Hazlehurst v. Savannah, Grippin & North Alabama Railroad

43 Ga. 13 | Ga. | 1871

Lead Opinion

McCay, Judge.

1. We think the Judge was right in overruling the demurrer. There is clearly equity in the bill. There is a distinct charge of fraud and combination between Mr. Hazlehurst and the contractors, in the receipt of the road in an unfinished condition, and in the issue, without authority and fraudulently, of common stock. There is also equity in the prayer that the directors shall be restrained from purchasing the shares in the Macon and Western Bailroad. But overruling the demurrer is one thing and granting the injunction is another. Judge Cole has, as we think, properly restrained the directors from purchasing the Macon and Western stock. From his refusal to appoint a Receiver, and his denial of all the other prayers of the bill as to the contract and receipt of the road, and as to the common stock, and the confining of his injunction to the transfer of the preferred stoelc, we must conclude that he felt the charges of fraud to be either completely repelled, or that the complainants had by their acquiescence estopped themselves. As we understand his judgment, he has restrained the transfer of the preferred stock, on the sole ground that the issue of such stock was illegal, and that such being the case, acquiescence or even consent by the stockholders could not cure the illegality.

2. In this we think there was error. There is nothing in the charter prohibiting either the issue of preferred stock, or the other part of the agreement which stipulates that a majority of the directors shall be the holders of a certain number of shares of this stock.. As to the latter point, the qualification of directors, nothing is more common in corporations than to pass a by-law fixing qualifications for directors, as that they shall be the holders of certain shares of stock.

This charter provides that the directors may make bylaws; and if they have power to make a by-law, we can see no reason why they have not power to contraet that a certain by-law shall exist. As we have said, there is nothing in this charter prohibiting the issue of preferred stock. It is contended, it is true, that the provision of the charter fixing each share at $100 for the amount paid in, prohibits the issue of preferred stock by implication. We do not feel called upon in this case to decide this question. We are inclined to the opinion that if there be no express prohibition against such issue in the charter, a corporation has power to issue such stock, keeping within the amount -of stock limited by the charter. It is, in fact, only one mode of borrowing money, and it would largely, and we think unwisely, cripple the efficiency of corporations to deny them this mode of of-fering security to those dealing with them. The weight of authority is in favor of such a power: Redfield on Railways 2d volume, 516; 49th Maine, 491; 15th Indiana, 395. Though we admit the question is a new one, and the doctrines upon the subject are not well established.

3. The record in this case shows that this contract, both for the issue of the stock, and as to the qualification of directors has been acted upon by the contractors. The contract was reported to the company and it was acquiesced in. The contractors, on the faith of it, have built the road. And the question is, not whether the directors had power to make it, but whether, after it has been made, after the company has, upon its part got the benefit of the contract, after the other parties have, upon the faith of it, spent their, money, and the company has acquiesced in the act of the directors, either the whole company, or a portion of the stockholders, can come forward and repudiate the contract?

Admitting the want of power in the officers to make the contract, can the company, or a portion of it, under the circumstances set forth, now repudiate it as:ultra vires ? Without doubt, there is an apparent conflict in the authorities upon this subject. It would seems from many cases, that an act ultra vires, by the officers of a corporation, is void, and that no amount of consent or acquiescence by the stockholders can estop them from setting up the illegality: 7 E. L. & E., 509; 35 E. L. & E., 8; 16 E. L. & E., 180; 22 Conn., 502; 21 Howard, 442; 12 E. L. & E., 224. On the other hand, it has often been held that the company or the stockholders may be estopped, like individuals, by consent, acquiescence, etc.: 30 E. L. E., 120 ; 35 Id, 37; 22 N. Y., 358; 17 Barb., 38 ; 5 El. & Bl., 248; Redfield on Railways, volume 1, 75; 14 Penn. St. R., 81; 23 Howard, 381; 4 John Chan., 370; 11 Eng. L. & E., 442; 24 Barb., 375; 9 Col., 45; Pierce on Railroad Law, 401; 19 Barb., 568; 6 Ohio, 119; 1 English Railway cases, 436; 2 Id, 187; 6 Allen, 52; 28 Georgia, 117. Upon a close examination, however, of the authorities, it will be found that this conflict is, for the most part, only apparent.

Every charter is a contract between the public and the corporators, and between the corporators themselves. An act of the officers (and a corporation can act in no other way) may violate the contract with the public. According to the authorities, such an act is an illegal contract, contrary to public policy, and void. But if the act only violate the contract between the corporators, it may or may not be void, accordingly as the corporators may have directed, assented to, or acquiesced in it. The former class of acts includes those which relate to enterprises or franchises not granted. The latter class includes such acts as violate those provisions of the charter which regulate the rights of the corporators with each other. It is apparent that there is a wide difference in the nature of things between these two classes of acts.

The officers of a corporation may do an act which is, under the charter, beyond the legitimate scope and province of the grant, as if a railroad company should undertake to build a cotton manufactory, or a bank to build a railroad. Such an act would be an attempt to exercise a franchise not granted to the corporation. There is strength in the argument that such an act is illegal, contrary to public policy, and however parties may have consented, they may ask the Courts to refuse to enforce contracts based upon or in furtherance of it. If by consent the stockholders could give validity to contracts based upon such acts, they could, in effect, grasp new franchises from the public at their pleasure. But acts of the officers of a corporation are often said to be ultra vires when they are wholly within the scope of the franchise granted in the charter, but they are beyond the authority conferred upon the officers.

Such acts, though directly contrary to the provisions of the charter, if they be authorized by the stockholders, or be acquiesced in, or confirmed, cannot be avoided after third persons have acted upon them. They are regulated by the rules which govern the relation of principal and agent to third persons: 4 John. Chan., 370; Pierce on Railroad Law, 401.

Applying these principles to the facts of this record, what is the result? The contract for the building of the one hundred and fifty miles of unfinished road was reported by the president to the stockholders’ meeting; these complainants were present. It is true the bill states that the president did not go into details, and that there were provisions of the contract, which, if the complainants had known, they would not have assented to. But it is admitted in the bill that they were distinctly informed as to the preferred stoelc. It is also stated in the bill, that the president did not pretend to state the details of the contract, or do more than give its general features. The whole thing was there for their inspection. It is not charged that there was any deception, much less that the contractors deceived them. If the complainants did not know the terms of the contract, it was simply because they did not care to know; five minutes reading of a paper, at the call of any stockholder, would have told them the exact truth. They saw fit not to read, to be satisfied with what was avowedly only a general statement of it to them by their own agent. Would it not be monstrous, after the contractors have done the work, to permit men, thus acting, to come forward and repudiate their own contract? The provision of the charter fixing the stock at $100 00 per share, and implying equality between the shareholders, is clearly a matter in which the public, as such, has no interest. It is simply a regulation looking to the internal management of the affairs of the company, to the rights of the stockholdei’s among each other. So, too, as to the qualification of directors. The company may make any rule on that subject they see fit. If so they may contract to do it, and if they receive the consideration they cannot say the contract was ultra vires.

These things are, even if they be provided for in the charter, mere contracts among the stockholders for the regulation of their rights as to each other; they are contracts, too, which any one stockholder has a right to insist upon, even against every other. But if there be a dealing with third persons, in which the stockholders acquiesce, or which they confirm, they cannot plead, when they are called on to comply with their contract, that it was ultra vires. We think, therefore, that as to the contract, even as the facts are stated in the bill, it is too late now for the complainants to set up ultra vires.

4. As so the question of fraud in the receipt of the road, we agree with Judge Cole, that the answer of Mr. Hazlehurst, with the printed annual reports attached, completely deny it. We think, too, that here, also, the acquiescence of the complainants for a year and their receipt of the profits, estops them. It was the contract that Mr. Hazlehurst should be the judge of the acceptance of the road, and the whole point of the charge is, fraud upon his part. If he was incompetent, if his judgment was bad, he was still the agent of the company. It is only the charge of fraud and complicity which gives vitality to this part of the bill. That, it seems to us, is completely denied. No matter if the road was incomplete. If, in the judgment of the president and engineer of the company, in good faith entertained, it was to the interest of the company to receive the road, and he has done it, and the company has, for a year, uncomplainingly acquiesced, they are estopped. They cannot now put the contractors where they were, and it would be a gross wrong to permit them at this late day to object. It is a well settled principle, that when work is to be received or not, according to the judgment of an engineer, his decision is final, unless there be fraud : 1 Redfield on Railways, 406, 416.

5. Upon the question of the right of the directors to purchase the stock of the Macon and Western Railroad, we abide by the decision made in the case of The Central Railroad vs. Stephen Collins, decided at December Term, 1869. We think the cases precisely parallel. If one railroad com-any may, at its option, buy the stock of another, it practically undertakes a new enterprise, not contemplated by its charter1 This it cannot do by any implication. The power so to do must be clear, and that, too, under the rule of construction that the charter is to be strictly construed as against the power. The power granted by the Act of 1860, pamphlet 193, to hold any kind of property, can only mean any kind of property necessary to carry out the purposes of the franchise, to-wit: the building and working a railroad from Macon to Brunswick. The purchase of this stock would be, and could be, only for the purpose of exercising a new franchise, to-wit: the running of a road from Macon to Atlanta. We do not care to go over the argument we have used in the case referred to. We simply say we see no reason to change the doctrine there, stated, and that there is nothing in the Act of 1856 or of 1860 broader than was in the charter of the Central Road. We take occasion to say that, in our judgment, the use of the State indorsed bonds for this purchase would be illegal. The purpose of the State was clearly not to aid the Macon and Brunswick Railroad in constructing the Macon and Western Railroad, but to complete and equip its own road.

6. Any stockholder has a right to insist that the bonds thus indorsed shall be, in good faith, used for the purpose intended by the State.

7. But we do not see how it is possible for a Chancellor, in this State, to enjoin a non-resident who has not been served with process by some officer of this State, from doing an act in the State of New York: Dearing vs. Bank of Charleston, 5 Georgia, 427; Adams vs. Lamar, 8 Georgia, 82; 1 Daniel Chancery Practice, 502. We greatly regret that this is the case. These bonds have been illegally used, and we should be very glad to lay our hands upon them. But the desire to do this cannot change the settled law of the case. Unless the parties can be served by some process, our Courts cannot control them by injunction. We do not say that there is no remedy for this wrong. These men hold property in Georgia, in this road, and any claim a citizen of Georgia has against them may, without doubt, follow that property. Clearly, also, the stockholders have a right to see to it, that the sinking fund provided for by the Act of 1865, indorsing the bonds, shall be set aside, as that Act requires. But there is no allegation in the bill that the company refuses to do this. The bill charges that it has not been done. Perhaps these very complainants have voted against doing so.

Courts will not, as a general rule, interfere between the stockholders and a corporation, until the methods in the power of the stockholders have been tried. It is not charged in this bill that any person has sought to have this fund set aside. Perhaps if a motion to that effect were made it would be done : Redfield on Railways, volume 2, 325; 4 E. L. & E., 113; 2 Hare, 461; 49 Penn., 310. We think this ought to be done. If none of the stockholders, will move it, we hope the State authorities will interfere and demand it, and if it is refused, we hope steps will be taken to compel it. These State indorsements are full of danger to the State, unless the law be very faithfully complied with.

Judgment reversed.

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Concurrence Opinion

Lochrane, Chief Justice,

concurred from the Bench as follows:

It appears from the record in this case, that defendants in error filed their bill charging several acts done by the Macon and Brunswick Railroad Company; to be ultra vires, and others as fraudulent, and injurious to the rights of the minority stockholders, who are the complainants. Their grounds of complaint are: 1st. In relation to a contract made with Hull and Miller for the completion of the road to Brunswick. 2d. That preferred stock had been issued to them in payment. 3d. That such stock it had been agreed should form the qualification for directorship in the company. 4th. That the contract has not been fulfilled. 5th. That the directors have issued $200,000 00 in bonds as a bonus for the purchase of certain shares in the Macon and Western Railroad Company.

To this bill there was a demurrer, which was overruled, and the answer of the president of the company was then filed, upon which the hearing took place, and the Judge below, in Chambers, March 20, 1871, ordered that the defendants, George Hazlehurst and the Macon and Brunswick Railroad Company, be restrained and enjoined from delivering the $600,000 00 in indorsed bonds, etc., also from transferring the preferred stock upon the books, etc.; also he enjoined and restrained the parties (non-residents) who hold the preferred stock from disposing of it, and also the $200,-000 00 bonds which they hold, and this judgment (1st) in overruling the demurrer, and (2d) in granting the injunction as stated, is now before us and forms the basis of this writ of error.

We do not propose to go through this record in giving the reasons of our concurrence in the opinion delivered by the Court. Nor.is it necessary in the view we entertain of the only question of importance in the case. The demurrer was, we think, overruled properly by the Court below upon the ground that the use of the two hundred thousand bonds, to buy the stock of the Macon and Western Railroad Company was ultra vires, and the proper subject matter of equity interposition and jurisdiction by the Court. The other charges of the bill give no right to the complainants, as minority stockholders, to invoke the jurisdiction of equity without reference to the answer, which is complete, conclusive and overwhelming in its effect, responsive to the allegations. We feel satisfied, that the corporation in making this contract did not exceed its duty, that the right to issue preferred stock or income bonds, or mortgage bonds, with which to pay for the construction of a railroad, is a clear and unquestionable right under the corporate powers incident to all corporations. And in view of the great benefit to the public, by permanent investments in railroads in this State, we lay down the proposition broadly that such right may not further be made a question of judicial controversy. In the wisdom of the legislative power grants of charter privileges have been conferred for the purpose of building additional roads throughout the limits of this State, and State indorsement superadded to induce the consummation of such enterprises. "When such roads are built they contribute largely to advance the public interests, and while this Court will hold the strict accountability of the use of such State indorsement by such corporators, we will recognize the right of such companies to enter into such contracts as will secure the construction of these respective roads within the proper exercise of these corporate powers either express or implied, as essential to consummate the purposes of their creation. We therefore hold that, neither in the making of the contract or issuing preferred stock to the contractors, was there anything done which would not be legally done within the legimate scope and power of their charters. Nor do we see any equity in the allegations that this road was not completed according to contract, under the facts. This question was settled finally and firmly by the acts of the officers of the company and the approval of the stockholders. Nor is there anything ultra vires in the twelfth section of the contract relating to the qualifications of directors. These directors had the power to make the by-laws and to make the contract, and the approval of both ends the question as to these complainants. But we think that the use of the $200,000 00 in bonds as a fund to purchase the stock of another road was ultra vires, and not authorized by the charter. And the injunction as to this was properly granted. But as to all other things ordered therein it was improperly granted. Remarking that injunctions against non-residents can bear no extra territorial force, and should not be granted by Courts, we reiterate the opinion of this Court at the present term. It is only in a strong case and when the majority are clearly violating the chartered rights of the minority and putting their interests in imminent danger, that a Court of equity will,- at the instance of a minority of the stockholders in a corporation, interfere with the management of its affairs.

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Dissenting Opinion

Warner, Judge,

dissenting.

This is a bill filed by the complainants as stockholders in the Macon and Brunswick Railroad Company, against the company, alleging that they are the holders and owners of seventeen hundred and forty-four shares of the capital stock of said company, which has been bona fide paid to said company at the rate of $100 00 per share, and that their interest as such stockholders in said company is greatly endangered by the illegal conduct of the president and board of directors of said company in violation of the charter thereof, with a prayer for relief and injunction. The complainants allege, amongst other things in their bill, that their company, in direct violation -of their charter, which provides that the stock of said company shall consist of a certain number of shares, to be subscribed and paid for at $100 00 per share, have made a contract whereby they have issued $1,500,000 00 of preferred stock, which was estimated and valued at the sum of $300,000 00 only; that this preferred stock was issued for the purpose of enabling the holders thereof to obtain the control of the affairs of the company, to the injury of the bona fide stockholders thereof, inasmuch as it is provided in said contract that a majority of the board of directors shall each be a holder of two hundred shares of said preferred stock, and that such directors shall be elected as soon as there are parties qualified to serve; that said company shall not increase the further issue of bonds, or the common or preferred stock of the company, except by consent in writing of a majority in amount, of the holders of the preferred stoch. The complainants further allege and charge in their bill that the company, after having obtained the State’s aid by an indorsement of their bonds for $10,000 00 per mile to enable them to build their road, and after they had been running their trains thereon for several months through to Brunswick, obtained from the State additional State aid, by an indorsement of their bonds to the extent of three thousand dollars per mile, under the pretext that it was wanted for the purpose of paying off $1,100,000 00 of the second mortgage bonds of the company, whereas the contrary thereof is the truth; that it never was the intention of said company to extinguish any part of said indebtedness held by themselves, but to retain the $600,000 00 of the State’s indorsed bonds, for the use and benefit of said preferred stockholders, to the exclusion of the complainants and other stockholders in said company. It is further alleged and charged in said bill that notwithstanding said company has received the State’s indorsed bonds, on the representation that the road had been completed so as to entitle the company to receive the same; yet, in fact, the road has not been so completed, but is still in an incomplete and unfinished condition, rendering it not only unsafe, but dangerous as a highway of travel, and thereby exposing the complainants, as stockholders in the road, to heavy damages for loss in running trains over such a defective road. The bill alleges especially the defects in the construction of the road, which is supported by the affidavits of two engineers who worked on it at the time of its being constructed. The bill also alleges and charges that tile directors of said company, made such by virtue of said preferred stock, have purchased five thousand shares of the stock of the Macon and Western Railroad Company on their own private account, and not for the Macon and Brunswick Company, and have paid therefor in the Macon and Brunswick State indorsed bonds. The bill further charges that a majority of the said preferred stockholders are non-residents of this State; that their interests are in conflict with the interests of the original bona fide stockholders in said company; and that the holders of such preferred stock, under said illegal contract set forth in the bill as an exhibit thereto, are enabled to control the management of said company, and the financial affairs thereof as they may desire; and that said company has not set apart annually, and deposited with the Governor, two per cent, upon the amount of the bonds indorsed by the State, as a sinking fund, for the payment of said bonds, as required by the Act and resolutions granting the aid of the State to said company.

After hearing the parties by their counsel on the application for an injunction, the Judge granted the same, whereupon the defendants excepted. The contracts made by corporations, within the limits of their respective charters, as well as those of natural persons, are under the protection of the law, and it is the duty of the Courts to maintain and enforce them; but when incorporated companies undertake to-make contracts or do other acts not authorized by their respective charters, or in violation thereof, then it is equally the duty of the Courts to restrain them. The allegations and charges made by the complainants in this bill against the-President and Directors of the Macon and Brunswick Railroad Company, are, to speak in the mildest terms, of a very grave character', and it is due to them, as well as to the public, that they should have an opportunity to meet them, not by sharp, technical objections, but squarely on the merits thereof, on the final hearing before the proper- tribunal. If a railroad corporation can be allowed, without express authority granted to it for that purpose, to make a contract b^ which they can provide for the issuing of preferred stock of the company, and prescribe thereby that the holding of a certain number of shares of that preferred stock shall constitute a necessary qualification for a director in that company, without any regard to the amount to be paid for each share of such prefaired stock, and thus obtain in that way the control of the affairs of the company, there will not be much security for the rights of the minority bona fide stockholders who have paid the full amount of their stock as required by the charter of the company; that is- to say, $100 00 for each share of stock therein. Although the State is not complaining in this case, but only the stockholders of the company, still the principle involved is the same as if the State was complaining, and it is an important principle in view of the extent to which State aid lias been granted to railroad companies in this State. The Act of the General Assembly granting State aid to this company, provides, that the indorsed bonds shall not be sold for less than ninety cents in the dollar, but if the company, as was done in this case, can make a contract by which they create cheap preferred stock, and then make a contract for the sale of the State’s indorsed bonds and the cheap preferred stock to the same purchaser, though the indorsed bonds might be nominally rated at ninety cents in the trade, what would be the average price paid for the whole? How much money would the purchaser in fact pay for the cheap preferred stock and the State indorsed bonds? By this arrangement the strong indorsed State bonds as well as the original paid up stock are diluted and weakened by the company’s cheap preferred stock, in the same manner as good, strong brandy is diluted and weakened by pouring into it plenty of water. If all the company’s stock was such as required by its charter, $100 00 per share, and that amount actually paid in therefor, then that stock could not be used to dilute and .weaken the value of the indorsed State bonds or the original paid up stock of the company, but the cheap preferred stock issued outside of the provisions of the charter could be so used. And it is charged in this bill that the $1,500,000 09-of the preferred stock issued by the company under the contract was estimated and valued at only the sum of $300,000 00, and that this latter amount was not actually paid in to the company in money, but was to be paid in work after the same was issued. The facts’ of this case illustrates the practical effect of a railroad company being allowed to issue preferred stock in a different manner from that which-is prescribed by its charter. And the principle involved in this case is applicable to every other railroad in the State, and is especially important for the protection of the interests of the people in view of the extent to which State aid has been granted to the several railroad companies in this State.

There is another important principle involved in this case, of which the original stockholders in this company complain, and that is the indorsement of the bonds of the company by the State, when the road has been imperfectly built and in an unfinished condition. If the road is in the condition as stated in the bill of complaint, and the indorsement of the bonds was procured from the State for the benefit of the preferred stockholders in that company, then it was not only a legal fraud on the complaining stockholders, but a legal fraud on the people of the State. I say a legal fraud, because it was a fraud perpetrated under the form and color of law. It is true, the State is not complaining here now, but the principle applicable to railroads constructed with State aid, should not be ignored. The only security which the State has for her indorsement of the bonds of railroad companies is the roads and their equipments. If the State’s indorsement shall be procured on the bonds of a half finished or improperly constructed road, the bonds sold, and the money arising therefrom in the pockets of unknown persons, and the road is sold on the foreclosure of the State’s mortgage, such a road might not, and probably would not sell for enough to pay the debt due the State, but the bonds would have to be paid by taxation of the people. The facts disclosed by this record shew what has happened in regard to this road, and what may and probably will happen in regard to other roads to which State aid has been granted, if the Courts fail to protect, by the exercise of that restraining process with which they are clothed when corporations undertake to make contracts and do other acts not authorized by their respective charters, or in violation of the Acts of the General Assembly, granting to them State aid by the indorsement of their bonds.

The purchase of the five thousand shares of stock of the Macon and "Western Railroad by the directors of the Macon and Brunswick Company, on their own private account, and paying therefor with the indorsed State bonds of the latter company, in the manner and for the purpose as charged in the bill of complainants, was unauthorized and illegal as against the rights of the complaining stockholders. The appropriation of $600,000 00 of the State indorsed bonds by, and for the use of the preferred stockholders, to the exelusion of the complainants and the other stockholders of the company as charged and set forth in complainants' bill, was unauthorized and illegal as against the rights of the complaining stockholders of the company. I am, therefore, of the opinion that the judgment of the Court below granting the injunction in this case should be affirmed.