Dunbar v. American Telephone & Telegraph Co.
79 N.E. 423
Ill.
1906
Check Treatment

Lead Opinion

Mr. Justice Wilkin

delivered the opinion of the court:

The theory of the original bill is, that the American Telephone and Telegraph Company of New York (called the American company) purchased a majority of the stock of the Kellogg Switchboard and Supply Company of this State, (known in the record as the Kellogg company,) for the purpose of suppressing competition and creating a monopoly in itself of the telephone business. The ground of the demurrer was that the allegations of the bill were insufficient to sustain the cause of action, and that complainants, being minority stockholders in the Kellogg company, could not legally maintain it.

That the American company could not lawfully make a contract for the purpose claimed is not seriously questioned, but the argument of counsel for appellees is devoted to the proposition that the traversable allegations of the bill are not sufficient to present the theory relied upon and that complainants below are not entitled to the relief prayed. The demurrer, so. far as the question thus raised is concerned, is general, and, of course, admits all the material facts well pleaded in the bill. The bill certainly is not a model of conciseness in pleading, but is justly subject to the criticism of being indefinite, uncertain and more or less evasive. We think, however, that it sufficiently shows, against a general demurrer, that the American company, through defendant Barton and others, became the purchaser of the shares of stock with the unlawful purpose and intention of putting the Kellogg company out of business or so using and controlling it as to prevent rivalry in business and creating a monopoly, and it called for an answer from defendants. If such was the purpose and object of the purchase, the decisions of this court are full to the effect that the law will not lend its aid to accomplish the object. That is to say, if the American company had purchased a majority of the capital stock of the Kellogg company in its own name for the purpose of controlling the latter and thereby preventing competition between itself and the latter corporation, the transaction would have been one which the courts of this State would not uphold. (People v. Chicago Gas Trust Co. 130 Ill. 258; Distilling Co. v. People, 156 id. 448; Bishop v. American Preservers’ Co. 157 id. 284; Harding v. American Glucose Co. 182 id. 551.) Nor can it be seriously contended that a purchase by the company in the name of others, as agents or trustees, will relieve the transaction of its illegality. To hold otherwise would be to sustain a transaction illegal in its character, accomplished by indirection, when it could not be done if the methods were direct. Northern Securities Co. v. United States, 193 U. S. 197, affirming the decision of the Circuit Court. (120 Fed. Rep. 721.)

The American company and its sub-company, the Western Electric Company, must be considered as one in determining whether the tendency of the purchase alleged in the bill would be to suppress the competition existing between the Kellogg company and the Western Electric Company in the manufacture and sale of telephone appliances, etc. Neither is it material that the Kellogg and Western Electric Companies were not the only parties engaged in manufacturing such appliances, for the reason that if such was the case, while a complete monopoly or a complete restraint of competition would not necessarily result, the tendency would be in that direction, which is sufficient to condemn the transaction as unlawful. People v. Chicago Gas Trust Co. supra; More v. Bennett, 140 Ill. 69.

The averment of the bill to the effect that it is the purpose of the American company to suppress competition and create in itself a monopoly is further aided by the averment that Barton, through whom the purchase was made, agreed to pay, as part of the purchase price, so much per share in cash and the balance by applying thereto the pro rata proceeds of any or all bills and accounts reasonably due and owing to the Kellogg company on December i, 1901, the same to be settled and paid to said seller as the same are paid and collected by said company, plainly indicating that a dissolution of the Kellogg company was contemplated, because in no other event could the American company appropriate the assets of the Kellogg company to pay a stockholder of that company for ■ the stock purchased by the former company from him; also, that by the contract of purchase the Kellogg company should be carried on in the usual manner for the space of one year in order that bills and accounts receivable could be collected in the usual course of business, thus showing a purpose to dissolve the Kellogg company after the expiration of one year.

We have examined the briefs and arguments of counsel for the defendants, and reached the conclusion that the purpose and tendency of the purchase by the American company are sufficiently shown by the bill to be to suppress competition by that company in telephone service to the public and create in the American company a monopoly of that business.

That the American company, a foreign corporation coming into the State of Illinois, is subject to all the rules and regulations provided by the laws of this State cannot be doubted. (Hurd’s Stat. 1905, chap. 32, sec. 26, p. 501; Stevens v. Pratt, 101 Ill. 206; Bishop v. American Preservers’ Co. supra; Harding v. American Glucose Co. supra; Coler v. Tacoma Power Co. 64 N. J. Eq. 117.) The question here, therefore, is whether the American company, if it had been organized in this State, would have' had the power to purchase a majority of the stock of the Kellogg company for the purpose of controlling the latter, and that question, as we have already indicated, has been frequently decided in the negative by this court. The decisions in other States are to the same effect. (Marble Co. v. Harvey, 92 Tenn. 115; Nassau Bank v. Jones, 95 N. Y. 115.) In Pearson v. Railroad Co. 62 N. H. 537, it was said: “A corporation cannot become a stockholder in another corporation unless such power is given it by its charter or is necessarily implied in it, especially if the purchase be for the purpose of controlling or affecting the management of the other corporations.” (Elkins v. Camden and Atlantic Railroad Co. 36 N. J. Eq. 5; Great Eastern Railway Co. v. Turner, L. R. 8 Ch. 149.) These authorities fully sustain the position that the purchase by the American company, either in its own name or in the names of others, of the majority stock of the Kellogg company with the purpose and intent of controlling the latter and putting it out of business as a competitor of the American company and its sub-company, the Western Electric Company, Was an attempt to exercise a power which it did not have. To permit it to do,so would be against the law of this State and its public policy. Haselton Boiler Co. v. Tripod Boiler Co. 142 Ill. 494; Santa Clara Female Academy v. Sullivan, 116 id. 375, and Illinois cases above cited.

The courts below, as we understand their decision, do not uphold the contract of purchase by the American company as one made by it in its own name; nor do we understand counsel for appellees to contend that under the facts alleged in the bill such a purchase could have been lawfully made. It is attempted, however, to show that, inasmuch as the purchase was made in the names of others and the legal title to the stock vested in them, the strict doctrine of ultra vires has no application. A court of equity will look through all devices to discover and afford relief against the real situation, and we shall hereafter, in considering another branch of the case, have occasion to cite more at length the authorities bearing on this question. For the present it will be sufficient to cite Central Railroad Co. v. Pennsylvania Co. 31 N. J. Eq. 475, where a bill was filed by a railroad company to enjoin another from building tracks across the complaining company’s tracks, and it was alleged that the defendant had, through its nominees and employees, effected the incorporation of another corporation for the purpose of building said tracks. A writ of injunction being granted, the court said: “A corporation cannot in its own name subscribe for stock or be a corporation under the general railroad law; nor can it do so by a simulated compliance with the provisions of the law through its agents, as pretended corporators and subscribers of stock.” We have fully considered the reasoning of the chancellor on this branch of the case which was adopted by the Appellate Court, and have reached the conclusion that it is based upon a distinction without a legal difference. If, as a matter of fact, the object and purpose of the purchasing company was to acquire such ownership in the Kellogg company as would enable it to control the latter, then, whether it did so by a direct purchase in its own name or through the intervention of agents or trustees, the want of power was the same, and the purchase was strictly ultra vires, no matter what the device may have been.

The remaining important question to be considered is whether the complainants below, minority stockholders in the Kellogg company, can maintain this bill. If we are correct in the view that the object of the American company was illegal and that its attempt to acquire ownership of the stock in the Kellogg company was absolutely null and void as being in excess of its chartered powers, then it would seem to follow that each and every stockholder in the latter company would have the right to say that the American company, assuming to own stock which it did not and could not legally own and vote at any meeting of the Kellogg company in the management and control of its business, should be restrained. In other words, every lawful owner of stock in a corporation has the right to say that others assuming to vote shares of stock which they do not have the legal right to vote, shall be restrained. This, we assume, must be admitted, and such is the logical effect of the decision of this court in Stebbins v. Perry County, 167 Ill. 567.

In Marble Co. v. Harvey, supra, the Supreme Court of the State of Tennessee, in passing upon the question whether shares of stock in a corporation of that State engaged in a similar business transferred to a trustee chosen by the purchasing corporation for its use and benefit were legally transferred, said: “The evidence shows that the declared purpose of complainant in buying in the shares held by the defendant was to enable it to manage and control the business of the Tennessee company in the interest of the Ohio company. There is no pretense that it had any express power to purchase shares in another company, and it is too clear to need argument or further citation of authority, that it had no implied authority to purchase and hold shares, either in its own name or in that of a trustee, for the purpose of controlling another corporation. * * * The purpose and intent in granting a charter is, that the corporation shall carry on its business through its own agents, and not through the agents of another corporation. The public policy of this State will not permit the control of one corporation by another. Especially is this true when a foreign corporation thus undertakes to control and swallow up a domestic company. Such control of one corporation by another in a like business is unlawful, as tending to monopoly. The result is, that this purchase of shares for the express object of controlling and managing another corporation was ultra vires, and therefore unlawful and void. Being void, it was of no legal effect, and no rights result from it enforcible by or through the courts of the State, when such aid is invoked in furtherance of the unlawful agreement.” Nassau Bank v. Jones, supra; De La Vergne R. M. Co. v. Savings Institution, 175 U. S. 40.

Pearson v. Railroad Co. 62 N. H. 537, was a bill by a stockholder of the Concord Railroad Company against the Northern Railroad Company, in the decision of which case the court used the following language: “The court finds that the Northern Railroad Company is the" owner of 1290 shares of Concord railroad stock purchased in 1873, upon which it has since voted at the meetings of the Concord railroad. A corporation cannot become a stockholder in another corporation unless such power is given it by its charter or necessarily implied in it, especially if the purchase be for the purpose of controlling or affecting the management of the other corporation. * * * It [the Northern railroad] can no more make a permanent investment of funds in the stock of another road than it can engage in a general banking, manufacturing or steamboat business. It is neither incidental to the purposes of its incorporation nor necessary in the exercise of the powers conferred by its charter. If it can purchase any portion of the corporation stock of the Concord company it may buy up the whole, and thus engage in a business for which its charter gives it no authority. And what will hinder a banking corporation from becoming a manufacturing company, or a manufacturing company from becoming a railroad common carrier ? But the facts in this case go farther. The stock was bought at $105 or $106 per share, (par value $50,) a price largely in excess of its market value, and for the purpose of obtaining control of the Concord company and securing more favorable contracts to itself.”

Many other cases might be cited in support of the position that all such contracts are ultra vires and void.

Nor do we think it can be said in this case there was a mere exercise of an excess of power rendering the transaction merely voidable and not an absolute nullity. We said in Barnes v. Suddard, 117 Ill. 237, a case in which there had been a mere excess of power (p. 243) : “Had the corporation been clothed with no power to acquire real estate in this State, or if the purchase had been prohibited by statute or contrary to the manifest policy of our láws, a different question would be presented, and the cases of Carroll v. City of Bast St. Louis, 67 Ill. 568, and Starkweather v. American Bible Society, 72 id. 50, might properly be invoked as authority. But such is not the case.” Consequently it was held that relief could not be granted at the instance of a private individual, as was held in the Carroll v. City of East St. Louis, and Starkweather v. American Bible Society cases referred to, the remedy in the Barnes v. Suddard case being only at the instance of the public authorities. In the one case a title vests which may be set aside; in the other the whole transaction is null and void.

But aside from the question as to whether the contract of purchase was ultra vires in the sense that the contract became a nullity, we think that such equitable rights are shown in the complainants, though minority stockholders, as ought to entitle them to maintain this bill. It is alleged in the bill, and admitted by the demurrer, that in order to stifle competition in trade and create a monopoly in itself and its licensee company, and for the purpose of enabling it to secure and maintain unreasonable and excessive rates and charges, said American company conceived the illegal purpose of acquiring at least two-thirds of the stock of said Kellogg company, and through such ownership to select and maintain a board of directors which should act in the real interests of and subservient to the American company and free that company and its licensee from the competition of the Kellogg company and independent exchanges; also, that its ultimate purpose was to injure and finally destroy the Kellogg company. That such conduct on the part of the American company was fraudulent as against the stockholders of the Kellogg company cannot be denied, and against which, on the plainest principles of equity, a stockholder in the Kellogg company should have "the right to relief. (Menier v. Hooper Telegraph Works, L. R. 9 Ch. 350.) And, on principle, Chicago Hansom Cab Co. v. Yerkes, 141 Ill. 320, Wheeler v. Pullman Iron and Steel Co. 143 id. 197, Gamble v. Queens County Water Co. 123 N. Y. 91, and Fougeray v. Cord, 50 N. J. Eq. 185, are in point.

In Memphis, etc. Railroad Co. v. Woods, 88 Ala. 630, the bill was by stockholders representing a minority of the stock of the Memphis company, and the case was submitted to the court below on- a demurrer and motion to dismiss the bill and to dissolve the injunction, which the court overruled and the company prosecuted an appeal. In the decision of the case the Supreme Court held that where a corporation has acquired the majority of the stock of another corporation, its officers, directors or others acting in its interest may be enjoined from exercising the voting power that the majority of the stock confers, so as to govern and control the management of such other corporation, especially when the two corporations have the same held of action and operation and the profits of one may be advanced' by lessening those of the other, and where their interests are conflicting as to expenditures and division of earnings. In many respects that case is similar to the one at bar. In the opinion it is said: “We come, then, to the naked inquiry, can one corporation acquire a majority of the stock of another corporation, and by the exercise of the voting power the majority of stock confers, govern and control the management of such corporation ?” And the question was answered in the negative. See State v. Newman, 51 La. Ann. 835.

In Milbank v. New York, Lake Erie and Western Railroad Co. 64 How. Pr. 20, minority stockholders, on behalf of themselves and others, sought to enjoin another railroad company from voting. The injunction was granted, the court holding that the purchase was against public policy, and used this language: “In the case under consideration the New York, Lake Erie and Western company have acquired, by purchase, the majority of all the stock issued by the Buffalo, New York and Erie railroad. If its officers are permitted to vote thereon they can elect a board of directors of their own choosing. It would then be for the interests of the New York, Lake Erie and Western Railroad Company to have the Buffalo, New York and Erie company managed and controlled in the interests of the former company. This would be liable to result in injury to these plaintiffs and their fellow-stockholders, and if so, they have a right to complain.” See, also, Parsons v. Tacoma Smelting Co. 25 Wash. 492.

In Franklin Bank v. Commercial Bank, 36 Ohio St. 350, one bank purchased certificates of stock in the other and sought to have the same transferred upon its books, which was refused, whereupon the bank claiming to have purchased the stock brought an action against the other for conversion, based on refusal to make the transfer, but the court denied the relief, saying: “There would seem to be little doubt, either upon principle or authority and independently of express statutory prohibition of the same, that one corporation cannot become the owner of any portion of the capital stock of another corporation unless authority to become such is clearly conferred by statute. * * * Were this not so, one corporation, by buying up the majority of the shares of stock of another, could take the entire management of its business, however foreign such business might be to that which the corporation so purchasing said shares was created to carry on. * * * Its action in refusing the transfer was but the denial of any right by the plaintiff to be placed in a position to interfere and participate in the control and management of its internal affairs. To the claim of-the plaintiff that it was the duty of the defendant to make the transfer when the same was demanded and leave the State to impose the penalty of forfeiture on the plaintiff for a violation of its charter, we do not assent. The cases of Union Nat. Bank v. Matthews, 98 U. S. 621, and Jones v. Guarantee and Indemnity Co. 101 id. 622, and cases therein cited, do not support such proposition. The principle of those cases is, that where a corporation is incompetent, by its charter, to take a title to real estate, a conveyance to it is not void, but voidable only, and that the sovereign alone can object;- that the conveyance is valid unless assailed in a direct proceeding instituted for that purpose. But they neither, by the- principle maintained nor by the reasoning advanced in support of it, sanction the doctrine that one corporation may buy up the stock of another and thereby enable itself to interfere with the internal management of its affairs, especially where the power to do so is.expressly prohibited by its charter.”

Other authorities, some of which have been already cited, are to the same effect.

There are other grounds upon which the complainants’ right to maintain this bill may be placed, but we do not feel called upon now to extend this opinion for the purpose of pointing them out. Three separate, independent, lengthy briefs and arguments have been filed on behalf of appellants, which have unnecessarily increased, the labor of reviewing and deciding the case. We have endeavored only to point out the substantial grounds upon which we hold the defendants to the original bill should have been required to answer the same.

We think the decree of the circuit court sustaining the demurrer to and dismissing the cross-bill is right and should be affirmed. No necessity whatever for that bill is shown; At most, Milo G. Kellogg was a mere nominal party to the original bill. No relief was prayed against him, and if a decree granting the prayer of that bill had been rendered he would have obtained all he was in equity entitled to. Moreover, as a bill to set aside the contract of sale for the fault or misconduct on the part of his attorney, DeWolf, he does not offer to place the purchaser in statu quo.

The decree, in so far as it sustains the demurrer to the cross-bill, will be sustained, but for the error in sustaining the demurrer to the original bill the decree will be reversed and the cause remanded, with directions to proceed in conformity with the views herein expressed.

Decree affirmed in part.





Rehearing

Afterwards, on consideration of the petition for rehearing in this case,.the following additional opinion was filed:

Per Curiam

: The object and purpose of the cross-bill is to rescind the sale of Kellogg’s shares of stock on the ground of fraud. In order to entitle him to that relief he must have shown by his bill that he promptly disaffirmed the sale upon discovering the alleged fraud and offered to refund the purchase price which he received therefor or give some sufficient legal excuse for his failure to do so, and in this respect his cross-bill is fatally defective. The rule in this State is, that a party who seeks by bill in equity to rescind a contract of sale for fraud on the part of the purchaser, must, as a condition precedent, offer to re-pay the purchase price. In other words, he must, before filing his bill, offer to restore the purchaser to the same position he was in before the sale was made. The contract is not void, but only voidable at the election of the defrauded party. (Rigdon v. Walcott, 141 Ill. 649.) And it was there said (p. 662) : “The complainant then having failed to show that prior to the filing of his bill he elected to rescind the transaction or agreement complained of, or took any of .those steps which are legally necessary to effectuate a rescission, it must be held that, so far as is shown by the bill, said transaction remains in full force and that the complainant is entitled to no relief based upon the theory of its rescission.” The rule is clearly stated by Judge Gary in Duncan v. Humphries, 58 Ill. App. 440, that to lay the foundation for a bill to rescind a contract, the complainant must, before the commencement of his suit, offer and be willing to perform such acts on his part as will restore .the defendant to the position which he occupied before the transaction,—citing Rigdon v. Walcott, supra. It is not sufficient to make the offer in the bill.

The judgment of the Appellate Court as to the cross-bill is and will be affirmed.

Judgment affirmed.