Tanner v. Lindell Railway Co.

YALLIANT, J. This is a suit in equity. The plaintiffs are stockholders in the Lindell Railway Company, a corporation chartered by an act of the General Assembly approved January 26, 1864, for the purpose of constructing and operating certain lines of street railways in the city of St. Louis and the county of St. Louis. The defendants are the Lindell Railway Company, The United Railways Company of St. Louis, The St. Louis Transit Company (the two last named being street railway corporations), the St. Louis Trust Company, and certain individuals who compose the officers and board of directors of the Lindell Company, and who compose also the officers and board of directors of the two other street railway companies. In the circuit court a demurrer to the plaintiffs’ second amended petition was sustained, and plaintiffs declining to plead further there was a final judgment for defendants, from which the plaintiffs prosecute this appeal. — 12 — The petition copies in full the act of 1864 by which the Lindell Company was incorporated, and next states that under the provisions of sections 2779, 2780, 2781, Revised Statutes 1889, the charter of the corporation was amended to enable it to extend its business and add to its lists certain other lines of street railways in the city and vicinity. The pleader then draws the legal conclusion that the original charter and the amendment mentioned constituted a contract having three relations, viz.: it was, first, a contract between the State and the corporation; second, one between the corporation and the stockholders; and, third, one between the stockholders inter sese. The further conclusion is drawn that all the rights and powers of the parties to that contract are to be found within the terms of the charter and its amendment, and that among them is not found the “power to convey away all the property and franchise of said Lindell Railway Company and to abandon its corporate business without the unanimous consent of all its shareholders.” The petition further states: That on January 26, 1899, plaintiffs became the owners of certain shares of the Lindell stock, which on that day stood and still stand on the books of the corporation in plaintiffs’ names; that at that time the individual defendants were the owners of two-thirds of the shares of stock and constituted the board of directors and managing officers of the corporation. That during that month those defendants conspired with a certain banking concern in New York and other persons ■unknown to plaintiff to sell all the assets, franchise an’d property of every description of the Lindell Railway Company to a corporation, to be formed, to be controlled and managed by themselves as stockholders and directors and officers, for their own profit without regard to the rights of other stockholders. That the scheme was kept secret from the plaintiffs and was not known to them until September 30, 1899. That in pur — 13 — suance of that scheme the individual defendants purchased and acquired control of a corporation called the Central Traction Company and changed its name to United Railways Company, and on the sixteenth of September, 1899, increased its capital stock from $5,-000,000 to $45,000,000, and on September 19, 1899, they as directors of the Lindell Company executed a quitclaim deed whereby for the nominal consideration of one dollar they attempted to convey to the United Railways Company all of the ‘ ‘ assets, franchises and property of every kind and nature whatsoever,” belonging to the Lindell Railway Company. That the deed was executed without the knowledge or consent of plaintiffs, against their wishes; in fraud of their rights and was not discovered by them until it was put on record September 30, 1899. That at the date of the deed the Lin-dell Company owned seventy-five miles of street railway in the city and county of St. Louis and other property “worth many millions of dollars;” it had a capital stock of $2,500,000, divided into 25,000 shares of the par value of $100 per share, its assets were largely in excess of its liabilities, its business was being profitably conducted and increasing and it was paying a dividend of one and a quarter per cent quarterly on its capital stock, but by that deed the corporation was incapacitated from doing the business for which it was created and its earning power totally destroyed. That besides the property of. the Lindell, The United Railways Company about the same time bought “the property, capital stock, and franchises of a number of other street railways in the city of St. Louis,” the aggregate capital of all the companies so bought was $19,275,000, carrying a bonded indebtedness of $13,-980,000, making a total liability of $33,255,000. That the United Railways Company had no other property except that so purchased, yet thereupon it predicated an issue of its capital stock to the amount of $45,000,000, and a bonded indebtedness of the same amount, making — 14 — a total of $90,000,000, being an excess of $57,744,900, over and above the aggregate amount of stock and bonds ■which had been predicated on the same property and franchises in the hands of the original companies, of which excess the individual defendants took a large share to themselves. That the bonded indebtedness just mentioned is secured by a deed of trust to the defendant, the St. Louis Trust Company, as trustee, which company took the deed with full knowledge of the facts above stated; the deed of trust covers all the properties acquired by the United Railways Company as above stated, including that of the Lindell Company, and is on the records in the office of recorder of deeds in the city of St. Louis and in the county of St. Louis. That on September 30, 1899, the United Railways Company leased all the property so acquired by it to the St. Louis Transit Company by a deed recorded October 19,1899, for a term beginning October 1,1899, and ending April 1, 1939, and all the property is now in the possession of and being operated by the Transit Company, which company was organized for that purpose by the same men who organized the United Railways Company and is under the same management and ownership. The petition then goes on to state facts to show that it would be useless to ask the officers of the Lindell Company or the directors or the stockholders, other than the plaintiffs themselves, to bring this suit, hence they bring it in their own names for the benefit of themselves, and such other stockholders, if any, as may see fit to join herein. The petition then proceeds rather in the form of an argument than of a pleading to discuss an act of the General Assembly entitled, “An Act to revise and amend chapter 155 of the Revised Statutes of Missouri, 1889, entitled ‘street railroads,’ ” approved, June 19, 1899 (Laws 1899, p. 374), which the plaintiffs are advised is relied on by the defendants for authority for — 15 — the deeds now complained of. Much of that act is copied into the petition. The features of it to which particular attention is drawn are those which authorize to a street railroad company “to sell, lease or dispose of its v stockholders' at a meeting called on notice therein prescribed, to “purchase, lease or acquire by other lawful contract” the capital stock, bonds and property of other street railroad companies, and to hold and operate the roads so acquired; and a corresponding power given to a street railroad company “to sell, lease or dispose of, by any other lawful contract, to any other street railway company, its railroad, rights, franchises,” etc., by a like vote at a meeting held on a like notice. The act authorizes street railway companies in existence at the date of the act to come under its provisions by conforming to certain requirements therein specified which include payment of a fee to the Secretary of State and taking out a certificate therefor, the fee being $50 for the first $50,000 of capital stock and $5 for every additional $10,000 of its stock. The petition alleges that the Lindell Company never complied with the requirements of that act necessary to bring itself under the provisions thereof, but that nevertheless a stockholders’ meeting was held, as if under that law, on the notice therein required, and at that meeting two-thirds of the stockholders voted to * authorize the sale of the company’s property now complained of and the deed was executed on that authority, but these plaintiffs had no actual knowledge of that meeting and never consented to the act. At that meeting it was voted that the stock was worth $170 a share and that price should be paid to the minority shareholders and an agreement was then made by the Lindell Company with the United Railways Company for the latter to pay to the minority shareholders that sum per share of their holdings, but plaintiffs would not accept that sum. The pleader draws the conclusion that under the — 16 — original charter of the Lindell Company and the amendments thereto, the plaintiffs had the vested right to have that corporation operated as long as it conld be so with profit, that this was a right bedded in contract between the State and the corporation, the corporation and the stockholders, and the stockholders inter sese, and that neither the State by its. subsequent legislation, nor the corporation assuming to act under such subsequent legislation, nor the stockholders themselves, could impair the obligation of that contract, in which the plaintiffs are protected by the Constitution of the United States and the Constitution of the State of Missouri. The petition prays that the quitclaim deed from the Lindell Company to the United Railways Company be cancelled and held for naught, that the lease to the Transit Company and the mortgage to the St. Louis Trust Company, in so far as they purport to cover the property of the Lindell Company, be cancelled, that the property of the Lindell Company be restored to it unincumbered by anything the United Railways Company may have done or suffered, that the Transit Company account to the Lindell Company for the earnings of its property, and for general relief. Appellant assigns for error the sustaining of the demurrer to the petition and the judgment thereupon. The legal proposition which lies at the foundation of the plaintiffs’ case is that by the implied contract between themselves, the corporation and the other stockholders arising out of the relation of corporation and stockholders, the property of the corporation was to be used to carry on the business for which it was created and that it was not lawful for the board of directors without the unanimous consent of the stockholders to sell all of its property and thereby render it incapable of doing business. The plaintiffs say that such was the law when they invested their money in the stock of the Lindell Railway Company, that they have never consented to a change of the contract in that respect, and — 17 — that neither the corporation nor the other stockholders nor even the State itself conld impair the force of that contract. The legal proposition as stated by the plaintiffs is to be found in the text-books and the many decisions cited in the brief of their learned counsel, among which is our own decision in Feld v. Roanoke Investment Co., 123 Mo. 603. That is a principle of law founded in justice and is Y applied to protect the weak against the strong — when the weak is right and the strong is wrong — it is applied to prevent or relieve against an unjust abuse of the power of the majority. It is not an unqualified rule of law. None of the authorities cited says that a sale of all the property of a corporation pursuant to a resolution of a majority of its members is void. They all recognize that the maj ority in interest have the right to rule within reasonable bounds and that whilst they have no right, arbitrarily or oppressively, to close out a corporation for their own advantage yet they are not compelled to continue an unprofitable business or to pay the minority more than their stock is worth for the privilege of closing it up. The principle invoked by the plaintiffs is wise and just, but, since it is liable to, abuse, its wisdom and justice are seen only in its application to the facts of the given case. It is, as before said, designed for the protection of the minority, but like some other equitable principles it is to be used as a shield, not as a sword. When, therefore, the principle is invoked in a court of equity, the case turns on a question of remedy, the court applies the law ex aequo et bono, with due regard to the rights of the plaintiff and also with due regard to the rights of the defendants and others whose interests may have become involved. Because all the; • stockholders have not consented to the sale it does not ' follow that the sale will be set aside regardless of the ¡ consequences. ■ Sometimes when The act is stained with ' — 18 — bad faith and only those who are guilty of the wrong are to be affected, the court will set aside the sale and restore the conditions as they were before. [Abbot v. American Hard Rubber Co., 33 Barb. 589.] And sometimes, when the plaintiff is prompt, the court will enjoin the sale. [Zabriskie v. Railroad, 18 N. J. Eq. 178.] But the issuance of an injunction even when promptly applied for is always in the sound judicial discretion of the court. ‘ ‘ The courts will require a very strong case for the granting of an injunction which will cause more injury than it will remedy, and it may be said, as a general rule, that an injunction will not be granted when it will be productive of greater injury than will result from a refusal of it. This rule is especially applicable when the party applying for an injunction has by his own laches made it impossible to grant the injunction without inflicting serious injury on the ■ party so to be enjoined. In determining which way the balance of convenience lies, the resultant benefit and detriment to the parties litigant are not the only matters to be considered. The court will also consider the injuries which may be inflicted on strangers to the suit and to the public generally.” [16 Am. and Eng. Ency. Law (2 Ed.), 363.] That doctrine was announced by this court in Bailey v. Culver, 84 Mo. 540. The reasons for the refusal of an injunction under those conditions are applicable also when the court is asked to decree a rescission of a sale which has gone into effect and other rights have grown out of it: ' In Lauman v. Lebanon, etc., R. R., 30 Pa. St. 42, the Supreme Court of Pennsylvania considered a case the facts of which were very much like the facts of this case. The plaintiff was a stockholder in the Lebanon Company, the Legislature had by an act, subsequent to the incorporation, authorized that corporation to consolidate with the Reading Railroad Company and provided that the stockholders of the Lebanon Company were to surrender their stock and take in substitution — 19 — and satisfaction thereof stock in the consolidated Reading Company. Plaintiff as minority stockholder brought suit to enjoin the Lebanon Company from carrying into effect the scheme of consolidation. The court decided' that the act of consolidation was in effect an act of dissolution of the Lebanon Company; that an act of dissolution, like an act of incorporation, was not an act of the corporation, but an act of its members; that a corporation having a public duty to perform could not dissolve without the consent of the State; that with such consent it could dissolve by vote of a majority of its members; but that, even with permission of the Legislature, the majority could not dictate to the minority what they should take in payment of or substitution for their stock, and, since in that case the only thing that was offered to the plaintiff was stock in the consolidated company, the court issued an injunction to “be dissolved on the defendants giving security to the plaintiff in double the market value of his stock, to pay for said stock when its value shall be ascertained. ’ ’ Railroad v. Bremond, 53 Tex. 96¿ was also a case of consolidation, in which the plaintiff who was a stockholder objected to the act. The original charter of the plaintiff’s company did not authorize a consolidation with another company, but subsequently the Legislature did authorize it, yet the court held that the plaintiff could not be compelled against his will to take stock in the consolidated company in exchange for his original stock. It was urged that the plaintiff had delayed two years after the consolidation was effected before bringing his suit and was thereby estopped to deny that he asquiesced in it. The court said: ‘ ‘ The delay of the plaintiff and the effects of that delay might well preclude him from enjoining the further prosecution of the consolidation enterprise, but not from following up his equitable interest in the hands of a corporation, which, by appropriating it without authority and by assuming the place and obligations of the Houston & Gr. N. R. Co., — 20 — became equitably bound to compensate bim therefor.” It was held that he was entitled to recover of the new company the value of his stock in the original concern. In Ervin v. Oregon, etc., Co., 27 Fed. 625, the general principle for which the plaintiffs in the case at bar contend is declared in forceful terms. That was also a case of consolidation against the wish of the plaintiff stockholder. After the majority had effected the consolidation they undertook to impose on the minority a price for their stock that was not satisfactory. The court said (1. c. p. 630): “It can not be denied that minority stockholders are bound hand and foot to, the majority in all matters of legitimate administration of the corporate affairs; and the courts are powerless to redress many forms of oppression practiced upon the minority under the guise of legal sanction, which fall short of actual fraud. This is a consequence of the implied contract of association, by which it is agreed, in advance, that a majority shall bind the whole body as to all transactions within the scope of the corporate powers. But it is also of the essence of the contract that the corporate powers shall only be exercised to accomplish the obj ects for which they were called into existence, and that the majority shall not control those powers to pervert or destroy the original purposes of the corporators. [Citing authorities.] It is for this reason that the majority can not consolidate the corporation with another corporation, and impose responsibilities and hazards upon the minority not contemplated by the original enterprise, unless express statutory authority for this purpose is conferred upon the majority. It is no more repugnant to the purposes of the association to permit the majority to merge and consolidate the corporation with another corporation than it is to permit them to dissolve it, and abandon the interprise for which it was created, when no reasons of expediency require this to be done. A dissolution under such circumstances is an abuse of the powers delegated — 21 — to the majority! It is no less a wrong because accomplished by the agency of legal forms.” After thus declaring the principle governing the rights of the parties, the court turns to the question of the remedy of the injured stockholder, and on that subject says (1. c. p. 632): “Applying those principles to the ease in hand, although the minority of stockholders can not complain merely because the majority have dissolved the corporation and sold its property, they may justly complain because the majority, while occupying a fiduciary relation towards the minority, have exercised their powers in a way to buy the property for themselves, and exclude the minority from a fair participation in the fruits of the sale. . . . The minority stockholders are therefore entitled to demand their fair share of the transaction and to be placed upon terms of equality with the majority. . . . This results from the rule of equity which entitles those whose property has been misapplied by an agent or fiduciary to follow it into any form in which it has been converted, and impress it with a trust whenever its identity can be traced, or, at their election, to recover the value of the property in any form into which it has been transmuted. [Story, Eq., secs. 1261, 1262.] ” These and other cases cited in the briefs of the learned counsel declare the law to be that when the majority of stockholders against the will of the minority sell all of the property of the corporation and thereby work a practical dissolution of it, the minority stockholders are not bound to take in payment for their stock a pro-rata share of the proceeds of the sale, or, in substitution therefor, the stock of another corporation, but, at their election, may have out of the proceeds of the sale, whether it be money or other property, the market value of their stock at the date of the sale or their proportional share of the proceeds, or they may follow the property into the hands of the purchaser and share in the profits arising from its use in the same ratio that they would have shared if the sale had not been made, and, — 22 — if the transaction be made with bad faith, they may, under some circumstances, as in the New York case above cited, have the sale set aside and a rehabilitation of the corporation, or, if equity requires it, and the application. is timely, as in the New Jersey case, they may have an injunction to arrest the transaction. But the authorities cited do not hold that the sale is void, or that it will be set aside at the suit of a stockholder merely because the corporation was doing a fairly good business and some of the stockholders did not consent to the sale. And what is above said in reference to the choice of remedies the injured stockholder may make, is to be taken with the qualification that when it comes to following the property and demanding a pro-rata share of its earnings after it has passed into other hands and been put to other uses, the choice must bq made under the supervision and with the approval of the equity court to prevent the infliction of unnecessary injury. The aim of the court in such case should be to give the injured stockholder, at his election,, the fullest measure of compensation consistent with a protection of the rights of others from unnecessary injury. With these principles in view let us now return to the facts of this case. After the passage of the act of June-19, 1899, a meeting of the stockholders of the Lindell Railway Company was called on notice of twenty days published as in that act required. At that meeting the holders of at least two-thirds in value of the stock authorized the officers of the corporation to make the sale of all its property and franchises to the United Railways Company. The deed now sought to be set aside was executed pursuant to that authority. Plaintiffs say they had no actual notice of that meeting and were not present, but that they were then holders of certain shares of stock and have never consented to the sale. They do not say how many shares of stock they then held or now hold, and when challenged in the argument to speak on that — 23 — point their counsel said it was immaterial whether they owned the other one-third of all the stock, not alleged in the petition to have been represented at that meeting, or only one share each, the principle of law invoked was the same. The principle of law invoked is the same and will protect the plaintiffs in their rights whether they own one or one thousand shares, but when a court of equity comes to adjust the rights of the parties the proportion of stock held by them respectively is a fact to be taken into consideration in selecting the remedy to be afforded the plaintiffs. By declining to say how many shares they hold and taking before the court the position that the relief they ask is as- applicable to the holder of one share as it is to the holder of any number less than a majority, they invite a judgment of their case as on a holding of one share. The relative holdings of the plaintiffs and defendants is a fact to be considered when the good faith and good judgment of the transaction is questioned. In any business concern the proportion of one’s interest naturally influences the degree of deference his associates pay to his wishes and judgment — not controlling but influencing their action. The rule that the majority in interest is entitled to the control within the bounds of good faith is one of universal acknowledgment, and is implied in every contract when the contrary is not expressed. There were 25,000 shares of stock in this concern of-the par value of $2,500,000. Suppose the plaintiffs are the owners of one share each, of the aggregate par value of $200, and suppose the holders of all the rest see in a merger of the property of the corporation into a large concern an opportunity to greatly increase the value of their investments, and, acting on that idea, sell all the property to be so merged without consulting, or even in the face of the earnest protest of the plaintiffs who believe it will be a bad venture, would there be any ground to suspect that the majority were being actuated by a desire to defraud the plaintiffs, or would there be any — 24 — doubt on tbe point of good business judgment? It might turn out that it would have been better to have followed the plaintiffs’ judgment, but prima facie the judgment of the majority would be accepted. The plaintiffs in their petition say that at that time, besides the capital stock, the corporation owned property worth “many millions dollars,” carrying a mortgage debt of $1,500,000; that its business was prosperous, paying a dividend of one and a quarter per cent quarterly. * Plaintiffs concede in their argument that if the corporation had been insolvent, or running its business at a loss, the majority of the stockholders would have had the right to sell its property and close it up. That concession recognizes a discretion to be exercised by the majority in taking action to avert loss. To what extent that discretion may be exercised may be a question for * the court in a given case. It is said that if the corporation is doing business at a loss the majority may close it out. But suppose it is not running at an actual loss, yet at a profit so small that in the judgment of the majority the capital invested is not yielding what it should, and from a business standpoint it should be diverted into a channel that promises better results, is there no discretion lodged in the majority to act in such emergency? Here was an investment of more than two million dollars, earning a dividend of five per cent per annum. The petition says that after the purchase of the property of the Lindell Company and that of other street railroad companies, the United Railways Company increased its capital stock from $5,000,000 to $45,-000,000, and issued mortgage bonds to the amount of $45,000,000, aggregating liabilities to the amount of $90,000,000, with the result that the company which is composed of the same individuals who sold the property of the Lindell, received as the proceeds of the transaction a net gain of $57,744,900, a large share of which ( those individuals appropriated to themselves. In the face of those figures the plaintiffs do not aver that the — 25 — transaction on the whole was a bad business venture, or that the stockholders of the Lindell who participated in it were damaged; and they do not say that they were denied the privilege of participating in it on equal terms with those who did. They ask that the sale be set aside and that the Lin- a dell Company be rehabilitated in its former property and set to work under its own charter. This they ask, not upon a showing that any wrong has really been done them, not that the transaction was not fair and profitable, not that they were not afforded an opportunity of participation in it to the same extent that was accorded the most favored, but upon the bare naked legal proposition that it is a violation of the implied contract between the stockholders inter se.se, to sell the property of the corporation so as to disable it from doing business without the consent of all. To concede to the plaintiffs the right to annul the sale under those conditions would be to place the holder of one share of stock in position to dictate to the majority the terms on which a sale might be made, giving him an advantage which reason and justice can not approve. That is not the law. If under those circumstances the sale was a breach of the implied contract the courts of law are open to the plaintiffs to sue for damages for the injury, but there is nothing in the case to arouse a court of equity into action. If the court should grant the plaintiffs’ request and set aside this sale, who can foresee the consequences that might result? What would become of the interests *' of those people who may have invested in the $45,000,-000 of stock of the United Railways Company, or those who may have invested in the mortgage bonds or in the stock of the Transit Company? If the deed from the Lindell Company to the United Railways Company be set aside, all the investments that may have been made on the faith of that deed must fail. It is not necessary in order to redress the plaintiffs ’ 7-wrongs that any such remedy be applied. They are en — 26 — titled to recover in a proper proceeding the value of their stock at the time of its conversion if they elect to consider it a conversion, or they are entitled, if they so prefer, to have the same proportion of United Railways stock given to them in exchange for their Lindell stock that was given to the individual defendants in exchange for theirs, or if they prefer to hold their Lindell stock they may have their proportion of the earnings of the Lindell property in the hands of the United Railways Company or the Transit Company, but they are not entitled to pull down the whole new structure that has been built upon the properties that have been transferred to the United Railways Company under the circumstances stated in the petition. In the very, able argument of the learned counsel for appellants it is said: “No matter.whether the relief asked for is the relief which plaintiffs are entitled to or not, if they were entitled to any relief whatever the demurrer should have been overruled. ’ ’ If they were entitled to any relief whatever on the case as stated in their petition the demurrer should have been overruled. But the court can not, out of the materials at hand, construct a case for them different from that made by themselves, for the purpose of affording them some relief, which they do not ask. This is a suit in equity, wherein the plaintiffs repudiate the contract their business associates have assumed to make for them; the court can not, therefore, give them a money judgment, as in an action at law, on a theory of ratification of the contract. Nor can they, while repudiating the transaction and refusing to surrender their stock, receive stock in the United Railways Company in exchange. Neither is there any foundation in the petition upon which the court could build a decree admitting the plaintiffs to a participation in the earnings of the United Railways Company or its lessee in the form of dividends on their Lindell stock. The petition is not drawn on any such theory. ( Their petition, as correctly interpreted by — 27 — themselves in their brief, entitles them to a cancellation-of the deed and a rehabilitation of the Lindell Company, or it entitles them to nothing. ’ In the closing words of their brief they say: “It is the only appropriate remedy under the circumstances and no bar stands in the way of its being granted. ’ ’ It is the plaintiffs’ second amended petition; it is, as it were, their ultimatum; when the demurrer was sustained they declined to plead further, declaring in effect that they wanted only what they were entitled to under that petition. There is nothing in a court of equity for the plaintiffs on the case there stated. "What is above said disposes of this appeal without deciding whether or not the act of June 19, 1899, was valid to confer on two-thirds of the stockholders the power to authorize the sale in question. We have considered that act only as it confers on the corporation or its stockholders the State’s permission to do what was done. There are other interesting questions discussed in the briefs of the learned counsel but since the case is, decided before those questions are reached it would not be proper to consider them. The judgment is affirmed. All concur, except Burgess, J., absent.