March 11,
1940
Ponente: Stadtfeld, J.
FACTS:
There
are two issues in this case: (a) refusal to grant permission to inspect the
corporation's records; and (b) change in the corporation's by-laws without
proper notice.
REFUSAL TO HAVE RECORDS INSPECTED BY STOCKHOLDERS/SHAREHOLDERS
·
On June 2, 1937, Alfred M. Klein, being then a
stockholder of the Scranton Life Insurance Company, directed a request to the secretary
of the corporation, asking for an opportunity to examine the books and records
of the corporation.
·
The officers of the corporation disregarded
this request, and, subsequently, Klein again wrote to the company renewing his
request, which request was turned over to counsel for the corporation.
·
Klein stated in a letter dated August 3, 1937,
that he desired to ascertain the value of his shares and also to copy a list of
the shareholders in order that he might solicit proxies for voting at the annual
meeting of the corporation's shareholders.
·
Klein was thereafter joined by other
shareholders, but the officers of the company persisted in their refusal to
permit them to make extracts from the books.
·
Klein was finally allowed to inspect the
general ledger of the corporation and to inspect two of the corporation's eight
stock ledgers. But this inspection was confined to only one occasion, the
examination lasting for approximately two hours. He was not permitted to make
any notes of what he saw.
·
At the annual meeting of the shareholders of
the corporation held January 28, 1938, Klein, for himself and his
co-plaintiffs, renewed his request to be permitted to examine the books and
records of the company, which request was refused by the president, apparently
in pursuance of a resolution adopted by the board of directors of the
corporation that day. This request for examination of the books of the
corporation and permission to copy a list of the shareholders was renewed at
the annual meeting on January 27, 1939, and was again refused.
CHANGE IN THE BY-LAWS WITHOUT PROPER NOTICE
·
At the shareholders meeting on January 28,
1938, a resolution was offered under which the president was directed to refer
to counsel the drafting of a proposed amendment to the corporation's by-laws,
which would change the tenure of the directors, which amendment was to be
offered for adoption at the following annual meeting to be held January 27,
1939.
·
The proposed amendment provided that the
directors should be divided into four classes, two to be elected for four
years, two to be elected for three years, two for two years, and one or more
for one year.
·
No further or other notice of the proposed
amendment was given to the general body of stockholders. Nor was the form of
the proposed change submitted.
·
At the shareholder's meeting in 1939, the
amendment prepared pursuant to the resolution in question was offered. Klein
averred that he received no notice of that meeting and that the notice of the
meeting sent out by the secretary contained no information that a change in the
by-laws was to be proposed.
·
Despite Klein's protests, the subject
resolution was declared adopted. No stock vote was taken on the adoption of the
resolution, the president calling for a voice vote, and no ballots were cast
upon the adoption or rejection of the proposed amendment to the by-laws.
·
After the adoption of the resolution, seven
directors were nominated, their terms of office to correspond to the tenures
established by the purported amendment to the by-laws previously declared
adopted by the president. Klein, et al. objected to the legality of the
proceedings, but were overruled by the president, and the directors, having
been nominated, were declared elected by the president.
·
A complaint (bill in equity) was filed by
Klein, et al. to reiterate their right of inspection of the company's records
and to invalidate the change in the corporation's by-laws.
LOWER COURT: Request to inspect records denied because of
Klein's failure to impute any complaint or averment of mismanagement,
wrongdoing, unlawful activity or any violation of any law or sound principle of
management against the officers of the corporation. No ruling on the validity
of the change in the by-laws, though.
RULING:
Whether
Klein, as a stockholder, has the right to demand inspection of the company's
records. – YES.
·
Klein, et al., are entitled to an examination
of the books and stock-ledgers of the company, but that the same should be done
without undue interference with the operation of its business.
·
It is not necessary for a stockholder to aver
mismanagement or fraud to obtain his right to inspect corporate records. Where
a stockholder's object in requiring a list of his fellow-stockholders is to
enable him to communicate with them regarding the election of other officers
than those then serving, he need not aver mismanagement, or state why he
desires the change to be made. In fact, the right to inspect corporate records
may be validly exercised by a stockholder even though his only object is to
ascertain whether the business has been properly conducted.
·
In the instant case, there is no evidence to
sustain a finding that the examination of the books was sought for speculative
purposes, rather than for the reasons averred in Klein's complaint (i.e., to
determine value of his shares and solicit proxies).
·
The right of inspection is particularly
valuable if stockholders are dissatisfied with the general policy of the
company, in which case they have a perfect right to change it if they can by
securing the support of sufficient stockholders to elect another group of
directors or administrative officials. One of the means by which such change
can be effected is by having access to the corporation's records.
·
A stockholder has without question the right
to inspect the books of the company, at a proper time, and in a proper way,
even though his only object be to ascertain whether the business has been
properly conducted. Such a right is necessary for the protection of
stockholders. The books and papers of a corporation are the common property of
all the stockholders.
Whether
the change in the by-laws of the corporation effected without proper notice and
adopted without votation valid. – NO.
·
Under Article X, Section 1 of the
corporation's by-laws it is provided that the by-laws shall not be amended
except at a stockholders' meeting specially called for that purpose, or at a
regular meeting subsequent to the meeting at which notice shall be given of the
intention to make such alteration or amendment. Since the by-laws provide that
regular meetings shall be held only annually, it becomes obvious that the
provision here stipulates that notice of intention to amend can be given at one
annual meeting and the amendment can be presented a year later.
·
The first intimation that Article III, Section
1, of the by-laws was to be amended was given at a meeting of the stockholders
in 1938. But between that time until the stockholders' meeting in 1939, at which
the amendment was proposed for final enactment, no other notice was given to
the shareholders, except to the ten shareholders who were advised by the
president of the corporation when he solicited their proxies for the 1939
meeting.
·
The secretary of the corporation testified
that the call for the meeting contained no notice of the proposed amendment,
and granting that a total of 19,889 1/2 shares were represented either
personally or by proxy at the 1938 meeting, there still remained shareholders
holding 14,110 1/2 shares of the corporation's stock who had absolutely no
knowledge of the proposed change.
·
There is in the record, no evidence to show
that any of the other stockholders who were represented by proxy at the 1938 meeting,
other than the few named by the president, were advised of the impending
change.
·
The resolution adopted in 1939 undertook to
make a more radical change by dividing the directors to be elected into
classes. The effect of this was to place it in the power of a less number of
shares to choose every director and thus to reduce the representation of a
minority of the shares.
·
The notice given was not broad enough to
support such a change. It would be most inequitable to permit the officers of a
corporation to perpetuate themselves in office through an amendment of which
insufficient notice was given.
·
Given the radical change introduced in the
by-laws, such a change must have been made with the approval of a majority of
the stockholders upon notice to all. Such a change should not have been made
until all have had an opportunity to be heard by receiving notice of what
changes will be attempted.
Whether a
bill of equity is the proper remedy to compel the corporation to allow Klein,
et al. to inspect its records. – NO, PROPER REMEDY IS MANDAMUS.
·
The ordinary remedy with reference to
examination of the books would be by mandamus rather than by bill in equity.
·
However, in view of the relief sought to have
the amendment to the by-laws declared illegal and void, and there being no
substantial dispute as to the facts, equity jurisdiction attached to all the
matters embraced within the bill.