A. P. Smith Manufacturing Co. v. Barlow
13 N.J. 145, 39 A.L.R. 2d 1179, 98 A.2d 581 (1953)
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Rule of Law:
A corporation may make reasonable charitable contributions if the donation is voluntarily made in the reasonable belief that it will aid the public welfare and advance the interests of the corporation as a private entity and as part of the community in which it operates.
Facts:
- The A. P. Smith Manufacturing Company was incorporated in 1896 and is engaged in the manufacture of valves and fire hydrants.
- The company had a history of making charitable contributions to the local community chest and nearby universities.
- On July 24, 1951, the company's board of directors adopted a resolution appropriating $1,500 for a donation to Princeton University.
- The company's president considered the contribution a 'sound investment' that creates goodwill, a favorable business environment, and helps ensure a flow of trained personnel.
- Several prominent business leaders testified that corporate support for private universities is essential for the preservation of the free enterprise system.
- Objecting stockholders challenged the donation, arguing that the company's certificate of incorporation did not expressly authorize it and that later-enacted statutes permitting such donations could not constitutionally apply to the company.
Procedural Posture:
- After stockholders questioned a board-approved donation, The A. P. Smith Manufacturing Company filed a declaratory judgment action in the New Jersey Chancery Division (a trial court) to determine the donation's validity.
- The Chancery Division ruled that the donation was intra vires (within the corporation's legal powers).
- The objecting stockholders, as defendants, appealed the trial court's decision to the Appellate Division (an intermediate appellate court).
- Due to the public importance of the case, the Supreme Court of New Jersey (the state's highest court) certified the appeal directly to itself before the Appellate Division could hear it.
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Issue:
Does a corporation, created before the enactment of authorizing statutes, have the implied power under common law and express power under the statutes to make a charitable donation to a private university over the objection of its stockholders?
Opinions:
Majority - Jacobs, J.
Yes. A corporation has the implied power under evolving common law principles to make reasonable charitable donations, and state statutes expressly authorizing such contributions may be constitutionally applied to pre-existing corporations under the state's reserved power. The court reasoned that the common law must adapt to modern conditions, where corporations control a majority of economic wealth and are expected to assume social responsibilities. Donations that benefit the public welfare, such as supporting higher education, are viewed as advancing the corporation's long-term self-interest by fostering a stable social and economic environment, ensuring a supply of educated personnel, and preserving the free enterprise system. Furthermore, New Jersey's statutes authorizing such contributions are a valid exercise of the state's reserved power to alter corporate charters in the public interest, and this public interest outweighs any incidental impact on the contractual rights between the corporation and its stockholders.
Analysis:
This case marks a pivotal shift in corporate law, moving away from the strict shareholder primacy doctrine articulated in cases like Dodge v. Ford Motor Co., which held that corporate expenditures must directly benefit shareholders. The court embraced a broader view of corporate purpose, endorsing the concept of corporate social responsibility and validating expenditures that serve the public good with only an indirect or long-term benefit to the corporation. This decision provides corporate directors with significant discretion to engage in philanthropy, insulating such 'business judgments' from shareholder challenges. It effectively legitimized the modern practice of corporate giving and laid the groundwork for the stakeholder theory of corporate governance, which considers the interests of the community, employees, and customers in addition to shareholders.
