Homer v. Crown Cork and Seal Co.

Pabke, J., delivered the opinion of the Court. The appellants, Francis T. Homer, Luther M. R. Willis and Bertha F. Goldenberg, were the complainants, and the appellees, the Crown Cork and Seal Company of Baltimore City, a corporation, and the chairman of its board of directors and its vice-president, and its directors, were the defendants, in .a bill of complaint filed with the object of enjoining the corporate defendant, its officers and agents, from committing any act whatsoever looking towards or in furtherance of the sale of the corporate assets of the corporation as a whole, and particularly from holding the meeting of stockholders called for the purpose of ratifying a resolution of the board of directors that authorized a sale of all the assets of the corpo ⁶⁹ ration as a whole, and to show canse why the temporary injunction sought should not be made permanent. Upon the order to1 show cause-, the appellees demurred to the bill of complaint, and, this demurrer having been sustained and the bill dismissed, the appellants have brought this appeal. The Crown Cork and Seal Company of Baltimore City, which we shall hereafter refer to as the Corporation or Baltimore Corporation, was organized pursuant to- the laws of the State of Maryland, where it has its principal place of business, with a capital stock of 10,000 shares of the par value of one hundred dollars each.

Mine thousand five hundred shares of its corporate stock have been issued aud are outstanding. The appellants own 318 shares of this stock, or abo-ut three and one-third per centum of the stock issued, and they were acting for themselves and for such other stockholders -as would join them and share in the expenses. The Corporation has been engaged for a number of years in Baltimore in the manufacture of plants and equipment for the making and sale of caps for bottles, aud of the machinery for placing and closing the caps upon bottles; and of agglomerate cork sheets, cork discs, and other cork specialties. In connection with its business the Corporation owns or controls various companies in foreign countries.

Its largest competitor has been the Mew Process Cork Company of Brooklyn, Mew York, and the business rivalry between the two has been keen, and the Corporation had until the end of the fiscal year of 1926 -always declined the overtures of the Mew Process Cork Company to enter into any co-operative trade agreement. The two- companies- jointly controlled, in about eqtral proportions, more than fifty per centum of the annual consumption of caps in the United States; and more than eighty per centum -of the agglomerate discs used annually in this country. During January -and Eebruary, 1927, a certain Charles E. McManus, the president of the Mew Process Cork Company, and one Gerson W. Beringer, with James G. Moses and Henry Bennett Leary, formed a combination to buy and control a majority of the shares of stock of the Corporation, ⁷⁰ so as to unite its business with that of the New Process Cork Company in order to put an end to their keen competition. The combination bought for their common account from dissatisfied stockholders approximately 6,500 shares of stock, which was slightly in excess of two-thirds of the shares of stock issued, at prices ranging from $250 a share to $275 a share, so that the average price of every share of stock, including commissions, fees and other expenses, was $277.

After this block of stock had been acquired for the pool, 1,246 shares were bought at a price in undisclosed excess of the average price mentioned. These purchases gave the buyers 7,746 shares of stock, or slightly in excess of eighty-one per centum, of all the capital stock outstanding. Although the four parties named, with their associates, are the owners of the stock, it has been transferred upon the books of the Corporation in the names of various individuals, firms, and corporations, so as to conceal the real ownership, in an effort to relieve the actual owners and corporations associated with them from liability for the acts of which the appellants complain, notwithstanding the paper title to these shares of stock, the control of the shares of stock so bought for the pool is in its four members and their associates and bankers, with the result that since March, 1927, the management and operation of the Corporation and of the New Process Cork Company have Ijeen in the hands and under the control of the same persons and interests. Under date of July 15th, 1927, a formal notice was sent to the stockholders of the Corporation that called for a special meeting to approve of an agreement of sale of all the property and assets of the Corporation to the New York Improved Patents Corporation, a corporation organized under the laws of the State of New York, at and for a price which in liquidation would equal two hundred and seventy-seven dollars per share to every stockholder of the Corporation.

In the letter accompanying this notice, the chairman of the board of directors wrote: “If the agreement should be approved, and if this sale should be made, the purchasing-company proposes, as I have been told, to' consolidate the ⁷¹ business of jour company with that of tbe New York Process Cork Company, Inc.” Tbe meeting, and its two adjournments, resulted in an abandonment of the proposed sale, because, as was announced by their representative, the owners of more than two-thirds of the ontstandingi capital stock, although possessing the power, were unwilling to proceed without virtually the unanimous consent of the shareholders. However, the plan was revived and on November 37th, 1927, another special meeting of the stockholders was called for November 28th to consider a similar sale; and, on November 26th, 1927, was filed the bill of complaint in this canse asking for a temporary and then a permanent injunction restraining the proposed sale. The question proposed for submission to the stockholders was an agreement of sale, which had been formally approved by the directors of the Corporation, and which provided for the sale of all the Corporation’s property and assets as an entirety, including its good will and franchises (except its franchise to bo a corporation), to the New York Improved Patents Corporation, a corporation organized pursuant to and existing under the laws of the State of New York, or its successors, at a price which would liquidate every share of stock of the Corporation at $277 a share. Accompanying its proposal to pay, as set forth above, and revealing that it was acting for undisclosed principals, who would vote the shares of stock thus obtained for the contemplated sale of the assets of the Corporation, the New York Improved Patents Corporation offered, (a) independently of the authorization of the sale by the stockholders of the Corporation, to pay in cash $277 to every stockholder of the Corporation desiring to sell; (b) or in the event that the proposed sale of the assets should be consummated, to give to every stockholder of the Corporation, who would subscribe in advance of the sale, the privilege of buying when, as, and if issued, stock of the New York Improved Patents Corporation on a basis which would give the stockholders for each, or as many of his present shares in the Corporation as he would wish, seven and seventy-five hundredths (7,75) shares ⁷² of the preferred and two and eight-tenths (2.81 shares of common stock of the purchasing company.

In addition to this offer, the letter of the New York Improved Patents Corporation stated that it had been organized for the express purpose of acquiring certain patents and formulas which had been used upon a royalty basis by the New Process Cork Company, Inc., and of consolidating with the latter corporation, and of purchasing the assets of the Baltimore Corporation. The resulting commercial, economic and financial benefits and advantages of this plan were outlined; and details concerning the capitalization and assets, the indicated net income, and the market value of the preferred and common stock, of the New York Improved Patents Corporation, were set forth for the consideration of the stockholders of the Corporation, who were advised where further information might be obtained. It was also explained in the notice from the board of directors of the Corporation that, if the sale be effected to the New York Improved Patents Corporation, the latter corporation intended forthwith to consolidate with the New Process Cork Company, Inc., whose stockholders had approved of this consolidation and were not afforded an opportunity to sell their holdings for cash, but are to receive for their shares of stock a certain named proportion of the preferred and common stock of the New York Improved Patents Corporation. The notice pointed out to the stockholders why the directors regarded the sale of the assets as advantageous to the Corporation’s stockholders, and why the directors believed the offer by the New York Improved Patents Corporation to their corporate shareholders either to pay the specified price or to subscribe for its stock on the given basis was more favorable to the shareholders of the Corporation than-to the shareholders of the New Process Cork Company under the terms of its consolidation.

The facts thus narrated are those found in the bill of complaint and exhibits, and state the not uncommon instance of a corporation consolidating with another and acquiring by purchase all the assets of a third, in order to eliminate ⁷³ their competition and wasteful duplication, increase efficiency of operation, lessen the cost of financing, of production and of selling the product. As has been seen, it was the E"ew Process Cork Company which was to be consolidated with the New York Improved Patents Corporation, and the Crown Cork and Seal Company of Baltimore City whose assets were to be purchased by the first named corporation. The plan did not contemplate the consolidation of the Crown Cork and Seal Company, as would appear from some of the statements found in the bill of complaint and, so, set forth in the recital of the allegations found in this opinion. Up to this point, there is no ground for equitable intervention by injunction, but the bill of complaint contains further charges which appellants urge establish their equity.

These allegations attempt to show fraud in the form of concealment, of disclosure of trade secrets, and of bad faith in the proposed sale. The substance of these allegations will be set forth and considered in order. 1. It is alleged that, after the combination obtained control through the purchase of more than two-thirds of the outstanding shares of stock, they elected a board of directors and filled the offices of the Corporation with men of their own choice and obedient to their direction, “for the sole and distinct purpose, your orators believe and therefore aver, to hide and secrete from each and every stockholder who would not be coerced into selling his shares, all information whatsoever concerning the affairs of the company.” The charge of a fraudulent purpose in the removal of directors and officers, who had been selected by the former stockholders and their board of directors to operate the Corporation, direct its policy and manage its affairs, and the substitution of other directors and officers in harmony with what a different group of stockholders, owning at least eighty-one per centum of the shares of stock entitled to participate in their selection, deemed to be in the interest of the stockholders, is based upon belief, and no facts are stated in the paragraph from which the above quotation is taken upon which it could be inferred that this change in the ⁷⁴ corporate official personnel was “for the sole and distinct purpose” of hiding and secreting all information concerning the affairs of the Corporation from those stockholders opposed to the proposed sale. So, if there he any justification for the sweeping accusation made, it must be found from facts and circumstances alleged in the bill of complaint.

An allegation of fraud may be made upon belief only when the facts are set forth upon which that belief is reasonably founded. In the scrutiny of the bill of complaint, to find averments of facts from which concealment or fraud may be deduced, it is important to bear in mind that the appellants were in possession of the thirty-fifth annual report of the Corporation for the year ending December 31st, 1926, which was made on February 19th, 1927, and certified to by accountants and auditors; that the present ownership of the controlling shares of stock did not exist earlier than January or February, 1927; that since March, 1927, the management has been in the hands of the representatives of the combination; and that the bill of complaint was filed on November 26th, 1927. Thus the period of the alleged concealment or fraud against the minority stockholders is limited to the comparatively brief period between March 3rd, and November 26th, 1927. There are two allegations of fact with reference to concealment.

The first is that the appellants “have at various times requested and insisted that the management, if they desired to sell the assets of the corporation in their entirety, - should produce a valuation made by competent experts, so that the minority stockkholders could be advised and determine what was the proper value for the assets, and what was a proper liquidating price for their shares of stock. In each and every instance Grerson W. Beringer, Henry Bennett Leary, and those associated with them, have refused to give unto your orators the information so requested.” It is clear that this is not a denial of information, but a refusal to comply with the demand of a few minority stockholders to have a fresh valuation of its assets made by experts for the information of the minority ⁷⁵ stockholders. The question of a fresh valuation by experts was one of policy, and the refusal to authorize one was neither a concealment of facts known to the majority stockholders and unknown to the minority, nor a deprivation of any inherent right in the minority stockholders. The second alleged concealment is in respect to the offer of the New York Improved Patents Corporation to give to the stockholders of the Baltimore Corporation an opportunity to subscribe, on a specified basis of exchange, for the preferred and common stock of the first named corporation, provided the sale of the assets of the Baltimore Corporation be consummated as proposed.

The criticism of this offer is that “it fails to show (1) what, are to be the capital assets of said corporation (to wit: no statement of assets and liabilities); (2) what are estimated to be the annual earnings of the said corporation; (3) how the remainder of the 1,455,000 shares of preferred stock is to be issued and at what price; (4) how the remainder of the 275,000 shares of Class ‘B’ are to be issued, or that their issuance will not be in cash or services to* the corporation.” The appellants state that all this information was refused them “when in stockholders’ meeting assembled upon the 25th day of June, 1927.” The occasion specified was the meeting of the shareholders to act upon the first or abandoned proposal of sale of the Corporation’s assets. There is no allegation that at any other time or place this information was sought or refused, although in the offer of Hovember 17th, 1927, it was stated that further information might be obtained at the office of the Baltimore Corporation or at the office of Leary & Rood in New York. It is true that the proposition of June 15th, 1927, referred the prospective subscriber to the same sources of information, but the refusal to give the information desired at the stockholders’ meeting held on June 25th did not warrant the averment that this information was definitely and positively refused under a similar but, in law, wholly different offer submitted on Hovember 17th, 1927, when the complaining shareholders never applied at either of the ⁷⁶ designated places for information before the institution of these proceedings. The allegations quoted from the body of the bill axe modified by the exhibits, which constitute a component part of the bill of complaint.

Without stating their contents, it is found that much information is given with regard to the capital assets and liabilities, the prospective net income, and market value of the preferred and common stock, and the bases upon which the preferred and common stock was to be issued to the shareholders of the New Process Cork Company, Inc., and to those of the Baltimore Corporation who would elect to subscribe on the terms presented. After the stock had been appropriated to these purposes, the residue of the unissued preferred and common stock would be presumed to have been or to be issued for corporate purposes under and in conformity with the laws of the State of New York. However, if there had been an inquiry made after the offer on Hovember 17th, a refusal to give the information sought would have been a denial of what might have been helpful in the exercise of the appellants’ option to subscribe for stock in the New York Improved Patents Corporation; but would have left unaffected the question whether $277 a share was a fair price to be paid, in liquidation, to every stockholder for every share of stock in the Baltimore Corporation. It follows that the allegations now being discussed, which are in general terms or. relate to prospective conditions, do not constitute any ground for relief, as a declination to give the indicated information is not shown by the bill of complaint to have been material in estimating the propriety and advantage of the proposed sale of assets of the Baltimore Corporation.

Even a shareholder does not enjoy an unlimited right to demand and receive information in respect to corporate affairs. Code, art. 23, secs. 84-87; Wight v. Heub lein, 111 Md. 657 ; 2 Machen on Corporations, secs. 1094-1113. 2. Another ground upon which the charge of fraud rests is that the Corporation owned and held many trade processes ⁷⁷ and secrets, which, had "been developed in its laboratory relating to the manufacture of caps and which, while not patentable, were highly important to maintain its competitive position and of great value to the Corporation, so long as they were kept secret from a competitor; and that immediately after securing enough shares of stock to control the Corporation, or in March, 1927, Charles E. McManus, president of the Mew Process Cork Company, Inc., and, with Gerson W. Beringer, the dominant party in the combination having obtained control of the Corporation, went, on numerous occasions, to the plants of the Corporation, where he demanded and received full particulars of all trade processes and secrets as well as full details of all costs' and agreements which the Corporation had made with its customers, without giving in return any of the trade processes or secrets of the Mew Process Cork Company or in any way recompensing the Corporation for the information so obtained. It is further alleged that McManus obtained this information by reason of his position in the combination and with the knowledge and consent of Beringer, who was at that time a director and chairman of the board of directors of the Corporation, and of Henry