Hinds & Adams Counties v. Natchez, Jackson & Columbus Railroad

Alexander, Special Judge, delivered tbe opinion of the court.* This is a suit brought by the counties of Hinds and Adams, as stockholders of the Natchez, Jackson & Columbus Railroad Company, to cancel, as fraudulent in fact and unauthorized in law, the sale by that company of its railroad property and franchises to the Louisville, New Orleans & Texas Railroad Company, and for other incidental relief. The sale was made pursuant to an act of the legislature approved February 19, 1890 (Laws 1890, p. 675, eh. 502), entitled “An act to authorize the Natchez, Jackson & Columbus Railroad Company to sell its railroad situated in this state, or to consolidate the same.” ¡Section 1 of the act authorized the company to sell absolutely all or any part of its railroad, including its franchises. Section ■2 empowered the Louisville, New Orleans & Texas Railway Company to consolidate with the Natchez, Jackson & Columbus Railroad Company on such terms as might be agreed on by them. The record contains a complete history of the Natchez, Jackson & Columbus Railroad Company, in its minutest details, from its incorporation and organization. After a careful examination of all the evidence relied on by plaintiffs as establishing fraud, we concur with the chancellor in his finding: that there was no actual fraud either on the part of the buying or selling corporation, in the sale itself or in any of the dealings culminating in the sale. Nor do we find any actual fraud in the issuance, hypothecation, or sale of capital stock. On the contrary, we think that the history of the Natchez, Jackson & Columbus Railroad Company presents a record singularly free from any suspicion of misconduct, and characterized by scrupulous regard for stockholders and fidelity and fairness to creditors. At the time the company was chartered, in 1870, it could hardly have been considered a promising business venture by — 625 — those conversant with the then conditions in this state. Projected without any capital stock or financial backing, and dependent for its construction almost wholly upon county aid, its natal and normal condition was insolvency. That the task of its construction was undertaken at all was due mainly to the indomitable zeal and energy of its chief promoter and for many years its president, Gen. W. T. Martin. Undaunted by difficulties, he successfully encountered all the vexations and grappled with all the problems that arose during the ten years of construction, and, we might add, without receiving the emoluments which are usually thought to be consequent upon the position of a railroad president. The company was chartered in 1870, and the first subscription to its capital stock was made in the following year by Adams county, which voted to subscribe for $600,-000 of the stock and issue its bonds to pay therefor. The legality of this subscription was afterwards questioned, and by a compromise settlement it was reduced one-half. The corporation was then permanently organized; and as only a comparatively trifling amount of stock was then or at any time after-wards subscribed by individuals, Adams county had practically exclusive control of the enterprise. With the money obtained by discounting these county bonds and with funds borrowed on its own obligations and mortgages at ruinous rates of interest, the railroad crept along from Natchez to Jackson, building by piecemeal, and so slowly that the equipment of sections first built was old and worn out before the road was completed, and the interest on its indebtedness amounted to almost as much as the cost of the road. In 1880 the city of Natchez was induced to vote a subscription of $225,000 to the capital stock, conditioned on the guaranty of the railroad to pay the interest and principal on the city’s bonds as they matured, and thus prevent any levy of taxes to pay them. This subscription is assailed by complainants as ultra vires, and the guaranty of the railroad company and the — 626 — issuance of the mortgage bonds to secure such guaranty are attacked as beyond the power of the corporation. Before the railroad was completed to the Hinds county, line, the county of Hinds voted a subscription of $200,000 to the capital stock of the company, but to be used only in payment for the construction of the road within the county. Thus the bonds of the county to pay for the subscription did not become available until 1882. Meanwhile the stock of the company was greatly embarrassed, and, having no credit, it procured certain of its directors in Natchez to lend their credit to the company by executing their accommodation notes, aggregating $150,000, to be used by the company as collateral security. These notes were obtained on a nominal sale of stock to the amount of $1,-500,000, being on the basis of ten cents on the dollar, and issued subject to the right of the company to repurchase it within some short fixed period at a slightly advanced price. By the hypothecation of these accommodation notes and of this stock and by pledging the undelivered Hinds county bonds, the needed loan-was secured. In connection with the issuance, sale, and hypothecation of the stock and bonds of the company, it is well to note that the charter of the railroad company authorized it to borrow money upon its own credit for the purpose of constructing and maintaining the railroad, and to issue its corporate bonds or promissory notes, and to mortgage its railroad and franchises, and to sell, dispose of, or negotiate its bonds and corporate stock at such prices as, in the judgment of the company, evidenced by the voice of two-thirds of the directors, would best advance its interests, and if such bonds, notes, or stock should be sold at discount, the sale should nevertheless be valid for the par value thereof. In January, 1888, matters being in the general condition above described, the company, through its president, and pursuant to an order of its directors, entered into a contract with Jos. W. Drexel, by which, in consideration of the company’s obligation to pay $304,000 in twelve months and a transfer and — 627 — delivery to Drexel of 30,000 shares ($1,500,000) of stock of the company and $1,250,000 of bonds secured by second mortgage on the railroad, Drexel turned over to the company certain bonds of the New York, West Shore & Buffalo Railroad Company, of the face value of $320,000, which could be sold and were sold by Gen. Martin, but at a discount of more than twenty per cent. The agreement with Drexel further stipulated that, upon default in the payment of the company’s obligation, all of the stock and bonds hypothecated should become the absolute property of Drexel, upon the further condition that he should pay off all the outstanding mortgages of the railroad company, estimated to be about $425,000. This transaction is characterized by complainants as a loan, and is assailed by them as usurious, and also illegal, on the ground that it was voted by the directors to provide a mode of payment of the debt secured in part by their own accommodation notes aforesaid and to pay the debt of the company growing out of its guaranty of the city of Natchez bonds. The note or obligation of Drexel was extended from year to year, but meanwhile the city of Natchez was being pressed and importuned by the holders of its bonds; and the railroad company obtained another loan on short credit from Morris 3L Jesup, trustee for Drexel, to pay off the bonds of the city of Natchez. These were paid, and the mortgage bonds which had been pledged to secure performance of the company’s guaranty in favor of the city were transferred, to be held as collateral for Drexel. Thus Drexel, through his trustee, held practically all of the stock of the company, except that owned by the counties of Adams and Hinds; and the right of the company to redeem, under its contract, having been lost by default, Drexel claimed the absolute ownership of the stock and bonds. Thereupon the directors, on May 6, 1887, waived the right to redeem, and by a formal order directed the reissuance and delivery of the said amount of stock to such persons a3 might be indicated by Jesup, which was done. The latter then, in execution of his part of the contract, procured a surrender to — 628 — the company of all the outstanding mortgage notes and bonds which he had conditionally assumed to pay. Thus Drexel and Jesup and their appointees came into the ownership and possession of a controlling interest in the Natchez, J ackson & Columbus Railroad Company, and at the succeeding annual meeting, in January, 1888, dictated the selection of the directory. At the same meeting T. J. Nichol became president of the sompany instead of Gen. Martin. In March, 1889, the Drexel and Jesup stock and bonds were sold to the Financial Improvement Company, a construction company organized and controlled by the shareholders of the Louisville, New Orleans & Texas Railroad Company; and the control of the railroad company thus passed to those identified in interest, if not in name, with the company. On February 19, 1890, on the procurement of the officers of the Louisville, New Orleans & Texas Railroad Company, the act of 1890 (Laws 1890, p. 675, ch. 502) was passed, authorizing the sale of the Natchez, Jackson & Columbus Railroad, or its consolidation with the Louisville, New Orleans & Texas Railway Company.' Soon after the passage of the act the directors of the Natchez, Jackson & Columbus Railroad Company met, and, by the unanimous vote of the directors who were present, accepted the provisions of the act, and made a -sale of the railroad and other property and the franchises of the company to the Louisville, New Orleans & Texas Railway Company, and directed the necessary conveyance to be executed. The directors also called a meeting of the stockholders to consider the matter of ratification of the sale, and at the meeting of the stockholders thus called the action of the directors was ratified. There was only one stockholder — the owner of fifty-four shares — who voted in the negative. The deed was thereupon executed, and the Louisville, New Orleans & Texas Railway Company (now, by consolidation, the Yazoo & Mississippi Valley Railroad Company) took exclusive control of the railroad and other property of the Natchez, Jackson & Columbus Railroad Company. — 629 — We have given a mere outline of the history of the railroad, stating only so much as we think necessary to a proper understanding of the legal principles which must be decisive of the controversy. The first ground of attack on the sale is that, while the act of 1890 gave the Natchez, Jackson & Columbus Railroad Company authority to sell, the Louisville, New Orleans & Texas Railway Company had no authority under the act or under its own charter to buy. It is sufficient as to this to say that whatever complaint might be made by creditors of the selling corporation or stockholders of the purchasing company or by the state in its sovereign capacity, this objection cannot be made by the selling company or its stockholders. Fritts v. Palmer, 132 U. S., 282 (10 Sup. Ct., 93; 33 L. ed., 317); Union National Bank v. Mathews, 98 U. S., 621 (25 L. ed., 188); Ohio Railroad Co. v. McCarthy, 96 U. S., 258 (24 L. ed., 693). See, also, Quitman County v. Stritze, 70 Miss., 320 (13 South. Rep., 36). The next objection is that the act of .1890 was an amendment of the charter of the Natchez, Jackson & Columbus Railroad Company, and, being fundamental in its nature, it could not be operative until accepted by all of the stockholders. We are aware of the rule announced by many courts that, even although the right is reserved in the state to repeal, alter, or amend the charter, an amendment which fundamentally changes the nature of a corporation cannot be imposed upon it if any of the stoekhoMers dissent. This rule, if correct, has no application in this case. Even in the absence of express statutory power, a private corporation doing a losing and unprofitable business may sell its entire assets upon a vote of a majority of the stockholders. Berry v. Broach, 65 Miss., 450 (4 South. Rep., 117, citing Morawetz on Priv. Corp., sec. 413); Wood’s Field on Corp., sec. 445; Cook, Stock & Stock., sec. 668. It is true that a railroad corporation has quasi public functions, •but where the state, by a valid statute, has assented to the sale, — 630 — as in this case, all difficulty on this account is removed. Whatever interest the public might have in the continued ownership and operation of the road by the corporation, this interest was certainly committed to the control of the legislature. Treadwell v. Salisbury Mfg. Co., 7 Gray, 393 (66 Am. Dec., 490); Black v. Delaware Canal Co., 22 N. J. Eq., 130. It is not denied that the sale was approved by a majority of the stockholders present and voting, but the point is made that the stock held and voted by the Einancial Improvement Company and its appointees was illegally issued and wrongfully acquired by Drexel and Jesup and their assignees, and could not be'lawfully voted. There does not seem to have been any concealment from stockholders or the public of any of the facts or circumstances connected with the issuance, • hypothecation, or sale of this stock. Whatever right other stockholders might have had to question the validity of this stock, the county of Adams cannot be heard to complain. Bjy virtue of its ownership of a majority of the stock, it had virtual control of the company from its organization in 1871 until- 1882; and after that, until 1887, the counties of Adams and Hinds together controlled the company. At every meeting of stockholders from 1872 to 1889, Adams county was represented by the president of its board of supervisors, and all the acts of its officers and directors were reported to and ratified by the stockholders. The county of Adams, by the president of its board of supervisors, participated in the issuance of this stock; and it was. by its consent,, if not by its active procurement, that the stock was placed with Drexel and Jesup. Consequently the county cannot object that the owners exercised the right incident to ownership of voting the stock at the stockholders’ meetings. It thus becomes unnecessary to decide whether the appointment of Gen. Martin to’ represent Adams county stock was invalid because not entered on the minutes of the board of supervisors. Due notice of the meeting was given; and even if Adams county was not rep — 631 — resented, it was bound by tbe action of tbe majority of the stockholders. The case in favor of Hinds county seems to be in no better attitude. After its acquisition of the stock, it was represented at nearly all of the meetings of the directors and stockholders. It is true that the persons assuming to act for it as stockholders were in many instances not appointed by the order of the board entered on its minutes. But, as stated above, we do not think it necessary to decide wThether their appointment to vote the stock of the county had to be evidenced of record, for the county was accorded the right to elect one or more persons to represent it on the directory of the company, and during the whole time of its ownership it was so represented on the directory by persons appointed for the purpose by formal orders entered on its minutes. Ona of the conditions of the subscription to the stock by Hinds county, as appears from the minutes of the board of supervisors, was that the county should be secured representation on the board of directors of the .company. The county appointed men for tbe very purpose of acting as directors, and they were invited by the company to act, and did act, as such, and by their votes and their acquiescence authorized and ratified the very transactions as to the loans and the issuance and disposition of the stock now the subject of complaint. The resolution in the directors’ meeting on March 28, 1890, accepting the act of 1890 and directing the sale of the railroad, was introduced by H. C. Roberts, who was acting as a director in the company by the appointment of the board of supervisors of Hinds county, regularly entered on its minutes; and, as if to remove all doubt as to his power under the charter to act for the county and serve as a director, it had caused a nominal amount of its stock to be transferred to him. In .determining how .far the county of Hinds was bound by the acts of Roberts, it must be borne in mind that the counties did not own and hold their stock in a governmental capacity. This we held in Adams County v. Railroad Company, 76 Miss., 714 (25 South. Rep., 667). It follows neces — 632 — sarily from the views announced in that case that the county of Hinds held the stock in the same way and subject to the same rights and obligations as purely private corporations or individuals. Incident to this right as owner was the right to appoint such agents to represent its interests as the nature of the property or the business required. The legislature, in providing, as it did in sec. 20 of the charter of the railroad company, that the board of supervisors might appoint any person it saw fit to vote its stock, was merely declaring a right which the county would possess in the absence of a statute — a right incident to its ownership, of the stock. It is immaterial-by what name the agent was called, if in fact he was duly appointed to represent the county, and did in fact represent it. The fact that in his appointment, on the minutes of the board, he was called a “director,” and was accorded and exercised all the functions of a director, sufficiently indicates the scope of his authority. Surely the agent of a private corporation, so appointed and so acting, would bind his principal. So we must hold the county of Hinds bound by the acts of Roberts. Berry v. Broach, supra. The cause of appellants has not'lacked for ability and zeal of counsel. The transcripts and briefs are exceedingly voluminous, and we have not undertaken to discuss seriatim or in detail all of the points presented, many of which are correct as abstract legal propositions. All the material questions presented are determinable in the light of the principles above announced. The decree of the chancery court is affirmed. Footnotes [*] Judge Calhoon, having been oí counsel before his appointment to the bench, recused himself, and C. H. Alexander, Esq., a member of the supreme court bar, was appointed and presided in his place.