Wheeler, J.
After stating the facts.] It is argued that this scheme is intended to be carried out by voting upon _ large amounts of this stock by proxy, and that the right to so vote can exist only by express statute, and that there is no such statute in Iowa. It is not, however, deemed to be necessary to examine or pass upon that claim as a ground for this motion. The election is to be held in Iowa, under the laws of that State. It is to be presumed that the officers conducting the election will be recognized and be governed by those laws. If they do not give heed to those laws as they are, or as they are claimed to be by the orator, he can, doubtless, object and test the validity of what is done to- the contrary by appropriate proceedings. This would seem to be a better course than for this court to undertake to determine in advance what should there be determined and what, for aught that appears, will there be properly and satisfactorily determined..
The next question raised by the motion is whether the orator has the right to control the vote upon his own stock deposited with Drexcl, Morgan & Co. lie has not sold his stock himself, lie has deposited it with them with authority to sell it, but they have not sold it. Ho therefore remains the legal owner. They .have no interest in the stock coupled with the authority to sell; therefore there is no apparent reason why that authority is not revocable. The deposit was made to enable the. board of directors to dispose of the property of the company, or of all of the stock deposited at a price not less than par, as well as to vote for directors. The directors do not appear to have acquired any vested right to the stock by the deposit sufficient to prevent revocation of the authority to vote. It did not become theirs by , the deposit. They were authorized to sell in a certain way, and if they had sold the sale would be good, but not having sold the title remains as before. It remains, in effect, his, with the right to control the vote upon it, which apparently cannot be granted away separately from its ownership [447]*447(Griffith v. Jewett. 15 Weekly Law Bulletin and Ohio Journal, 419). [See p. 457 of this volume.]
The remaining- question is as to the right of the orator to have defendants, Droxel, Morgan and Co., or the directors prevented from voting upon the stock of others deposited. It is urged for the orator that the transaction creates a trust for the corporation itself. Whether it does or does not depends upon whether what is done in this behalf is done with corporate funds for the corporation. The bill charges that it is so done. The answer denies this, and in this respect it is directly responsive to the bill. By the law an answer so responsive is evidence which must be overcome by evidence. It is said that the orator waived an answer under oath, as the rules in equity provide may be done. This is not understood to take away the right to answer under oath, and when a defendant does so answer the effect of the answer, as evidence, would appear to rest upon the law of the subject, which the rulers of court do not appear to attempt to change. The answer, must, therefore, in this respect, for the purposes of this motion, be taken to be true. If the stock was procured for the company, the defendants do not claim that it could be held for the company and still be voted upon (Studdert v. Grosvenor, 33 L. R. Chan., 528).
As it is not so held, but is held for the other depositors of it as that, deposited by the orator is held for him, the question is as to the right of the orator to control voting upon it as so hold. It is not understood that there is any law of Iowa to prevent directors from voting for others by virtue of proxies if any one can so vote. The other depositors may prefer to have the directors vote or control the vote upon their stock according to the arrangement. If so, that appears to be their right. If any of the stock has been sold the purchasers may prefer the same thing. An injunc[448]*448tion against it in behalf of the orator would take away from them their right in this respect and to that extent confer it upon him. As the case is now made t,o appear and is understood, this cannot properly be done.
Motion granted as to the one hundred shares deposited by the orator and. denied as to the residue.
Note oh Stock Trusts for the Cohtrol of Oorporatiohs.
The mystery which in the minds of some obscures this subject is a business mystery not a legal mystery. Each of the legal principles which have rendered these combinations possible is easily comprehended and generally familiar. Nearlyall of them have long been recognized and frequently separately applied. The modern spirit of organization has recently discerned the results that can he worked out through the combination of these familiar principles,' and the secrecy which has attended the operation of the device is a matter of business policy simply.
Previously, efforts to secure concert of action among corporations have been principally made either,
1. By one corporation taking stock in another ;*
[449]*4492. By one leasing the property of another;*
3. By contracts between the boards of directors, having one or more common members, †
[450]*450These involve, in one form or another, embarrassments arising out of the limits of the powers of corporations and their' directors,'and out of the fiduciary relation of directors to stockholders, and the incapacity of a director in two boards to .sanction a contract between them.
The fact that stockholders have not hitherto been regarded .as holding any fiduciary relation to each other or to their com- = .pany has led to the invention of these trusts of stock for the -control of corporations.
A “ Trust," so called, is a device to secure concert of action -.among a number of corporations of similar interests, by separating the voting power and the ownership of the stock, in’ -each.one, to a sufficient extent to concentrate the voting power of a majority of the slock in each corporation, in the hands of .a single committee or association whose policy will therefore .animate all the boards pf directors (or who may even put the .same- persons into the several boards) so that the corporate action of all.may he identical without contract. Under this arrangement ¡it is'intended that the beneficial interest in the ■ stock, -minus the voting power, shall rest where it was before ; .and.the pecuniary value of the stock may be enhanced by the •termination of all competition between the corporations thus brought under one control; and by the consequent advantage ;gáined by the combined corporations in their competition with corporations and Individuals in the same business, but not in rtlae combination.
A brief survey of the legal principles upon which this -device rests will lead us to a clearer comprehension of the -question now likely frequently to be litigated.
1. Characteristic features of corporate organization.] In ;:a partnership each member is agent of- all the others, and has, for all ordinary purposes of the business all the powers that any ■or all have. It makes no difference in (he legal principle that he is in the minority on any question. His power as a partner is not impaired thereby.
Free access — add to your briefcase to read the full text and ask questions with AI
Wheeler, J.
After stating the facts.] It is argued that this scheme is intended to be carried out by voting upon _ large amounts of this stock by proxy, and that the right to so vote can exist only by express statute, and that there is no such statute in Iowa. It is not, however, deemed to be necessary to examine or pass upon that claim as a ground for this motion. The election is to be held in Iowa, under the laws of that State. It is to be presumed that the officers conducting the election will be recognized and be governed by those laws. If they do not give heed to those laws as they are, or as they are claimed to be by the orator, he can, doubtless, object and test the validity of what is done to- the contrary by appropriate proceedings. This would seem to be a better course than for this court to undertake to determine in advance what should there be determined and what, for aught that appears, will there be properly and satisfactorily determined..
The next question raised by the motion is whether the orator has the right to control the vote upon his own stock deposited with Drexcl, Morgan & Co. lie has not sold his stock himself, lie has deposited it with them with authority to sell it, but they have not sold it. Ho therefore remains the legal owner. They .have no interest in the stock coupled with the authority to sell; therefore there is no apparent reason why that authority is not revocable. The deposit was made to enable the. board of directors to dispose of the property of the company, or of all of the stock deposited at a price not less than par, as well as to vote for directors. The directors do not appear to have acquired any vested right to the stock by the deposit sufficient to prevent revocation of the authority to vote. It did not become theirs by , the deposit. They were authorized to sell in a certain way, and if they had sold the sale would be good, but not having sold the title remains as before. It remains, in effect, his, with the right to control the vote upon it, which apparently cannot be granted away separately from its ownership [447]*447(Griffith v. Jewett. 15 Weekly Law Bulletin and Ohio Journal, 419). [See p. 457 of this volume.]
The remaining- question is as to the right of the orator to have defendants, Droxel, Morgan and Co., or the directors prevented from voting upon the stock of others deposited. It is urged for the orator that the transaction creates a trust for the corporation itself. Whether it does or does not depends upon whether what is done in this behalf is done with corporate funds for the corporation. The bill charges that it is so done. The answer denies this, and in this respect it is directly responsive to the bill. By the law an answer so responsive is evidence which must be overcome by evidence. It is said that the orator waived an answer under oath, as the rules in equity provide may be done. This is not understood to take away the right to answer under oath, and when a defendant does so answer the effect of the answer, as evidence, would appear to rest upon the law of the subject, which the rulers of court do not appear to attempt to change. The answer, must, therefore, in this respect, for the purposes of this motion, be taken to be true. If the stock was procured for the company, the defendants do not claim that it could be held for the company and still be voted upon (Studdert v. Grosvenor, 33 L. R. Chan., 528).
As it is not so held, but is held for the other depositors of it as that, deposited by the orator is held for him, the question is as to the right of the orator to control voting upon it as so hold. It is not understood that there is any law of Iowa to prevent directors from voting for others by virtue of proxies if any one can so vote. The other depositors may prefer to have the directors vote or control the vote upon their stock according to the arrangement. If so, that appears to be their right. If any of the stock has been sold the purchasers may prefer the same thing. An injunc[448]*448tion against it in behalf of the orator would take away from them their right in this respect and to that extent confer it upon him. As the case is now made t,o appear and is understood, this cannot properly be done.
Motion granted as to the one hundred shares deposited by the orator and. denied as to the residue.
Note oh Stock Trusts for the Cohtrol of Oorporatiohs.
The mystery which in the minds of some obscures this subject is a business mystery not a legal mystery. Each of the legal principles which have rendered these combinations possible is easily comprehended and generally familiar. Nearlyall of them have long been recognized and frequently separately applied. The modern spirit of organization has recently discerned the results that can he worked out through the combination of these familiar principles,' and the secrecy which has attended the operation of the device is a matter of business policy simply.
Previously, efforts to secure concert of action among corporations have been principally made either,
1. By one corporation taking stock in another ;*
[449]*4492. By one leasing the property of another;*
3. By contracts between the boards of directors, having one or more common members, †
[450]*450These involve, in one form or another, embarrassments arising out of the limits of the powers of corporations and their' directors,'and out of the fiduciary relation of directors to stockholders, and the incapacity of a director in two boards to .sanction a contract between them.
The fact that stockholders have not hitherto been regarded .as holding any fiduciary relation to each other or to their com- = .pany has led to the invention of these trusts of stock for the -control of corporations.
A “ Trust," so called, is a device to secure concert of action -.among a number of corporations of similar interests, by separating the voting power and the ownership of the stock, in’ -each.one, to a sufficient extent to concentrate the voting power of a majority of the slock in each corporation, in the hands of .a single committee or association whose policy will therefore .animate all the boards pf directors (or who may even put the .same- persons into the several boards) so that the corporate action of all.may he identical without contract. Under this arrangement ¡it is'intended that the beneficial interest in the ■ stock, -minus the voting power, shall rest where it was before ; .and.the pecuniary value of the stock may be enhanced by the •termination of all competition between the corporations thus brought under one control; and by the consequent advantage ;gáined by the combined corporations in their competition with corporations and Individuals in the same business, but not in rtlae combination.
A brief survey of the legal principles upon which this -device rests will lead us to a clearer comprehension of the -question now likely frequently to be litigated.
1. Characteristic features of corporate organization.] In ;:a partnership each member is agent of- all the others, and has, for all ordinary purposes of the business all the powers that any ■or all have. It makes no difference in (he legal principle that he is in the minority on any question. His power as a partner is not impaired thereby. But if the firm become incorpora[451]*451ted Ms power to act for the body ceases, and, as a member, ho can only cast a vote toward the election of a board to whose hams all the ordinary powers of the body are transferred. Half the stock, plus one share, can elect the whole board ; and half the stock, minus one share gives no right either of control or of voice in the board. Hence the entire control for the year is secured by simply securing the voting power of a major part of the stock.
The directors tb us elected, however, are trustees of a franchise granted by the State. They cannot convey away the corporate power to any external body, nor bind the corporation by executory contracts to exercise corporate powers in a manner inconsistent with the property rights of the stockholders. Hence all attempts to secure a concert of action among- corporations by executory agreements between their boards of directors arc of uncertain duration, as is constantly seen in the pooling arrangements between carrier companies.
2. The corporate combination by a “ Trust” needs no corporate act.] If the power to elect the board in each of several corporations is secured, and lodged in one hand, no -contract between the several boards is necessary. The members of the board that should not act in concert with the prescribed policy would simply be dropped at the next election, and others subservient to that policy take their places.. Each board thus elected goes forward in the pursuit of the concerted policy without assuming to bind its corporation by any agreement to do so.
Each corporation is thus left in a legal sense free, and does not enter into any contract in restriction of its franchise; and it is conceived that the conduct of neither board can be impeached on an allegation that it has entered into any executory obligation in the' nature of a combination or consolidation or an usurpation of power.
3. Alleged justification of the object of “Trusts.”] The remaining ground upon which the conduct of such a board might be attacked is the question whether it is faithful to its trust in administering the affairs of the corporation for the benefit of the stockholders.
The security of its position in this respect is regarded as [452]*452.assurer] by the fact that the object of the concert of action is the enhancement of the value of the stock ; and that the proprietorship of that value remains where it was before, the owners having parted with their right to vote for the purpose of enhancing the security of their property and their prospects of dividends. The mischiefs felt or feared from these Trusts, are not so commonly in any injury to the interests of stockholders, as in the aggrandizement of corporate power resulting from this concert of action.
4. Legal theory of the “ Tmst.”] The means by which this separation of the voting power from the pecuniary value of-the stock is effected is the device called the “trust.”
It depends on the legal principle that the Statute of Trusts, which forbids one person to hold the legal title to property in trust for another, except for specified purposes, 'does not in the form in which it exists in this State, and I believe elsewhere, apply to personal property; and stock in a corporation, even though it be a land company, is personal ' property. It is essential to the purpose in view that a majority of the stock in each of the corporations to bo within the combination, be assigned to one man or a committee, association, or syndicate, who will take the legal title, and the power to vote, but will hold the stock in all respects except the voting power (and any other expressly excepted), as trustees for the original owners. For this purpose it is not necessary to apply to the corporation. The corporation as such may possibly know nothing about it. If the owners of half the stock, plus one share, will transfer their stock to those trustees, the corporation will find itself at the next election, in the charmed circle of the combination, simply by the election of a board of trustees who are going to do just as'the boards of other corporations in the circle do.
Practically, more than a mere majority of the stock may be required ; for as one object of the combination is to enhance the value of the stock, it may be undesirable to bring any corporation into the circle if any considerable number of its stockholders will not surrender their stock ; but the legal principle does not require the assent of a majority.
5. ' Function of the trustees.] The “ Trustees ” to whom the [453]*453stock in numerous corporations is' thus entrusted, issue to the stockholders from whom they receive it, “ Trust certificates,” which represent the pecuniary value of the stock minus the voting power. The trustees do not represent the corporations; do not usually enter into any contract with the corporations,' nor do they necessarily have any communication with them. The trustees are only stockholders. In legal theory they have no other power over the corporations than to wait till election day in each and voto. But this power, since it consists of a majority in a large number of corporations, is enough in itself.' to infuso a common purpose into all the boards elected ; and it is not strange if in some cases the trust so far departs from the' legal theory of tho organization as to “run” the corporations more or less directly.
Tho remarkable power which such combinations wield both in enhancing the business of the companies thus securing tho benefits of common experience and concert of action, and in crushing out one after another-, competitors not in tho combination, has invited public attention to the questions which are involved in the legal theory of such conbinations, and tho circumstances under which in each caso they are attempted.
The state of the authorities seems to present several questions, among which the chief are,
1. Bo stockholders in the same corporation sustain a relation to each other which forbids a majority from combining with stockholders of other companies, to secure concert of. action, if it be secured without direct contract between the corporations ?
2. Bo such rules of law as forbid corporations to form direct combination by contract with each other, render unlawful, combinations of stockholders in different corporations to effect the samo result, by electing such boards of direction so as to secure concert of action without contract ?
3. Is the assumption by the unincorporated trustees of stock, of the power to issue in exchange, certificates, negotiable or otherwise, representing the ownership of the stock minus the power to vote, an usurpation of a corporate franchise ?
[454]*454' 4. Can the evils which aire assigned as the ground for invoking the jpolícy of the law against such trusts for the control of corporations, he remedied or restrained, without fore-l going the just advantages of this new and powerful form of organization ás a means of economy and efficiency and soundness in management ?
' The principles thus far affirmed by the courts (and with singular harmony) may be concisely stated thus
1. A stockholder cannot irrevocably divest himself of the power to vote on his stock; and his agreement to that end does not bind him. The law will not hold him in damages for a breach, of it, and equity will enforce his revocation of it.
2. A combination of stockholders, to commit their powers oí voting to a single hand, is not illegal per se, but amounts only to the giving of so many proxies.
■ 3. Stockholders not in the combination cannot have relief against'it, unless its object be illegal.»
4. If the object be illegal, as for instance to confer the power to dictate the vote, upon another corporation which could not directly hold the stock and cast the vote, the contract is illegal, and any stockholder may enjoin the execution of it.
Notes of Cases.
. The principal cases recently decided, hearing on the rules of law involved, which the reader may like to notice in connection with those in the text, are as follows :
The right to vote at meetings of the stockholders of a corporation, " upon shares held on a trust for the benefit of the corporation, is suspended while they are so held. American Railway F. Co. v. Haven, 101 Mass. 398.