8 A.D. 160 | N.Y. App. Div. | 1896
Judgment affirmed, with costs, on opinion in the court below.
All concurred.
The following is the opinion of the court below :
The careful examination by the court of the very voluminous testimony in this case, required for the purpose of making its rulings on 400 propositions of fact and of law which have been submitted to it by counsel, has involved so large an expenditure of time that it must confine any further consideration of the questions presented to some of those which are deemed to be of the most importance, and to which many of those passed upon are only subsidiary.
A part of the relief sought is to have the certificate of November 26, 1884, increasing the number of the trustees of the Burden Iron Company from three to fi ve, adjudged to be invalid, and to restrain the additional trustees from exercising any of the functions of their office. I apprehend that the true solution of this question depends npon the construction to be given to the promoters’ agreement, which was executed simultaneously with the certificate of incorporation of the Burden Iron Company. A brief history of the facts preceding and inducing this agreement and incorporation may render more intelligible some of the controverted questions. For several years prior to June 30, 1881, the plaintiff and his brother, the defendant James A. Burden, had been engaged, as equal partners, in the manufacture of iron in the city of Troy, and owned a large and valuable property for the purposes of their business, besides two valuable mansion houses, known as Woodside, and occupied by them as residences, a farm of about 170 acres and a large number of shares of stock in various corporations. Differences of opinion as to the management of the business arose from time to time between the brothers, which they, unfortunately, regarded as irreconcilable.
In June, 1881, this uncontrolled feeling culminated in a determi
To avoid an enforced dissolution, negotiations between them were instituted for the formation of a corporation, not only for the purpose of allaying the existing strife, but also in case of its continuance to preclude the disastrous results which were possible under the co-partnership. These negotiations resulted in the assent of the plaintiff to the terms and conditions persistently insisted on by James; but, notwithstanding the fact that the plaintiff’s submission to the terms exacted was reluctant, the evidence clearly shows that it was with his full knowledge and appreciation of the possible consequences to himself. These terms were, in brief, that the entire partnership property should be transferred to a corporation to be organized, should be capitalized at $2,000,000, and that the stock should be distributed among the two brothers and the defendant John L. Arts, and should be subject to the provisions contained in the following so-called promoters’ agreement, which was executed by the two brothers and Arts on June 30, 1881:
“For value received, it is agreed between the undersigned, who are • the sole associates of the Burden Iron Company, that the stock of said company shall be taken, owned and held as follows, to wit:
“ James A. Burden shall take, own and hold 1,000 shares; I. Townsend Burden shall take, own and hold 998 shares, and John L. Arts shall take, own and hold 2 shares.
“ The said James A, Burden agrees to and with the said I. Townsend Burden, that if he shall, at any time, sell or assign 998 shares of his said stock, then and in such case he will, without any consideration for the same, transfer the other two shares of his said stock to the said I. Townsend Burden, his executors, administrators or assigns. All the profits arising from the business of the said corporation shall be divided equally between the said James A. Burden and I. Townsend Burden. The said Arts agrees for himself, his executors and administrators, that in case of a sale of any or all of his said stock that said James A. Burden and I. Townsend Burden shall be entitled to the same severally, share and share alike, at and for its par value; and in case either of them shall refuse in writing to make such purchase then the other shall be entitled to his half, or the whole thereof, as he may elect. It is further agreed that said*166 Arts shall not receive any dividends, income or profit from the said corporation, or its business, but that in place thereof he shall have and receive a salary to be fixed by the said board of trustees of said corporation.”
On the same day James A. and I. Townsend Burden and John L. Arts, who executed the foregoing agreement, duly executed, acknowledged and filed a certificate, in the form required by statute, whereby the Burden Iron Company was incorporated under the General Manufacturing Act of 1848. This certificate set forth that the signers had associated as a manufacturing corporation to continue for the period of fifty years; that the corporate name is the Burden Iron Company, the amount of capital stock $2,000,000, divided into 2,000 shares of $1,000 each; that the number of trustees is three ; that the names of the trustees who will manage the affairs for the first year are James A. Burden, I. Townsend Burden and John L. Arts, and the operations of the corporation are to be carried on in the city of Troy.
Thereupon all the partnership property of James A. and J. Townsend Burden was transferred by them to the corporation, and it issued its $2,000,000 of stock therefor to the said promoters and incorporators in the proportions provided for in the promoters’ agreement, and they continued to he the sole stockholders and trustees until about November 22, 1884, when the defendant James A. Burden transferred one of his shares of stock to each of his brothers-in-law, the defendants William Irvin and Richard Irvin, Jr.
On November 26, 1884, the defendants Burden and Arts, two of the three trustees, under the statute providing for an increase of the number of trustees, executed and filed a certificate increasing the number from three to five, by the addition of the said William Irvin and Richard Irvin, Jr.
The plaintiff contends that this increase should he adjudged to be invalid, and that the 'additional trustees should be enjoined from exercising any powers as trustees of the corporation. On the motion made by the plaintiff for a temporary injunction, at a Special Term held by Mr. Justice Peckham, the only ground on which the increase of the number of trustees was claimed to be illegal was that the certificate was not made at a meeting of the board of trustees of which the members had notice. The learned justice held that the
The question then becomes one of interpretation. The contention of the plaintiff is that under the agreement James was proliibited from transferring the two shares of stock to William Irvin and Richard Irvin, Jr., who took it with this infirmity, and, therefore, were ineligible as trustees. He maintains that it was contemplated and intended by the provisions ¿f the agreement that James could not sell a part of his stock to outside parties unless he sold at one time 998 shares; but that he must hold his 1,000 shares until he desired to retire from the business, when he must sell at one time 998 shares to other parties and the remaining 2 shares to the plaintiff. Is this the proper construction of the agreement ?. Undoubtedly the instrument must be so construed as to effectuate the intention of the parties, but such intention must be ascertained from the language employed, and when this is ambiguous extrinsic testimony may be resorted to as an aid to interpretation. It should
The counsel for the plaintiff maintains that their theory derives support from the words, in the second clause of the agreement, “who are the sole associates of the Burden Iron Company.” But I think these words have no doubtful significance. They clearly, although superfluously, state a fact. The parties were “ the sole associates of the Burden Iron Company,” but to say that it was an agreement that they should continue to be “ the sole associates,” would be not only an unnatural construction, but one in conflict with the subsequent provisions of the agreement. The agreement then provides for the manner in which the stock shall be' issued and distributed, and says that “ James A. Burden shall take, own and hold one thousand shares.” I do not see how the word “ hold,” as here used, can reasonably be understood to be a restraint upon his disposition of the stock. That the word was here intended to have its ordinary legal import is evidenced by the subsequent clauses providing for the manner in which his stock might be disposed of. Furthermore, precisely the same words are employed in respect to the shares to be issued to the plaintiff and to the defendant Arts, and the agreement is silent as to any right of the plaintiff to sell, while it expressly provides for the manner in which Arts may dis-¡Dose of his shares. The words “take, own and hold” are here, obviously, used synonymously. They only mean that the stock shall be issued to the two brothers and to Arts in the proportions therein provided, and are not intended as a restraint upon the power of alienation. The plaintiff’s counsel base their contention very largely on the next clause in the agreement, which reads as follows : “ The said James A. Burden agrees to and with the said I. Townsend Burden, that if he shall, at anytime, sell or assign nine hundred and ninety-eight shares of his said stock, then and in such case he will, without any consideration for the same, transfer the other two shares of his said stock to the said I. Townsend Burden, his executors, administrators or assigns.”
The plaintiff emphasizes the words “ at any time,” and maintains that this clause prohibited James from selling any part of his stock unless he sold at one time 998 shares; or, in other words, that he
According to this theory, here was a man owning one-half of the partnership property, to be vested with the ownership of one-half of the stock which represented property worth over §2,000,000 and which probably constituted the bulk of his property, agreeing not to dispose of any of his holdings unless he found a purchaser to take the whole. Furthermore, what was to become of the corporation with only two trustees, instead of at least three, as required by statute, at any time when Arts should become dissatisfied with his salary, and elect to sell his two shares to the plaintiff and to James, if the plaintiff should not choose to sell any of his shares, and J ames had not the power to do so, to an outside person to make him eligible as a trustee ? Such an emergency might arise at any time after the formation of the corporation. It is very evident that if the intention was to prohibit James from selling his stock unless he sold it all at one time, it would have been expressed in very explicit language, and we would not have been left to spell out such intent from the words “at any time.” I think the reasonable interpretation of this provision is, not that James shall not dispose of less than 998 shares “ at any time,” but that “ at any time ” when James shall have disposed of 998 shares he shall transfer the remaining two shares to Townsend. I think the purpose of this clause was to provide against a majority interest being created against Townsend in case James should desire to retire from the business. It was to give Townsend, in that event, the same advantage of holding half of the stock that James then possessed. The conclusion which I have reached not only gives to the language of the agreement its natural import, but is, I think, more in consonance with the facts and circumstances which led up to the agreement; and, while I do not deem it material, it appears to be more in accord with the plaintiff’s understanding, as expressed in his letters to James of June 25, 1881, and November 6, 1882, the former six days before and the latter sixteen months after the formation of the corporation. In the former letter, urging that a corporation be organized, he says:
*170 “ Under a corporation you would sell your stock in small lots more readily, and probably for more money, than you could your half interest in the firm,” and in the latter he says, “ Who would buy any of your stock or mine, at any price, if they knew the company was carrying on these fancy farms ? ” I am aware that the remaining provision of the agreement, that “ all the profits arising from the business of the said corporation shall be divided equally between the said James A. and I. Townsend Burden,” literally construed, is not entirely in harmony with the view I have taken as to the power of James to sell to outsiders a part of his 998 shares. When the agreement and certificate of in coloration were made I think neither of the brothers had any intention of selling any of his shares, and this provision was designed to secure to them, equally, all the profits so long as their holdings of stock remained the same. The provision applied to Townsend as well as to James, and it is not claimed that Townsend was prohibited from selling any of his stock. The brothers equally owned the property transferred, and for which 1,000 shares were issued to James, 998 to Townsend and 2 to Arts. Arts was to have no dividends on his shares, but a salary in lieu of them. It was but equitable, therefore, that the profits or dividends should be equally divided between the brothers so long as the situation remained unchanged, and this is, I think, what the parties understood to be the meaning of this somewhat doubtful provision. I am of opinion, therefore, that the transfers by James to- William and Richard Irvin, Jr., were legal, and the increase of trustees is valid. The transfers of the two shares to the Irvins were without consideration, but, except as against creditors, a completed gift of siock vests the title in the donee as absolutely as does a purchase.
Another question in' the case arises out of the purchase by the Burden Iron Company of the ore of the Hudson River 'Ore and Iron Company, for use in the manufacture of pig iron. Of the one and a half million of dollars of stock of the last-named corporation, James owns about $400,000, Arts $22,000 and the plaintiff none.
James is also one of the directors. In April, 1883, the Burden Iron Company began to buy this ore to mix with other ores in the production of pig iron in its blast furnaces, and the proportion of
He invokes the settled rule of law which declares voidable all contracts made between two corporations having one or more common directors. It is familiar doctrine that a contract made by an agent or trustee is voidable, at the election of the principal or person represented, in all cases where the fiduciary has any personal interest in the contract. The law does not permit one to act in the dual character of principal and agent, and when one assumes such a character it declares the transaction invalid, at the 'election of the person represented, without regard to the question whether it was fair or otherwise. This principle of agency applies not only to a contract between a director and the corporation which he represents, but also to contracts between two corporations having common directors, and this notwithstanding the fact that a majority of the directors of each corporation, exclusive of the common directors, voted for the contract. A trustee represents the corporation, and he cannot have two principals with conflicting interests. There can be no divided allegiance. (Munson v. S, G. & C. R. R. Co., 103 N. Y. 58 ; Metropolitan El. Ry. Co. v. Manhattan El. Ry. Co., 14 Abb. N. C. 251.) I think there can be no doubt that the law would
In Wallace v. Long Island Railroad Company (12 Hun, 460) the plaintiffs, who were stockholders in the defendant corporation, which had taken a lease of two other roads, some of the directors of the defendant being also directors of the leased roads, sought to enjoin the carrying out of the lease. The court, by Gilbert, J., says: “ I cannot say that the directors of the Long Island Railroad Company have abused the power mentioned, or that they fraudulently entered into the leases in question. They may have erred in judgment, but the court has no power to control the lawful exercise of the discretion vested in them as officers of the corporation. I see no reason for imputing to them bad faith or fraud.
“ That being so, I am of opinion that a stockholder in that company is not entitled to have the leases avoided in opposition to the wishes of the parties to them. The directors are, no doubt, in one sense, trustees of the stockholder, but primarily they are the trustees of the corporation. If the corporation, acting with the approval of the holders of the major part of the stock thereof, prefer to abide by the leases, they cannot be avoided on the complaint of a minority of the stockholders against the will of the corporate body so manifested; and, in absence of evidence that the
The rule that persons acting in a fiduciary capacity shall not, directly or indirectly make any profit by means of such acts, or be interested in contracts made by their principals, undoubtedly applies to directors of corporations. It is a valuable principle and ought not to be impaired by any subtle or refined distinctions. Still, the mere fact that the same persons were directors of the corporation which made the lease and of that which took it is not of itself sufficient to avoid the contract at the instance of one or more stockholders against the will of the corporation. That fact alone might entitle either corporation to avoid the lease, but I apprehend it does not give the right to a stockholder. In the cases cited on behalf of the plaintiff, and in all the cases I have met with, where contracts have been avoided on that ground, the relief was sought or assented to by the “ corporation.” There is a class of cases, to which those cited by the plaintiff’s counsel belong, where the acts of the directors are fraudulent and an injury to the corporate property, in which it is held that an action may be maintained and an injunction awarded at the instance of an aggrieved stockholder. But this case does not belong to that class. The distinction between the two classes of cases is observed in MacNaughton v. Osgood (41 Hun, 109).
There the action was brought by a stockholder of the defendant corporation to restrain the payment of salaries which the three trustees had voted to themselves as officers of the corporation. The court held that the contract was not void, but voidable only at the election of the corporation; that the plaintiff as a stockholder could not maintain the action without showing dishonesty on the part of the directors and an injury to the corporate estate.; that it was not sufficient for him to show the fiduciary relations of the directors and that they,had adopted the resolutions in which they were personally interested, as it was not clear from the simple fact that the directors voted to themselves salaries and received them that the corporation had been injured. At the close of the opinion Landon, J., says : “ There is a plain distinction between a case in which the corpora
The plaintiff has assailed the validity of by-law No. 11, adopted at a meeting of the board of trustees of the Burden Iron Company on February 27, 1885. His counsel contend that it is unreasonable, in excess of the corporate power and void. The court is asked to adjudge it to be illegal and to enjoin the defendants from acting under it. Assuming the by-law to be void, I have very grave doubts whether the plaintiff, on that ground, can maintain the action. I know of no authority which permits one to bring an notion to annul a by-law on the ground of its alleged invalidity. It is only where an attempt is made- to enforce it to his detriment that the question of its validity can properly be raised for adjudication. Neither can he invoke equitable relief unless there is reason to apprehend some irreparable injury, which I think the plaintiff has failed to show in this case. But the conclusion at which I have arrived in respect to the validity of the by-laws renders unnecessary any discussion of that question. ■ Section 7 of chapter 40 of the Laws of 1848, under which act the Burden Iron Company was incorporated, provides as follows: “ The trustees of such company shall have power to make such prudential by-laws as they shall deem proper for the management and disposition of the stock and business affairs ■of such company, not inconsistent with the laws of this State, and prescribing the duties of officers, artificers and servants that may be employed.” This statute has wisely confided to “ the trustees ” of the corporation power to make such by-laws for the management of the business affairs and prescribing the duties of officers as “ they shall deem proper.” The only restriction that the section imposes is that the by-laws be “ not inconsistent with the laws of this State,’ and I do not think that the court can impose any further limitations on the power of the trustees. Whatever may have been the common-law doctrine in respect to the power of courts over by-laws enacted by corporations, as one of their incidental powers, I cannot conceive how, under this statute, the court can pursue its investigation of the validity of a by-law further than to inquire whether it is “ inconsistent with the laws of this State.”
The question of the wisdom or expediency of a by-law is quite
The powers delegated by it to the general manager are many and broad, but the question to be determined is whether the delegation of such powers was within “ the scope of their authority.”
The doctrine of a by-law being void because unreasonable, as applied when an attempt has been made to enforce it against a third j)erson, has no application to a question of delegation of authority under the statute, and I think that no case can be found where a delegation of power has been held to be invalid because it was deemed to be unreasonable. The object and effect of this by-law was to create an agency in the general manager, and the only question for the consideration of the court is whether the authority with which he is clothed is such as the board has power to confer. A board of trustees cannot carry on the business of the corporation except through the instrumentality of agents of its appointment. It is true that the law has confided to the board the management of the affairs of the corporation, but it is not a relinquishment of such management to confer their power and authority on agents who are subject to their control; and I am of opinion that the board does not act outside of the scope of its authority when it delegates to its agents power to
In that case the validity of an assignment of a bond and mortgage-of $60,000, which had been executed to the Morris Canal and Banking Company, was questioned on the ground that it was without the authority of the board of directors. The charter fixed the number of directors at twenty-three, and declared that-the corporate powers of the company should be exercised by the board. Authority was given to establish such by-laws, ordinances, and regulations as should be deemed necessary or convenient for the transaction of its business.. One of the by-laws adopted provided that five directors, including the president, should form a quorum for the transaction of the ordinary business of the company. An agreement was made with the State of Michigan, among other things, providing for a transfer to it by the corporation of between $500,000 and $600,000 of securities, including the bond and mortgage in question, and said agreement was executed, and the bond and mortgage assigned in pursuance of a resolution passed at a meeting of five directors and the; president. The court says: “The first inquiry suggested by the facts stated is whether the by-law of the company authorizing a.
The court then proceeds in the language which I have first above quoted, to say that the powers of a hoard of directors are not derived from the stockholders, “ and, like private principals, they may delegate to agents of their own appointment the performance of any acts which they themselves can perform.” It rests its decision that the by-law was valid on the doctrine of the power to delegate authority. It says of the by-law: “It was, in substance and effect, a regulation which constituted a subordinate agency to conduct the ordinary business of the corporation.” To the distinction made by plaintiff’s counsel, that the by-law there held to be valid delegated the power to transact only the “ ordinary ” business of the corporation, I think it an answer that the court, in considering that question, says: “ The ordinary business of the corporation had, I think, no limit short of the varied and extensive affairs in which it was authorized by its charter to engage.” The court below gives the same construction to the words “ ordinary business.” (Hoyt v. Shelden, 3 Bosw. 290.)
In Palmer v. Yates (3 Sandf. 137) the North American Trust and Banking Company, in pursuance of a statute which authorized it to make such by-laws for the management of its business as it might think expedient, adopted by-laws whereby the entire business which it was authorized to transact was divided into two departments, and a committee was appointed for each department with
The plaintiff also asks for a judgment of the court directing that the Woodside houses and grounds and the adjoining farm, together with the stocks in other corporations held by the Burden Iron Company, be withdrawn from and taken out of the assets and property of the corporation and that a division thereof be made between the plaintiff and the defendant James A. Burden. The ground for this relief is, that this is property which the corporation was not
The conveyance vested the legal title in the corporation and the sovereign alone can divest it. Furthermore, the granting of the request would be in violation of the doctrine that courts will not afford relief to a stockholder against the unauthorized acts of a corporation to which he has consented and in which he has participated. All of this property, of the value of at least $700,000, originally belonged to the plaintiff and to the defendant Burden, equally, as partners. It is not denied that when negotiations for organizing the corporation were pending the defendant Burden insisted as one of the conditions that this property should be transferred to the corporation ; that the plaintiff yielded his assent and united witli his brother in transferring this, together with all their other partnership assets, to the corporation, for which the plaintiff received and still retains his agreed proportion of the capital stock. The plaintiff cannot now be heard to object that the contract and performance were not within the legitimate powers of the corporation without a palpable violation of a plain principle of equity. To the suggestion that the property may be divided as profits, it is sufficient to say that it is capital and not profits, and furthermore profits can bo divided in the form of dividends only, the time, amount and kind of ivhich are within the discretion of the board of trustees.
But while the court has no power to withdraw the real estate from the corporate assets, it has the power, and I think it is its duty, to enjoin the further diversion of the corporate funds thereof on what is known herein as “fancy farming.” The testimony shows that since the corporation was organized a very large amount of money out of the treasury has been expended on the Woodside farm in the maintaining of conservatories, the cultivation of plants and flowers and the raising of blooded stock. This was begun while the brothers
"Resolved, That it is inexpedient for this company to continue the business and attending expíense of what is known as fancy farming, as heretofore carried on before the formation of this company, and that it be discontinued altogether from and after this date.”
He urged the board to entertain and adopt this resolution and it refused. The business was still being carried on and the expenses defrayed from the treasury of the corporation when the action was commenced, and this is the cause of action set forth in paragraph 17 of. the complaint, and to restrain the continuance of these acts is part of the relief demanded. That this is an illegal diversion of the funds of the company is conceded.
So long as the stockholders consented there was no substantial objection to these brothers gratifying their tastes at the expense of the company, but as soon as either of them dissented it was the legal duty" of the corporation to immediately cease the practice. There can be no doubt that under the co-partnership), and for some time under the corporation, this practice was as acceptable to the pdaintiff as to liis brother, but there came a time when he chose to dissent. His motives for doing so have been criticised, but it is the duty of the court to determine the various questions in this case not on those ethical pirinciples which should control the conduct of brothers, but according to the rules of law applicable to corporations. The plaintiff has a legal right to object, and he exercised that right. It is true that'after the intimation of the court, in its opinion on the motion for a temporary injunction, there was a cessation of this practice and it has not been resumed; but I do not think this furnishes an adequate reason for not enjoining its continuance or resumption.
When" the plaintiff offered before the board his resolution for its
Regulation — [Rep.