English v. Rosenkrantz

111 S.E. 198, 152 Ga. 726, 1922 Ga. LEXIS 267

Opinions

Atkinson, J.

1. The action is for damages for alleged breach of the contract set forth at length in the statement of facts, by preventing the plaintiff as a stockholder from voting all of the stock of the corporation for herself as vice-president under provisions of the contract, and thereby depriving her of stipulated salaries pertaining to the office. The action was instituted after the decision of this court in Rosenkrantz v. Chattahoochee Brick Company, 147 Ga. 730 (95 S. E. 225), being a suit for specific performance, in which the judgment of the trial court dismissing the petition on general demurrer was affirmed. A controlling question is whether the contract is void on the ground that it is contrary to public policy. Prior to the purchase of the Steele stock, which was arrayed against James W. English Sr., the latter did not have a majority of the stock of the corporation. After acquisition of the Steele stock English' and his family, including the plaintiff, who for convenience may be called the English faction, had a majority of the stock, which enabled them to dominate the corporation, while the Lowe estate, who for convenience may be called the Lowe faction, had a substantial minority amounting to more than one third of the total stock of the corporation. While the plaintiff owned an undivided interest in the stock held by the Lowe faction, she allied herself with the fortunes of the English faction, and was a party to the written pooling contract of date July 11th, 1900'. By the terms of this contract all of the stock held by the English faction was pooled for voting purposes, so that one person might exercise the voting power for all of the stock, whether or not its business was being operated wisely and to the best interest of the corporation or the stockholders as a whole. The contract was irrevocable and unchangeable, except upon mutual consent of all the parties thereto. The corporation was organized in 1895, under the provisions of the statute which is now found in the Civil Code, § 2823, and its period of existence fixed by statute was 20 years from the date of the charter subject to renewal. TJnder the provisions of the contract salaries to be paid out of net earnings of the corporation were provided for the president and vice-president, not to exceed $250 per month respectively; and the right to hold snch offices in the corporation was confined to members of the English faction, and should ecdst during the full term of the contract, which was 45 years from its date, being more than twice the term of the life of the corporation. The order in which different members of the English faction should become entitled to hold the offices of president and vice-president was provided for on the basis of survivorship of James W. English Sr., James W. English Jr., Harry L. English, and the plaintiff,. during the period of the contract. The plaintiff should become entitled to the .office of vice-president on the death of her husband James W. English Jr. Salaried offices above mentioned were to be held as above indicated, irrespective of whether or not it would be to the best interest of the corporation and the stockholders as a whole to have such persons hold the offices or to pay the salaries attached thereto. While the salaries were payable out of the net income, if the net income should not be more than sufficient to pay the specified salaries it would be possible to consume the whole of the net income in paying salaries, thus leaving nothing to be paid as dividends upon any of the stock in the corporation. Under such circumstances the holders of the majority stock who were not president or vice-president, and of course the minority stock held by the Lowe faction which was outside the contract,. would be under a great disadvantage. The plaintiff allied herself with the English faction, and indirectly through her husband, and directly as a prospective vice-president herself, had peculiar advantages under the contract in which her co-owners of the Lowe stock did not share. They could have no voice in the management or policy of the corporation during the whole term of the contract, whether or not the faction in control wisely and successfully conducted the business of the corporation. In such circumstances the tendency of the contract was to depress the value of the Lowe stock while in the hands of Mrs. Lowe and W. B. Lowe Jr., and cause it to gravitate towards the plaintiff or other members of the English faction, parties to the contract, who might be willing to buy at some reduced price. In the circumstances, while the facts differ somewhat from those involved in Morel v. Hoge, 130 Ga. 625 (supra), the principles there ruled are applicable and controlling. In that ease all of the stock of the corporation was represented in a contract, which in effect gave one faction of stockholders the right to permanently elect a majority of the directors, and thus render it possible for a minority of the stockholders in the corporation to control the policies and affairs of the corporation, whether or not the management was for the best interests of the corporation or its stockholders as a whole. The contract was held to be void as against public policy. .The opinion is so apposite that it will be restated:

“ The contention of the Morel faction is, that an agreement was entered into between it and the Hilton faction, which agreement was a„condition precedent to the incorporation of the Sylvania & Girard Eailroad Company, to the effect that, in consideration of the Morel faction subscribing for 50 of the total number of 100’ shares of the capital stock of the company, the Morel faction should permanently have the right of selecting and having elected three of the five directors of the company, ‘ and thus exercise a control over the company and its affairs/ Granting that the allegations of the answer are sufficient to sustain this contention, the question for adjudication is whether such agreement is valid. The company was incorporated by the Secretary of State, under the provisions of the Civil Code, § 2159 et seq. In § 2163 it is provided: ‘ The board of directors shall select from their number a president, and may elect one or more vice-presidents, and may appoint a secretary, a treasurer, and such other officers and agents as they may deem necessary.” Therefore, if the Morel faction has the right, by virtue of the agreement, to have elected a majority of the directors of the company, favorable to the interests of that faction and willing to carry out its policies in the management of the corporate affairs, and the members of the Hilton faction are bound by the agreement to so vote their stock as to enable the Morel faction to exercise such right, then the last-named faction may indefinitely control the entire management of the company, and accordingly name all its officers and agents, fix their compensation, and choose any of them from among the shareholders identified with such faction, even though it may own, as is now the case, only a minority of the corporate shares. In Shepaug Voting Trust Cases, 60 Conn. 579 (24 Atl. 41), Robinson, J., said: . . ‘the duty which each stockholder owes his fellow stockholder [is] . to use such power and means as the law and his ownership of stock give him, that the general interest of the stockholders shall be protected and the general welfare of the corporation sustained, and its business conducted by its agents, managers, and officers, so far as may be, upon prudent and honest business principles, and with just as little temptation to and opportunity for fraud, and the seeking of individual gains at the sacrifice of the general welfare, as possible. . . He may shirk it perhaps by refusing to attend stockholders’ meetings, or by declining to vote when called upon, but the law will not allow him to strip himself of the power to perform his duty.’

“ In Cone v. Bussell & Mason, 48 N. J. Eq. 208 (21 Atl. 847), the owners of a majority of the shares of a transportation corporation mutually agreed to execute, and did execute, a proxy purporting to be irrevocable for five years, authorizing the persons therein named to vote at all stockholders’ meetings; and they on their part agreed to so vote that one of the parties to the agreement should be continuously employed as a manager of the corporation, at a salary specified in the agreement. This agreement was held to be against public policy, and therefore void, upon the ground that it was the obligation of corporators and shareholders to attend in person and execute the trust or franchise imposed upon them, and that the good of the public required that each stockholder should exercise his individual judgment as to all matters presented. In the opinion delivered for the court, Pitney, Y. C., quoted the language of Chief Justice Shaw, in Fuller v. Dame, 18 Pick. 484, as follows: ‘ Mr. Fuller was one of the original proprietors of the Worcester Bailroad. His associates had a right to believe that, in all his acts as such stockholder, in choosing directors, in framing by-laws, and in doing other acts, pursuant to the powers of the corporation, he had a common, and, in proportion to his shares, an equal interest, and they had a right to rely on his judgment, his recommendations of directors, and other acts, with all the confidence inspired by such a belief.’ There are a number of other cases in which it has been held that agreements between stockholders, that particular persons shall fill the offices of a corporation and draw designated salaries, impair the duty of stockholders to choose for their officers such persons as are best adapted to promote the welfare of the corporation. Among them are Guernsey v. Cook, 117 Mass. 548, s. c. 120 Mass. 501; Woodworth v. Wentworth, 133 Mass. 309. In White v. Thomas etc. Co., 52 N. J. Eq. 178 (28 Atl. 75), the holder of certain patents 'agreed with several capitalists to form a joint stock company, a portion of the capital stock of which was to be issued to him in payment of patents to be assigned to the corporation, another portion to be issued to the capitalists for funds to be advanced by them in exploiting the patents, and the remaining shares were to be held in the treasury for sale. It was agreed that the shares other than those left in the treasury were to be transferred to a trustee, to be held for the term of ten years, and were by him to be so voted at the elections of the directors that the patentee should nominate and elect a minority of the directors, and the holders of the remainder of the stock should elect the majority. After the shares reserved in the treasury were sold and the purchasers thereof had also purchased of the patentee the greater portion of his stock, a suit was brought by such purchasers against the trustee, to restrain him from voting at an approaching election the shares of stock thus held by him in trust, and to have the agreements under which he held them cancelled and set aside. The court, relying upon the general principle that the right to vote stock ‘ can not be separated from the ownership in such sense that the elective franchise shall be in one man, and the entire beneficial interest in another, nor to any extent, unless the circumstances take the caso out of the general rule/ declared the trust in question void, and granted the relief sought by the complainants. In Harvey v. Improvement Co., 118 N. C. 693 (24 S. E. 489, 32 L. R. A. 265, 54 Am. St. E. 749), it was declared, that each stockholder, whether by himself or his proxy, must be free to cast his vote for what he deems the best interest of the corporation, the other stockholders being entitled to the benefit of such free exercise of his judgment by each; and hence any combination or device by which a number of stockholders shall combine to place the voting of their shares in the irrevocable power of another is held contrary to public policy,’ and power to vote is inherently annexed to, and inseparable from, the real ownership of each share, and can only be delegated by proxy with power of revocation.’ So in Gage v. Fisher, 5 N. Dak. 297 (65 N. W. 809, 31 L. R. A. 557), one of the grounds upon which the transaction therein involved was held to be void was that each stockholder in a corporation has the right to demand that every other stockholder, if he desires to do so, shall have the right to exercise at each annual meeting his own judgment as to the best interest of all the stockholders, untrammeled by dictation and unfettered by the obligation of any contract.’ We are aware that there are some cases in which a contrary principle is announced, but, in our opinion, the cases cited announce the better doctrine. One of the cases holding contrary to our opinion is Smith v. San Francisco & N. P. R. Co., 115 Cal. 584 (47 Pac. 582, 35 L. R. A. 309, 56 Am. St. R. 119), the soundness of which, we think, is very justly criticised in a note following a report of the case in 56 American State Eeports, 119. In that case it may be noted that the contract involved was limited to five years.

££ In the instant case the motives of Morel and those acting with him may be for the promotion of the prosperity of the corporation and the welfare of the majority of its stockholders, but, in passing judicially upon the question as to the validity .of the contract set up by them, and under the terms of which they claim the right to indefinitely control the affairs of the corporation, we must look alone to what such contract permits to be done, if the parties, or any of them, choose to press the privileges which it confers. According to the authorities we have cited, it is the theory of the law that the holders of the majority of the shares of stock in a corporation may control its management, and every person who becomes an owner of stock therein has a right to believe that the corporation will, and to insist that it shall, be managed by the majority. Morel and his friends owned only 50 shares of stock, just half of the whole number of shares, at the time the agreement in question was entered into; now they own only 45 shares, one of their number, contrary to an agreement entered into by them among themselves, having sold his five shares; and it is this minority which claims to have the right to control the corporate affairs by dictating the majority of the directors to be elected. To illustrate how small a minority might exercise such right under the alleged agreement, suppose none of the other members of the Morel faction should sell, and they should agree among themselves to vote their stock as a unit, as determined by ballot, then 23 shares would control. If this could bé done, then the owners of such 23 shares could agree among themselves that they would hold meetings, and by a majority of their shares determine how all the 23 votes should be east in the meeting to be held to determine how the 45 shares should be voted; and if so, then 12 shares could determine the whole policy of the corporation, though the Hilton faction should own 25 shares, Hoge 25 shares, and Mills 5 shares, as seems now to be the case, as the answer charges merely on belief that Hilton is the real owner of the shares standing in the names of Hoge and Mills.

■ “ Our conclusion is that the contract set up by the respondents to the rule, as cause why mandamus absolute should not be granted, is against public policy, and therefore void, because it indefinitely deprives the owners of the stock constituting the Hilton faction, though they may have a majority of the stock, of the pownr to exercise their right as well as their duty to the other stockholders, present or future, and to the public, to so vote in the election of directors for the company as will in their judgment promote its prosperity and best enable it to perform its duties to the public, and because it gives the • shareholders of the Morel faction, even though they may oto but a small minority of the stock, the right to indefinitely control the affairs of the corporation, including the right to fix the compensation of its officers and agents and to fill any of such positions from among their own members. It follows that the court did not err in rendering the judgment of which complaint is made.”

The connection in which the Court of Appeals uses the language, “ The Chattahoochee Brick Company, referred to in the contract declared on, is a private business corporation which has no functions of a public character,” shows a misconception of the foregoing opinion. It is true that in the concluding paragraph of the opinion, stating reasons why the contract was void as against 'public policj, it was said that the stockholders owed a duty “to the public, to so vote in the election of directors for the company as will in their judgment promote its prosperity and best enable it to perform its duties to the public,” but that was only one reason, and the language employed did. not mean that in order to make the rule applicable the corporation must be what is commonly called a public-service corporation. Other reasons were stated, all of which were discussed in the opinion based on principles applicable to contracts of the character involved, irrespective of the quasi-public or private character of the corporation, or whether its functions were private or public. Numerous prior decisions of other courts, not cited in the opinion, as well as subsequent decisions might be cited, holding such contracts void as against public policy, without regard to the public or private character of the corporation. However the decision above mentioned by this court is the law of this State, and it would be useless again to enter into further discussion of the case. The case was distinguished in Simmons v. Atlanta Telephone &c. Co., 139 Ga. 488 (77 S. E. 377), but not on the ground of the character of the corporation the stock of which was involved. The corporation in that instance was a quasi-public corporation, being a telegraph and telephone company. The nature of the contract upon'which the present action is founded need not be again stated. Sufficient has been said of it to show that under application of the principles applied in the opinion in Morel v. Hoge, supra, it is void because it is against public policy, and its breach does not afford the plaintiff a cause of action. Under this view it is unnecessary to deal with other grounds of attack on the contract raised by the demurrer.

2. The trial judge sustained a special demurrer and ordered paragraph ten stricken from the petition. The cross-bill of exceptions assigns error on this ruling. The Court of Appeals affirmed the judgment on the cross-bill of exceptions. The substance of paragraph ten is not of such materiality as renders it necessary to be stated. It is sufficient to state that there was no error in the ruling made.

Judgment reversed on the main bill of exceptions, and affirmed on the cross-bill.

All the Justices concur.