hollander." The litigation had lasted from August of 1934 until January of 1937 and the settlement was put into effect in the early part of 1937, at which time there was entered in the then still pending cause a final decree, by consent, by which the Joseph Hollander company and Joseph Hollander, individually, were perpetually enjoined from engaging in the fur processing business under any name or designation of which the name "Hollander" would be a part.
The purchase price for the acquisition of the business and property of the defendant company was the subject of much difference of opinion and considerable negotiation. Joseph Hollander wanted a half million dollars for his business and property, to be paid in cash. A. Hollander Son, Inc., offered initially a price of $100,000 and wanted that paid over a period of years without interest. Six months' bargaining brought the parties to an understanding. The price was fixed at $275,000 for the Joseph Hollander company's business, good will, real estate, formulae, processes, machinery and other physical assets. The sellers finally agreed to take their money over a period of nine years, without interest, but *Page 281
on the advice of their accountants they wanted the price broken down into several items and allocated accordingly. Of that price they wanted $15,000 paid annually for nine years as rent for the plant, $7,500 annually for a like period as a royalty for the use of formulae and processes and $45,000 for the title of the plant to be conveyed at the expiration of the nine-year term of the lease. The buying company was not interested in how the purchase price was divided or allocated, providing all items amounted to no more than $275,000 and providing, further, that a nine-year period of payment, without interest, was afforded. The seller's wishes as to the breakdown were submitted by its counsel and were accepted without dispute, because it was obviously of no concern to the buyer how the seller wished to regard the various annual payments of the purchase price. The figures of the breakdown were purely arbitrary and were not intended by the parties to reflect true or market values of the items to which those payments relate. The expert testimony before me, standing as it does without contradiction, establishes that the Joseph Hollander plant was at the time worth $38,750 and was worth no more at the time of the hearing before me.
A step in the carrying out of the settlement was the incorporation by A. Hollander Son, Inc., of a New Jersey company known as the Perfection Fur Dressing Dyeing Co., Inc., all the stock of which company was taken by the former so that Perfection was and continued to be a wholly owned subsidiary of the American company. That company consummated the settlement, taking in its own name all instruments of transfer. It took in its own name the nine-year lease for the Joseph Hollander plant at a reserved net annual rental of $15,000. The gross rental for the period, amounting to $135,000, was payment pro tanto of the amount for which the parties settled. On January 2d 1937, the day when that lease was taken by Perfection, Joseph Hollander and his associates entered into an agreement with the Canadian company, which agreement has been made the basis of complainant's charge of a diversion to the Canadian company. By that agreement the factory, already leased for nine years to the Perfection company, was to be conveyed to the Canadian *Page 282
company nine years later at a cash price of $45,000. Complainant argues that this latter agreement constitutes a breach of the fiduciary duty resting upon the three individual Hollanders and that this transaction demonstrates that in arranging for the sale of the plant to the Canadian company for $45,000 they were serving their self interest to the detriment of the American company. From the fact that the lease with Perfection called for a reserved net annual rental of $15,000, it is argued that the property was worth considerably more than $45,000, the inference being that the three Hollanders were passing on to their privately owned Canadian company a piece of property which, measured by that reserved rental, was worth much more than the $45,000 agreed to be paid therefor by the Canadian company. Yet, the complainant did not by any evidence dispute the proven fact that the stipulated rental of $15,000 was purely arbitrary and had no relation to the true rental value of the Joseph Hollander plant and that the plant was neither then nor now worth more than $38,750. This itself is sufficient to put an end to complainant's claim that the plant was to be conveyed to the Canadian company at less than its value. The contrary was proved. From the evidence it appears that a plant worth in 1937 the sum of $38,750 was to be conveyed nine years later to the Canadian company for $45,000 and this without allowance or abatement to the Canadian company for that depreciation and obsolescence which necessarily must take place in the interim of nine years. It seems that if any injury flowed from this transaction it was one to which the Canadian company was subjected, and this to the decided advantage of the American company. This is not all that may be said on the point. Complainant insists in his brief that the defendants have failed to explain why on the settlement of litigation between the American company and the Joseph Hollander company any right to purchase property should have been conferred upon the Canadian company. This contention still assumes that the transaction was one of potential benefit to the Canadian company and completely overlooks the proven values and the inescapable conclusion that the transaction was without intended benefit to the *Page 283
Canadian company and could not operate beneficially to it. There is a deeper vice in that contention, for it overlooks the reason why the agreement of sale for the plant was made with the Canadian company and not with the Perfection company. By the testimony of the defendant Michael Hollander and of Mr. Milton Unger, who acted in the litigation as counsel for Joseph Hollander and the Joseph Hollander Company, it was proved that when the settlement agreement was about to be consummated Mr. Michael Hollander stated that he did not wish to add another plant to those already owned by the American company and for that reason the contract should be made to turn the plant over to the Canadian company. Accordingly, the agreement of sale was made with the Canadian company but in order to preserve to the American company the opportunity of acquiring the plant at the end of the nine-year period or even within one year thereafter, an option agreement was drawn between the Canadian company and the American company, dated January 2d 1937, which recites that the agreement of purchase by the Canadian company was essential to the settlement of the aforementioned litigation since Joseph Hollander insisted that the real estate, too, be bought as a part of the transaction and A. Hollander Son, Inc. (the American company), declined to purchase the plant for the reason that it did not wish to increase its fixed assets and that in that situation the Canadian company offered to help out the American company by binding itself to buy the property, although it had no need for it then and would have no need therefor on January 2d 1946, the date fixed for conveyance. The option agreement further recites that the American company might have need on or before January 2d 1947, for the property and may desire its acquisition. The agreement, therefore, furnished to the American company the option of taking over by assignment before January 2d 1946, the executory agreement to purchase the plant or, in the alternative, of actually purchasing the plant from the Canadian company at any time between January 2d 1946, and January 2d 1947, for the sum of $45,000 in cash. By force of this agreement the American company was put into the position where up to January 2d *Page 284
1947, it could have the plant or not, as it chose, at $45,000, which sum was but part and parcel of the amount of the settlement of the Joseph Hollander litigation. It is very plain that by this transaction the Canadian company took nothing but the risk of loss. If, perchance, the property rose in value within

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/3568745. Public record. Not legal advice.