Luther v. C. J. Luther Co.

94 N.W. 69, 118 Wis. 112, 1903 Wisc. LEXIS 5

• Court: Wisconsin Supreme Court
• Decided: May 29, 1903
• Status: Published

Opinion

The following opinion was filed March 21, 1903:

Dodge, J.

Were Clarence J. Luther the sole plaintiff, we should have little doubt that he ought to be dismissed from a court of equity without relief, for the reason that his own conduct has been so in outrage of his duties as a director and officer of the corporation that no court can patiently listen to his prayer for enforcement of fiduciary principles and duties. That objection does not, however, exist to some of the other plaintiffs, who, as stockholders, ask that their rights be protected as to them. The circuit court has found, and we find, nothing of misconduct in their relations to the company.

The salient facts presented by the findings are that the governing board of directors of this corporation were divided into two factions — G. J. Luther on the one hand, interested only in the profits which the corporation might make,, and to • that end interested that it should buy its supplies as cheaply as possible; on the other hand, T. A. Boemer and If. W. Bolens, largely interested in the company from which supplies were mainly purchased, and therefore anxious to have such purchases continue, and at prices profitable to the seller. Here was presented a question of corporate policy which the stockholders, subject to temporary control by the directors, bad the ultimate right to decide according to majority vote. In that situation, Bolens and Boerner, availing themselves of the temporary constitution of the board, exercised the power thus vested in them to sell a quantity of unissued stock to a confederate of theirs for the purpose of placing in hands favorable to their policy a majority of the total corporate stock. Such sale is attacked primarily on the ground that, in an already established and going corporation, an increase of capital stock, accomplished either by formal increase of the amount originally authorized or by issue of what had originally been withheld, though within the authorized amount, without first giving opportunity to all existing stockholders to take their proportionate shares of such increase, is wholly beyond the power, not only of the directors, but of any mere majority of stockholders. This doctrine rests on the idea that, while its own corporate stock is property, so that the sale and disposition thereof involve questions of business policy properly controllable by the directors’ or stockholders’ meeting, the original issue thereof involves something more; that the latter act goes to underlying organization — modifies the fundamental arrangement and proportions of the members. This doctrine is supported by overwhelming and almost unconflicting array of authority, from which we need cite but a few illustrative cases and text book discussions. Cook, Stockholders (3d ed.) §§ 284, 286, 662; 2 Beach, Pr. Corp. §§ 473, 474; 2 Thompson, Comm. Corp. § 2040; Taylor, Pr. Corp. (5th ed.) § 569; Gray v. Portland Bank, 3 Mass. 364; Reese v. Bank of Montgomery Co. 31 Pa. St. 78; Electric Co. v. Edison E. I. Co. 200 Pa. St. 516, 50 Atl. 164; Jones v. C. & M. Railroad, 67 N. H. 119, 38 Atl. 120; Humboldt D. P. Asso. v. Stevens, 34 Neb. 528, 52 N. W. 568; Jones v. Morrison, 31 Minn. 140, 16 N. W. 854; Dousman v. Wis. & L. S. M. & S. Co. 40 Wis. 418. It has not yet been decided in this state whether the reasons on which rests this rule of law are sufficient to impose such limitation upon the powers of directors in our corporations, resting, as they do, upon sec. 1776, Stats. 1898, which provides that “the stock, property, affairs and business of every such stock corporation shall be under the care of and be managed by a board of directors,” etc. The Minnesota court, in face of a similar statute, has held affirmatively. Jones v. Morrison, supra. The question will be worthy of careful consideration when its decision becomes necessary.

For the purposes of the present case, it is not necessary to consider the unissued stock otherwise than as mere property, over which the powers of the directors are the same as over any other assets of the corporation, namely, to sell to whom and at such prices as to them shall seem best for the corporation and all its stockholders, in the honest exercise of the discretion and- trust vested in them. Even then, however, their duties with reference thereto are fiduciary; they are bound to act uberrima fides for all stockholders. To dispose of or manage property of the corporation to the end and for the purpose of giving to one part of their cestuis que trustent a benefit and advantage over, or at the expense of, another part, is breach of such duty, especially when the directors themselves belong to the specially benefited class. In re The Taylor Orphan Asylum, 36 Wis. 534; Eschweiler v. Stowell, 78 Wis. 316, 47 N. W. 361; Spaulding v. North Milwaukee T. S. Co. 106 Wis. 481, 494, 81 N. W. 1064; Goodin v. Cincinnati & W. C. Co. 18 Ohio St. 169; Farmers’ L. & T. Co. v. N. Y. & N. R. Co. 150 N. Y. 410, 44 N. E. 1043. It cannot matter how this result is accomplished, nor what the form of the undue benefits conferred or acquired. The benefit to the one class or the injury to the other need not be pecuniary. While the ultimate purpose of most stock corporations is money profit, the right of proportionate voice and influence in selection of policy and method of accomplishing that result is most important to each shareholder. It is as fundamental and vital as the right of suffrage under a representative government. While a governmental act may not take away from any class of citizens property or physical liberty, yet if, contrary to the fundamental law of organization, it abates their suffrage, it would be held void. Each holder of a share of stock has the right that, by convincing the holders of a certain number of other shares, his policy of business be followed. Any invasion of that right is an injury to him which, from his point of view, may be greater than very considerable present money loss to the corporation. While this right must yield to a power over it given by the terms of the association, still he has the right to insist that such power shall be exercised for the purposes of the whole association. It is not so when exercised for the direct purpose of depriving him of his proportionate voice and influence. That is not a legitimate manner for those temporarily vested with power to perpetuate the policy which they favor. Nothing can be more fallacious in corporate or in popular government than the argument that because they honestly believe their policy right, and another dangerous, they may rightfully invade the field of the suffrage upon which policy rests, and disfranchise, in whole or in part, those who disagree with them. We have said this much of perhaps rather trite and elementary philosophy because the conclusions of the trial court seem to rest on the argument that, because the majority of the directors honestly considered Clarence J. Luther’s control of corporate management dangerous, they might properly exert their power over unissued stock in order to colonize enough new votes to turn the majority supporting Luther s policy into a minority.

Since the trial court has found, and upon sufficient evidence, that the purpose of the sale of the new stock was to take from the faction supporting Luther’s policy the control of the corporation, and to transfer it to the other faction to which the two directors perpetrating the act belonged, as did also the recipient of the stock, we must hold that such sale was a breach of the duty of the directors, and could confer no rights upon the beneficiary, who knew and participated in the unlawful act and purpose.

That conclusion having been reached, the next question is as to what a court of equity should do in the premises. What form of remedy will accomplish rescission of the unlawful acts, and re-establish the status quo disturbed by means thereof ? In some cases, where, at the time of decision, the issue and delivery of the stock was not complete, the remedy of declaring void the transaction and enjoining issue has sufficed. Electric Co. v. Edison E. I. Co. 200 Pa. St. 516, 50 Atl. 164; Dousman v. Wis. & L. S. M. & S. Co. 40 Wis. 418. It is also intimated, though on demurrer, that improperly issued stock may be adjudged canceled and the holder enjoined from voting thereon. Wood v. Union G. C. B. Asso. 63 Wis. 9, 22 N. W. 756; Jones v. Morrison, 31 Minn. 140, 16 N. W. 854. And finally, it has been held proper to adjudge the cancellation of the unlawful'stock, and to enjoin from acting directors and officers who had been elected by voting it. Humboldt D. P. Asso. v. Stevens, 34 Neb. 528, 52 N. W. 568; Reynolds v. Bridenthal, 57 Neb. 280, 77 N. W. 658. We have not found any case in which a court has gone any further than as above stated.

In the present record we are embarrassed by no circumstances of delay or acquiescence on plaintiffs’ part-, nor of defendants’ change of position in innocent reliance upon the validity of the stock issued. Plaintiffs gave full notice of their objections to the sale of the stock, and commenced this action, asserting its invalidity, and seeking .to prevent defendants from recognizing it as giving any voting right to the holder, nearly a month before the stock meeting of November 6, 1899. We deem it clear, therefore, that the decree should declare the invalidity of the thirty-nine shares of stock issued by Arthur B. Boemer and adjudge their cancellation, and that upon surrender of the' certificates the corporation repay to him, the amount paid for the stock, without interest, less any dividends received by him on that stock; also that the election of directors purporting to have taken place November 6, 1899, be adjudged void, and defendant Arthur B. Boerner be enjoined from in any wise claiming or exercising the office of director. Any election to either of the general offices of the corporation made by such illegally chosen board of directors should be adjudged invalid,'and the persons so elected, if defendants, should be restrained from claiming or exercising any such office by reason of any such election. This will restore the situation as it existed before the unlaw-ful acts complained of, and a stockholders’ meeting can then be held to elect a board of directors. This, as already stated, is going as far as any of the decided cases which have come to our notice, and we think does substantial justice, without the drastic remedy of now endeavoring to install in office those whose claimed election occurred more than three years ago, and whose legal term of office would have expired long since if successors bad been elected.

2. Upon defendant Bolens’ appeal is assigned as error the adjudication that be transfer to the corporation a certain patent. That relief is obtainable, of course, only in an action by the corporation against the individual defendant, to which none of the other parties to this record are either necessary or proper parties, and in which none of them would have any direct interest. True, in case of refusal of the corporation to bring such an action, the present plaintiffs might bring it, but- only in the right of the corporation. It would still be an action by it merely forced into court by the individuals in representative capacity. Land L. & L. Co. v. McIntyre, 100 Wis. 245, 75 N. W. 964; Jenkins v. Bradley, 104 Wis. 540, 551, 80 N. W. 1025; Boyd v. Mut. Fire Asso. 116 Wis. 155, 90 N. W. 1086, 94 N. W. 171. Such an action cannot be joined with one brought by the plaintiffs in their own right to remedy or redress direct wrongs to them. The two causes of action would not both belong to any one of the classes specified in sec. 2647, Stats. 1898, nor would they both affect all parties to the action, as required by that section. Spaulding v. North Milwaukee T. S. Co. 106 Wis. 481, 492, 81 N. W. 1064; Boyd v. Mut. Fire Asso. supra; Pietsch v. Krause, 116 Wis. 344, 93 N. W. 9. Hence, if the complaint containing the principal cause of action for cancellation of stock issued in derogation of plaintiffs’ rights had also attempted to state a cause for recovery to the corporation of this patent, it would have been obnoxious to demurrer for multifariousness. It, however, contained nothing even suggesting such attempt. It does not declare two separate causes of action, as required by sec. 2647. It refers to Bolens’ conduct with reference to this and other patents merely as part of the charge of fiduciary misconduct, and the prayer does not hint at any such relief as that granted against Bolens; hence there was no opportunity to raise the objection by demurrer.

Plaintiffs, however, urge two rules of practice, both well settled in this court: First, that although the complaint may fail to state a cause of action, nevertheless, if, by evidence permitted by defendant to go in without objection, the cause of action is proved, judgment may properly be rendered thereon, the complaint being amended, br deemed to be, so as to correspond with the proof; secondly, that, unless the objection to a complaint for multifariousness be raised bv demurrer or answer, it is waived. Sec. 2654, Stats. 1898. These rules have been adopted to promote justice and to enable full decision of the merits of a controversy after they have been tried by consent of both parties. They are not intended, and will not be perverted, to deprive a defendant of his rightful defenses without his consent or some lapse of reasonable diligence. They proceed on the theory of waiver of the right which every defendant has to be informed intelligibly of the facts which the plaintiff claims to entitle him to recover, as well as the right to have litigated a cause of action without the trial being complicated by the joinder of an incongruous one. Like all waiver predicated u]xm ’ silence, however, there must have been reasonable opportunity, as well as omission, to object. When evidence is offered which is pertinent to the cause stated in the complaint, it naturally is assumed to be offered in support of the cause of action so stated, and mere omission to object to it cannot, with reason, be ascribed to defendant’s willingness that some other and unstated cause of action be tried, to which also that evidence may be competent. Mowatt v. Wilkinson, 110 Wis. 180, 85 N. W. 661. The same considerations forbid any inference of consent that an incongruous cause of action may be joined, from omission to object by demurrer or answer, when the complaint seeks no such joinder. It is not until the plaintiff reasonably notifies defendant of his desire to make such joinder, either by offering evidence unambiguously tending to support such additional cause of action or by offer to amend, that the latter can be deemed by silence to consent thereto or waive objection. Demurrer for multifariousness could not have been sustained to this complaint, for it certainly does not state any separate cause of action for recovery of the patent from defendant Bolens. The duty to object did not arise upon introduction of evidence with reference thereto, for such evidence was admissible, and apparently offered upon the issue as to the relative fidelity, or the reverse, of Luther and Bolens to the corporate welfare. It is clear that defendant Bolens never was so placed that silence on his part could be deemed to waive objection to adjudication in this action of a right of the corporation to enforce the conveyance of this patent to it. Hence judgment to that effect must be reversed, and also all findings of fact on the issue thereby adjudicated, to the end that no estoppel by res adjudícala, against either party may rise from this erroneous trial of an issue not presented to the court.

By the Court. — Judgment reversed on botb appeals, and cause remanded, with directions to enter judgment in accordance with the foregoing opinion.

A motion for a retaxation of costs was denied May 29, 1903,

Siebecker, J., taking no part.