State v. Chilhowee Woolen Mills Co.

115 Tenn. 266

• Court: Tennessee Supreme Court
• Decided: September 15, 1905
• Status: Published

Opinion

MR. Justice Wilkes

delivered the opinion of the Court.

This is a hill in the name of the State, on the relation of the majority of the stockholders in the Chilhowee Woolen Mills Company, against the corporation and the minority of its stockholders, to have the court adjudicate and decree that the corporation has surrendered and forfeited its charter rights, and that it be dissolved. The corporation is a domestic one; the amount of stock subscribed for being $48,600, or 486 shares. Of these complainants own 272 and the defendants 184 shares.

Defendants resist the right of complainants to enforce the surrender of the charter and a dissolution of the corporation.

The chancellor held that complainants were not en-tled to the relief sought, and dismissed their bill, the court of chancery appeals reversed the decree of the chancellor and declared the corporation- dissolved and its charter rights surrendered, and defendants have appealed to this court.

The material facts found by the court of chancery appeals are: That the corporation was chartered and organized in April, 1904, under the general incorporation acts of the state of Tennessee, to engage in the business of manufacturing woolen, cotton, and mixed fabrics. The capital stock was fixed at $50,000, but bona, fide subscriptions were obtained to only the amount of $48,600. The stockholders held a meeting, organized, and elected a board of seven directors, to serve for a term of twelve months, and the directors were instructed to proceed as expeditiously as possible to carry on the business for which the corporation was chartered. The .election of permanent directors was delayed until the stockholders should adopt a code of by-laws. Steps were taken to procure real estate for a site and suitable machinery, and a call of ten per cent, upon the stock was made. Such was the status of the new corporation on April 1, 1904.

It appears that previous to this time there was a corporation known as the Athens Woolen Mills, which had had a very prosperous history, and declared large dividends and accumulated quite a surplus. The managers of this corporation made overtures to the principal promoters in the new enterprise, the object of which was to prevent the new corporation from going into active business. The scheme was to increase the capital stock of the oid corporation, enlarge its plant, and let in the members of the new corporation upon certain terms.

The court of chancery appeals reports that this proposition was to be open to all the stockholders of the new corporation, with no special privileges to any of them, so far as the taking of stock was concerned, and that it was submitted to the stockholders of the new concern, and a majority of them were willing and anxious to accept it, but a minority were not The stockholders in the new concern thereupon became divided, and considerable bad feeling was engendered. Whereupon by a majority vote the stockholders of the new corporation passed a resolution that tlie new corporation be abandoned and dissolved, to which action the minority protested.

The board of directors passed a similar resolution to dissolve the corporation, to set aside subscriptions to its capital stock, and to annul the call that had been made for any payment to the subscription to the stock, and this was also passed by a majority vote, and over the protest, of the minority.

That court reports that it was evidently the purpose of the people who owned and controlled the Athens. Woolen Mills to stop further proceedings of the new enterprise, and specially to secure and retain the services of Messrs. Blizzard and Mahary, to whom was due in a very large extent the success of the old company, with that company. These gentlemen did decide to go with the old company and abandon the enterprise.

So far as the motives of the two factions are concerned, the court of chancery appeals report that each was actuated by what it considered to be its best interest pecuni-arily, that the old concern was a very profitable one, and that the prospect of the new was very good, and that the chief object of the Athens Woolen Mill Company, in its opposition to the new enterprise, was that it might retain the services of Messrs. Blizzard and Mahary.

Both parties seemed to have viewed the matter from their pecuniary interests.

Our statutes provide for the dissolution of a corporation by the following, among other provisions (Shannon’s Code, section 5165), is in this language:

“An action lies under the provisions, of this chapter in the name of the State against a person or corporation offending in the following cases: . . . (4) or, if being incorporated, they do or omit acts which amount to a surrender or forfeiture of their rights and privileges of a corporation; (5) or exercise powers not conferred by law; (6) or fail to exercise powers conferred by law and essential to corporate existence.”

Section 5181 provides:

“That if it be adjudged that a defendant corporation has by neglect, nonuser, abuse or surrender forfeited its corporate rights, judgment will be rendered that the defendant be altogether excluded from such rights and be dissolved.”

These sections appear to refer more particularly to involuntary proceedings against a corporation arising out of some abuse, neglect or dereliction of duty, but they are broad enough to embrace also cases of voluntary surrender of a charter by the stockholders, and this was so held in the case of Parker v. Hotel Company, 96 Tenn., 252, 34 S. W., 209, 31 L. R. A., 706.

In this case we have a deliberate and formal surrender of the charter under a resolution passed by a majority of the stockholders, a similar resolution passed by a majority of the directors, all ratified and affirmed in the bringing of this bill.

If the application in this case was made on behalf of all the stockholders to have the charter surrendered and the corporation dissolved, we think that there can be no doubt that the relief would be granted, and- the question remains whether it should be done by a majority of the stockholders, oyer the wish of the minority, where no business has been done by the corporation and no debts or obligations have been incurred and no liabilities have accrued.

It would seem to be an anomaly that the minority of the stockholders, under such circumstances and under such a status of affairs, could compel the majority to go forward with the organization and operation of the corporation, when the majority were opposed to such action, and could, if they saw proper, block and prevent the success of the enterprise.

This, of course, relates alone to private corporations, and not to public or quasi public corporations, nor to charitable or eleemosynary corporations, in which the public has an interest.

The court, we think, could not under such circumstances take charge of the corporation and manage it through a receiver or otherwise, nor can it grant the power to the minority to control the majority.

We do not mean to hold that a majority of the stockholders can, in bad faith, put an end to the existence of a corporation, and dissolve it, to the prejudice of the property rights of the minority.

We think there can be no doubt that the majority of the stockholders have the right to control the corporation, provided they act in good faith; that is, 'without any attempt to take advantage of the minority for the benefit of the majority.

The true rule, as we understand it, is laid down in Cook on Corporations, sections 629 and 670.

In section 629 it is said:

“It is an unquestioned rule that stockholders by unanimous consent may effect a dissolution of a corporation by a surrender of the corporate franchise. Greater difficulty is found in determining whether a majority of the stockholders may dissolve the corporation. It has been held that the majority in interest in a corporation may dissolve it by a voluntary surrender of its franchises, even though a minority of the stockholders are opposed to its dissolution”—citing Treadwell v. Salisbury Manufacturing Company, 7 Gray, 393, 66 Am. Dec., 490, Hancock v. Holbrook (C. C.), 9 Fed., 353, and other cases.

He states, however, a number of instances in which this can not be done, but he states the general principle to be that a majority of the stockholders may, where it can be done without bad faith to the minority, seek and obtain a dissolution of the corporation.

In all his excepted cases we find, however, some element of bad faith or want of good faith, or the fact of an established business or existing liabilities, where the dissolution would be practically a fraud upon the dissenting minority stockholders.

The doctrine which we approve has been virtually announced by this court heretofore in the case of Parker v. Bethel Hotel Company, 96 Tenn., 252, 34 S. W., 209, 31 L. R. A., 706, where it is said by Special Judge Bradford : “An ordinary business corporation, where its charter specifies no definite time for its continuance, may sell its property and wind up its affairs whenever a majority of the stockholders may deem it advisable” — citing cases.

In the case of Treadwell v. Salisbury Manufacturing Company, supra, the supreme court of Massachusetts says: “We entertain no doubt of the right of a corporation, established solely for trading and manufacturing purposes, by a vote of a majority of its stockholders, to wind up its affairs and close its business, if, in the exercise of sound discretion, they deem it expedient SO' to do.”

At common law, the right of corporations, acting by a majority of their stockholders to sell their property is absolute and it is not limited as to object, circumstances or quantity. He proceeds to state that there are many exceptions to the rule, as in cases of quasi public corporations and charitable and religious corporations, in which the community has some interest.

To the same effect, see Trisconi v. Winship, 43 La. Ann., 45, 9 South., 29, 26 Am. St. Rep., 175, and Slee v. Bloom, 19 Johns., 456, 10 Am. Dec., 273.

Thompson on Corporations, vol. 5, section 6686, says, after commenting on public and quasi public corporations and corporations of an ideal kind, that “the same reasons do not apply in case of a corporation of a purely private nature, as in its business the state has no special interest. It is accordingly held that corporations of a private nature, established solely for trading or manufacturing purposes, may by a vote of a majority of their members, against the protest of the minority, wind up their affairs, and close their business, if, in the exercise of sound discretion, they deem it expedient to do so, and may sell the whole of their property to a new corporation taking payment in shares of the new corporation, to be distributed among the stockholders of the old corporation who are willing to take them.”

The same author says (section 6694): “When we .consider that it is not only competent for a majority of the stockholders, but also for a quorum of the directors, to assign all property of the corporation to a trustee for the payment of its debts, an act which in itself is substantially a dissolution of the corporation and a winding up of its affairs, the conclusion that it is within the power of the majority to take action to wind up any bus- • iness corporation, in the absence of a statutory prohibition seems unavoidable.”

To the same effect, see Hitch v. Hawley, 132 N. Y., 221, 30 N. E., 404, where it is said: “We think that when the interests of the corporation are so discordant as to prevent efficient management, and a large majority of both trustees and members wish to wind up its affairs, a dissolution thereof would be beneficial to the interests of its stockholders, because the object of its corporate existence cannot be attained.”

While this is a general rule which we think applicable in all save the excepted cases which we have mentioned, it is peculiarly applicable under the facts of the •present case, where the organization and operation of a corporation has not so far progressed that any of its stockholders would be materially prejudiced or financially injured by its dissolution and discontinuance, except as to prospective profits, which, at most, are speculative, and depend upon a harmonious and successful management of the business.

Here it is true there had been an incomplete organization, stock had been subscribed, temporary officers had been elected, and a scheme for future management,. to some extent, had been devised, but no property had been bought, no liability had been incurred, except as between the stockholders, arising out of their subscription, no good will had been created, and, in short, nothing tangible had been accomplished.

Under such a status of affairs the majority decided to abandon, to discontinue, and dissolve upon terms which they deemed advantageous, and which were offered alike to the majority and minority.

A difference arose between the majority and minority, and a sharp controversy and divergence of views took place, bitterness of feeling was engendered, so that even the future success of the enterprise became problematic, and this was rendered still more acute by the withdrawal of Blizzard and M'ahary from the new organization.

While the majority acted as they evidently thought in their own interest, they did not intend thereby to prejudice the rights of the minority, but tendered to them the same benefits which they themselves were to receive.

The conrt of chancery appeals finds that there was, in fact, no fraud or bad faith on the part of the majority towards the minority in. discontinuing and abandoning the enterprise.

In such case we think there can be no question of the right of the majority to dissolve the corporation, and to have the court decree such dissolution in order to avoid future complications and possible liabilities.

Nor do we think that the act of 1903 (Laws 1903, p. 268, c. 140), prohibits and renders void the acts of the majority in this case. That act simply declares unlawful and void all arrangements, contracts, agreements, trusts, or combinations between persons or corporations made with the view to lessen, to tend to lessen, full and free competition in the manufacture or sale of articles of domestic raw material.

There was no arrangement here between the two corporations, but it is simply a case where a majority of the stockholders in a new enterprise decided to abandon what in their opinion it would not be wise and profitable for them to continue.

Again it is said that the surrender of the charter in this case was not valid, because a large number of the votes cast in favor of the proposition were cast by those holding proxies, and it is said that there is no law authorizing such votes.

It is said that at common law there was no right to vote by proxy, and there is no general statute in this State authorizing such votes, and the right is not conferred by the charter of the particular corporation in question.

The charter does provide for an election of officers, by votes cast, either in person or by proxy, and we are aware that the practice and custom of voting shares of stock by proxy is in latter days, at least, almost universal, unless it is in some way expressly prohibited.

But whether this be so or not, the majority have ratified this action by joining in the present suit and making the request for a dissolution of the corporation, so that the point raised is a merely technical one.

It plainly appears that a majority of the stockholders are seeking and asking a dissolution and abandonment of this corporation, and we think that, under the facts, as found by the court. of chancery appeals, they are entitled to have the relief they ask.

The decree of the court of chancery appeals is therefore affirmed, and the costs of the appeal will be paid by the defendant minority stockholders. The costs of the court below will be paid as adjudged by that court.