
    Knickerbocker Investment Company, Respondent, v. Foster M. Voorhees and Others, Individually and as Voting Trustees of the Stock in the Bankers’ Life Insurance Company and the Bankers’ Life Insurance Company, Appellants.
    
      ■A Nevf Jersey corporation organized to acquire the stock and management of a New York insurance company—certain individuals, exercising a voting trust over stock held by it, enjoined from voting upon it — the power of tlte New Jersey corporation and the question of public policy not determined in the courts of New York — voting trust agreements under section 20 of the General Corporation Law — what injunction does not violate section 56 of the Insurance Law.
    
    The Knickerbocker Investment Company was organized under'the laws of New Jersey for the purpose of controlling, managing and 'operating the Bankers’’ Life Insurance Company, a New York corporation, through the ownership of a majority of the capital stock of the latter company. After the investment, company had obtained a valid option for the purchase of a majority of the dapital stock of the insurance company, but before the stock had been actually delivered, the board of directors of the insurance company passed a resolution declaring their opposition to the transfer of the control of the capital stock to. any person of whom they had no. previous knowledge. The parties then entered into negotiations, as a result of which the investment company entered into an agreement constituting thrée persons voting trustees of the stock of the insurance company held by it for a period of five years. The voting trustees covenanted in the agreement to “ exercise their best judgment from time to time to select suitable directors, to the end that the affairs of the company shall be .properly managed.”
    After the execution of the voting trust agreement, and .before the expiration of the stipulated five years, the investment company brought an action against the voting trustees and the insurance company to annul the voting trust on three grounds: First, that it was void upon its face; second, that it was void for fraud in that its execution was obtained through false and fraudulent material misrepresentations of two of the individual defendants; and, third, that the voting trustees have been guilty of bad faith and mismanagement justifying-its rescission.
    The investment company obtained in such action a temporary injunction enjoining the voting trustees from voting on the stock at any meeting of the stockholders of the insurance company and from in any manner interfering therewith pending the action except to properly indorse and return the same to the-plaintiff, and “from in any manner dealing with the assets,or property of the Bankers’ Life Insurance Company by virtue of their holding such certificate of stock.”
    Upon an appeal from the order granting the temporary injunction it was
    
      Held,, that as the investment company was concededly the owner of the stock; and had made out a prima facie case showing that the individual defendants: had no right to represent it further in voting on the stock, the order should be affirmed;
    That this court would not determine whether the formation of a Hew Jersey corporation to control, manage and operate a New York corporation, through the ownership of a majority of the stock of the latter corporation, was valid under the laws of the State of New Jersey or was opposed to the public policy of the State of New York;
    That, even if this were valid and not opposed to the public policy of the, State of New York, it did not follow that the New Jersey corporation thus organized might delegate to individuals, not its directors or officers, exclusive power to-manage and control the o,ther corporation for a period of five years, leaving its-directors, through whom the law contemplates that the corporation shall exercise its powers, virtually without any function to perform;
    That the court would not determine whether the voting trust agreement was made pursuant to the provisions of section SO of the General Corporation Law, and was, therefore, valid and irrevocable;
    That the injunction order did not violate the provisions of section 56 of the Insurance Law (Laws of 1892, chap. 690), which provides that “no order, judgment or decree providing for an accounting or enjoining, restraining or interfering with the prosecution of the business of any domestic insurance corporation or appointing a temporary or permanent receiver thereof shall be made or granted otherwise than upon the application of the Attorney-General, on his own motion or after his approval of a request in writing therefor of the Superintendent of Insurance, except in an action by a judgment-creditor or in proceedings supplementary to execution.”
    Van Brunt, P. J., and Ingraham, J., dissented.
    Appeal by the defendants, Foster M. "Voorhees and others, individually and as voting trustees of' the stock in the Bankers’ Life Insurance Company, and another, from an order of the Supreme Court, made at the New York Special Term and entered in. the office of the clerk of the county of New York on the 28th day of June, 1904, continuingpendente lite an injunction-theretofóre granted in the action. '
    
      Herbert Barry, for the appellants.
    
      Eugene Van Schaick, for the respondent.
   Laughlin, J.:

The plaintiff is a corporation organized under the laws of New Jersey for the purpose, as shown by the admissions in the answers and the affidavit of its president presented by the defendants in opposition to the motion, of controlling or managing and operating a new life insurance company, through ownership of the majority of the shares of the capital stock. The incorporators of the plaintiff originally contemplated organizing, owning and operating the Lincoln National Life Insurance Company, but they abandoned that project and decided to obtain control of the Bankers’ Life Insurance Company, which was an existing, successful insurance corporation organized under the laws of New York, having 1,000 shares of capital stock of the par value of §100 each'. The plaintiff corporation purchased 626 of these shares of stock, and, by resolution of its board of directors, constituted the individual defendants voting trustees thereof for the period of five years. The plaintiff now desires fo terminate this voting trust and to manage its stock in the insurance company as its duly elected directors may deem best for its interests, and it brings this action to annul the so-called voting trust on three grounds: First, that it was void upon its face; second, that it was void for fraud in that its execution was obtained through false and fraudulent material misrepresentations of two of the individual defendants, and, thvrd, that the voting trustees have been guilty of bad faith and mismanagement justifying its rescission. The temporary injunction order from which the appeal is taken enjoins the individual defendants frpm voting on the stock at any meeting of the stockholders of the insurancé company and from in any manner interfering therewith pending the action except to properly indorse and return the same to the plaintiff, and “ from in a'ny manner dealing with the assets or property of the Bankers’ Life Insurance Company by virtue of their holding such certificate of stock.”

Whether tire formation of a corporation for the purpose of controlling or managing and operating another corporation through the ownership of a majority of its stock, as distinguished from leasing or purchasing its property and franchises, is valid under the laws of New Jersey is a question not presented for decision on this appeal, but we cannot refrain from observing that the propriety or necessity therefor is not apparent. If, however, that be lawful under the statutes of New Jersey and not opposed to our public policy, which it is unnecessary at this time to decide, it does not follow, as contended by the learned counsel for the appellants, that the corporation thus organized to control and manage another may delegate to individuals, not its directors or officers, exclusive power to manage and control the other corporation for a period of five years, leaving its directors, through whom the law contemplates that .the corporation shall exercise its powers, virtually without any function to perform after thus delegating to others all of their powers and duties. The purchase by the plaintiff of the insurance company’s stock was made in December, 1902, from two individuals, one of whom held 501 shares and the other 125. The holder of the 125 shares had paid par therefor on the incorporation of the company in 1899, and the holder of the 501 shares had paid $120 per share therefor in September, 1902. The company had accumulated a large surplus. Its business "was .increasing and it was paying dividends of six per cent. The stock was all purchased by the plaintiff at $300 per share. The moving papers tend to show that this was more than its value, and that the purchase was induced by false and fraudulent representations of the individual defendants Voorhees and Stokes concerning its value and in furtherance of a scheme formed by them with the defendant Sherer and the individuals from whom the stock wás purchased to control the management of the insurance company for the benefit of the individual defendants, their relatives and friends. It does not appear but that the vendors of this stock had the absolute right to sell it unconditionally or that in giving the option thereon, pursuant to "which the transfer was subsequently made, they imposed any condition’s ; but after the' execution of a valid option -for the sale of the stock and the payment of $30,000 .thereon, but before the actual delivery of the stock,, the board of directors of the insurance company passed- a resolution declaring their unalterable opposition to the transfer of -the control of the capital stock to the defendant Voorhees, or anybody else of whom they had no previous knowledge and directing that the resolution be communicated to the parties interested; that the attorney for the company take such steps as ■might be-necessary to protect its interests. in the premises, and that the chairman explain to the parties interested that the board was opposed to the transfer of the stock ■ previous to the submission to it of the names of the purchasers in order to enable it to decide whether the transfer was for the interests of the company. Upon the presentation of this resolution to Voorhees and the investment Company, negotiations were opened between the parties, apparently with a view to averting friction and not in recognition of the right of the board of directors of the insurance company to interfere with a sale of the stock. As a result of these negotiations a voting trust agreement was signed by the plaintiff and the individual defendants as voting trustees. It purports to be. an. agreement between the stockholders of the insurance company who •should become parties thereto and the three trustees, concerning whom it is recited that óné had been chosen to represent the majority and one the minority of the stockholders of the insurance company, and-that the other" was selected by these two. It contains no reference to the investment company or recital that it had become a stockholder, or any condition or understanding that such agreement should be executed. It purports to give to these trustees exclusively the voting power, on the stock of such stockholders as should subscribe thereto, for the period of five years; and provides that the stock shall be transferred upon the books of the company to the names of the- trustees who were to give the stockholders certificates showing that at the expiration of the five years they would be entitled to have issued to them the same number of shares and to any dividends declared in the meantime. The trustees covenanted to “exercise their best judgment from time' to time to select suitable directors, to the end that the affairs of 'the company shall be properly managed.”

There must be a trial ¿f the issues, and, therefore, we should, in reviewing the propriety of issuing the temporary injunction^ refrain as far as possible from expressing views that may be regarded as controlling on the final disposition of the case, and yet, in view of the many contentions of the appellants strenuously urged both upon the argument and in the points, we cannot refrain from making some observations that may have a bearing on the merits.

The defendants contend that the voting trust agreement was made pursuant to the provisions of section 20 of the General Corporation Law (Laws of 1892, chap. 687, as amd. by Laws of 1901, chap. 355) and that it is, therefore, valid and irrevocable. Doubtless a voting trust agreement 'made pursuant to that statute would ordinarily be valid, but on the question of whether it might not be revocable, in many instances depending on the facts, we refrain from' expressing an opinion at this time. The circumstances here presented, however, appear to us to be extraordinary. If it should become necessary the statute may be declared inapplicable to a corporation organized, as the plaintiff was, to control the operations of another through ownership of the majority of the stock; for otherwise the directors would be divest,ed of any voice in the affairs of the corporation which they were elected to manage. ,■

The appellants also contend that they have fully rebutted all charges of fraud and bad faith. The defendant Sherer at the time of the purchase of the stock by the plaintiff owned a single share of stock in the insurance company and was director thereof, but so far as appears he had no interest in the investment company. The defendant Voorhees held 5 of the total issue of 2,400 shares of the capital stock of the investment company for which the plaintiff claims he never paid. The- defendant Stokes was a director and held 100 shares of the investment company capital stock which it is claimed was given to him for .his good will and friendship owing to his influence politically, but this he denies and claims that full consideration was paid for the stock. After the making of the voting trust agreement Stokes and Voorhees each purchased one share of the capital stock of the insurance company to qualify' them as directors and they' were elected directors, and Voorhees, against' whose control in the management of the corporation the board-of -directors had recently protested, was elected president. The moving papers tend tó show that the other directors of the investment com-pony were political or personal friends of Voorhees or Stokes and that their action was dominated and controlled by them; that neither of them had had any experience or possessed any special qualification for conducting an insurance business ; that during the succeeding year the volume of the business of the insurance company materially fell off, its surplus largely decreased and its expenses largely increased and it ceased to pay dividends ; that an attempt was made to have the stockholders ratify the action of the board of directors in creating the voting trust agreement, by having the stockholders convened on call of the chair after an adjournment of the annual meeting, subject to the call of the chair, without any special notice that this question was to "be considered, and that, although the minutes show the adoption of a resolution of ratification, it was not in fact adopted and the action was not in fact taken by the requisite stock vote, which, however, is denied by the oppose '. ing affidavits. It thus appears without controversy- .that by" the voting trust agreement the management of the affairs of the .in vestment company has been virtually turned over to the voting trustees who have but little personal interest therein or in the success of (the insurance company, which they are thereby also enabled to I control.. Even the uncontroverted facts disclose an extraordinary state of circumstances and slight evidence of bad faith may be sufficient to justify a finding that the. execution of the voting trust agreement was procured by fraud.

It is claimed that the injunction order violates the provisions of section 56 of the Insurance Law (Laws of 1892, chap. 690), which provides that- “no order, judgment or decree providing for an' accounting or enjoining, restraining or interfering with the prosecution of the- business of any domestic insurance corporation or appointing a temporary or permanent receiver thereof shall be made or granted otherwise than upon the application of the Attorney-General, on his own motion or after his approval of a request in writing therefor of the Superintendent of Insurance, e'xcept in an action by a judgment-creditor or in proceedings supplementary to execution.” So far as the voting trustees are individual stockholders of the insurance company, they are not enjoined from voting, nor are they enjoined from acting as officers of the insurance company. They are merely enjoined from taking any further-action with reference to voting upon the stock of the plaintiff, or attempting further to control or influence the action of the insurance company by virtue of the trust agreement.'* The plaintiff is concededly the owner of this stock. It makes out a prima faoie case showing that these individual defendants have no right to represent it further in voting on the,stock. If the plaintiff prefers that its stock should not be voted upon at all rather than that these individual defendants should vote it, that would seem to be its privilege as the owner; and if the individual defendants, moved by a commendable desire to protect the plaintiff, are solicitous lest the minority take advantage of the situation and control the next election, they are at liberty under the order of the court to return the stock to the plaintiff, its rightful owner, who may, in that event, take part in the election of officers.

It follows that the order should be affirmed, with ten dollars costs and disbursements.

Patterson and Hatch, JJ., concurred; Van Brunt, P. J., and Ingraham, J., dissented.

Order affirmed, with ten dollars costs and disbursements.  