Montgomery Traction Co. v. Harmon

140 Ala. 505

• Court: Supreme Court of Alabama
• Decided: November 15, 1903
• Status: Published

Opinion

TYSON, J.

The complainant in this case is the owner of one share of the capital stock of the Montgomery Traction Company, á corporation under the laws of the State- of Alabama, with an authorized' capital stock of one million dollars. He files this bill for himself and all other shareholders of said company who might join in said suit to cancel certain stock in the Traction Company issued tó J. G. White & Company, a New York corporation, under two construction contracts between the two companies in the course of execution by White & Company, and to prevent the issue of certain other stock and bonds of the Montgomery Traction Company to J. G. White & Company..under said contract, or to compel full payment'for said stock and bonds. The Traction Company is made a defendant to the bill and also one W. H. Eagland, as a transferee with notice of part of said stock issued to White & Company. The Montgomery Traction Company and Eagland demurred to the bill and moved to dismiss it for want of equity, -and they appeal from the decree ■ overruling the demurrers and sustaining the equity of the bill.

It is contended in behalf of the appellants that the bill fails to show a demand upon the directors of the Traction Gompany to institute this suit or sufficient excuse for failure to make this demand. It is well settled “that a stockholder may bring suit in equity in his own name and enforce the rights of the-corporation without first requesting the directors to sue, when it is made to appear that if such request has been made it would have been refused, or if granted that the litigation following would necessarily be subject to the control of the persons opposed to its success; and that where the directors of the corporation are themselves the wrong doers or the partisans of the wrong doer they are incapacitated from acting as the members of the corporation in any litigation which may be instituted for the correction of the wrong which it is alleged they have committed and approved.”—Steiner v. Parsons, 103 Ala. 221.

Where no demand upon the board of directors to institute the suit is shown, and the stockholder relies upon the fact that an application to the directors to sue would have been in vain, the facts upon which such conclusion rests must be set out so that the court may judge intelligently for itself as to whether the conclusion of the stockholder is well founded.—Steiner v. Parsons, supra. It is not sufficient to aver that the board of directors or a large majority of them are under the control of the offending parties, nor that they are interested as guilty parties in the frauds and wrongs complained of; the facts showing such control or such interest must be set out. We are of the opinion that the averments of the bill conform to these requirements, and that the court was correct in its conclusion upon the facts bearing on this issue.

The board of directors of the Traction Company is composed of nine members. At the time the bill was filed three of them resided in the city ,of Montgomery, the principal place of business of the Traction Company, and the remainder in New York. . The six non-resident members had only one share of the stock each in the Traction Company transferred to them by J. G. White ¿e Company to enable them to qualify. The president of the Traction Company, one of the non-resident directors, was elected at the instance of White & Company; the secretary of the company was an employee of White & Company, and its assistant secretary one of White & Company’s attorneys. It is presumed that directors will do their duty, but this presumption • is overcome by the presence of causes sufficient to influence them to do otherwise.—Decatur Mineral Land Co. v. Palm, et al, 113 Ala. 531. One of the three resident directors was employed by J. G. White & Company in the execution of the contracts which the bill- assails, and two of the non-resident directors,, holding only one share of stock each in the Traction Company, are financially interested in J. G. White & Company, whose title to two thousand nine hundred and ninety-three shares of the Traction Company’s stock and three hundred thousand dollars of its bonds, the bill seeks to invalidate. As to these three members of the board it can certainly be said that causes sufficient are shown in the bill to influence them to disregard -their duty as directors of the Traction Company in- the manner of this- proceeding. ■ It is unreasonable to suppose that the four of the remaining directors who are residents of New York, and who had practically no stock in the Traction Company, which is doing business in Alabama, and who were made directors at the instance of White & Company through whom they were enabled to qualify' by the transfer to each of one share of stock, became directors in their own' interest. The' conclusion is irresistable that they accepted the position in the interest of J. G. White & Company, also 'of New York, and were subject to the influence of its interests. It cannot be supposed that under these circumstances these directors would have directed a suit whose purpose was to invalidaté the contracts of White & Company with the Traction Company or deprive'White & Company of illegal benefits derived under such contracts, or if such suit was directed that they would prosecute it in a manner hostile to the interests of J. C. White & Company. It is apparent, therefore, taking the averments of the bill to bé true, that at least all but two of the board of directors of the Traction Company at the time this bill was filed were under the control of J. G. White & Company; and it appears that these two, with knowledge that they were sacrificing the interests of the Traction Company, voted for the contracts with White & Company and the issue to it of the stock and bonds. A request to the board of directors thus composed to in-si i tute this suit would have been vain, or if acceded to, the litigation following would have been subject to the control of the persons opposed to its success. The facts averred in the bill show a sufficient excuse for failure to make a demand upon the board of directors to sue.

The bill shows that on the 26th day of August, 1902, a meeting of the stockholders of the company was held at which the board of directors were directed to issue to J. G. White & Company two thousand two hundred and forty-three shares of the capital stock of the company on account of promoting and developing the property of the Montgomery Traction Company, and on account of the labor performed and materials furnished to said date. The resolutions directing the issue of the stock recited that it was to be payment on account, and that in addition thereto there should be issued to White & •Company, bonds at tbe rate of ninety cents in payment of work as tbe same progressed. On tbe same day tbe board of directors adopted similar resolutions. On November 3d, 1902, another meeting of tbe shareholders was held at which meeting resolutions were adopted by them reciting that twenty-five hundred shares should be voted to J. G. White & Company; at the meeting of August 26th, instead of the two thousand two hundred and forty-three shares, the board of directors were directed to issue two hundred and forty-eight additional shares of stock to J. G. White & Company. At the same meeting the board of directors were directed to enter into -t contract with J. G. White & Company for the construction of a railroad recited to be in the course of construction and for fixing and preparing the park at Pickett Springs. On the same day the board of directors of the company adopted similar resolutions. In pursuance of the said resolutions the Montgomery Traction Company on November 3d entered into a contract with J. G. White & Company which recited that in consideration of the delivery of twenty-five hundred shares of the capital stock and two. hundred thousand dollars of five per cent first mortgage bonds, par value, J. G. White & Company agreed to furnish all the labor and materials and perform all the work necessary to complete in a substantial and workmanlike manner the grading and construction and equipment of the line of the Traction Company in the city of Montgomery and the improvement of the Pickett Springs park in accordance with the specifications thereto annexed. On the 25th day of March, 1903, the shareholders and board of directors directed the execution of another contract with White & Company for the construction of additional lines which' was executed on the same day. This contract recited in consideration of the issue of seven hundred and fifty shares of the capital stock and one hundred thousand dollars of its bonds, J. G. White & Company agreed to furnish all the labor and materials and perform all the work necessary to complete in a substantial and workmanlike manner the construction and equipment of such extensions in accordance with the specifications thereto annexed.

It is averred in the bill that the value of the work and labor done and material furnished by White & Company prior to August 26th, 1902, ivas of less value than one hundred thousand dollars, which fact it is averred was well known to the shareholders and the board of directors of the Traction Company and J. G. White & Company at the time of said meeting. It is further averred that this work and labor and material furnished together with all work and labor to be done and material to be furnished provided in the contract of date November 3d would not exceed in value the sum of one hundred and sixty-two thousand dollars, and that at the time the contract was executed this fact was also known by said shareholders and board of directors and said J. G. White & Company. It further appears from the bill that all the work and labor and materials specified under contract of March 25th, would, not at the time the contract was entered into have exceeded the sum of eighty-one thousand dollars in value and that this fact vas also known to White & Company, and the shareholders and directors of the Montgomery Traction Company. It further appears from the bill that it was never' contemplated by White & Company, or the officers and directors of the Traction Company that áll the work and labor to be done and material to be furnished by White & Company, should exceed in value the sum of two hundred and forty-three thousand dollars.

It appears from ,the bill that at the time the two contracts were entered into, J. G. White & Company, in addition to holding a large majority of the stock of the Traction Company upon which nothing had been paid, controlled its board of directors, by whom the execution of the contracts were authorized. Of the nine members of the board of directors of the Traction Company at tire time of the execution of the contracts and who were elected by the vote of the stock subscribed for by J. G. White & Company, six were either attorneys or employees of J. G. White & Company, holding one share of stock each, subscribed for at the instance of J. G. White & Company and for its benefit. Of the nine members of the board of directors only two are shown not to have been affected by this influence. Tbe vice-president and treasurer of tbe Traction Company, were officers and shareholders of J. G-. White & Company, and the president of the-Traction Company its employee. Possessing this control of the Traction Company, the contracts between the two corporations must be regarded as if between a corporation and its directors or other- trustees, and must be governed by the same principles. — 2 Cook on Corporations, § 662. The courts will set such contracts aside unless they are fair and- reasonable. In the case of Memphis & Charleston Ry. v. Wood, 88 Ala. 641, it is said: “Nothing can be more unjustifiable and dishonorable than an attempt on the part of those holding a majority of the .shares in a corporation to place their nominees in control of a company and then to use their control for the purpose of obtaining advantage to themselves at the expense of the minority; it would be a conspiracy to commit a breach of trust. The directors of corporation are bound to administer its affairs with strict impartiality, in the interest of all the shareholders alike, and the inability of the minority to protect themselves against unauthorized acts performed with the connivance of the majority, renders their right to the protection of the courts the clearer.”

It appears from the bill that all the work and labor which had been done and material furnished bv J. G. White & Company for the Traction Company up to August 26, 1902, the day that two thousand two hundred and forty-three shares of the par value of one hundred dollars per share of the stock of the Traction Company was voted to J. G. White & Company, was of less- value than one hundred thousand dollars; that the cost of all the work and labor to be done and material to be furnished under the first contract between the two companies of date November 3d, 1902, including all that had been done prior to August 26, 1902, would not exceed in value the sum of one hundred and sixty-two thousand dollars, and that this fact was known at the time said contract was executed by the board of directors of the Montgomery Traction Company and by J. G. White & Company. ' For this • work and labor and material averred to be of the value.of one hundred and sixty-two thousand dollars, the contract of November 3d, 1902, provides that the Traction Company should pay two thousand five hundred shares of its capital stock of the par value of one hundred dollars a share, amounting to two hundred and fifty thousand dollars,, and two hundred thousand dollars of its five per cent first mortgage bonds, a total consideration of four hundred and fifty thousand dollars, to J. G. White & Company. It further appears from the bill that the whole work and labor and material specified to be done or furnished by J. G. White & Company under the contract between the two companies of date of March 25, 1903, would not at the time the said contract was entered into have exceeded in value the sum of eighty-one thousand dollars, which ' fact was known to J. G. White & Company and the officers and directors of the Montgomery Traction Company. For this work and labor and material which the bill avers was not worth exceeding eighty-one thousand dollars, the contrac-t of March 25, 1903, between the two corporations provides that the Traction Company should pay seven hundred and fifty shares of its capital stock of the par value of seventy-five thousand dollars and one hundred thousand dollars of its first mortgage bonds to J. G. White & Company, a total consideration of one hundred and seventy-five thousand dollars for eighty-one thousand dollars in value to be received by the Traction Company. Under the averments of the bill the two contracts were grossly unfair to the Traction Company, and the values of the work and labor to be done and material to be furnished by White & Company-thereunder being knowingly excessive they were also in violation of the constitution and statutes prohibiting the fictitious issue of stock and bonds. The Traction Company, and hence the complainant (under the circumstances averred in the bill authorizing him to sue) is, therefore, entitled to have so much of the stock or bonds as represents the profit illegally obtained by White & Company cancelled, or to have the two contracts between the corporations set aside and all the stock and bonds provided for therein cancelled upon payment for work and labor done and materials furnished thereunder.

The bill fails to aver that J. G. White & Company, a corporation, was authorized to subscribe for the stock, and this objection is made one of the grounds of demurrer. In the absence of this averment the right of a shareholder to compel the payment for stock either generally, or under the circumstances averred, is not considered. This averment, however, is immaterial in the aspects of the bill above sustained and as the demurrer goes to the whole bill it was properly overruled.

The bill shows that two hundred and forty-eight shares of the stock delivered to J. G. White & Company under said contracts had been transferred by it to W. H. Ragland with notice, and he is made a party defendant. Under these circumstances he was a proper party. Making him a party defendant does not render the bill multifarious, the object of the bill being single to all ■ the defendants and the relief substantially the same.

The errors assigned by J. G. White & Company to the ruling of the court in refusing to set aside a decree pro confesso cannot be considered upon this appeal. An appeal from an interlocutory decree is only allowable by virtue of the statute and cannot be extended by the court to other interlocutory orders than those mentioned therein.—Montgomery Iron Works Co. v. Capital City Insurance Company, 137 Ala. 134.

It follows from what has been said that the demurrers and the motion to dismiss the bill for want of equity were properly overruled.

Affirmed.