Katzowitz v. Sidler

Brief Fact Summary.

Isador Katzowitz, (Appellant), instituted a declaratory judgment action to establish his right to a proportional interest in the assets of Sulburn Holding Corp. Appellant appeals the Appellate Court decision affirming the District Court judgment in favor of Jacob Sidler and Max Lasker, (Appellees).

Synopsis of Rule of Law.

When the issuing price is shown to be markedly below book value in a close corporation and when the remaining shareholders-directors benefit from the issuance, a case for judicial relief has been established. In that instance the corporation’s directors must show that the issuing price falls within some range that can be justified on the basis of valid business reasons.

Facts.

Appellant is a director and stockholder with Appellees in Sulburn Holding Corp, (Sulburn), a closely held corporation. The parties had been engaged in several corporate ventures as equal partners receiving equal compensation from the corporations they controlled. Eventually Appellees joined forces to oust Appellant. The parties then entered into a stipulation whereby Appellant withdrew from active participation in the operations of the business but would receive equal compensation and other fringe benefits as that paid to Appellees.
In December of 1961, Sulburn was indebted to the parties in the amount of $2,500 each. Appellees wanted Sulburn to loan this money to another corporation instead of repaying the debt. Appellant refused to invest any additional funds in Sulburn. Appellees called a special meeting of the board excluding Appellant and approved the issuance of $75 shares of common stock at $100 per share. The amount to be raised was the exact amount owed by the corporation to its shareholders. The offering was at 1/18th the book value of the stock. Notice was mailed to each stockholder that they had the right to purchase 25 shares and failure to do so by a certain date would constitute a waiver. On August 31, 1962, the directors unanimously voted to dissolve the corporation. Upon dissolution, Appellees received 18,885.52 and Appellant received $3,147.59.

Issue.

Whether under all the circumstances, the additional offering of securities should be condemned.

Held.

Yes. The additional offering of securities should be condemned because the directors have not established a valid business reason for issuing at that price.

Discussion.

Here the difference in selling price and book value of the stock was calculated to force Appellant into investing additional sums. Appellees did not offer a valid business justification for the disparity in price and were the sole beneficiaries from it. The price was a tactic to make the failure to invest costly. Since the stipulation entitled Appellant to the same compensation as Appellees the disparity in equity interest caused by their purchase did not affect stockholder income form Sulburn and therefore Appellant may not have been aware of the effect of the stock issuance on his interest in the corporation until dissolution. By permitting Appellees to recover their additional investment before the remaining assets of Sulburn are distributed, all the stockholders will be treated equally. Therefore, Appellant should receive his share of the assets of Sulburn less the amount invested by Appellees for their purchase of stock.