WOODBURY, Circuit Judge.
This is an appeal from a judgment entered for the defendant in a suit brought by a minority stockholder to enjoin his corporation from putting an employees' stock option plan into operation. The plaintiff is a citizen of Florida, the defendant is a Massachusetts corporation, and there can be no doubt whatever that the matter in controversy between them exceeds the sum or value of $3,000 exclusive of interest and costs. Thus federal jurisdiction under Title 28 U.S.C. § 1332 (a) (1) is clearly established.
The L. S. Starrett Company, the defendant-appellee herein, is an old, well-established corporation which employs some 1400 persons in Athol, Massachusetts, in the business of manufacturing band saws, hack saws and precision machinists' tools. At all times material hereto it had only one class of stock, common without par value. Two hundred thousand shares of this stock were authorized of which 150,000 shares were issued and outstanding.
On September 17, 1952, the directors of The L. S. Starrett Company (for simplicity the Company hereinafter), ostensibly to increase employee incentive, voted to authorize the officers of the Company "to develop and install an Employee Stock Purchase Plan" available to all employees who wished to participate "under which payroll deductions may be made for employees authorizing the same, and the amounts deducted used for outright purchases of shares of stock of the Company." Pursuant to this vote the officers of the Company submitted to the Directors, and the Directors approved, a plan with which we are not here concerned under which employees acquired nearly 5,000 shares of the Company stock. Subsequently the corporate officers after further study and consultation with Company counsel submitted another plan, which is the one under consideration herein, designed to supplement if not to supersede the earlier one, and the Directors approved this second plan on November 30, 1955, subject to the approval of the stockholders.
Under this latter plan not more than 20,000 of the authorized but unissued shares of the Company stock were to be allocated for purchase by employees on the installment plan. All employees with six months service or more with the Company were eligible to participate, but the maximum number of shares which any employee might purchase could not exceed in market value at the time of granting the option the amount of the employee's base annual compensation, or 500 shares, whichever should be less.
Eligible employees selected by the Committee for participation in the plan were to be granted options to purchase the shares allocated to them. These options were nontransferable and could be exercised only by the optionee and then not later than thirty days after granting and only if he were still employed by the Company.
An eligible employee who elected to participate in the plan was required to sign a Purchase Agreement, so-called, within the thirty-day period allowed for acceptance of the option, wherein he agreed to purchase all or any part of the stock allotted to him at its "fair market value * * * at the time of the grant of the option as found by the Committee." Upon receipt of an executed Purchase Agreement and payment of the first installment due thereunder, the Company undertook to issue the appropriate number of shares in the name of the employee, but simultaneously with the issuance of the shares the employee agreed to pledge them with the Company as security for the purchase price.
On January 6, 1956, the clerk of the Company by order of the Board of Directors sent out notices to all stockholders of a special meeting to be held at the office of the Company in Athol on January 25, 1956, to vote on the plan. Included with the notice of meeting was a general statement describing the plan,
On January 13, 1956, before the date set for the meeting, the plaintiff McPhail, who had begun to acquire stock in the Company in 1950, and who had made himself known to the Company officers as a holder of 10% or more of the Company stock in August, 1953, when he unsuccessfully sought election to the Board of Directors, visited the Company's office in Athol and expressed to the Company's management his strong opposition to the plan. The stockholders' meeting was postponed at McPhail's request to give him time to mail material in opposition to the plan to the stockholders, which he did on February 24, and on March 8 the stockholders met and voted to approve the plan. At the meeting 142,738 shares were outstanding and entitled to vote, 128,055 shares were represented in person or by proxy and of these 87,297 shares were voted for the plan; 38,758 shares were voted against it.
The prospectus with regard to the plan became effective by order of the S.E.C. on April 2, 1956, and the plan was approved by the Massachusetts Department of Public Utilities on May 25, 1956. On March 6, 1957, the Directors limited the number of shares to be issued under the plan during that year to 11,500, and we understand that the plan to that extent at least has already gone into effect.
The plaintiff-appellant makes a two-pronged attack upon the plan. One prong consists of the contention that the plan is illegal in two respects; the other consists of the contention that the plan was adopted for an illegal purpose.
The plan is said to be illegal in that it contemplates issuing stock to some employees without any down payment, or a very small one, and thereafter permitting a substantial part of the purchase price to be paid by the crediting of dividends declared on the stock not paid for, and in that it contemplates the granting, without consideration, of valuable options to buy stock on more favorable terms than could be obtained by the plaintiff, who is not an employee of the Company. We find no merit in either contention.
The appellant concedes in his brief that he is not aware of any decisions of
But the appellant contends that the statutory provisions ought not always to be read literally, and that so far as this particular case is concerned, "the law should be that, unless all stockholders agree, dividends should be paid only on stock for which the stipulated payment has been received by the corporation." In short, he is asking us by judicial decision to engraft on the Massachusetts statutes an even more restrictive provision than that in force in the states referred to in footnote 5 above, for he is asking us to rule, at least for the purposes of this case, that dividends not only may, but must, be paid only in proportion to the amount of the consideration actually paid in for stock bought on the installment plan. We think that this would be asking a good deal of the Supreme Judicial Court of the Commonwealth of Massachusetts. Certainly it is asking far more of us who are charged under Erie Railroad Co. v. Tompkins, 1938, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188, not with making the law of Massachusetts but with determining, following and applying it. We decline the invitation extended to us by the appellant to write a missing provision into the Massachusetts statutes.
This is not to suggest that there may not be cases of this general nature in which a court of equity would be justified in giving relief to minority stockholders in spite of literal compliance with the statutory provisions, as, for instance, cases in which only one or a very few corporate employees in the higher echelons of command who by large stock holdings have actual or practical control over their corporation are given an opportunity extending over a great many years to subscribe for stock at a very advantageous price. There will be time enough to consider such situations when they arise. It will suffice at this point to say only that the case at bar does not fall into this category.
We turn now to the appellant's contention that the plan is illegal because it contemplates the granting without consideration of valuable options to buy stock on more favorable terms than the
So limited, the appellant's contention is easily disposed of, for it is elementary law that an option is not always a contract but an offer to enter into a contract coupled with a promise to hold the offer open for a given period of time, which promise is or is not binding on the offeror depending on whether or not it is supported by consideration. 1 Williston on Contracts (Rev.Ed.1936) § 25. Lack of consideration for an option therefore does not destroy an option or render it illegal as an offer. The only effect on an option of lack of consideration is to make the promise to keep the offer open unenforceable against the optionor. Thus an option without consideration is only an offer which like any other offer may be revoked by the offeror at will at any time before the offer is accepted, i. e. the option taken up, and the offer ripened by acceptance into a contract. Boston & Maine R. v. Bartlett, 1849, 3 Cush. 224, 57 Mass. 224. Therefore, even if the instant options were determined to be unsupported by legal consideration, they would nevertheless remain offers, which if the Company kept its word, as we may well suppose that it would in the interest of its relations with its employees, could be accepted by the execution of a Purchase Agreement by the optionee at any time within 30 days after the granting of the option and thereupon the options would be matured into contracts.
The thrust of the appellant's argument on this point, however, is somewhat deeper than the foregoing discussion indicates. He says that the options to buy stock given to the employees were things of cash value to the Company because of the advantageous terms under which the stock could be paid for, so that, to grant the options to employees without receiving any consideration in return therefor, amounted to a gift of corporate assets to the employees in violation of the rule in Rogers v. Hill, 1933, 289 U.S. 582, 591, 592, 53 S.Ct. 731, 735, 77 L.Ed. 1385, wherein, quoting with approval from Judge Swan's dissenting opinion in the court below, the Court said: "If a bonus payment has no relation to the value of services for which it is given, it is in reality a gift in part, and the majority stockholders have no power to give away corporate property against the protest of the minority."
We do not, of course, question the soundness of the above rule. Nor do we feel it necessary to comment on the apparent applications of that rule in the Delaware cases cited in the margin on which the appellant relies.
Assuming that the provisions of the plan omitting interest charges on installments not yet due and giving ten years to pay for the stock made the options things of value to the Company in the sense that they might be sold by the Company for a price, although the appellant concedes that the value of the options would be difficult if not impossible to determine, the fact remains that the Company could reasonably expect to receive as consideration for the options not only the increased loyalty and effort of its employees but also that its employees who were given options would stay on in their employment to take advantage of the privilege of paying for their stock in installments without interest. Whether this is adequate consideration is a matter of business judgment which has been decided not only by the Company's Board of Directors but also by a substantial majority of its stockholders. Only in a far clearer and stronger case than this would any court be justified in substituting its business judgment for that of those charged with the responsibility of corporate management.
There remains for consideration the appellant's contention that the plan is illegal because it would constitute an unlawful manipulation of voting power for the benefit of management and the majority stockholders and to the detriment of McPhail as the largest minority stockholder.
The basic applicable rule which the appellant seeks to invoke in this phase of his appeal is set forth in Andersen v. Albert & J. M. Anderson Mfg. Co., 1950, 325 Mass. 343, 346-347, 90 N.E.2d 541, 544, to be:
Strictly speaking, this rule has no application here for the Directors did not adopt the plan; that was done by a majority vote of the stockholders, who apparently were disinterested and who had been fully and honestly informed by the Company's management as to the nature of the plan and knew in detail of McPhail's objections to it. But even if we assume that the Directors of the Company had an improper purpose in mind when they promulgated the plan and that their improper purpose would vitiate the approval of a majority of the stockholders upon challenge by a minority stockholder, the appellant's contention still founders on the finding of the court below, which is amply supported by the evidence, that [157 F.Supp. 563]:
Naturally any increase in the outstanding stock of the Company would dilute McPhail's voting power. But the risk of
Perhaps no more needs to be said on this point. But if the motive of the Directors in choosing 20,000 shares for sale under the plan was indeed to neutralize McPhail's holding of 20,400 shares, and their motive is of any importance, the evidence shows a reason for their action other than petty personal dislike of McPhail or a selfish desire to entrench themselves in their managerial positions beyond reach of McPhail. This evidence consists of the findings of a special master appointed by the Superior Court of the Commonwealth of Massachusetts in an unsuccessful suit brought by McPhail in 1953 to obtain access to the Company's list of stockholders. In denying McPhail the relief he requested on the ground that McPhail sought access to the stock and transfer books of the Company for reasons other than his interest as a stockholder, the master found, and his findings were affirmed, that McPhail's purpose was to insinuate himself into the Company's management so that he could manipulate its affairs to his personal profit. The master found that McPhail wished to be elected a director in order to be in a position to reduce the Company's dividend rate, not because of insufficient earnings, but to cause dissatisfied stockholders to sell their stock and so to depress its market value so he could buy it up more cheaply, but that he ran into opposition from the Company's management for the reason that "Starrett believed in production of tools, not in market manipulations." In addition the master found:
We feel that it would be to "strain at a gnat, and swallow a camel," 23 Matt. 24, for us to infer some improper, ulterior or selfish purpose on the part of the directors in choosing a figure to neutralize
Judgment will be entered affirming the judgment of the District Court.
"That the board of directors of this corporation be and it hereby is authorized, without offering the same, or any part thereof to the stockholders for subscription, to issue the whole or any part of the authorized capital stock of this corporation at such time or times, to such person or persons, whether or not stockholders of this corporation, and for such consideration, or as stock dividends, as shall be determined from time to time by the board of directors."
This vote has not since been altered, amended, or rescinded.