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Alm v. American Hair & Felt Co.

June 30, 1937

ALM ET AL.
v.
AMERICAN HAIR & FELT CO.



Appeal from the District Court of the United States for the Northern District of Illinois, Eastern Division; Charles E. Woodward, Judge.

Author: Sparks

Before EVANS, SPARKS, and MAJOR, Circuit Judges.

SPARKS, Circuit Judge.

This appeal is from a decree in equity in which the District Court, exercising its discretion, declined jurisdiction of the action and dismissed it without prejudice.

On July 29, 1936, appellee and its subsidiaries were engaged in buying from tanneries and selling animal hair, and in making and selling products in which such hair was used, both in interstate and intrastate commerce.

Appellants, who were holders of appellee's common stock, instituted the action for themselves and others similarly situated. By the bill, which was amended on August 14, 1936, appellants sought to enjoin appellee, a Delaware corporation, from redeeming its common stock and immediately issuing it to others who were common stockholders, patrons, officers, directors or employees of appellee, or other persons who were affiliated with appellee's industry. Appellee, by resolution of July 23, 1936, had declared its intention of doing the acts complained of on October 1, 1936. The challenged plan was to distribute all of the common stock to tanning stockholders proportionately to the quantities of hair sold to appellee by such respective tanners; that the officers, directors and employees of appellee were to be permitted to continue to hold the same amount of common stock they then held, and to acquire additional stock if not taken by the tanners, but all common stock held by such officers, directors and employees was to be held under an option to appellee to repurchase at the price at which it might be called.

The amended original bill set forth various provisions of the Delaware Corporation Code, and disclosed that appellee had taken all steps for the call and purchase of its common stock in compliance with its charter. Much of the bill which is quite voluminous, is not material to the question here presented, and need not be referred to other than in a general way. It averred that the business was first established in Chicago in 1864, and incorporated in Illinois in 1885; that in 1918 it was dissolved and reincorporated under the laws of Delaware under the name of the Tanners Products Company, and in 1928 its present name was adopted. It was further averred that appellants were informed and believed that appellee was incorporated under the laws of Delaware as a mere matter of convenience and with the intention of carrying on its business from its principal office in Chicago, where it had always been located; that it was authorized to do business in Illinois, and, either directly or through its subsidiaries, then maintained factories in many large cities of the United States, including Chicago and Wilmington, Delaware, and owned fifty-five per cent of the capital stock of the Dominion Hair Felt Company, Ltd., which then had a factory in St. Johns, Quebec.

It was also averred that pursuant to appellee's by-laws all meetings of its board of directors and stockholders were held in Chicago, where its main books and records were kept; that all of its officers had their offices in Chicago and resided within the jurisdiction of the District Court which issued the challenged decree; that of the twenty-one directors, nine resided in Chicago, four in Wisconsin, three in Massachusetts, two in New York, and one each in New Jersey and Ohio. The company's registered office was in Wilmington, Delaware. More than 150 of the common stockholders resided in Illinois, 140 of whom were in the jurisdiction of the District Court here concerned, and owned 25,000 shares of common stock. In no other state did fifty stockholders reside. Only three resided in Delaware and they owned less than four hundred shares.

On July 1, 1935, a reorganization of the company's capital structure was effected which resulted in the issuance of first preferred stock, second preferred stock, and an authorized issue of 200,000 shares of common stock of no par value, of which 160,354 shares were outstanding, and 300 shares were held in the company's treasury. Of the outstanding shares appellants owned 625, which they had purchased in "over the counter trading" between August 1935, and May 1936, at prices ranging from $5 to $9.73 per share, and that at the time the bill was filed such stock had a value greatly in excess of $5 per share.

By the provisions of its charter*fn1 the common stock and the first preferred stock were callable. The second preferred stock was not callable, but upon call of the common stock the second preferred stock was to become vested with all voting rights, and the rights to the residue of the assets upon liquidation of the corporation.

It was also alleged in the bill that appellee's attempted action to redeem its outstanding common stock and to reissue it to tanning stockholders constituted a threatened violation of the Federal Anti-Trust Laws, chapter 1 of Title 15 of the United States Code (15 U.S.C.A. § 1 et seq.); and would also be violative of an injunctive decree heretofore entered by the District Court on October 3, 1927, in an equity action brought by the United States of America against Tanners Products Company, which by reference was made a part of the bill, and which we shall discuss later.

Appellee, on August 12, 1936, entered its special appearance and filed a motion to dismiss the bill on the ground that the threatened acts concerned only those matters which affected the internal management of a foreign corporation. On August 14, 1936, the parties stipulated and agreed in open court "that the defendant might file its answer to the amended bill * * * and that the filing of such answer * * * should not be construed as constituting a general appearance * * * nor as waiving the special appearance theretofore filed, nor as waiving the motion to dismiss * * *." Thereupon, on August 24, 1936, appellee filed its answer to the amended bill incorporating by exhibits appellee's certificate of incorporation and by-laws; a form of the common stock certificate; section 28 of the Delaware Corporation Code (Rev. Code Del. 1935, § 2060), which related to the reduction of capital; the form of notice given to stockholders, to the public, and to those selling appellee's stock in excess of the call price, of the call provisions in the charter; appellee's balance sheet of July 30, 1936; and the notice given to the common stockholders of the proposed redemption of the common stock, dated July 30, 1936. The answer repeated appellee's motion to dismiss and the reasons theretofore given, and admitted practically all of the material allegations of the bill with the following exceptions: It denied that the incorporation under the Delaware laws was a mere matter of convenience, and alleged that appellee did business in many states, and had manufacturing plants outside Illinois, and that its largest plants were in New Jersey and Wisconsin; that it had operated a factory in Delaware since 1890, and that its home office and its required corporate records were in that state; that more than 83 per cent of its manufacturing was done outside Illinois; that less than 14 per cent of its sales represented materials shipped from Illinois plants; that of its outstanding common stock only 29,167 shares were held by Illinois residents; and that more than 80 per cent of its common stock was held by 226 stockholders who lived in nineteen states other than Illinois, or in a foreign country.

The answer set forth the applicable provisions of subsection (17) of article IV and subsections (5) and (6) of article VIII of appellee's Certificate of Incorporation.*fn2 It also set forth the applicable provisions of sections 5, 13 and 19 of the Delaware Corporation Code, and also a portion of section 27 of that Code which was omitted from the bill.*fn3

On the day of submission appellants by leave of court struck from their amended complaint sections 13 and 27 of chapter 65 of the Delaware Corporation Code (Rev. Code Del. 1935, §§ 2045, 2059), under which chapter appellee was organized, and which prescribes the classes of stock, preferred or special, which may be redeemed, and the terms and conditions of such redemption. At the same time, by leave of court they also struck section 28 of that chapter (Rev. Code Del. 1935, § 2060), pursuant to which appellee's resolutions were passed. The cause was then submitted to the court without ...


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