62 N.H. 537 | N.H. | 1883
The gist of the referee's report is, the two upper companies were justly entitled to more favorable contracts for their business over the road of the Concord, and the upper companies (i. e., the managers acting for them and in their interests) bought a controlling interest in the stock of the Concord for the purpose of making with themselves, as controlling managers of the Concord, contracts more favorable to themselves; and they accomplished that purpose. The upper companies having bought Concord stock for the purpose of controlling that road for their own advantage, having exercised their control of it by making certain contracts with themselves, and having passed the vote of indemnity for their own benefit, the question is whether they can be allowed, against the objection of a stockholder in the Concord, to execute their illegal contracts and their illegal vote, on the ground that the contracts and vote are just and fair, and such as the Concord ought to have made and passed.
A director of a railroad corporation, though not technically a trustee, stands in a fiduciary relation to the corporation, and is under the disability of a trustee. Practically, the directors are trustees, and the stockholders are the cestuis que trust. Like all other persons where this relation exists, he cannot, as buyer for his corporation, buy of himself against the objection of his cestui que trust, nor as seller for the corporation become the purchaser, nor, being its agent and trustee, contract with himself, or secure *541
to himself advantages not common to other stockholders, because such contracts and relations are likely to bring him in conflict with his duty and self-interest, and tempt him to be unfaithful to the superior obligations he has assumed. Pierce R. R. 36; Mor. Corp., s. 245; Ang. A. Corp., .ss. 233, note a 312; Butts v. Wood,
The plaintiff is a stockholder in the Concord, and sustains to the directors of the company the relation of a cestui que trust. He seeks an injunction to prevent the execution of these illegal contracts and vote. Must he fail because they are, or may be shown to be, fair and just? On this question the authorities are not unanimous. One class answers it in the affirmative, some of them putting upon the trustee the burden of proving fairness. Coal Iron Co. v. Parish,
In Currier v. Green,
In Perkins v. Thompson,
In Remick v. Butterfield,
It hardly seems necessary to go to the reports of other jurisdictions for confirmation of a doctrine so firmly established in our own reports. There is a partial review of some of the leading cases in the opinion of Gilchrist, C.J., in Sparhawk v. Allen,
Judge Story says, if "the seller were permitted, as the agent of another, to become the purchaser, his duty to his principal and his own interest would stand in direct opposition to each other, and thus a temptation, perhaps in many cases too strong for resistance by men of flexible morals, or hackneyed in the common devices of worldly business, would be held out, which would betray them into gross misconduct, and even into crime. It is to interpose a preventive check against such temptations and seductions that a positive prohibition has been found to be the soundest policy, encouraged by the purest precepts of Christianity." Sto. Ag., ss. 210, 211. And, again: "The principle applies, however innocent the purchase may be in a given case. It is poisonous in its consequences. The cestui que trust is not bound to prove, nor is the court bound to decide, that the trustee has made a bargain advantageous to himself. The fact may be so, and yet the party not have it in his power distinctly and clearly to show it. It is to guard against this uncertainty and abuse, and to remove the trustee from temptation, that the rule does and will permit the cestui que trust to come at his own option, and, without showing essential injury, to insist upon having the experiment of another sale." 1 Sto. Eq. Jur., s. 322. *543
Parsons lays down the rule thus: "If an agent to sell become the purchaser, or if an agent to buy be himself the seller, a court of chancery, upon the timely application of the principal, will presume that the transaction was injurious, and will not permit the agent to contradict this presumption, unless, indeed, he can show that the principal, when furnished with all the knowledge he himself possessed, gave him previous authority to be such buyer or seller, or afterwards assented to such purchase or sale." 1 Pars. Con. 87, and cases cited, viz., Coles v. Trecothick, 9 Ves. 234, 247; Lowther v. Lowther, 13 Ves. 103; Ex parte Hughes, 6 Ves. 617; East India Co. v. Henchman, 1 Ves. Jun. 289; Ex parte Bennett, 10 Ves. 385; Oliver v. Court, 8 Price 127; Fox v. Mackreth, 2 Bro. C. C. 400; The York Buildings Co. v. Mackenzie, 8 Bro. P. C. 42; Molony v. Kernan, 2 Dru. War. 31; Murphy v. O'Shea, 2 Jones La T. 422; Davoue v. Fanning, 2 Johns. Ch. 252; Moore v. Moore,
The reasons for the exclusion of all inquiry into the bona fides of the transaction are expressed in these cases with clearness and exactness. Mr. Justice Field said, — "The two positions impose different obligations, and their union would at once raise a conflict between interest and duty; and constituted as humanity is, in the majority of cases duty would be overborne in the struggle." Wardell v. R. R. Co.,
In Hughs v. Watson, decided in Scotland in 1846, cited in Gardner v. Ogden,
In Michoud v. Girod, 4 How. 503, 657, the court said, — "We are aware that cases may be found in the reports of some of the chancery courts in the United States in which it has been held that an executor may purchase, if he be without fraud, any property of his testator, at open and public sale, for a fair price, and that such purchase is only voidable, and not void, as we hold it to be. But, with all due respect to the learned judges who have so decided, we say that an executor or administrator is, in equity, a trustee for the next of kin, legatees, and creditors, and that we have been unable to find any one well considered decision to sustain the right of an executor to become the purchaser of the property which he represents, or any portion of it, though he has done so for a fair price, without fraud, at a public sale."
This case is within that class where the agent to sell is precluded by the policy of the law from purchasing. The Northern, *545
B. C. M., and Concord companies are connecting roads. The upper companies have the right by statute to require the Concord to haul their passengers and freight over its road upon paying reasonable tolls therefor, and in turn they are required to do the same for the Concord. Rates for such transportation must be fixed by contract, or by referees appointed by the court upon petition of one of the parties. G.L., c. 164, ss. 3-9. The statute has provided a remedy, simple, adequate, inexpensive, expeditious, and effectual. The upper companies, feeling aggrieved by the tolls charged by the Concord, declined to seek redress under the statute, but sought a remedy by disabling the Concord to contract with them, and undertook to contract with a board of directors elected by themselves. The relation of the upper companies to the Concord was that of buyer and seller. The upper companies desired to purchase of the Concord the transportation of their freight and passengers over the road of the latter. The Concord desired to sell the transportation over its own road of the traffic of the upper roads. It was for the interest of the upper companies to procure the lowest rates, and their directors were bound to use the knowledge they had derived from the confidence reposed in them as directors to attain that result; and the interest of the Concord was to procure the highest rates, and its directors were bound to use their special knowledge for the advantage of that company. Their interests being conflicting, it was impossible for common directors to procure the lowest rates for one party and the highest rates for the other. "No man can serve two masters." They were not arbitrators called in to adjust conflicting claims, nor were they disinterested. The referee has found that the purchase of Concord stock at prices largely in excess of its market value was made with the intent and purpose of obtaining control of the Concord, and thereby to secure more favorable contracts for the business of the upper companies over the lower. The plan was formed, the purchase was made, the control of the Concord was obtained, and more favorable contracts were secured. By taking the control of the Concord, the upper companies disabled it as a contracting party. In fixing the rates of that company for their business, they were contracting with themselves. When a transaction is a fraud in law, it is unnecessary to prove a fraud in fact, nor is it permissible to show that the transaction was an honest one. Coburn v. Pickering,
A plea in trespass qu. cl. that the defendant was a creditor of *546 the plaintiff, and entered upon his farm to take the crops in payment of his debt, is no better in ethics than in law. If the defendant in replevin or trover were to defend upon the ground that he was a creditor of the plaintiff, and took the goods in payment of his claim, he would scarcely need to be informed that the justness of his claim would be utterly immaterial upon the question of his right to enforce payment by committing a tort. A person may require a common carrier to transport his goods for a reasonable compensation. His refusal does not justify the former in seizing his teams, fixing reasonable rates, and compelling the carrier's servants to transport his goods at such rates. The reasonableness of the rates so fixed would impart no validity to the compulsory process employed in fixing them. A guardian cannot contract with himself for the rent of his ward's real estate, or for the use of his ward's mill, nor resolve to compensate himself out of his ward's money, for wrongs done him by his ward before he was put under guardianship. It would be immaterial whether or not he obtained the appointment of guardian for the purpose of making the contract, or of obtaining the compensation. The fairness and justness of the contract, and of the resolution formed by him as guardian for his own benefit, would not be a ground on which the illegal contract and resolution could be maintained by the guardian against his ward.
The immediate government and direction of the affairs of the Concord Railroad are, by its charter, vested in a board of seven directors, to be chosen by the members of the corporation. In the exercise of the director's powers the stockholders have no voice and no vote. They are as powerless as a ward in the hands of a guardian annually elected by himself. The law requires of a guardian self-denial, integrity, diligent attention, an eye single to the interest of his ward, and that he be above mercenary motives (Sparhawk v. Allen,
The question whether the contracts made by the defendants for rates over the lower roads are fair and just, and whether the upper companies have valid and legal claims against the Concord, cannot be litigated or contested with the upper companies by a board of Concord Railroad directors whose interests are opposed to those of the Concord, and are in harmony with those of the upper companies.
In the making of these contracts, and in the settlement of these claims, the stockholders of the Concord have the legal right to the *547
services of directors whose interests are not hostile to their interests. A director or stockholder in the Northern or B. C. M. company is not such a director. It may, for most purposes, be convenient and desirable that the same person or persons should act as directors of two or more roads forming parts of a continuous line. For many purposes their interests are not adverse. The harmonious working of the several parts, when a large portion of its business is the transportation of goods and passengers over the whole line, requires unity of purpose and management. Burke v. Concord R. R.,
In England parliament has declared by statute (8 9 Vict., c. 16) that no person interested in any contract with a corporation shall be capable of being a director thereof, and if any director shall directly or indirectly be concerned in any contract with the corporation, his office shall become vacant. The office becomes vacant, although in a suit at law between the parties upon such a contract the contract is not held void. Foster v. Railway Co., 13 C. B. 200. Such contracts are voidable in equity at the suit of a stockholder. We have no such statute; but reason and common sense, and all the analogies of the law, forbid that a person should act in a position of trust when self-interest conflicts with duty. The consciences of men in such positions will not stand the strain of self-interest. We approve the remarks of Welch, J., in Goodin v. Canal Co.,
Flagg v. Railway Co., 20 Blatch. 142 — S.C., 21 Am. Law Reg. 775 — decides that where an agreement is made by the directors' relinquishing the right to a guaranty of dividends to a corporation by another corporation, the execution of the agreement will not be enjoined at the suit of a stockholder, because three of the directors voting were also stockholders in the guarantor corporation, it appearing that, without counting their votes, a majority of the directors voted for the measure.
In Butts v. Wood, 38 Barb. 181 — S.C.,
Our conclusion upon this part of the case is, that the directors of the Concord could not make the contracts with the upper companies, nor settle the claims of those companies against the Concord. For the transaction of that part of the business of their office they were disabled by the understanding on which, the purpose for which, and the interest in and by which, they were elected.
The case finds that the Northern Railroad is the owner of 1,290 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 is necessarily implied in it (Franklin Co. v. Bank,
Certain classes of corporations, such as religious and charitable corporations, and corporations for literary purposes, may rightfully invest their moneys in the stock of other corporations. The power, if not expressly mentioned in their charters, is necessarily implied, for the preservation of the funds with which such institutions are endowed, and to render their funds productive. So an insurance company or savings-bank may rightfully invest its capital or deposits in the stocks of railroad companies, banks, manufacturing companies, and similar corporations. The power is necessary to enable them to engage in the business for which they are organized, and hence is implied, if not expressly granted, in their charters. Such investments are in the line of their business. On the other hand, a manufacturing or railroad corporation is incorporated to do the business of manufacturing, or transporting passengers and merchandise. Investing their funds in that of other corporations is not in the line of their business. Under extraordinary circumstances it may become necessary for a national bank, or a manufacturing corporation, or a railroad corporation, to acquire stock in another corporation, as in satisfaction of a valid debt, or by way of security, but with a view to its subsequent sale or conversion into money so as to make good or redeem an anticipated loss. Bank v. Bank,
In Hodges v. N.E. Screw Co.,
The Northern Railroad by its charter was vested with all the powers necessary to carry into effect the purposes and objects of its incorporation, subject to the laws in relation to corporations and railroads contained in the Revised Statutes. The objects of its incorporation are declared to be the accommodation of the *550 public travel, and the transportation of goods and merchandise Laws 1844, c. 190. It was not contemplated that more funds would be raised by the issue of stock than was necessary to construct and equip its road. The provision that when the net receipts shall amount to a sum making, with the prior net receipts of the corporation, more than an average of ten per cent. per annum from the commencement of its operations, the excess shall be paid into the treasury of the state, is evidence that the legislature never contemplated the accumulation of a fund from its earnings, or from loans, or from the issue of stock, to be invested in the stock of another railroad corporation. It 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 capital 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 would 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 further. 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, and securing more favorable contracts to itself. In Sumner v. Marcy, 3 W. M. 105, the corporation was chartered to deal in lumber, with a capital of $150,000, of which only $75,000 could be invested in personal property, and took stock in a bank to the value of $168,000, for the purpose of getting control of the bank — a clear violation of its charter, but no more so than in this case. The purchase by a corporation of stock in another corporation will be enjoined at the instance of stockholders, when it involves a misapplication of corporate funds, or is a mere speculation, or is induced by a vicious purpose. Pierce R. R. 505. If the investment by one railroad corporation of more than $135,000 in the stock of another at prices exceeding its market value, for the purpose of controlling such corporation for its own benefit, is not a misapplication of corporate funds, it would be difficult to find a case where such investment would be.
The law does not suffer a trust to fail for want of a trustee. This principle applies as well when, without legal remedy, the fiduciary failure would be partial as when it would be total. In this case the failure would be partial. The trustees, namely, the directors of the Concord company, are disabled to perform their official duty of managing the trust fund, namely, the property and business interests of that company, only so far as the dealings between that and the upper companies are concerned. The plaintiff has not shown that the trustees are incompetent to manage the *551 other affairs of the trust, or that there is danger of the other affairs being mismanaged. His protection should be commensurate with the fiduciary disability and the danger shown to exist. For the legal incapacity of the trustees to deal with the upper companies the plaintiff is entitled to a complete remedy that will prevent a partial failure of the trust. This requires not a removal of the trustees (directors), but the provisional appointment of a trustee (one or more) for the performance of that part of the duty of the present directors which they are legally incapacitated to perform. The court will appoint a trustee to manage those affairs of the Concord which are subjects of controversy in this suit, and which the directors of the Concord are held by this decision to be legally disabled to manage. And an injunction is granted against the execution by the directors of the vote to pay sums of money to the upper companies upon claims made by those companies against the Concord company. It will be the duty of the trustee appointed under this decision to manage the trust so far as it involves dealings with the upper companies in relation to those claims and all other claims between those companies and the Concord, in relation to terms of connection and transportation, past, present, and future.
The roads must be run upon some terms of connection and transportation; and the existing terms will be allowed to continue until they are terminated by the trustee now to be appointed, or in some other legal manner. To the control and management of such trustee the interests of the Concord company in that behalf are transferred.
The selection of a trustee remains to be made. If the parties agree on a suitable person for that position, they can report the same for consideration. As the trustee will have possession of no property, a fiduciary bond will not be required.
It may be necessary to go further than this decision goes; but such necessity does not now appear. If the remedy now given is found by experience, or, on further consideration, to be inadequate, it will be supplemented by such action as the case requires.
Decree accordingly.
DOE, C. J., ALLEN and CLARK, JJ., concurred. STANLEY, BLODGETT, and CARPENTER, JJ., did not sit.