91 A. 428 | Pa. | 1914
This was a bill for discovery and to compel the defendants to account for and pay over to the plaintiffs their respective proportions of a sum of money alleged to be an illicit gain acquired by them "in the course of the transfer of the stock of the Pottstown Light, Heat Power Co." The concern in question was a Pennsylvania corporation, and its capital stock consisted of 700 shares; the plaintiffs were minority stockholders, *430 while the defendants owned in their own names 183 shares and directly influenced about 200 more belonging to their relations, — they were officers and directors of the company and had managed its affairs for many years, — one of them being president and all of them together constituting a majority of the board. A purchaser appeared who desired the entire stock of the company, so as to own and possess its property and franchises; he was willing to expend $202,330 for that purpose. While negotiations were pending, the defendants secured such control of about 100 additional shares that they could safely contract for their transfer, together with the other stock at their command, at $165 per share. With matters in this condition, a bargain was struck, evidenced by a letter from the purchaser to the Security Company of Pottstown, of which one of the defendants was president, wherein it is stated that $115,500 deposited with that company was "to be applied to the purchase of 700 shares of the capital stock of the Pottstown Light, Heat Power Co., at the rate of $165 per share," that at least 484 shares were to be delivered forthwith at that price and "as many additional shares from day to day" as might be deposited by shareholders up to the 18th day of March, 1910, at which time the recipient was to return any unused balance of the fund, and further, that the four defendants named in this suit were to sign and forward to all shareholders whose stock had not been delivered, "a letter" advising them that there was deposited with the security company a "sum sufficient to purchase all the said outstanding stock at $165 per share." The defendants did not send out this letter; but the purchaser had one prepared and mailed to the stockholders, over the names of the defendants and others, including the security company, in which it was stated that the individual signers, constituting a "majority of the capital stock," had sold their holdings "at $165" per share, "upon the understanding that all stockholders should have the same *431 privilege," and that $115,500 was on deposit with the security company to take up the stock at that price. The exact contents of this communication were not made known to the defendants at the time, and there was no proof that more than one of them had knowledge that it had been issued, until long subsequent. The letter had the desired effect, and almost every one accepted the $165 per share, although forty-eight shares, owned by two of the plaintiffs, were not turned in until the merger of the company with another corporation, under the Act of May 29, 1901, P. L. 349, which occurred shortly afterwards, when they accepted the same price for their stock. At the time of the deposit of $115,500, a further sum of $86,830 was paid directly to the defendants, under a secret arrangement, not known to the plaintiffs until they and all other outside shareholders had parted with their stock; in fact, the amount of this fund with the details concerning its payment were not fully disclosed until the hearing on the bill. It appears that this money was not divided by the defendants in accordance with the shares of stock owned by them; but that one took $40,740 for himself, without making any division with those whose stock he controlled, two took $41,090, which they divided with the stockholder members of their family, and the remaining defendant received $5,000. It further appears that the purchaser would not pay the $86,830 until actual control of the organization of the corporation was duly passed to him, and that to secure this, he had the transfer of stock put in escrow until a meeting of the directors was convened. At this meeting the defendants tendered their resignations and had them duly acted upon in turn, as each retired a successor designated by the purchaser being elected in his place; after which, and not before, the "control fund" was turned over.
Equity jurisdiction has not been questioned and the defendants did not attempt to avail themselves of the Act of June 7, 1907, P. L. 440, The chancellor who *432
heard the testimony made many findings of fact which, according to the view we take of the case, are of no particular importance to this opinion. In the first place, we do not give controlling weight to the written communication sent out by the purchaser; while upon this subject, however, we stop to observe that, although in some particulars this circular may have gone beyond the letter which the defendants agreed to sign, yet, the names it contained were given to the purchaser by them for use in a communication to be sent to the shareholders, and the letter in question was in practical accord with the impression meant to be created by the defendants, i. e., that the deposit of $115,500 represented the entire price to be paid for all the stock of the Light, Heat Power Company, and that each and every stockholder was to receive but $165 per share; moreover, in this transaction the defendants and the purchaser "were associates in a common enterprise, each bound by the knowledge and acts of the other" (Commonwealth Title Ins. Trust Co. v. Seltzer,
The court below found in effect that the defendants had capitalized and made an illicit sale of their influence and positions as directors of the Light, Heat Power Company, and that the $86,830 was paid and accepted by them, at least in part, as a consideration for so doing; but the appellants contend that the plaintiffs did not *434 draw their bill on that theory and that the pleadings presented no such issue. In considering this contention it is to be noted that the defendants not only admitted in their testimony that the "control fund" was separate and apart from the price received for their stock, but the answer filed by them, in speaking of the sale of their holdings, expressly avers, "the price fixed for the stock itself was $165 per share. . . .and the additional compensation that we were to receive for parting with our control was an entirely private business matter. . . . In the sale of our stock and in all that we did in connection therewith we acted solely as individual owners. . . .and never did any act in connection therewith as directors." The defendants thus treated the bill as raising an issue concerning their conduct as directors and the effect thereof; moreover, when the court found against them on that issue they applied for a further hearing so that they might introduce other evidence relative thereto, and neither at the time of this application, at any of the hearings, nor in their exceptions filed below, did they expressly make the objection that the averments of the bill failed to raise the issue in question; finally, none of the present assignments of error expressly makes that point. But, nevertheless, the appellants now argue that no such issue was before the court and, hence, that the decree cannot properly be supported upon that ground. As to this, it is sufficient to say that, under the circumstances, even though the bill may not in express words aver that the acts of the defendants constituted official misconduct, yet, in our opinion, its averments of fact are sufficient to sustain a decree upon that ground.
In determining that the defendants would have to pay to each of the plaintiffs a share of the $86,830 proportionate to their respective holdings of stock, the chancellor proceeded on the theory that a majority of the directors of a corporation cannot "barter their offices for individual gain," particularly when they act in a manner *435 calculated to mislead and deceive others into parting with their stock at a price fixed upon by the purchaser and such directors, and when if it had not been for their illegal conduct each of the shareholders would, in all probability, have received out of the money so illicitly gained, an increased price for his stock equal to the amount awarded to him. After referring to the authorities, the court below states, "Our attention had not been called to any case where. . . .the majority directors, who were majority stockholders, sold the control of the company and the resignation of their offices, for a specific sum independent of the money received for their shares of stock. . . .The authorities that seemingly countenance a resignation by majority directors as part consideration for their sale of stock, are careful to say that such contracts are carefully scrutinized by the courts. They must be entirely free of any bad faith to the shareholders, and as already shown, the defendants cannot meet this test." We likewise have examined all the authorities cited, and find none that rules this case; but we feel that the court below applied correct and appropriate legal principles in reaching its final conclusion that the defendants were liable to the plaintiffs in accordance with the decree entered.
The principle is well established that those in control of the management of a corporation are under an inherent obligation not in any manner to use their positions to advance their individual interests as distinguished from the interests they represent, and in Pennsylvania we have ruled that "A director of a corporation is a trustee for the entire body of stockholders"; it is likewise settled in this State that, though one who is a director may sell his stock and keep any profits so acquired, yet, under the guise of this rule, he cannot in combination with others, even by means which if standing alone would be lawful in themselves, take advantage of his official position for his individual profit to the detriment of his corporation or its other stock-holders *436
(Bird Coal Iron Co. v. Humes,
In the last analysis, there is really only one substantial question for our consideration, and that is, — Was the chancellor justified in concluding that the defendants intended to and in fact did, include the sale of their positions, with the influence flowing therefrom, as part of the consideration delivered by them in return for "the control fund" of $86,830. On this important point, after a review of all the proofs, we do not feel that the inferences drawn by the chancellor who heard the testimony are unreasonable or his conclusion unwarranted; therefore, we accept the facts embraced in that conclusion as properly established, and with these found against the defendant, the law of the case is clear and requires no long citation of authorities. By force of existing conditions, the corporate form is rapidly becoming the accepted method of conducting business, and much of the wealth and savings of the people is invested in such enterprises. When the individual investor places his contribution of capital in a concern of this character, of necessity, he must trust to the integrity of its directors, and he may do so with the knowledge that the law requires a high degree of honesty on their part, not only toward the corporation itself, as a separate entity, but toward its shareholders, and that, in so far as those in control owe a duty to the latter, they must observe good faith to the whole body of stockholders, and may not *437
act with any separate group or clique in order to serve their own personal interests. Although the stock of one who is a director of a corporation is his individual property to be dealt with as he pleases, and to be sold for such a price as he may be able to get for it, either in association with others or alone, yet, his official position is not his individual property in any sense, and he has no right, either directly or indirectly, to use it for his own selfish ends; when he does so, and thereby derives a gain that can be reasonably traced to such an abuse, all money thus made belongs either to the corporation or, in a case like the present, in common to its shareholders; furthermore, when alleged misconduct of the managers of a corporation is under investigation, as recently said by this court in the Tenth National Bank v. Smith Construction Co.,
Aside from the matters which we have already discussed, it is contended by the appellants that there can be no legal recovery by the present plaintiffs in their *438
individual right, and that, even if under some circumstances such a recovery would be allowed, yet, all of the claimants in this particular case are barred, because they parted with their stock before instituting suit. In discussing the first branch of this contention, the chancellor states, "If directors are guilty of a breach of trust, injuries. . . .to the rights of the shareholders, or a portion of them may be redressed at the suit of the injured stockholders; the rule is founded in part upon the consideration, that directors are trustees for the stockholders, and that in any action to redress breaches of trust on the part of directors toward stockholders, the shareholders are the real parties in interest"; citing, 10 Cyc. 965, and Com. Title Ins. Trust Co. v. Seltzer,
The assignments of error are overruled and the judgment is affirmed at the cost of the appellants.
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