67 Tenn. 108 | Tenn. | 1874
delivered the opinion of the court.
This bill is filed by James G. Deaderick, N. M. Taylor, John H. Miller (administrator of the estate of Ann C. Taylor), John W. Harle, Wilson Wyatt, Isaac P. Tipton — a portion of whom are stockholders, and a part had sold their stock before filing the bill — in behalf of themselves and all other persons who aré the share and stockholders in the corporation under the ■style and name of the East Tennessee, Virginia and Georgia Railroad Company, excepting such of the shareholders as are made defendants; and is against the said railroad company; R. T. Wilson, who is sued both as president and director and in his own wrong; C. M. McGhee, as vice president and director and in his own wrong; Joseph Jaques, who is sued as vice president, superintendant, director and individually; R. H. Richards, a director and in person; R. C. Jackson and W. C. Kyle; the said Wilson, Jaques, Mc-Ghee, Richards and Jackson being sued both as present and former officers and directors of said corporation. In addition to these, by amendment, Rufus T. McAd-den and Hiram Libby, non-residents, were made parties — the first as representing the Western North Carolina Railroad, aud the second as the party from whom certain bonds of said last mentioned road have been purchased.
We may remark at the commencement of this opin
The bill' was dismissed on demurrer by the chancellor, said demurrer reaching in its specifications all the matters alleged in the bill. We will dispose of the questions raised in the order presented by the prayer of the bill mainly, and not in the order as presented by the demurrer, or it may be, group the questions so as to include several propositions under one general view.
The first question we discuss is raised by the first and part of the fifth, the sixth and seventh prayers of the bill, together with the subordinate prayers in aid of the relief thus sought. They are as follows:
1. That the defendants be required to produce and file the genuine original contract in writing made with the Southern Railway Security Company, or with Thos. A. Scott, for the sale of the said ten thousand shares of stock, and that the same be decreed to be null, void, and of no validity.
The clause of the fifth prayer is: “But if your Honor shall hold they are not entitled to the relief for which they above pray, that is, to have the sale of ten thousand shares of stock set aside, then they pray that Wilson, Jaques, McGhee and Jackson, with such other directors and officers as were confederated with them in the purchase and sale of said stock, be held to account to the stockholders from whom they
The facts on which this latter branch of relief is prayed, may be substantially stated as follows: It is alleged that Wilson, Jaques, McGhee and Jackson, with other officers and directors of the corporation, receiving salaries as such, conceived and formed the design and scheme of speculating in the stock owned by complainants, and others on whose behalf they sue, to the damage of the owners of the stock, and profit of said respondents; that they availed themselves of their superior knowledge, influence and power, and other advantages incident to their positions as such officers and directors, and as trustees for the stockholders, to carry said scheme into execution, and procured the smaller stockholders to transfer to them their shares of stock at prices far below their par value, and far below the prices that their superior information enabled them to-foresee said shares would command.
Stripped of all verbiage, this charge is, simply, that officers and directors of a railroad corporation have purchased stock of parties owning small amounts of stock at below the par value of the stock, and below the value which they foresaw it would command — that is, in the future — and that they so purchased because of their superior knowledge of the real
The legal proposition that underlies it, on which relief is sought, and the charge made, is, that the officers and directors of a corporation of this kind are trustees for the stockholders, or individual owners of the stock, and, as such, cannot be allowed to make a profit out of their trust, — the rule applicable to all trustees in courts of equity. On the correctness and accuracy of this proposition all this branch of the case made by the bill turns, assuming for the present, but not deciding, that complainants have presented themselves properly before the court to obtain this relief. To this question we now address ourselves.
Numerous cases, both in England and this country, have settled that the position of a director is in some sense one of a fiduciary character; in most of them, directors are stated to be trustees for the stockholders. That this is true in some particulars, is beyond all question. See cases of Overend, Gurney & Co. v. Gibb, 3 vol. Eng. R., 7-17; Liquidators v. Coleman, 6 vol. Eng. R., 26-33; 1 Redf. on Railw., 576; and numerous authorities cited in printed brief of Shields’ counsel, pp. 29, 30, 31; also cases collected in Board of Commissioners of Tippecanoe County v. Reynolds, June number Amer. L. Reg., p. 376, decided by Supreme Court of Indiana. To call directors of a corporation trustees for the stockholders, however, without limiting the use of. this term by the facts of the cases in which the question has been presented for adjudication,
As said by Judge Sharswood in Spering’s appeal, 71 Pa. Amer. Kep. vol. 10, p. 689, “It is by no •means a well settled point what is the precise relation which directors sustain to stockholders. They are undoubtedly said in many authorities to be trustees, but that, I apprehend, is only in a general sense, as we term an agent or any bailee instructed with the care and management of the property of another. It is certain they are not technical trustees.”
This statement of the learned judge, we think, is correct beyond doubt. The officers and directors of a railroad corporation do not have the legal title of the corporate property vested in them as such, to be held by them for the use of the company nor the stockholders; much less have they the title to or control of the individual shares of stockholders.
The corporation, the legal entity, owns the franchise and corporate property. The officers and directors are the agents through whom this legal entity acts, and, in the performance of the duties pertaining to their positions, represent the corporation. And so, with reference to the stockholder, who, by virtue of his ownership as his individual property, is entitled to the dividends properly accruing to him- as owner of such shares of stock, the officers and directors are under obligations to the faithful management and use of the ■corporate franchise and property, so as to secure him the benefit of such dividends. In both cases they
But do these principles sustain the argument of complainants, and the theory of their bill on this branch of the case? It is, first, that the shares of stock, amounting to ten thousand, sold by defendants Thomas A. Scott, or Security Company, be declared null and void, for reasons that will be referred to hereafter. Second, if this is not done, then that defendants be held to account to the stockholders from whom they purchased, on what stock they purchased from them, for all profits realized by said purchase and sale; and this on the ground that the officers and directors were trustees in such a sense as to forbid their purchasing the shares of ' stock owned by
It suffices to say, first, on this proposition, that we have been pointed to no case that holds such a doctrine, and we feel sure none can be found going this length. We are totally unable to see the application of the principle invoked to the case in hand. The officers and directors of a corporation are charged with no trust, nor fixed with any duty, as far as we-can see, as to the sale or disposition or transfer in-any way of the shares of stock owned by the shareholder. They have no power to control its sale or transfer, are charged with no duty in reference to such sale or transfer, by reason of their official position. They, as individuals, might by contract assume-such duties, as any other parties might, and would then be held responsible individually as others under like circumstances. But officially they could not, probably, assume or undertake such a duty; certainly not without the previous authority of the corporation, regularly conferred. It certainly is not in the line of the duty of the president, directors, or other officers of a railroad company, to sell the shares of stock owned by the shareholders. If not, then as such they can be charged with no breach of trust or duty in connection with said transfer or sale growing out of their official relation to the company, for no such duty is imposed or trust assumed to be violated. Nor can it be said that such officers may not, as individ
The true relation between directors and officers of a corporation and the shareholder,' is thus stated, by Chief Justice Shaw in the case Smith v. Hurd, 12 Ind. R., 371, cited in A. L. R., vol. 13, p. 378:
“There is no legal privity relation or immediate connection between the holders of shares in a bank, in their individual capacity, on the one side, and the directors of the bank on the other. The directors are not the bailees, the factor’s agents, or trustees o f such individual stockholders.”
In the language of the Supreme Court of Indiana,
It being clear and beyond all question, both on sound principle and authority, that the directors or-officers of the company were charged with no trust in reference to the sale or disposition, the management or control of the shares of stock owned by the-individual stockholders, it follows that none of the responsibilities growing out of this relation attach to them in making such purchase from the stockholder as are . contended for by complainant, and that this feature of the bill cannot be maintained, and the demurrer was properly sustained on this question.
It is proper to say, that in all the cases and other authorities cited by complainants’ counsel in his learned and elaborate argument, in which directors are called trustees, not one of them hints at the idea that they are trustees, or have any fiduciary relation whatever to the shares of stock owned by the stockholders, so
This brings us to the relief sought, as against the sale of ten thousand shares owned by respondents to the Southern Railway Security Co., or with Thomas A. Scott. The charge of facts on which this relief is based is briefly as follows:
■“That there exists in the United States a combination of capitalists, whose purpose is to make money for themselves by obtaining the control of - the great lines of railroads in the Middle and Southern States. That this combination has obtained an act of incorporation by the Legislature of Pennsylvania, under the style of ‘The Southern Railway Security Company/ popularly known,” says the bill, “as ‘Tom Scott/ from the fact that the combination or corporation is controlled and managed by Thomas A. Scott.”
It is also stated that respondents have an interest in said corporation, owning a large number of shares in the stock of the same. It is then alleged that, in September, 1871, Wilson, McGhee and Jaques, being officers of the railroad company, owned only 8,350 shares ol stock in said railroad company, and, intend
How this last ruinous result is reached, or by what process it can be effected, without equally affecting the value of the stock owned by the majority, we are not informed.
From the fact of this sale to the Southern Security Company, or to Scott, is deduced the conclusion, that it is a sale of the railroad to a corporation in a distant State, that it is a violation of the sovereignty ■of the State of Tennessee, of the charter of the road, a perversion of the franchises granted, a transfer of the property of complainants, and is illegal, unconstitutional, inequitable, contrary to public policy, and unconscionable.
We have given careful thought and attention to this question, and to the able and eloquent argument of counsel in support of it. We are, however, unable, from the facts charged, to see its correctness, or how it can find a legal basis in said facts. The ■stock must be owned by some one. It is bought and sold in the market as other property of like
We need not discuss at length the deduction or assumption that the sale of a majority of the shares of stock of a company of this kind is a sale of the railroad, or the corporate property, or its franchise. It is no such thing. The company, the legal entity,, owns all the corporate property and franchises it ever owned. The ownership of the stock does not give any title to the capital stock or property owned by the corporation. The two properties are separate and distinct, as we have shown in the previous part of this opinion. How can a sale of the one, then, be a sale of the other? Upon this theory, a corporation of this character might change or modify its ownership every day in the year, by the simple act of transferring the shares of stock in the market, by the owners of such stock.
In a word, we hold that the sale of ten thousand shares of the stock of this company, or of any number whatever, is neither, in law or in fact, a transfer of the road, the corporate property or its franchise;, and this portion of the bill, and the argument based upon it, must fail.
We next examine the question raised by the 8th prayer of the bill. It is, that Wilson, McGhee and Jaques, and such other officers and directors as were guilty of the malfeasance, be held to account for all loss which resulted to the stockholders in consequence of the neglect, failure and refusal to call a meeting
Without going into the history of this transaction, which failed to be effected, we need but say that no relief can be given, such as is asked, for several reasons. In the first place, we know of no duty on the part of respondents to call a meeting of stockholders in order to effect a sale o.f the stock of their company to the president of another company. In the •second place, there is no basis of facts given on which it can be seen that such an arrangement would have resulted in profit, or its failure in a loss, to complainants, or any one else. In the third place, such damages would be of the most speculative character,
It is not improper to add, that the complaint in the bill, based on failure of the officers and directors to call this meeting and arrange to allow Gen. Ma-hone to purchase a controlling interest in the stock of the road, is not very consistent with the view taken in the bill of the conduct of the parties who. sold their ten thousand shares of the stock to the Southern Security Company. If the latter was a transfer of the road to that company, the other would equally have been a transfer to Gen. Mahone. Which would have been the better transaction it is impossible for this court to decide. As between two such rival schemes, this court can feel no possible interest in the success of either the one j¡jc the other in their plans.
In the 4th prayer of the bill, the court is asked to declare void an amendment to the charter, adopted on the consolidation of the East Tennessee and Virginia Railroad Company with the East Tennessee and Georgia Company, and without obligatory force on the stockholders. By the original charter of the East
The next question we notice is based on the charge of purchase of certain railroads, to-wit, the Rogersville and Jefferson Railroad, and the Cincinnati, Cumberland Gap and Charleston Railroad. No relief, however, is asked as against the purchase of the first named railroad, but the contracts shown to have been made, as set out in a report made to the directory in 1872, and adopted by the directors in a meeting of that date, so far as they purport to or were intended to bind the East Tennessee, Virginia and Georgia Railroad Co., are asked to be declared void, and ordered to be cancelled. The latter mentioned road, it seems from the report, was purchased as follows: “ At the instance of the board of directors, by C. M. McGhee and R. T. Wilson, for the sum of $214,175.59. This
The other two contracts, which may be mentioned here and the questions discussed together, are one, made through the president of the company, R. T. Wilson, .and made between R. T. Wilson and C. M. McGhee as one party, and the East Tennessee, Virginia and Georgia Railroad and one Rufus T. McAdden. The other contract was between Wilson, the company and one Sibley of New York. In these contracts, the company has advanced $100,000 to purchase from McAdden his title to the Western North Carolina Railroad, and a like sum was advanced to purchase $1,057,000 of the bonds of said North Carolina Railroad Company, which were bought from Sibley, as we understand it. This involves the question of the right to use the money of the railroad corporation to purchase a railroad out of the State, and bonds of such a railroad, the object being to secure what is deemed by the officers and directors — or rather a majority of the latter — important business connections, either at •once or in the future, and whether such a use of the funds is a violation of the obligations and trusts imposed on the officers and directors of such corporation for which the officers and directors of such corporation joining in such purchase will be held to account to the company — and last, the right of complainants, as
We dispose of the last question first. It has been earnestly argued that conceding there has been an improper exercise of power by the officers and directors in making these contracts, and in the use of the money of the corporation in carrying them out, yet no suit can be brought or sustained such as this, because the bill does not aver that the directors have on application refused to sue in the name of the corporation, or to allow a suit to be brought in its name for such misapplication. That this is the general rule there can be no question. It is based on the principle, that the funds belong to the corporation, not the stockholder, and therefore the corporation should sue for it, or if the shareholders sue it should be with the consent of the corporation to the use of its name. See Ang. & Ames on Corp., p. 367, sec. 312, 6th Ed.; Redf. on R., vol. 2d, p. 335, secs. 9, 10, 11, 3d Ed. But we think on sound principle, as -well as authority, there are well-settled exceptions to this rule. It is laid down in Ang. & Ames on Corp., 367: “But as a court of equity never permits a wrong to go unredressed, merely for the sake of form, if it appear that the directors of a corporation refuse in such cases to prosecute, by collusion with those who had made themselves answerable by their negligence or fraud — or if the corporation is still under the control of those who must be defendants in the suit, the stockholders, who are the real parties in interest, will be permitted to file a bill in their own name, making
We think this exception is as well based and as sound as the general proposition itself. Applying it to the case before us, taking the facts in the bill as true, it appears, that the parties defendant are the parties who have been guilty of the alleged misuse of the funds; that they are still the officers of the road, and have a controlling interest in its management;: that they have procured an endorsement and approval of their contracts by the board of directors, in spite of, and over the opposition of the minority of the stockholders; and are not only interested in their feelings, but pecuniarily, in having these contracts remain, undisturbed, and in full force.
Under these circumstances, we hold, that the stockholder may well bring his suit in equity for redress,, making the parties complained of defendants together with the corporation, as has been done in this case. If there was no remedy in such cases given in a court of equity, the directors might put the stockholders to defiance, or so embarrass and delay them as to do great injury,' and on either ground the jurisdiction, we think, maintainable.
Under the general powers conferred in the original ’ charter of the railroad, and by its scope and design we hold it clear, that the directors and officers had no power to make the contract either in reference to the purchase of the road in this State or beyond its limits. It has become an axiom almost of this branch of the law, that corporations are but
Or as laid down by Judge Turley in the case of Nichol v. Mayor aud Aldermen of Nashville, 7 Hum., 261: “In the State of Tennessee, a corporation is the •creature of the legislative department of the government.” It exists solely and alone by virtue of its act of incorporation, and it can exercise no powers but such as are expressly granted to it, and such as are the result of necessary and proper implication. Numerous authorities sustain this position, and applying it to such contracts as are now under consideration, in reference to the powers given in original charter, hold them to be ultra vires, and beyond the powers of the corporation, the officers or directors of the same, and that such a contract, if executory, would certainly be enjoined, and the parties inhibited from its completion. We confine ourselves in this statement to the powers conferred by the original charter. O. & M. R. R. Co. v. In. & C. R. R. Co., 5 Amer. L. R., 739-40, and cases cited; Gabriskie v. Railroad Co., 6 Amer. Law Reg., 426, and cases cited.
As to the precise grounds and what facts must b'e shown, on which the officers and directors shall be held individually responsible, we need not definitely decide here. We only hold that on the statements of the bill, a prima facie case of violation of duty is made out, so far as the general power of officers and
We hold the same in reference to the question of setting aside said contracts, both the one in the State and beyond it, that is, on the powers granted by the charter of the company originally.
As to what powers were granted by subsequent acts of the Legislature to which we have been referred, and how far these contracts are authorized by the same, or how stockholders, not assenting to such new provisions, are bound, or can be bound by them, we do deem it proper to settle in this opinion, in view of the aspects of the case and other questions presented by the demurrer. Such questions can more properly be settled hereafter, as we shall see.
The next question presented, is on the prayer of the bill, that Wilson and the other officers and directors be required to answer and show a detailed statement of the bonds issued under the act of the Legislature, ch. 38, passed February 25th, 1869,' the amount issued, disposition made of them, and of their proceeds, what was used in the purchase of State bonds,, what commissions were charged in their sale or purchase, and by whom. The account sought is, of any profits or benefits realized by any officer or director of the railroad company in such sales. The allegations of the bill on which this prayer is based are in substance, that under the act of 1869, the consolidated company issued bonds to the amount of nearly four millions of dollars, to be used in payment of indebtness of the company to the State — but that the indebtedness to the State was in fact paid by the actual
We do not understand the bill as charging that uny, portion of the money arising from the sal^ of these bonds was used in the. purchase of the shares of stock of the minority of the stockholders. We therefore do not notice that aspect of the case. We may say here, the charge on this question is lacking in specialty somewhat — but we deem it sufficient "for ■an answer. As to the next prayer of the bill for discovery of what profits were otherwise realized, in any manner and by whom, it is too general and vague, ■and is based on no allegation of facts to sustain it, and is not sufficient to require an answer or discovery from respondents.
That the stockholders have the right to inspect the
The 12th prayer of the bill for discovery, whether any officer or agent of the corporation has, by means of loan or use of the money of the company, purchased stock from shareholders, need not be noticed, as no such charge is made in the bill, nor specifications of facts on which such discovery could be asked, or required.
We now come to the question of whether the bill be multifarious, and what shall be its effect on the bill, whether to dismiss, or remand for amendment. We have carefully considered this question. That the bill is multifarious, under any rule that has been laid ■down to test this question, we think beyond doubt.
In the first place, complainants James G. Deader-ick and W. M. Taylor, with the county of Washington, were joined as stockholders, and sue in that right, and to assert their claims as such. The county of Washington having dismissed her part of the suit, the case stands alone in the name of the two others in this aspect of it.
The other complainants had been owners, but had sold their shares, and thus ceased to be corporators, •or have any rights, as against the officers of the company. This was an improper joinder of parties, and for diverse purposes. The parties who liad sold, want
Again, the question of whether the officers and directors failed of their duty in not arranging with Gen. Mahone to put their road under a single control of a company from Norfolk to Memphis, has no necessary connection whatever, as we can see, with the question of misuse of the property of the company,, as the sale of the bonds, and profits derived therefrom. Damages for this failure on the basis sought, would not' be in anywise related, nor the inquiry on the subject connected with the relief sought in the other matter. It would only complicate the inquiry, but neither aid the other, or be in any way connected with its investigation or settlement — and still less does this question bear any relation to the question of the sale and purchase of the shares of stock from the stockholders, or the sale of the stock owned by McGee, Wilson and Joynes to the Southern Security Company. We need not point out other incongruous allegations contained in the bill before us. We have stated enough to show that the bill is unquestionably liable to this objection. What shall be the effect of
By sec. 4326 it is provided, that “if the demurrer is sustained, the court may authorize amendments, by directing sepai’ate . bills to be filed without new process as to the parties before the court, aud by the addition-of new parties, or otherwise, as may be deemed necessary for the attainment of justice.” In all proper cases this discretion should be exercised in favor of the bill. But we do not think this a proper case for its exercise, for several reasons. The major part of the bill, and its allegations, we have held either to be improperly joined with other matters, or have sustained the demurrer to the relief sought by it.
We refer especially to the charge of the sale of the bonds, which is made in very general terms, and •evidently was not deemed a leading ground on which relief was sought by the draftsman of the bill. In In view of these facts, we can see no advantage in ■sending the case back for amendment, after the greater portion of the bill is dismissed on the demurrer. We think it best, if the parties choose to do so, to •give them a chance to file a new bill, in which the questions proper for investigation can be presented in such form, that an investigation may be had of them, without complication, and on distinct and full allegations, which may ’ be equally full answers on the part ■of the respondents, and thus the question involved be fairly settled. •
We have given more than ordinary time to the discussion of the questions involved in the case on account of the magnitude of the interests involved, and the very earnest and persistent argument of the