"Agreement made and entered intó in one or more parts, all to be taken as a whole, this twenty-eighth day of May, 1900, by and between James H. Post on behalf of himself and of such others as are associated with him, herein called the purchasers, he being trustee for all, of the first part, and Mr. Claus Doscher, as representative for himself and others owning not less than two-thirds of all the stock of the New York Sugar Refining Company, herein called the sellers, of the second part, "Witnesseth that in consideration of the mutual execution hereof, and of the agreements on the part of the several parties herein contained and particularly of the mutual execution hereof by and between the subscribers as stockholders of the said the New York Sugar Refining Company between themselves, the parties hereto have agreed and that they do hereby covenant and agree, each with the other, as follows: "I. The option herein provided for shall continue until May 29, 1900, at twelve o'clock noon. "II. On or before that date, the sellers will procure the holders of at least two-thirds of the stock and bonds of the said the New York Sugar Refining Company to become parties to this agreement. "III. The purchasers will, after two-thirds or more of such stockholders in par value shall have become parties hereto, upon notice to that effect, proceed to take the necessary steps for the organization of a new or the use of an existing corporation, under the laws of the state of New Jersey, with a capital of which ten million dollars ($10,000,000) shall consist of preferred stock (with the right of votes), the preference being for cumulative dividends at the rate of six per cent. per annum, a preference as to capital as well; that is, in the final distribution of capital, preferred stock shall be entitled to preference, of which company the said James H. Post shall be the first president. "IV. The sellers hereby confer upon the purchasers, the option down to May 29, 1900, at noon, to elect to buy all the stock of the said the New York Sugar Refining Company which shall be subscribed hereto (to be not less than two-thirds of the entire capital) at the price of three million dollars ($3,000,000) payable in the preferred stock at par of a corporation to be formed as hereinbefore provided. The sellers do not bind themselves to produce more than two thirds of the total capital. * · its preferred stock, in exchange for the stock of the sellers. The notice in writing above referred to shall be delivered to Mr. Claus Doscher at his office No. 104 Wall St., New York City, within the time specified, accompanied by a certified check for fifty thousand dollars ($50,000) which shall be returned on payment of the purchase price, and which money shall be forfeited to the seller should the purchaser refuse to consummate the contract. "XI. As a guarantee by the sellers of the performance and to secure the performance on their part of the provisions of this agreement, their stock with all reasonable despatch and within six days after the exercise of such option by the purchasers, shall be indorsed in blank by them respectively and shall be deposited in trust with B. H. Howell Son & Co., on their receipt. "XII. Preferred stock of the proposed company not required to purchase the stock of the sellers may be issued for the acquisition of the stock of other sugar refining or collateral companies. All other preferred stock, not used for that purpose when issued, is to be issued for cash at par. Any amount received from it is to come into the treasury of the company. "XIV. In the event that the sale herein provided for shall take place, the sellers will at the request of the purchasers, transfer to the proposed company direct, the property of their company, in addition to their stock at the option of the purchasers, by proper deeds or other instruments, containing covenants of warranty and further assurance, for the said sum, payable in preferred stock at par as before mentioned. * * The sellers will also procure the resignation of the directors and officers of their company in favor of nominees of the purchasers. "XV. The stock which is to be sold to the purchasers is to carry with it all the property of the said the New York Sugar Refining Company, including good will, trademarks, patents, plant and all business appliances and other property of every description, with the exception of merchandise, cash supplies and money due from sales of merchandise, except the amount of cash (one hundred dollars) to remain in the treasury as above and except as hereinbefore provided. (The things thus excepted were under the provisions of article 13 to be devoted to the payment of debts, etc.) "XVII. All details necessary to carry out the agreement to complete consummation, including details of the organization of the proposed company, if the option shall be availed of, shall be agreed upon between Mr. Post as representing the purchasers and Mr. Claus Doscher as representing the sellers, and in the event of disagreement between them shall be determined in his absolute dis "VI. If the option herein provided for shall be availed of by the purchasers on or before May 29, 1900, at noon, and notice to that effect be given to Mr. Claus Doscher, one of the sellers, at his office No. 104 Wall St., New York, then and in such case, the purchasers shall have such reasonable time as may be necessary for the arrangement of "The date of sale is the date when the deed or transfers are finally delivered and consideration paid." The option agreement is signed by Doscher and Post in the case of the New York Company, by Mollenhauer and Post in the case of the Mollenhauer Company, and by Post, Tooker, Bunker, and others in the case of the National Company. There is no uncertainty with respect to the meaning and design of these options. Post, although designated "purchaser," was, according to their terms, to be nothing more than the promoter of the new company, acting, as he says in his testimony, as agent for and under the directions of Havemeyer. Neither of these gentlemen became, in any proper sense, purchasers. The sole consideration for the stock of the old companies was to be the preferred stock of the new company. The new company, when formed, was to deal directly with the stockholders of the old companies. Their stockholders were to transfer to it their stock direct, and, if required, the property which the stock represented. The new company was to issue to each stockholder individually an exact equivalent for that which each individual gave. The options gave neither Post nor Havemeyer $1 of interest in the new company except in so far as they or either of them might, as stockholders of the old companies, become entitled to their shares of the new preferred stock. What is specially noteworthy in these options is that not a word is said about the common stock, although it must have furnished the inducement to the plan. I have been thus explicit in stating the position of Post and Havemeyer, because the argument on their behalf rests largely on the fallacious assumption that, when the new company was organized they, as owners in their own right of the stock of the three companies, had something to sell to it, viz., that stock taken as one whole, more valuable on that account. On the contrary, they had nothing to sell; they were not vested with the legal or equitable title; they were not even its custodians while the organization of the new company was proceeding. Post, he proceeded to organize the National Sugar Refining Company of New Jersey in accordance with their terms. Havemeyer's name was not mentioned. The evidence indicates that there was, for some reason, a general disposition not to mention it. Havèmeyer's office was alluded to as "the corner," because on the corner of Sixth and Wall streets. He himself had no direct communication with any of the sellers and did not appear at any of the organization meetings. The certificate of incorporation of the National Sugar Refining Company of New Jersey bears date May 31, 1900. Its authorized capital stock was $20,000,000, of which $10,000,000 was to be preferred and $10,000,000 common. The organizers met on June 2, 1900. There were present Messrs. Post, Mollenhauer, Howell, Cory, and Bunker. After the by-laws had been adopted, they proceeded to an election of directors. Those chosen were the gentlemen above named, and in addition Messrs. Doscher and Mollenhauer, all of whom had previously been approved by Havemeyer. Then Mr. Post retired from the meeting. What followed I state in the words of the minutes. "On motion of Mr. Howell it was by unanimous vote of all the stockholders (except James H. Post not voting) resolved that this company do purchase from James H. Post all the following shares of stock and other property, to wit, 10,000 shares of the National Sugar Refining Company; 10,000 shares of the Mollenhauer Sugar Refining Company; 6,000 shares of the New York Sugar Refining Company, and the three per cent. bonds of the said New York Sugar Refining Company of the par value of $2,400,000, and issue therefor to said James H. Post 182,500 shares of the capital stock of this company, of which 100,000 shares shall be common, and 82,500 shares shall be preferred, stock, and the board of directors are authorized to proceed to consummate such purchase and to issue certificates for the said shares of stock accordingly; such shares to include the shares subscribed for in the certificate of incorporation." The stockholders' meeting then adjourned, and was followed by a directors' meeting at which substantially the same resolution was adopted; Mr. Post having, as before, retired while it was being considered and passed. This resolution, however, contained the added statement that the price of $18,250,000 was, in the judgment of the board, the value of the property purchased. It was further directed that the stock should be issued and delivered to Post. I stop to make some observations, at this point. Article 9 provided that, as a guarantee by the sellers of the performance of the agreements on their part, they (the sellers) were, within six days after the acceptance of the option, to indorse their stock certificates in blank and deposit them in trust with B. H. Howell Son & Co. So that B. H. Howell Son & Co. were to be custodians, and not Post. Neither Havemeyer nor Post was to pay one penny for the stock thus deposited, nor did 1. All the stockholders of the new company they pay one penny. Post was indeed to are said to have voted unanimously to purhand over to the sellers a certified check chase the shares and other property from for $50,000, but this was to serve as a guar- Post. The only stockholders at that time anty merely, to be returned to him when were Messrs. Post, Mollenhauer, Howell, the new company's stock was issued. Cory, and Bunker, who had each, on May 31, mon stock making an aggregate of $100,000, none of which had then been paid in. [2] 2. Post is said to have retired from the meeting when the subject of his proposal was under discussion. His absence, so far from validating the transaction, was in itself a breach of trust, not only for the reason that, in the language of Justice Dixon in Stewart v. Lehigh Valley R. R., 38 N. J. Law, 505, 523, "he could hold against the stockholders no advantage that he had got through his neglect of duty toward them," but for the additional reason that the options themselves imposed upon him a trust, the performance and responsibility of which he could not delegate to others. 3. Post, at these meetings, assumed to be the owner of the stock of the old companies. In point of fact, as I have already said, he personally had nothing to sell. The options provided, in unambiguous language, that the several stockholders of the old companies were to deal with the new company direct. By section 3 Post was to organize a new company, or to use an existing one; by section 4 the price of the stock of the old companies was to be paid by the preferred stock of the new; by section 6 the transaction was designated as an exchange of the preferred stock for the stock of the sellers; by section 14 it was provided that "the sellers will, at the request of the purchasers, transfer to the proposed company direct the property of their company * * payable in preferred stock at par as before mentioned," and the final clause provided that the date of sale was "the date when the deeds or transfers are finally delivered and consideration paid." [3] 4. If Post had really purchased the stocks of the several companies at the price of $8,250,000, and had really paid for them with his own money, he could not have resold them to the new company for $18,250,000. The properties would have been consciously overvalued and the attempted sale would have been, according to Eastern National Bank v. American Brick Company, supra, not voidable but absolutely void. The reasoning of Pitney, V. C., in See v. Heppenheimer, 69 N. J. Eq. 42, 61 Atl. 843, is conclusive on this head, and I shall not here repeat it. The transaction would have been void because it violated the statute, and it would also have been voidable under the rule of Gardner v. Butler, 30 N. J. Eq. 702, which denies to a director the right to bargain with his company for a price in excess of the real value of the thing sold. It cannot be disputed that, when the options provided that Post should form a new company "under the laws of the state of New Jersey," they required Post to proceed according to the prescriptions of those laws. Section 48 of the corporation act (P. L. 1896, p. 293) prescribes "that nothing but money except as of the capital stock hereinafter provided." The proviso is that "any corporation formed under this act may purchase mines, manufactories or other property necessary for its business, or the stock of any company or companies owning mining, manufacturing or producing materials or other property necessary for its business, and issue stock to the amount of the value thereof in payment therefor, and the stock so issued shall be full paid and not liable to any further call, neither shall the holders thereof be liable for any further payment under any of the provisions of this act; and in the absence of actual fraud in the transaction the judgment of the directors as to the value of the property purchased shall be conclusive." These sections have been so often construed by our highest court that their meaning is not open to question. I need only refer to the leading cases of Wetherbee v. Baker, 8 Stew. 501; Donald v. American Smelting Co., 62 N. J. Eq. 729, 48 Atl. 771, 1116; Volney v. Nixon, 68 N. J. Eq. 605, 60 Atl. 189; See v. Heppenheimer, 69 N. J. Eq. 36, 61 Atl. 843; Easton National Bank v. American Brick Co., 70 N. J. Eq. 722, 64 Atl. 1095. They all hold that the stock must be paid for in money or money's worth, and that any conscious or intentional overvaluation is actual fraud, within the meaning of the sections quoted. Section 18 of the corporation act provides that "at no time shall the total amount of the preferred stock issued and outstanding exceed two-thirds of the capital stock paid for in cash or property." When the options authorized the formation of a new company, they necessarily authorized its formation subject to this provision. When, therefore, $10,- • 000,000 of preferred stock was provided for, at least $5,000,000 of common stock must also have been provided for. It was therefore quite within the authority of the directors to have issued $5,000,000 or $10,000,000 of this stock, but they must have issued it for money or money's worth. The vice of the transaction lay not in its issue, but in its issue as a gift to Havemeyer. As a 5. The reason for its issue is apparent. As I have already said, the three companies were engaged in a disastrous competition with a more powerful rival. They were losing money. If their stockholders could get back the money which they had invested in their plants and a reasonable profit beside, they would more than avert loss. business proposition, the plan had much to recommend it. The organizers were experienced men, intent upon guarding their own interests and those of the other stockholders of the old companies. They were to get preferred stock in a company, free from mortgage-a company which they were themselves to manage, at least during the pleasure of Havemeyer-the dividends were to [4] The defense of ratification may easily be disposed of. In 1905 and subsequently at the annual meetings of the stockholders, the following resolution was passed: "Resolved that the stockholders hereby ratify and approve all the acts of the directors in the management of the company's business and the conduct of its officers and their action generally down to and including the present time." lution, the preference was to extend to prin- | nor Havemeyer was, in point of fact, the cipal as well as interest. It is true that the owner. It is argued, however, that, concedcontrolling power was to be Havemeyer, but ing that the transaction was unlawful in the very fact that he held the common stock the beginning, it was permitted to stand was a guaranty that the company's interest | without objection for ten years and a half. would be attended to, and that the competi- That during that period the stockholders, by tion with the American Company would not resolution, ratified it; that they are now esbe destructive. That their expectations were topped from questioning it; and that in any justified by the event appears from the fact event they are barred by laches and by lapse that, within four years after the organiza- of time. tion, Havemeyer received in dividends on the common stock $2,500,000; that for 12 years there has been no default in the payment of the dividends on the preferred stock; and that the company now has a surplus. If I had merely to pass upon the wisdom or unwisdom of the transaction, from the standpoint of benefit to the old stockholders, I should not hesitate to conclude that the bargain was a good one. The agreement that Post for Havemeyer was to have com- It might, perhaps, be open to question mon stock was of course known to the pro- whether, properly interpreted, this resolution moters of the arrangement, but the amount could be held to include the acts of the of it was not announced, even to them, un- stockholders and directors in organizing the til after the options were signed. The op- company and issuing its stock, but, assuming tions, as I have said, do not mention com- that it could, it is evident that it was withmon stock. Post says that he suggested to out effect. Stockholders cannot ratify their Havemeyer that the issue should be $5,000,- own ultra vires acts; neither can they ratify 000, but that Havemeyer objected and said the ultra vires acts of their directors unless he wanted it fixed at $10,000,000, and that they are intra vires the corporation. They that fixed it. The announcement of the cannot make lawful acts which the statute amount was first made on June 2d, the day has declared to be unlawful. Breslin v. of the organization meeting. Plainly Have- Fries-Breslin Co., 70 N. J. Law, 283, 58 Atl. meyer fixed it at that sum because he want-313; Siegman v. Electric Vehicle Co., 72 N. ed control. J. Eq. 409, 65 Atl. 910. 6. It is said that there was some discus- [5] In considering the question of laches. sion at the stockholders' and directors' meet- we must revert to the options. Article 3 ings of the value of the combined plants tak- stipulated that "the purchasers will, after en as a unit from Post as seller. It was, two-thirds or more of such stockholders (i. 'at best, perfunctory, for evidently every- e., the stockholders of the three old comthing but the amount of the common stock panies), in par value, shall have become parhad been settled beforehand, and the ques- ties thereto, upon notice to that effect, protion of amount was not settled by the di- ceed to take the necessary steps for the orrectors, but by Havemeyer. They would ganization of a new or the use of an existing no doubt, have settled it at $5,000,000, as corporation under the laws of the state of Post suggested, had Havemeyer so directed. New Jersey with a capital, of which ten It is incontestable that Havemeyer acquir-million dollars shall consist of preferred ed the $10,000,000 of common stock with- stock (with the right to vote); the preferout tangible consideration moving from him- ence being for cumulative dividends at the self, either money or property. He received rate of six per cent." etc. This article conit only because he was president of a pow-templates the issue of common stock, but erful competitor, able, through his acts and only by implication. As the company was to influence, as was thought, to make the new organization a paying concern. He did not bind himself to exert this influence, but the directors relied upon his self interest. It is plain that the transaction could have been enjoined in fieri. It could also have been attacked with success, after the stock had been issued, for the reason that there inhered in it the actual fraud referred to in section 49 of the corporation act. That fraud consisted, as I have shown, in issuing the stock for a consideration that was neither money nor property, and in covering up the gift by a seeming sale, at a conscious be organized under New Jersey law, and as that law requires (section 18 of the corporation act) that "at no time shall the total amount of the preferred stock issued and outstanding exceed two-thirds of the capital stock paid for in cash or property," it was a necessary part of the scheme, if it was to be a legal scheme, that the common stock would not be less than $5,000,000 (the preferred stock having been fixed at $10,000,000), and that it would be paid for in money or property, dollar for dollar. When, therefore, the preferred stockholders were informed by the certificate of incor the subscribers to respond to assessments whenever called for. The subscriptions would be genuine assets. thorized capital was $20,000,000, divided into | stock was $10,000,000, it might have been 200,000 shares, of which 100,000 were to be taken to mean that common stock to the shares of common stock, and, when they read amount of $10,000,000 had been subscribed on their stock certificates that the common for as the law required-not necessarily paid stock was $10,000,000, they would naturally in, but standing there as an obligation of have supposed that the common stock had been issued for the equivalent which the law prescribed. Neither of these papers gave them any notice or information to the contrary. Those of the stockholders who were incorporators and directors knew the facts, for they were parties to the organization, but, with one or two exceptions, none of the others knew or were informed of them. I think I do not overstate the case when I say that the fact that the stock had been given to Mr. Havemeyer was kept secret. Up to the time of his death, Mr. Post stood on the books as its sole owner. Neither by circular, announcement at any stockholders' meeting, nor in other ways were the body of the stockholders informed of the circumstances. Post, their president and trustee, did not see fit to make any explanation or disclosure. It is further said that the reports filed annually with the State Board of Assessment would have disclosed the fact. Among the questions asked and answered in the first report (and in the others they are very similar) were the following: "(1) What is the amount of your capital stock authorized? $20,000,000. (2) Into how many shares is it divided? 100,000 common; 100,000 preferred. (3) How many shares are fully paid, either in cash or by property purchased? 199,785. (4) How many shares are partially paid? None. (5) What is the amount of your capital stock issued? $19,978,500. Now if we assume, what I do not understand to be the law, that these reports are, through filing merely, constructive notice of their contents to every stockholder, they fail to give him any notice of any fraudulent act. They do not show that stock to the amount of $19,978,500 (which includes the McCahan stock purchase, to which I have not heretofore found it necessary to allude) was issued contrary to law. On the contrary, taken in connection with the book entries to which I have referred, they suggest that the common stock had been fully paid, in money or property, in the manner prescribed by law. I fail to find that [6] But it is said that the persons who any fact which came to the notice of the held the proxies knew and the stockholders stockholders, or which they may be presumare affected by their knowledge. This knowl-ed to have known, was of a character to put edge was the very knowledge which the prox- them on inquiry. There being on their part ies, their directors and trustees, were withholding from them. The proxies merely authorized the persons named in them to vote for directors, and in the transaction of such other business as might otherwise properly come before the meeting. How so limited an authority could affect them with knowledge -more especially as it is not pretended that the facts were stated at any stockholders' meeting-I cannot understand. This is conceded, but it is said that the stockholders knew facts which should have put them upon inquiry, and that, if they had made the inquiry, they would have learned the truth. What facts did they know? They knew what the option agreement told them, but it told them nothing about the common stock. When they exchanged the old certificates for the new at B. H. Howell Son & Co.'s office, that office gave them no additional information. When they were asked to sign proxies, the proxies gave them none. no knowledge, and on the part of Havemeyer no change of position to his detriment, there can be no laches and therefore no estoppel. [7] Is, then, lapse of time a bar? Havemeyer and his estate, so far from being worse off to-day because of his ownership of the stock, are better off. He has received dividends in money to the amount of $2,500,000, and has paid out nothing. There is no inequity, therefore, in holding that the stock, Then it is said that, if they had looked at void in its origin, has continued void for a the books, which were open to them, they period of 11 years and is now void in the would have learned the facts. The first en- hands of the original holder and his chiltry, made under date of June 1, 1900, shows dren. Nothing is better settled than that that the sum paid for the stock of the three mere lapse of time does not operate as a bar, companies was $8,250,000. This, so far from in a matter exclusively cognizable in equity, indicating a purchase for $18,250,000, indi- unless the time be much longer than that. cates the contrary. It shows a purchase for Says Pomeroy (Eq. Jur. vol. 2, § 917): "No the sum for which they really were pur- lapse of time, no delay in bringing a suit, chased. Then we find further on an item however long, will defeat the remedy provid"assets (entered by order president and treased the injured party was, during all this inurer) $10,000,000." This was a misleading entry. If it really stood for anything, it stood for "Havemeyer's anticipated influence," but to a stockholder looking at the books, and remembering that on his stock certificate it was written that the authorized common terval, ignorant of the fraud. The duty to commence proceedings can arise only upon his discovery of the fraud, and the possible effect of his laches will begin to operate only from that time." But the case presents this rather singular |