Appeal by defendants from the Superior Court of Cook county;
the Hon. FRANK M. PADDEN, Judge, presiding. Heard in the third
division of this court for the first district at the October
term, 1950. Decree reversed and cause remanded with directions.
Opinion filed January 31, 1951. Rehearing denied February 20,
1951. Released for publication March 13, 1951.
MR. JUSTICE KILEY DELIVERED THE OPINION OF THE COURT.
Rehearing denied February 20, 1951
This is an action to restrain the directors of Velsicol Corporation from carrying out a plan of recapitalization and to nullify acts already done pursuant to the plan. A master in chancery recommended a decree dismissing the suit for want of equity. The chancellor sustained exceptions to the master's report and entered a decree in favor of plaintiff. Defendants have appealed.
Plaintiff is a research chemist. In 1930 he was employed by the Pure Oil Company. During the latter part of 1930 he spoke to defendant Regenstein, his cousin, about inventions he had made in the petroleum field. He wanted capital for exploitation of the inventions. At the time Regenstein was owner of two-thirds of the stock of defendants, Arvey and Transo Corporations, referred to hereinafter as Arvey and Transo. It was decided that the two corporations would provide the capital necessary for plaintiff's purposes.
In 1931 the Velsicol Corporation was organized. Its authorized capital was $20,000 and its authorized stock 200 shares. Arvey and Transo each paid in $8,000 in cash for 80 shares of the stock. Plaintiff assigned two applications for patents to Velsicol in consideration of the issuance to him of the remaining 40 shares. The original Velsicol officers were defendant Regenstein, president, plaintiff Hyman, vice president and F.P. Schneider, secretary-treasurer. The original directors were plaintiff, Regenstein, Schneider, Sidney Blum and Henry Degginger. Schneider was a stockholder in Transo and Blum and Degginger were shareholders in Arvey. In 1940 Degginger was succeeded on the board of directors by defendant A.R. Jameson.
Velsicol's sales increased from $1,021 in 1932 to $4,096,356 in 1945. Except for 1935 ($2,114) it had no net profit until 1940. Beginning in 1940 its net profit before federal taxes ranged from $44,002 to $353,347. Prior to 1939 Transo and Arvey each advanced to Velsicol, for building and operating purposes, $264,000. Non-interest bearing notes covered the advances until January 1, 1944 when two 4% per annum demand notes for $264,000 each were given.
Plaintiff was the managing vice president of the business from its inception. His salary ranged from $40.00 per week in 1931 to $600.00 per week in 1945 and 1946. From 1943 to 1946 he drew expenses of over $8,000.00 per year. In 1943 he sought a greater proportion of stock interest. In 1946 he refused to assign certain applications for patents covering insecticides, referred to as "1068," to Velsicol until his interest was increased. The dispute over this event resulted in plaintiff's resignation from Velsicol September 13, 1946. Schneider succeeded him in office. On October 15th Velsicol sued plaintiff to compel assignment of the "1068" patent applications. The following day plaintiff resigned as director of Velsicol. In November he brought about the organization of a Delaware corporation to do business in Denver, Colorado, for the manufacture and sale of insecticide "1068". Velsicol's suit to compel assignment of the patent applications covering "1068" was successful 405 Ill. 352).
Early in December the directors of Velsicol decided on a plan of recapitalization for the company. Due notice of a special meeting of the stockholders, to be held December 16, 1946, was given to plaintiff. At the meeting resolutions for the recapitalization program, passed by the directors, were submitted to the stockholders for approval. These decreased the par value of Velsicol stock from $100 to $10 per share and increased the number of shares from 200 to 2000; amended the charter to authorize 100,000 shares of common stock, $10 par value; authorized issuance of 68,000 additional shares to the stockholders so that 70,000 shares would be outstanding, representing $700,000 capital; provided for purchase of these additional shares by cash or "by credit against sums owing by this corporation on outstanding notes"; and that the subscriptions should be paid for in full before 5:00 P.M. on December 27, 1946. The resolutions were approved by the stockholders. Plaintiff did not attend the meeting. His proxy voted against the resolution.
In due course subscription warrants for the pre-emptive rights were issued. Transo and Arvey each surrendered their demand notes and each paid $8,000 in cash to exercise in full their rights for 27,200 shares each of the additional stock. Plaintiff had the right to subscribe for 340 shares of the $10 par value stock for each share of the $100 par value stock held by him. He did not exercise his rights to purchase the 13,600 shares at $10 per share. He filed this suit on the day fixed by resolution for expiration of the time within which rights had to be exercised.
Plaintiff's suit charged, among other things, that the plan of reorganization was the design of an oppressive majority of stockholders and directors to decrease his interest in Velsicol, was not adopted in the interest of Velsicol but in defendants' interests and was fraudulent and a violation of the fiduciary obligation of the majority. The chancellor confirmed the master's report in most respects. Contrary to the master, however, the chancellor found the plan of recapitalization inequitable and motivated by the desire only to oppress and defraud plaintiff; that the burden of proving the transaction was in good faith and fair rested on defendants; and that they had failed to make that proof. This contrariety is the crux of the case.
It is not disputed that the majority stockholders were entitled to control the policy of the corporation, that when plaintiff became a stockholder he agreed to the majority's ruling, that he had notice of the stockholders' meeting and that the resolutions received the requisite vote at the meeting. We think that, if the circumstances justified the recapitalization and if the plan was legal and fair, the questions of defendants' state of mind with respect to plaintiff and as to the effect of the plan on his interests are immaterial.
We consider it unnecessary to decide whether the majority was the fiduciary of the plaintiff in the transactions or whether plaintiff or defendant had the burden of proving good faith and fairness. We think that the plaintiff's testimony shows clearly that the plan was legal and not unfair and, for the reasons given hereinafter, that the plaintiff is not entitled to the relief sought.
In 1931 plaintiff had the inventions and Regenstein, through Arvey and Transo, had the money. Between 1935 and 1938 a plant was built in Marshall, Illinois and put into operation with more than $500,000 of Arvey's and Transo's money. In 1941 and 1942 plaintiff discussed with Regenstein the capitalization of these loans. After notes were given, covering the loans, plaintiff suggested their capitalization through the issuance of preferred stock. He thought this was a wise tax move. He brought up the subject of capitalization again in 1945 and in 1946. At no time did he have a "concrete plan". In early 1946, when Velsicol borrowed money, the First National Bank suggested that the notes be subordinated or capitalized. It is apparent that the idea of recapitalization was common to all concerned.
There was no question about the validity of the notes held by Arvey and Transo. Under their terms the holders could demand payment whenever they decided to do so. We cannot see that the position of the note owners was like that of the Federal Reserve Bank in American Bank and Trust Co. v. Federal Reserve Bank, 256 U.S. 350. Arvey and Transo had, in 1946, subordinated payment of their notes to facilitate Velsicol's borrowing an additional $675,000. The method of capitalizing the notes was the prerogative of the majority of the directors and stockholders, who in this case were substantially the same because of Regenstein's majority interest in Transo and Arvey corporations. At the stockholders' meeting there was no discussion of the resolutions, yet plaintiff was represented by attorney as proxy. There was no recommendation of a substitute plan of recapitalization, though plaintiff had discussed such a plan with his attorney. Plaintiff's preferred stock idea was not proposed. Assuming the recapitalization was prudent business, we see no reason for concluding that the method was not ...