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A.P. Smith Mfg. Co. v. Barlow | 98 A.2d 581 (1953)
It’s been said that a good corporate citizen not only maximizes wealth for its stockholders but also is philanthropic. But what if stockholders object to the company’s donation of some of its profits to charity? The New Jersey Supreme Court addressed this issue in A.P. Smith Manufacturing Company versus Barlow.
A.P. Smith Manufacturing Company, incorporated in New Jersey in 1896, produced valves and fire hydrants. In its first few decades of existence, it contributed to local charities and public educational institutions. In 1951, its board of directors decided to donate $1,500 to Princeton University, an elite private university. The amount of the donation was well within the limits provided by a 1930 New Jersey statute permitting corporate boards to make donations of up to one percent of a company’s capital stock and surplus without notice to or permission from the stockholders.
After some of the company’s stockholders objected to the proposed donation to Princeton, the company filed suit in state trial court, asking for a declaratory judgment that the donation was legally permissible. At an evidentiary hearing, the company’s president testified that he considered the donation to be a sound investment because it would generate good will in the community and create a favorable business environment for the company. He also opined that advancing higher education would create a better-trained pool of future employees. Other witnesses, including current and former chairpersons of major corporations, testified that, in America’s free-enterprise system, good corporate citizenship requires businesses to promote public welfare through philanthropy. The president of Princeton testified that private universities play an important role in America’s capitalist and democratic systems and that corporate donations advance that role.
The objecting stockholders didn’t dispute the company’s witnesses, but instead contended that the company’s corporate charter didn’t expressly authorize the contribution. The stockholders alternatively contended that the state’s corporation statute, which authorized such corporate donations, would be unconstitutional if applied to A.P. Smith Manufacturing Company, whose charter was filed, and whose corporate certificate was issued, before the statute was enacted. The trial court entered a declaratory judgment that the corporation was authorized to donate $1,500 to Princeton.
Barlow and the other objecting stockholders appealed to the New Jersey Supreme Court.
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