A. P. Smith Manufacturing Co. v. Barlow

Supreme Court of New Jersey
98 A.2d 581, 13 N.J. 145 (1953)

ELI5:

Rule of Law:

A corporation has the implied power under common law to make reasonable charitable contributions, even without express authority in its charter, because such actions benefit the corporation by promoting a favorable social and economic environment. State statutes authorizing such contributions may be constitutionally applied to pre-existing corporations through the state's reserved power to alter corporate charters in the public interest.

Facts:

The A. P. Smith Manufacturing Company was incorporated in New Jersey in 1896 for the purpose of manufacturing and selling valves, fire hydrants, and other equipment.
Over the years, the company made occasional contributions to local charitable and educational institutions.
On July 24, 1951, the company's board of directors adopted a resolution authorizing a $1,500 donation to Princeton University.
The company's president considered the contribution a sound investment that would create goodwill, foster a favorable business environment, and ensure a supply of trained personnel for corporate employment.
A group of stockholders objected to the donation, contending it was not authorized by the company's 1896 charter and was beyond the corporation's powers.

Procedural Posture:

The A. P. Smith Manufacturing Company filed a declaratory judgment action in the New Jersey Chancery Division to affirm the legality of its donation.
The Chancery Division (the trial court) ruled in favor of the company, finding the donation to be intra vires (within its powers).
The objecting stockholders, as defendants, appealed the trial court's decision to the Appellate Division.
Before the appeal was heard by the intermediate appellate court, the New Jersey Supreme Court certified the case for direct review.

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Issue:

Does a corporation, created prior to the enactment of statutes permitting corporate charitable donations, have the power to make a donation to a university over stockholder objections, and can such statutes constitutionally grant this authority?

Opinions:

Majority - Jacobs, J.

Yes, a corporation has the power to make such a donation. The court holds that reasonable charitable contributions are a legitimate exercise of a corporation's implied powers under modern common law and are expressly authorized by state statutes. The court reasoned that the traditional common law rule requiring a direct, tangible benefit to the corporation is outdated. In the modern era, corporations have a social responsibility, and their survival depends on a healthy social and economic environment, which is nurtured by institutions like private universities. Supporting such institutions is a long-range investment in the free-enterprise system, which ultimately benefits the corporation. Furthermore, the New Jersey statutes authorizing corporate philanthropy were a valid exercise of the state's reserved power to amend corporate charters in the public interest, and their application to a pre-existing corporation does not unconstitutionally impair the stockholders' contractual rights.

Analysis:

This decision marks a pivotal shift in corporate law, moving away from the strict shareholder primacy doctrine of Dodge v. Ford toward a broader stakeholder-oriented view of corporate purpose. It legally validates the concept of corporate social responsibility by expanding the definition of 'corporate benefit' to include indirect and long-term societal advantages. The ruling empowers corporate boards to make reasonable charitable donations without needing to prove a direct, short-term profit motive. By upholding the state's reserved power to statutorily authorize such giving for pre-existing corporations, the court solidified the legal foundation for modern corporate philanthropy across the United States.

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