144 F. 765 | 8th Cir. | 1906
after stating the case as above, delivered the opinion of the court.
The complainant seeks a restoration from the Consolidated Company of the property of the Edison Company on the grounds (1) that the consolidation was unauthorized by the statutes of Missouri and violative of the anti-trust laws of that state; and (2), that it was accomplished by a fraudulent abuse of the fiduciary relation which the holders of the majority of the stock of the Edison Company and the directors of that corporation bore to the holders of the minority of its stock. If the bill states sufficient facts to invoke relief in equity upon either of these grounds, it must be sustained. Westinghouse Air Brake Co. v. Kansas City Southern Railway Co. (C. C. A.) 137 Fed. 26, 32.
The relation of a stockholder to his corporation, to its officers and to his co-stockholders, is one of contract and of confidence. By the acceptance of his shares of stock he agrees to assume the liabilities and to discharge the duties imposed upon a stockholder by the law. The statutes, the charter and the by-laws of the corporation, as well as the settled law of the land at the time he takes his stock, are read into, and become a part of his agreement. The provision of the statutes of Missouri that a manufacturing corporation might be consolidated with another corporation whose objects and business were of the same nature, upon.the consent of three-fifths of the owners of its stock, was a. part of the agreement of the complainant and a consolidation made by the officers and the owners of the requisite amount of the stock of his corporation by the faithful exercise of the powers thus granted was neither void in itself nor voidable at his option, because it was but the performance of the agreement which he made with them. Erwin v. Oregon Ry. & Nav. Co. (C. C.) 20 Fed. 577, 580; Durfee v. Old Colony, etc., R. Co., 5 Allen (Mass.) 234, 242; Bill v. Western Union Tel. Co. (C. C.) 16 Fed. 14, 19. Conceding, but not deciding that the consolidation here in question was authorized by, and was not obnoxious to the laws of Missouri, let us consider the second ground upon which the complainant founds his prayer for relief.
A combination of the holders oí a majority or of three-fifths of the stock of a corporation to elect directors, to dictate their acts and the acts of the corporation for the purpose of carrying out a predetermined plan places the holders of such stock in the shoes of the corporation and constitutes them,actual, if not technical trustees for the holders of the minority of the stock. The devolution of power imposes correlative duty. The members of such a combination become in practical effect the corporation itself because they draw to themselves and use the powers of the corporation. In a sale of its property, in a consolidation of the corporation with another, in every act and contract of the. corporation which they cause they make themselves the trustees and agents of the holders of the minority of the stock because it is only through them that-the latter may act or contract regarding the corporate property or preserve or protect their interests in it. Such a majority of the holders of stock owe to the minority the duty to exercise good faith, care, and diligence to make the property of the corporation in their charg'e produce the largest possible amount, to protect the interests of the holders of the minority' of the stock and to secure and deliver to them" their just proportion of the income and of the proceeds of the property. Any sale of the corporate property to themselves, any disposition by them of the corporation or of its property to deprive the minority holders of tlieir just share of it or to get gain for themselves at the expense of the holders of the minority of the stock, becomes a breach of duty and of trust which invokes plenary relief from a court of chancery. Jackson v. Ludeling, 21 Wall. 616, 622, 22 L. Ed. 492; Menier v. Hooper’s Telegraph Works, 9 Ch. App. Cas. 350, 352, 359; Goodin v. Cincinnati & Whitewater Canal Co., 18 Ohio St. 169, 182, 183, 98 Am. Dec. 95; Ervin v. Oregon Ry. & Nav. Co. (C. C.) 20 Fed. 577, 580. 27 Fed. 625, 632; 2 Story's Eq. Jur. §§ 1261, 1262; Sage v. Culver, 147 N. Y. 241, 247, 41 N. E. 513; Gamble v. Q. C. W. Co., 123 N. Y. 91, 99, 25 N. E. 201, 9 L. R. A. 527; Farmers’ Loan & Trust Co. v. N. Y., etc., R. R. Co., 150 N. Y. 410, 425, 430,
In Jackson v. Ludeling, 21 Wall. 616, 622, 625, 633, 634, 22 L. Ed. 492, a mortgage bondholder and the directors of the mortgagor corporation combined together and caused a foreclosure sale of the mortgaged property to themselves at an unconscionably low price, and the Supreme Court avoided the sale at the suit of the other bondholders, restored the property to the .mortgagor and re-established the lien of the mortgage. The forms of law' in the foreclosure and sale had been scrupulously observed. There was no lack of porver in the complainants or in the court to foreclose the mortgage and no irregularity of the proceeding. But the court held that the bondholder and the directors were in a very legitimate sense trustees for the other bondholders, that they had no right to seek their own profit at the expense of thd mortgagor, its stockholders or bondholders, and that their acts and transactions rvere voidable at the suit of the latter.
In Menier v. Hooper’s Telegraph Works, 9 Ch. App. Cas. 350, 353, 354, the officers of Blooper’s Company held a majority of the stock and nominated a majority of the board of directors of the European Company. They caused the directors of the latter corporation to abandon a well-founded suit in its behalf and put it into liquidation to the advantage of Hooper’s Company and the loss of the holders of the minority of the stock of the European Company. One of the latter exhibited his bill and prayed that Hooper’s Company might b.e adjudged to be a trustee of the profits it had secured for the benefit of the shareholders of the European Company. Ford Justice James said:
“The minority of the stockholders say in effect that the majority has divided the 'assets of the company, more or less, between themselves, to the exclusion of the minority. * * * . Assuming the ease to he as alleged by the bill, then the majority have put something into their pockets at the expense of the minority. If so, it appears to me that the minority have a right to have their share of the benefits ascertained for them in the best way in which the court can do it, and given to them.”
Ford Justice Mellish said:
“I am of opinion that although it may be quite true that the shareholders of a company may vote as they please, and for the purpose of their own interests, yet that the majority of shareholders cannot sell the assets of the company and keep the consideration, but must allow the minority to have their share of any consideration which may come to them.”
And the hill was sustained.
In Goodin v. Cincinnati & Whitewater Canal Co., 18 Ohio St. 169, 183, 98 Am. Dec. 95, the stockholders of railroad companies purchased a majority of the stock, and selected a board of directors of a' canal company and then caused the boards of directors of the three corporations, which they controlled, to agree upon a low appraisal for which all the property of the canal company should be condemned for the benefit
“The vendor and purchaser were in the same interest. As directors of the canal company, it was the duty of Mr. Lord and liis associates to obtain the highest price for the property: while as stockholders of the railroad company, it was their interest to get it as low as possible. It was, in effect, a sale by the railroad company to itself. There was no adverse interest or adversary parties, and the sale was a mere form. Nothing is better settled In equity than that such a transaction, on the part of a trustee, does not bind the cestui que trust. It is equally well settled that the property of a corporation is a trust fund in the hands of its directors, for the benefit of its creditors and stockholders. * * * Any act of the directory by which they intentionally diminish the value of the stock or property of the company is a breach of trust, for which any of the stockholders or creditors may justly complain, although all the other stockholders ami creditors are benefited? in some other way, more than they are injured as such.”
In Meeker v. Winthrop Iron Co. (C. C.) 17 Fed. 48, 50, 52, the Winthrop Iron Company owned a mine worth $500,000. The Winthrop Hematite Company desired to obtain a lease of it. The owners of the stock of the latter corporation purchased a majority of the stock of the former, elected a majority of its board of directors and then caused the boards of the two companies to make a lease of the mine to the 1 tematite Company for 38 years on such terms as would during that time give all the profits of the mine to the Hematite Company, ''inontv stockholders brought suit on behalf of themselves and other stockholders to rescind the lease and to obtain an account of the rents and profits under it and the court granted their prayer. It said:
“The ownership of a majority of the capital stock of a corporation invests the holders thereof with many and valuable incidental rights. They may legally control the company’s business, proscribe its general policy, make themselves its agents, and take reasonable compensation for their services. But, in thus assuming Ihe control, they also take upon themselves the correlative duty of diligence and good faith. They cannot lawfully manipulate the company's business in their own interests to the injury of other cor-porators. Any contract made by them in behalf of their principal with themselves or with another for their personal gain would be voidable at the option of the company.”
In Pondir v. N. Y., L. E. & W. R. R. Co., 72 Hun, 384, 389, 393, 25 N. Y. Supp. 560, the Erie Railway Company held a majority of the stock of the Buffalo, Bradford & Pittsburg Railroad Company, elected its board of directors and caused them to strip the Pittsburg company of all its property except its railroad and appurtenances and to lease those to the F,rie company for 499 years for taxes and interest. The court sustained a bill for equitable relief exhibited by the minority stockholders.
In Hinds v. Fishkill, etc., Gas Co. (Sup.) 88 N. Y. Supp. 954, the holders of the majority of the stock of one corporation organized a new corporation in which they also secured a majority of the stock and then sold the property of the old corporation which was worth $250,000 to the new corporation for $06,000. The hill of a holder of a minority of the stock who brought suit in behalf of his corporation to rescind the sale was sustained.
Perhaps the opinions to which reference has now been made sufficiently illustrate the principles of equity determinative of the case in hand. If the averments of the bill are true, the holders of the majority of the stock of the Edison Company were the owners of the stock of the ' Union Company a.t the time of the consolidation. They had issued a capital stock of $10,000,000 for that company to represent net assets of only $600,000 and had purchased the majority of the stock of the Edison Company with the preconceived intent to deprive the holders of its preferred stock of a large share of its value for their own profit. For this purpose they had elected directors of the Edison Company whose acts they dictated. The complainant was a preferred stockholcie* of the Edison Company. The preferred stock of that corporation represented, and was entitled to continue to represent, one-halt of the combined net assets of the two constituent corporations, while the stock of the Union Company which the majority stockholders owned represented only 6/32 thereof. The holders of the majority of the stock of the Edison Company and their directors drew unto themselves and' exercised its corporate powers. They thereby constituted themselves trustees of the property of the Edison Company for the minority stockholders and stood in the shoes of that corporation. It was their
Counsel for the defendants argues with an ingenuity and persuasive force that command admiration that, conceding the wrong, there are many reasons why a court of equity can apply no remedy under this bill. He says that the existence of the consolidated corporation mav not be collaterally assailed and annulled by a private party and that it may be successfully questioned by the state only, and he cites in support of this contention, Town of East Lincoln v. Davenport, 94 U. S. 804, 24 L. Ed. 322; Nugent v. Supervisors, 19 Wall. 249, 22 L. Ed. 83; County of Scotland v. Thomas, 94 U. S. 682, 2 t L. Ed. 219 ; Wilson v. Salamanca, 99 U. S. 499, 25 L. Ed. 330; Empire v. Darlington, 101 U. S. 87, 25 L. Ed. 878; Menasha v. Hazard, 102 U. S. 81, 26 L. Ed. 83; Harter v. Kernochan, 103 U. S. 562, 26 L. Ed. 411; County of Tipton v. Locomotive Works, 103 U. S. 523, 26 L. Ed. 340; New Buffalo v. Iron Co., 105 U. S. 73, 26 L. Ed. 1024; Clearwater v. Meredith, 1 Wall. 25, 17 L. Ed. 604; Tomlinson v. Branch, 15 Wall. 460, 21 L. Ed. 189, and
Moreover, the position of counsel here overlooks the true nature and purpose of this suit. The gravamen of this bill is the deprivation of the complainant and those stockholders who unite with him of their just share of the property of the Edison Company, not the existence of the consolidated corporation. The purpose of the bill is not the ouster of that corporation, but the restoration to the holders of the minority of the stock of the Edison Company of their share of the property of that company or of its value. The prayer of the bill is not that the Consolidated Company be dissolved or deprived of its franchises and powers. There is in the bill, it is true, a prayer that the agreement of consolidation be set aside, and that the property of the Edison Company be restored to it, but this is a prav'er for the means to an end, not for the end itself. The end is the restoration to the minority stockholders of the Edison Company of their share of the property of the latter corporation. A bill would not lie to make an individual trustee who had wrongfully appropriated to himself trust property more than sufficient to pay all his obligations, insolvent, but it would lie to restore to the cestui que trust the property he had thus appropriated although that restoration made the trustee insolvent. While it may be true that a bill would not lie to oust or dissolve the consolidated corporation, it will lie to take from it on behalf of the cestuis que trust all the trust property, franchises, and powers which have been transferred to it by the trustees in violation of their trust. The rule that the existence of a corporation may not be collaterally assailed by a private individual constitutes no bar to a suit by a minority stockholder to avoid for fratid or breach of trust a contract and act of consolidation of corporations and to restore the property of the corporation injured to its former owner.
The next objection to the bill is that the complainant is not a stockholder of, and cannot maintain a suit in behalf of the Edison Company because that corporation was extinguished by the consolidation. This might have been the result of a consolidation in the absence of fraud or breach of trust. Clearwater v. Meredith, 1 Wall. 25, 17 L. Ed. 604; Tomlinson v. Branch, 15 Wall. 460, 21 L. Ed. 189, Ridgway Township v. Griswold, 1 McCrary, 151, Fed. Cas. No. 11,819. But the contract and transaction by which this consolidation -was effected were voidable for fraud and breach of trust at the suit of the Edison Company
It i.s next contended (1) that the complainant states no cause of action and praj's for no relief on his own behalf and that if he does (2) he may not assert that claim and his claim for relief on behalf of his corporation in the same suit. But the gravamen of the bill, as we have seen, is the loss of the complainant and the other minority stockholders caused by the acts of the majority. Its purpose is to right this wrong, and it is to this end that the complainant prays in the alternative for the rehabilitation of his corporation or for a lien upon the property of the Edison Company and upon the property of the Consolidated Company for the valite of his stock. The fads set forth in the hill are sufficient to sustain both his claim on liis own behalf and his claim on behalf of the corporation. And where the same facts sustain the claim of a stockholder on his own behalf and his claim on behalf of his corporation and warrant the same or similar relief, it is not the duty of a court of equity, one of whose functions is to avoid a multiplicity of suits, to compel him to plead and prove these facts in two separate suits in order to obtain the relief to which he is entitled. It may determine both claims in the same suit and so mold its decree as to mete out substantial justice to all the parties.
Counsel argues that the complainant is entitled to no relief in equity because he has an adequate remedy at law, an action against the Consolidated Company for damages for the conversion of his stock, and he cites Lauman v. Railroad Co., 30 Pa. 42, 72 Am. Dec. 685; Gresham v. Bank (Tex. Civ. App.) 21 S. W. 556, International, etc., R. Co. v. Bremond, 53 Tex. 96. and Tanner v. Lindell R. Co., 180 Mo. 1, 25, 79 S. W. 155, 103 Am. St. Rep. 534. That the complainant might at h\s
“This they ask not upon a showing that any wrong has really been done them, not that the transaction was not .fair and profitable, not that they were not afforded an opportunity of participation in it to the same extent that was accorded the most favored, but upon the bare naked legal proposition that it is a violation of the implied contract between the stockholders inter sese to sell the property of the corporation so as to disable it from doing business without the consent of all. * * * If under these circumstances the sale was a breach of the implied contract the courts of law are open to the plaintiffs to sue for damages for the injury but there is nothing in the ease to arouse a court of equity into action.”
In the case in hand there is a showing that wrong has really been done to the complainant. The transaction assailed was not fair. The complainant was not accorded an opportunity of participation in the consolidation to the same extent that was accorded the most favored. On the other hand, the holders of the majority of the stock of his corporation arbitrarily took from him all his interest in the corporate property, and offered him in return for it nothing but stock in a new corporation which represented less than one-third' of his just share of its assets, while they appropriated the other two-thirds to themselves. There is much in these facts to move a court of equity to action.
Nor is the suggestion that the complainant may not recover the value of his stock in this suit in equity because such a recovery would be inconsistent with his repudiation of the contract of consolidation and because he has not prayed for it, very-material. The 'first prayer of the bill is for the restoration of its property to the Edison Company and this is in effect for a restoration to the complainant of his share of it. Now, as the court may under this prayer rehabilitate the Edison corporation, it may do less. It may grant a decree nisi, a decree that all its property, powers and franchises be restored to the Edison Company unless within a time certain the defendants pay to the complainant and those who join him the value of their share of the property'
It is said that the bill states no cause of action against the directors of the Edison Company, because the consolidation was not their act, but the act of the majority of its stockholders; and. in support of this contention, counsel calls attention to the decision in International, etc., R. Co. v. Bremond, 53 Tex. 96, 118, to the effect that a minority stockholder was not entitled to a personal judgment against a director in an action for conversion by means of a consolidation. But the case in hand is not an action of that nature, but a suit in equity for the rehabilitation of the old corporation atid the transfer of the complainant’s stock on its books or for a lien upon (he property of the Consolidated Conipany'for the value of his stock. The directors were in a substantial, if not technical, sense trustees for the minority stockholders. Jackson v. Ludeling, 21 Wall. 624, 625, 22 L. Ed. 492. They were necessary and actual actors in the breach of trust which injured the complainant. They executed the voidable contract of consolidation and if a decree ior the relief first prayed in the bill, the rehabilitation of the Edison Company and the transfer of the 992 shares of stock should be found requisite to secure adequate relief to the complainant, the action of these directors would become essential to the execution of the decree. They are therefore proper, if not indispensable, parties to this suit. Sioux City Terminal, etc., Co. v. Trust Co. of North America, 27 C. C. A. 73, 75, 82 Fed. 124, 126, The fact that no demand for the transfer of the
The conclusion of the whole matter is that the bill presents facts sufficient to sustain a decree for the rehabilitation of the Edison Company and for the transfer of the 992 shares of stock to the complainant upon its books, if such decree proves to be necessaiy in order to procure adequate relief to the complainant. But the court will not be restricted to this or any other specific form of relief when the final hearing has b.een concluded. It is not impossible that the consolidation of the corporations has been affirmed by all the stockholders of the Edison Company except the complainant, that the bonds and stocks of the Consolidated Company have been sold upon the market to many persons who had no connection with the consolidation and that great changes in the character, use and value of the property of the Edison Company have been made since it was transferred to the new corporation, so that its rehabilitation would entail upon the consolidated corporation a loss many times the value to it of the complainant’s interest in the property he seeks. These facts, if they exist, create no bar to the recovery of complete relief by the complainant, but they may be considered by the court below in determining whether a decree nisi or a decree for a lien upon the property of the Consolidated Company, or upon the property of the Edison Company in its hands, for the value of the complainant’s interest,
'fhe decree below is reversed, and the case is remanded to the court below, with instructions to permit the defendants to answer, and to take further proceedings not inconsistent with the views expressed in this opinion.