Byrne v. Schuyler Electric Manufacturing Co.

28 L.R.A. 304, 31 A. 833, 65 Conn. 336, 1895 Conn. LEXIS 20

• Court: Supreme Court of Connecticut
• Decided: January 8, 1895
• Status: Published

Opinion

Andrews, C. J.

The Schuyler Electric Manufacturing Company is a corporation chartered by the legislature of this State, and is located at Hartford. The Schuyler Electric Company is a corporation formed under and pursuant to the joint stock Acts of the State, and is located at Middletown. For convenience we may call the first named company the Hartford corporation, and the other the Middletown corporation. The Hartford corporation was chartered “ for the purpose of manufacturing, buying, selling, and dealing in all kinds of machinery, appliances, and apparatus adapted to the purposes of producing and distributing light, heat, or power, by the use of electricity, and with power to manufacture and sell plants for furnishing electric light, heat, or power; and generally to manufacture such other articles incidental to its business as it may deem for its interest.” Its capital stock was of two kinds: preferred stock to the amount of $350,000, and common stock amounting to $150,000. The common stock might be increased to an amount not exceeding $500,000, but only for the purpose of paying off and retiring a corresponding amount of the preferred stock; and no payment was to be made which should reduce the assets of the company below the sum of $150,000.

The articles of agreement of the Middletown corporation are not given, but it is stated that that corporation was formed to continue the same business which the Hartford corporation was chartered to carry on. By an agreement between these two corporations made on the 17th day of October, 1887, the Hartford corporation undertook to convey, and did in point of form convey, assign and transfer to the Middletown corporation “its entire assets including its letters patent, stock, bonds, ehoses in action, and property of every description,” and received in pay therefor two thousand shares of the capital stock of the latter corporation of the nominal value of one hundred dollars each. These shares of stock were subscribed for and issued to certain persons who had been named as trustees for that purpose by the Hartford corporation, and who subscribed as such trustees and were so named in the issue of the same. The Middletown company accepted said transfer of property as full payment for the said shares of its stock. The property so transferred consisted of the various letters patent covering the system of electric manufacture and lighting according to which the Hartford corporation manufactured its electrical apparatus, and the machinery, tools and appliances with which it performed its work. It was the property without which it was and is impossible for that corporation to carry on its manufacture ; and without which it is put entirely out of business and out of all active existence; and the Schuyler Electric Manufacturing Company, instead of being engaged in the manufacture for which it was created, has become simply a cestui que trust of two thousand shares of the capital stock of another corporation. The case shows that the officers and managers of this corporation have made the sale and taken the stock as above mentioned, not with the intention of winding up its affairs and dividing the stock so received among their own stockholders, nor as a temporary arrangement resorted to merely to carry the corporation over a period of distress, but with the intention to hold it as a permanent investment. To sum it all up, the result is to practically dissolve the Schuyler Electric Manufacturing Company, and to transfer its business to the Schuyler Electric Company.

The plaintiff is the owner of two hundred and fifty shares of the common and ten shares of the preferred stock of the Hartford corporation. He has at all times objected to all the votes and acts of that corporation pursuant to which it transferred its assets and all its property to the Middletown corporation and became the owner of the stock of the latter company. He brought the present action to the Superior Court — after the corporation and the directors had refused to take any action to rescind the said contract — averring in his complaint that the said agreement of the Hartford corporation was a fraud upon him, was ultra vires and void, and asked the court so to declare, and to afford him some remedy either by an injunction or by the appointment of a receiver. Both said corporations were made defendants, and they both came into court and made answer. Their second defense sets forth the several votes of the Hartford corporation according to which the Middletown corporation was organized ; alleges that the Hartford corporation was insolvent ; that the Middletown corporation was organized for the purpose of continuing the business of the Hartford corporation ; and that all the assets and property was transferred and the stock received in payment, as is hereinbefore stated. It then proceeds as follows: “ If said plan for continuing the business of the said Schuyler Manufacturing Company by the organization of the Schuyler Electric Company had not been carried out, the said Schuyler Electric Manufacturing Company would have been compelled to wind up its affairs, either under a receiver or in insolvency, and in either case the assets of said corporation, in the judgment of the directors, would have yielded not much, if anything, more than enough to pay creditors, and the preferred stock would have been of little value, and the common stock of no value whatever.” And so the defendants aver that they did not act fraudulently towards the plaintiff, but in good faith, and for the best interests of the said corporation and all its stockholders.

The State Referee, to whom the case was committed, found the facts generally in accordance with the defendants’ claims. The Superior Court accepted his report, found the facts to be as stated therein, and rendered judgment for the defendants to recover their costs. From that judgment the plaintiff appealed to this court.

Among the reasons of appeal are: “ That the acts of the stockholders and directors of the Schuyler Electric Manufacturing Company in authorizing the subscription to the stock of said Schuyler Electric Company were constructively fraudulent, ultra vires, and void as against a non-assenting stockholder. That the transfer of the assets of the said Schuyler Electric Manufacturing Company, in the manner set forth, was likewise constructively fraudulent, ultra vires, and void.”

These reasons of appeal present the two sides of the one transaction which is the subject of the plaintiff’s complaint. Their full significance can only be appreciated when they are considered in connection with the purpose for which the property of the Hartford corporation was sold and the stock of the Middletown corporation taken in payment, as set forth in the second defense and found true by the referee. That purpose was to keep the Hartford corporation in nominal existence, and at the same time to carry on its business through the agency of the Middletown corporation, upon the hope that the Hartford stock would become valuable by the successful operation of the Middletown company, and so in effect make the stockholders in the Hartford corporation stockholders in the Middletown one. A nominal corporation was to be maintained in Hartford, a real one in Middle-town. And although the entire property and assets of the Hartford corporation was thus invested in a new business, and its stockholders are to gain or lose as that business is successful or otherwise, that new business is carried on under a different charter and under different rules, in forming which the stockholders of the Hartford company have no voice, and under the direction of officers unaccountable to them. The Hartford corporation is the beneficial owner of four fifths of the Middletown stock, but it can have no control over its business. It cannot have any direct control, for it is not the legal owner of that stock ; and there is nothing in the agreement between these corporations to show that it can have any control over the action of the trustees. A unanimous vote of the Hartford stockholders could not displace one of the trustees and appoint another in his stead. If one of them should die, a like unanimous vote could not name his successor. This is the scope of the reasons of appeal.

The plaintiff insists that this is an arrangement into which he cannot lawfully be taken against his will, and he says the Superior Court erred because its judgment forced him into this scheme when he had all along protested against it. Is', then, the plaintiff correct when he says there is error in the judgment of the Superior Court? That is,is the agreement which the Schuyler Electric Manufacturing Company undertook to make with the Schuyler Electric Company ultra vires?

An act is ultra vires of a corporation when it is not within the power of the corporation to perforin it. The charter of any corporation is its enabling Act; the- corporation is empowered to do those things only for which it is created, and to do them in the manner specified in the charter. This is especially the rule in the case of private trading or manufacturing corporations. “The charter is the full measure of the powers which the corporation possesses. It cannot lawfully exercise any others. In ordinary cases every corporation is just what the incorporating Act has made it, and is capable of exercising its faculties only in the manner the Act authorizes.” Farrell v. Winchester Ave. R. R. Co., 61 Conn., 127; Berlin v. New Britain, 9 id., 180; Bank of Augusta v. Earle, 13 Peters, 587, Taney, C. J. And as charters of this kind are usually granted at the request of the corporators, they are construed most strongly against the corporation. Nothing is granted except what is given expressly or by fair implication. And no other powers can be implied except such as are necessary and proper to carry into effect the powers expressly granted. 2 Kent’s Comm. *298; New York Firemen's Ins. Co. v. Ely, 5 Conn., 560; Mechanics &c. Ass. v. Meriden Agency Co., 24 id., 159; Sumner v. Marcey, 3 Woodb. & Minot, 112; Franklin Co. v. Lewiston Sav. Bank, 68 Me., 43; Endlich on Construction, § 354. Sutherland on Statutes, § 325.

It is not claimed that there is in the charter of the Hartford corporation any express authority to make such an agreement as it did make with the Middletown corporation. And if, upon the true construction of the charter of that corporation, it does not appear to have been the intention of the legislature, expressed or implied, that that corporation should have power to enter into such an agreement as the one now under consideration, then that agreement must be treated as illegal and wholly void. Riche v. Ashbury Ry. Carriage Co., L. R., 9 Ex., 262. And as the rule of construction given in the cases we have cited is to be applied, then no such intention does appear. It is consistent, however, with these eases and the rule of construction they establish, that a corporation may carry on its business in the way in which such a business is usually carried on. It would not be questioned in the case of a trading corporation that it should trade. A manufacturing corporation is, on the contrary, ordinarily expected to retain its assets in its own business — not to sell and invest in the stock of another. The legislature fixes the amount of the capital of a manufacturing corporation because it is expected, that the corporation will employ it all in its own business. The Hartford corporation, or any other like corporation, might sell its assets in part or in whole if it was done in the usual course of business. It might take the stock of another corporation in payment if it was done in the carrying on of its own business. But the agreement made with the Middletown corporation was not of this kind. That agreement was not the carrying on of its business but the ending of its business. It put the Hartford corporation out of all business and out of active existence, and undertook to embark and continue its entire capital in the business of the Middletown company. Nor do the cases cited deny that a corporation, under some circumstances, might expend its whole capital in the purchase of the stock of another corporation; as if such purchase was made for the purpose of selling the stock, and not permanently to hold it. This is what was said to be lawful in Hodges v. New England Screw Co., 1 R. I., 347. So, too, if such a purchase was made by a corporation in embarrassed circumstances, as the most advantageous way of closing its affairs, paying its debts and settling with its stockholders, it would be legitimate. This was what was done, and decided to be proper, in Treadwell v. The Salisbury Mfg. Co., 7 Gray, 405. This case was referred to in Evans v. Boston Heating Co., 157 Mass., 37, by the court with approval. It was held, however, that the sale in the latter case had received the implied sanction of the legislature.

Easun v. The Buckeye Brewing Co., 51 Fed. Rep., 156, arose in Ohio. The defendant, a corporation organized under the laws of that State, had contracted to sell all its plant and assets to the plaintiff, and to take in payment the-stock and bonds of another corporation to be organized to carry on the business. The corporation was solvent and doing a profitable business. The suit was brought to recover damages of the defendants for not fulfilling that contract. It was held that the contract was ultra vires under the laws of Ohio — that one corporation could not become the owner of the stock of another, unless authority to do so was conferred by its charter; citing Franklin Bank v. Commercial Bank, 36 Ohio St., 350, and Coppin v. Greenlees & Ransom Co., 38 id., 275. In discussing the case the court said: 15An insolvent corporation, contemplating voluntary dissolution by consent of its stockholders, might have a light to dispose of its property, and accept, in whole or in part, for the purchase price thereof, stock in another corporation ; this stock either to be sold, and the proceeds thereof distributed to its creditors, or to be apportioned in kind to such creditors or stockholders as the terms of dissolution might provide.” In the case of Buford v. Keokuk Northern Packet Co., 3 Mo. App., 159, it was held that in ordinary cases the directors and the majority of the stockholders could not sell out the property of a corporation; but that the officers of a corporation which was on the eve of dissolution by operation of law might, in the exercise of a sound discretion, transfer its assets to another corporation and take in payment the stock of such other corporation and convert it into money for the purpose of liquidation.

The Miners' Ditch Co. v. Zellerlach, 37 Cal., 543, was like this. The plaintiff was organized to dig and maintain ditches for the purpose of supplying water to the miners in Nevada county. It owned several ditches suitable and used for that purpose. The Eureka Lake Co. was another corporation organized for a like purpose, and was doing a business which was in competition with the business of the Miners Co. These two companies, by an agreement which was intended to be only temporary, united their stock and property. The defendant was a mortgagee and as such in possession of certain of the ditches of the plaintiff company. The suit was to recover the possession of the ditches, the complaint alleging that the agreement by which the two companies became united was ultra vires and void. It was held not to be so ; and whether it was so or not, the plaintiff could not against its own mortgage set up that the contract was illegal.

Other cases bearing on this subject are People v. Ballard, 134 N. Y., 269, 136 N. Y., 639 ; Boston & Providence R. R. v. N. Y. & N E. R. R., 13 R. I., 260; Holmes & Griggs Mfg. Co. v. Holmes & Wessell Metal Co., 127 N. Y., 252; Pearson v. Concord R. R., 62 N. H., 537; The Central R. R. of N. J. v. Penn. R. R., 31 N. J. Eq., 475; Central R. R. Co. v. Collin, 40 Georgia, 582; Marble Co. v. Harvey, 92 Tenn., 115, 23 Am. & Eng. Ency. of Law, 798 ; Cools on Stock and Stockholders (3d Ed.), §§ 64, 313; Morawetz on Corporations, § 433.

It may be stated as a general rule we think — subject possibly to some exceptions — that a corporation may not become a stockholder in another corporation for the purpose of holding the stock permanently, unless expressly authorized to do so. A solvent corporation may buy and sell the stock of another corporation, if done in the usual course of business, and may become the owner of such stock if taken in payment for debts; but an insolvent corporation may take the stock of another corporation only for the purpose of closing up its business, to be divided in kind, or to be converted into money and divided among its creditors and shareholders.

The defendants, though not admitting the correctness of the rule as just stated, place the stress of their defense on other grounds. They say that the directors of the corporation and all the stockholders, except the plaintiff, consented to the agreement before it was entered into, and ratified the action taken pursuant to it after the action was had; and that the plaintiff is bound bjr such consent and ratification; that the plaintiff does not show that he is injured, or that he would be benefited if the agreement should be declared to be void; that in fact the action taken is advantageous to the plaintiff, and its defeat would be to the injury of all the other stockholders. And they also say that the plaintiff by his own laches is debarred of all right to have the agreement disturbed. These considerations are urged with great force and ability, and are entitled to careful examination.

It is true that ultra vires is a doctrine which has not at all times received from the courts a perfectly consistent application. An act done or a contract entered into by a corporation may be alleged to be ultra vires of the corporation. The objection may come from tbe State, from a dissenting stockholder, or from the party with whom the contract is made. And the courts often give a different meaning to the term according to the source whence the objection comes. An act or a contract may be ultra vires if the State objects, when it would not be so held if the objection came from a stockholder or from a contracting party. In this case we are dealing with this doctrine only as it maybe invoked by a non-assenting stockholder. And this is to be determined by the obligation into which the stockholder has entered by becoming a member of the corporation.

A leading and perhaps the earliest case in which the reciprocal obligations of a corporation and its stockholders are discussed, is Livingston v. Lynch, 4 John. Ch., 573, decided in 1820, by Chancellor Kent. He held that the charter of a corporation was a contract between the corporation and its stockholders, and that neither the directors nor a majority of the members could bind a minority without their assent in any matter not expressly or impliedly authorized by the charter. The case of The H. & N. H. R. R. Co. v. Crosswell, 5 Hill, 385, is to the same effect. These cases have been followed by very many others down to the present time. Morawetz on Corporations, § 1047; Cook on Stock and Stockholders, § 666; and the cases cited under each of these sections. Natusch v. Irving, 2 Cooper’s Ch., 358, is an English case which held exactly to the same results. This case was decided by Lord Eldon in 1824. Other English cases are Simpson v. Westminster Palace Hotel Co., 8 H. L. Cases, 712; Pickering v. Stephenson, L. R., 14 Eq., 322 ; Lyde v. Eastern Bengal Ry. Co., 36 Beav., 16.

It seems to be the settled law of America and England, that any act, or proposed act of a corporation, or of the directors, or of a majority of the stockholders, which is not within the express or implied power of the charter of incorporation — in other words any ultra vires act — is a breach of the contract between the corporation and each of the stockholders; and that consequently any one or more of the stockholders may object thereto, and compel the corporation to observe the terms of the contract set forth in the charter. Therefore it results that neither the directors nor a majority of the stockholders can sell the corporate property against the dissent of any stockholder. This is entirely clear in the case of a solvent corporation. Abbot v. American Hard Rubber Co., 33 Barb., 578; March v. Railroad, 43 N. H., 523; Lauman v. Lebanon Valley R. R., 30 Pa. St., 42 ; Morawetz on Corporations, §§ 274, 512, 513. And although the corporation is actually insolvent, if the purpose of the sale is not the bona fide winding up of its business, but is the continuance of the business in another corporation, the rule is not changed. A dissenting stockholder may interfere and prevent the sale. Kean v. Johnson, 9 N. J. Eq., 401; Boston & Providence R. R. v. N. Y. & N. E. R. R. Co., 13 R. I., 260. The reasons are well stated by Chief Justice Lowrie in Lauman v. Lebanon Valley R. R., supra. In that case the defendant company had undertaken to consolidate with another railroad company, to transfer all its property to, and take in payment the stock of, the other corporation. The plaintiff was a dissenting stockholder. Judge Lowrie said: “A majority of the members of a corporation cannot be authorized to divest the interest of a dissenting stockholder, by a transfer of the whole of its property to another company, * * * without first giving security for the interest of such dissenting stockholder. * * * The contract of consolidation is an act of dissolution in form and substance * * * and the corporation cannot in the act of dissolution, dispose of the rights of its members. The act of dissolution, like the act of association, is not a corporate act, but an act of the members of the corporation. They may commit to their officers the business of effecting it in its details, but they are not required to do so by the terms of their association, and in effecting such a purpose the officers would be rather trustees of the members than corporate functionaries. Then it follows, quite obviously, that no corporate apt can settle the terms of the dissolution, or distribute the effects among the members, and that this company cannot decide what the plaintiff shall take for his interest.” To the same effect are Black v. Delaware &c. Co., 22 N. J. Eq., 415; Mason v. Pewabic Mining Co., 133 U. S., 50; Beman v. Rufford, 1 Sim. N. S., 564.

The State Referee finds that “ the plaintiff failed to show that he was in anyway injured by the transactions of which he complains, nor does it appear that he will be in any way benefited if the relief that he seeks is granted him.” It does not seem to this court that the question of the profitableness or the unprofitableness of the transaction affects at all the plaintiff’s right. In the case of Beman v. Rufford, last cited, the vice chancellor, Bakon Cbaítwobth, said: “ The bill, however, is filed by the shareholders of the Oxford &c. R. R. Co., and the principle on which they are entitled to file it on behalf of themselves and all the other shareholders, is that this court will not allow any of them to say that they are not interested in preventing the law of their company from being violated. It will not allow any of them to speculate as to whether it would be more advantageous to do something which the Act of Parliament does not authorize to be done; and therefore it is that a very small number or, indeed, one of the shareholders may file a bill on behalf of the whole body, although, at a meeting of the company, a large majority of the other shareholders may have sanctioned that course of proceeding which the bill complains of. The shareholders so filing this bill, say that the company, together with the directors of it, have entered into a contract, * * * different from that which was contemplated by the Act of Parliament, and so to apply funds, which the plaintiffs say are their funds, in a mode in which they were never authorized to be applied; and, therefore, the plaintiffs seek to restrain them.” That case was brought by the plaintiffs — three shareholders of the Oxford &c. R. R. Co. against that company, its directors, etc. — to prevent a certain agreement made with another railroad company, from being carried into effect. And an injunction was granted.

In the ease of the Central R. R. v. Collins, 40 Ga., 582, the court in rendering judgment said: “ We do not think the profitableness of this contract, to the stockholders of the Central, etc., R. R. Co., * * * has anything to do with the matter. These stockholders have a right, at their pleasure, to stand on their contract. If the charters do not give to these companies the right to go into this new enterprise, any one stockholder has the right to object. He is not to be forced into an enterprise not included in the charter.

“ That it will be to his interest is no excuse; that is for him to judge. By becoming a stockholder he has contracted that a majority of the stockholders shall manage the affairs of the company yvithin its proper sphere as a corporation, but no further; and any attempt to use the funds, or pledge the credit of the company not yvithin the legitimate scope of the charter, is a violation of the contract which the stockholders have made with each other, and of the rights — the contract rights — of any stockholder yvho chooses to say ‘ I am not willing.’ It may be that it will be to his advantage, but he may not think so, and he has a legal right to insist upon it that the company shall keep within the powers granted to it by the charter.” Stevens v. The Rutland &c. R. R. Co., 29 Vt., 545 ; Hoole v. Great Western Ry. Co., L. R. 3 Ch. App., 262.

The claim that the plaintiff is chargeable with laches yve think is fully disposed of by the finding. The meeting of the directors of the Hartford corporation, at which the agreement to transfer all the assets to the Middletown corporation was made, was held on the 17th day of October, 1887. By some oversight notice of this meeting was not sent to the plaintiff. The omission was discovered, and a notice was sent by telegram to New York directed to the plaintiff’s place of business, yvhich he received on the 17th, but too late to attend the meeting. He telegraphed in reply protesting against the meeting and denying the right of the directors to hold the meeting. The finding then proceeds: “Immediately upon learning that a sale of the assets of the Schuyler Electric Manufacturing Company had taken place, the plaintiff served upon said company and upon its directors a notice, requesting that suit be instituted by said corporation for the purpose of setting aside said contract, agreement, and sale, and for other purposes set forth in said notice. Said directors refused to cause the institution of said proceedings, and on the 7th day of March, 1888, the plaintiff caused to be presented to the stockholders of said company, at their annual meeting, holden on said day (and at which meeting the stockholders ratified the said agreement), a written notice and demand that a suit be brought to set aside said contract. Said stockholders neglected and refused to take the action requested by said notice, and thereupon, as soon as possible, the plaintiff instituted the present suit. I find that the failure to give seasonable notice to the plaintiff was not intentional, but accidental.”

Laches is defined as ^ inexcusable delay in asserting a right.” One who acts as soon as possible after learning of his right, or that his right has been invaded, cannot be charged with delay.

We think there is error in the judgment of the Superior Court and it is set aside. The case is remanded to be proceeded with according to law.

In this opinion the other judges concurred, except Prentice, J., who dissented.