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Katzowitz v. Sidler - 24 N.Y.2d 512, 301 N.Y.S.2d 470, 249 N.E.2d 359 (1969)

Rule:

It is clear that directors of a corporation have no discretion in the choice of those to whom the earnings and assets of the corporation should be distributed. Directors, being fiduciaries of the corporation, must, in issuing new stock, treat existing shareholders fairly. The power to determine price much be exercised for the benefit of the corporation and in the interest of all the stockholders.

Facts:

Plaintiff Isador Katzowitz  Isador was a director and stockholder of a close corporation, Sulburn Holding Corporation. Two other persons, defendants Jacob Sidler and Max Lasker, owned the remaining securities and, with Katzowitz, comprise Sulburn's board of directors. A subsequent stock issuance was offered, but Katzowitz declined to purchase. Upon dissolution, plaintiff received $3,147.59 but the other two directors each received $18,885.52 .Katzowitz sought a declaratory judgment to establish his right to a proportional interest in assets of Sulburn. The trial court found Katzowitz’s protest untimely because of failure to exercise his pre-emptive right to purchase additional stock, the judgment of which the intermediate appellate court affirmed. Katzowitz sought further appellate review, arguing that Sidler and Lasker stood in a fiduciary relation to plaintiff and breached their duty when they issued stock at a grossly inadequate price.

Issue:

Were defendant directors, who authorized a subsequent stock offering for the lawful purpose of reducing the corporation's debt but for which plaintiff third director did not exercise his pre-emptive right to purchase, required to distribute the assets of the corporation proportionately with plaintiff third director?

Answer:

No

Conclusion:

The appellate court reversed, holding that the two remaining directors were entitled to recover their additional investment before distribution. Judicial review of a stockholder's right not to purchase was limited to whether the additional offering should be condemned because the sale price was not fixed with reference to financial considerations respecting the ready disposition of securities. Katzowitz’'s right not to purchase was seriously undermined if the stock offered was worth substantially more than the offering price, since any such purchase diluted his interest and impaired his original holding.

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