Schwab v. Frisco Mining & Milling Co.

After stating the facts, MiNee, J., delivered the opinion of the court: The first question for consideration is, whether the failure of the acting members of the .board of directors making the assessment and sale, to file their oaths of office as required by the statute, rendered their acts, and the assessments and sale.of the stock, void. Sec. 317, Rev. Stat. 1898, reads as follows: “Before the first or any other officers shall enter upon the duties of their respective offices, they shall take and — 265 — subscribe an oath of office, that they will discharge the duties of such office to the best of their judgment,, and that they will not do nor consent to the doing of any matter or thing relating to the business of the corporation with intent to defraud any stockholder or creditor or the public, which oaths shall be filed in the office of the county clerk.” The three directors who participated in levying the as sessment and conducting the sale of the stock, and who constituted a majority of the directors, were not dejwre officers of the company, because they had not qualified and taken the oath required by the statute. By enacting the statute referred to, the Legislature had doubtless determined to correct or prevent the evil that might exist, or that had existed, and each director was required to take an oath that he would not do, nor consent to the doing, of any matter or thing with reference to the corporation, with intent to defraud any stockholder, creditor, or the public. Directors are agents of the stockholders. By this act the Legislature has clearly expressed its will that no officer shall act until he qualifies as provided by statute. The object of the statute is to protect tho stockholder against the frauds and wrongs of the directors, under the presumption that they would perform their duty under oath more faithfully than without it. It required from each director an oath that they would not do that which they are impliedly charged with doing. They assumed to act for the company and assessed the stock, without taking the oath that they would administer the affairs of the company and the stockholders according to the best of their ability. They acted in violation of the statute, and were not de jure officers of the company. As a general rule the validity of a forfeiture and sale of shares of stock in an incorporated company depend — 266 — upon a formal compliance with the requirements of the statute. This was not done. Raht v. Sevier Min. Co., 18 Utah, 290; 1 Cook on Stockholders, Sec. 129; Germantown R. R. Co. v. Fitler, 60 Pa. St., 124; Garden Gully Co. v. McLister, L. R. 1 App. Cas., 39; Portland v. Graham, 52 Mass., 1; Morris v. Metalline Land Co., 164 Pa. St., 326. This court held in Raht v. Sender Min. Co, 18 Utah, 290, that, “As a general rule, the validity of the forfeitnre and sale of the shares of stock depend upon the formal compliance with the requirements of the statute. It is also a well-established rule, that a forfeiture of shares of stock, where the forfeiture was irregular or defective in form, is not void, but voidable, and that, by subsequent knowledge and acquiescence, the shareholder and the company are alike estopped to deny its validity.” The testimony does not disclose that the plaintiff had any knowledge or notice of the illegal character in which the directors acted, nor does it appear in any manner, that the plaintiff thereafter in any way acquiesced or ratified the acts of the board in assessing or selling the stock. Therefore this case does not fall within the rule laid down in Raht v. Sevier Mining Co., supra, so as to estop the plaintiff from claiming his rights. The appellant also contends that admitting that the directors were not de jure officers, but were defacto officers, and that there was no acquiescence in the sale on the part of the plaintiff of the shares of stock, still the sale was legal and binding upon the stockholders and third persons, and that in cases of this character a stockholder must resort to his remedy at law by quo wa/rrcmto or other special proceeding. As to this contention, it must be remembered that this is an equitable action to redeem the stock that was — 267 — improperly sold; tbat it be reissued to the plaintiff, and that the sale thereof be set aside. The record shows that the stock had been sold and bid in by the company to pay the assessment thereon. If the sale was void, or voidable, the injury to the plaintiff was complete. A quo warranto proceeding might test the right of the directors to hold their office, but would be of little service to the plaintiff after the sale of his stock was made. Such a proceeding could not well replace the stock in the plaintiff, or permit a redemption thereof after it was sold by the company. A court of equity would not assume jurisdiction to remove an officer of a corporation from his office of which he is in possession, or declare a forfeiture of his office ; yet when the court has jurisdiction for one purpose, and the right and authority of certain persons, as officers, collaterally appear, it will inquire into and determine such questions. . In Moses v. Tompkins 84 Ala., 613, it was said, that when an independent and special ground of equitable interposition, on which the court may take rightful jurisdiction, exists and is shown, it will inquire into the legibility of an election, coming in question collaterally and incidentally. Nathans. Tompkins, 82 Ala., 437. In Garden Gully U. Q. Min. Co. v. McLister, 1 L. R. App. Cas., 39, a bill was filed to declare invalid a forfeiture of stock for the non-payment of calls, made by directors alleged to have been illegally elected. The question of the validity of the forfeiture ultimately depended on the validity of the election of the persons, who, assuming to be directors, declared complainants’ shares forfeited for non-payment of a call made by them. The bill was sustained, and the declaration of the forfeiture declared invalid; and. it was further held that — 268 — there must be properly appointed directors to make a call, and to declare a forfeiture of shares for non-payment. So the illegality of the election of persons, who as directors make a call or assessment on stock may be set up in resistance to a recovery. People's Mut. Ins. Co. v. Westcott, 14 Gray, 440. Thompson on Corp., See. 4525. That the directors were de facto officers will be conceded, but this fact will not necessarily prevent a stockholder who has not acquiesced in the illegal act of the directors from resisting an assessment or call on subscription to capital stock. There are some authorities to the contrary, holding that the power of a defacto director can not be collaterally questioned by stockholders without a judgment of ouster against them in a direct proceeding; but an examination of these cases will show that in a majority of them the election was either irregular or voidable, or that the stockholder questioning its validity acquiesced in their acts as officers. So far as third persons are concerned, their official dealings are sustained as valid on the ground of acquiescence by the corporation, and because they hold themselves out as having authority to act, and thereby induce others to deal with them in their official capacity. Therefore their acts and dealings, within the scope of their authority, are sustained. But stockholders are not third persons, with respect to their relation to the corporation. Those who usurp the duty of directors, without the acquiescence, knowledge, or against the wishes of the stockholders, are not officers, and their acts can not be deemed valid when invoked for their own protection ; nor can the corporation be heard to justify the illegal act as against one of the stockholders who has not consented or acquiesced therein. If it were otherwise, the wrongful assumption and exercise of official authority would operate — 269 — to constitute the usurpers as between themselves and the stockholders, a board vested with power to transact the business of the corporation. In such a case the justice and necessity of the rule, as to the validity of defacto officers, do not exist. The acts of defacto officers are valid only when third parties have rights and interests involved, or when other parties have acquiesced in the acts of such officers, or have by their acts become estopped from dis-' puting such authority. Under the articles of incorporation an assessment made by the directors duly elected and qualified under the statute is essential to create a liability upon the stockholder, and the validity of the acts of a board of directors, defacto, and their authority as such may be called in question by any stockholder who has not acquiesced therein, whenever such acts are detrimental to his interests, affect property rights, or impose liability upon him, and the rights of third parties do not intervene. 4 Thompson on Corp., Sec. 4525; Moses v. Tompkins, 84 Ala., 613; People’s Mut. Ins. Co. v. Westcott, 14 Gray, 440; Nathan v. Thomas, 82 Ala., 437; Baht v. Sevier Mining Co., 18 Utah, 290; 1 Cook on Stock & Stockholders, Sec. 129; Garden Gully v. McLister, 1 App. Cas., 39; Moses v. Woodson, 4 So. Rep., 763; Corey v. Gurtice, 9 Nev., 339; Bank v. Mfg. Co., 32 N. J. Eq., 236; Johnson v. Jones, 23 N. J. Eq., 217; 17 Am. & Eng. Enc. of Law (1st ed.), p. 52. In our opinion, the acts of the board of directors in assessing and selling the stock in question were illegal, and in no manner acquiesced in by the plaintiff. The findings, judgment, and decree of the district court are affirmed, with costs, with authority in said court to enforce said decree. Babtoh, C. J., and Bashin, J., concur.