Byers v. Rollins

Mr. Justice Hayt delivered the opinion of the court. This action was brought in the court below to compel an accounting by the defendants, as officers of the Grand River Bridge Company, to oust the defendants from office, and to obtain a decree for the cancellation of all the stock held by the defendants or either of them. If the defendants have assets in their possession belonging to the corporation, the corporation, and not the stockholders, is the proper party, to bring an action to compel them to account for such assets. It is well settled that whenever the officers of a corporation misappropriate the corporate funds, or are guilty of any kind of wrongful dealing with the corporate property, the corporation is primarily interested, and can alone seek redress, unless it is made to appear that it is necessary for the stockholders to bring the action in order to prevent a complete, failure of justice; and, to bring a case within the exception, it must be made to appear that the corporation refuses to bring a suit, or permit the same to be brought in the corporate name after reasonable application has been made to it for that purpose; or facts [27] must be alleged, showing that it would be useless to make such an application, as when the wrong-doing defendants constitute the board of directors of the company, or a majority of them, or that the directors, or a majority of them, are still under the control of the defendants, charged with the wrongful conduct, so that it is apparent that a demand would be unavailing; and in every such case it is indispensably necessary that the corporation should be made a party defendant, for the reason that the relief, when granted, belongs to the corporation and not to the stockholder, although, of course, he may be indirectly benefited by the result of the action. 3 Pom. Eq. Jur. § 1088 et seq.; Dodge v. Woolsey, 18 How. 331, 345; Davenport v. Dows, 18 Wall. 626; Jackson v. Ludeling, 21 Wall. 616; Newby v. Railroad Co. 1 Sawy. 63; Heath v. Railroad Co. 8 Blatch. 347. The corporation known as the Grand River Bridge Company not having been made a party plaintiff or defendant, the trial court correctly decided that an accounting could not be ordered. Neither were the plaintiffs entitled to a decree ousting the defendants from office under the agreed statement of facts, even if it be conceded that the title to their .offices could be determined in this proceeding, upon which question no opinion need be expressed. It is shown that the only defendants claiming the offices were legal officers prior to and up to the time of the meeting held upon January 17,1885, and that they have been managing the affairs of the corporation since its creation It is therefore necessary for the plaintiffs to show affirmatively that these defendants lost the right to hold such offices, as the result of some action taken at that or a subsequent meeting; and, we are not informed that any meeting whatever was held after the meeting held in 1885, although the action was not commenced for more than two years thereafter.- At this meeting the defendants received votes representing not only a majority of the capital stock after the increase [28] to $7,000, but also a majority of the original $3,000. It is apparent, therefore, if the plaintiffs’ claim be correct, that the capital stock had never been legally increased above the amount fixed by the original articles of incorporation, the defendants were nevertheless legally reelected, having received votes representing a majority of such stock; while if $7,000 be taken as the total amount of stock, it is shown that they also received votes representing a majority of said amount. The only remaining question relates to the plaintiffs’ right to have the stock held by the defendants canceled. It appears that the cost of the bridge was estimated at $3,000, and that the capital stock was originally limited to this amount, while it is shown that the actual cost of the bridge was something over $7,000. Consequently it became necessary to provide in some way for this difference, and the stockholders undertook to do it by increasing the capital stock. Nothing is shown to indicate mala fides on the part of any one connected with the transaction; on the contrary, it appears that the entire stock was disposed of at par, and the proceeds used to pay the expenses incident to the construction of the bridge, the only irregularity in the entire proceeding consisting in the failure of the parties to have the articles of incorporation amended so as to permit the increased issue of stock. Plaintiffs are asking for the cancellation of all the stock held by the defendants, whether the same be of the original or subsequent issue, to the end that there may be no stock left outstanding except that which is held by the plaintiffs. It is shown, however, that the defendants have at all times held a majority of the original capital stock; and it is admitted that the issue of this stock was kept within the limit fixed in the articles of incorporation; and certainly a subsequent issue, although unauthorized, did not invalidate this stock, and no reason for the cancellation thereof has been shown. [29] Should it be admitted that the action of the defendants in increasing the capital stock beyond the amount fixed in the articles of incorporation was irregular and illegal, and that in a proper case, with proper parties before the court, the excess of stock might be held for cancellation, such a decree is not sought in this case, and, if entered, would be of no benefit to the plaintiffs, as they are the owner’s of a large part of this excess, and, before such a decree could be properly entered, plaintiffs would be required to surrender all such stock held by them. If Oushman falsely represented the certificate sold to Byers as covering all the capital stock of the company, this would not change the result, as it does not appear that the defendants were in any way responsible for such false representations; and it does appear that, at the time of the purchase, it was well known that .the defendants Rollins, Gaskill and Gooch were then the managers and directors of the company, and had been such managers and directors since its organization, and that Byers purchased well knowing such facts, and the further fact that, under the law, none but stockholders could be directors of a company incorporated under the laws of this state. Byers, with this knowledge, purchased a mere certificate for stock, which was not under the seal of the company and was not signed by its president. Here was sufficient, we think, to have put a prudent man upon inquiry; and reasonable inquiry in this case would undoubtedly have disclosed the true condition of affairs as shown upon the books of the corporation. Byers, not having made such inquiry, must be treated the same as though he purchased with full knowledge of the facts. Wade, Notice, § 11. From whatever aspect the case is viewed, we must hold that the plaintiffs were not entitled to a decree of cancellation. Finding no error in the proceedings of the trial court, the judgment must be affirmed. Affirmed.