Nathan v. Tompkins , 82 Ala. 437 ( 1886 )

CLOPTON, J.-

— The appeal is taken from a decree of the chancellor made in vacation, on a motion to dissolve, on bill and answer, a temporary injunction, on the ground of want of equity in the bill, and on the denials of the answers. Though an injunction should not be continued, when it is apparent that the bill is wanting in equity, a motion to dissolve on this ground can not and does not perform the office of a demurrer. The inquiry on such motion is, do the facts alleged, if sufficiently pleaded, make a case calling for equitable interposition ? If so, all amendable defects will be regarded, for the purpose of the motion, as cured by amendment. — East & West R. R. Co. v. E. T., V. & G. R. R. Co., 75 Ala. 275.

2. The primary purpose of the original, bill, which is brought by appellant as a stockholder in the Sheffield and Tuscumbia Street Railway Company, is to annul, so far as accomplished, the consolidation of that company with the Sheffield Street Railwaj' Company, and to prevent and restrain the consummation of the consolidation. Both companies are incorporated under the general laws of the State, for the purpose of building and operating street railways from Tuscumbia; one to the city of Sheffield, and the other to East Sheffield, the two places adjoining each other. The Sheffield and Tuscumbia Street Bailway Company was organized January 6, 1887, by the election of seven directors, viz., Ferdinand D. McMillan, Arthur H.' Kellar, Alfred H. Moses, John T. Hull, Ed. B. Almon, W. B. Bussell, and G-. W. Swartz. At subsequent meetings of the directors, McMillan was elected president, Hull vice-president, Almon secretary, and complainant treasurer; and by-laws were adopted. The other company was incorporated and organized subsequently.

So far as necessary to be stated in this aspect of the bill, the allegations are, that certain persons who were stockholders in both companies, and who are largely interested in the development of East Sheffield, undertook to manipulate the consolidation of the two corporations. In order to accomplish this object, the president called a meeting of the directors of the Sheffield and Tuscumbia Street Bail-•way Company, at the Cleveland Hotel, to be held at 10 o’clock A. m., of April 27,1887. Two of the directors, Moses and Kellar, who were not in the combination, met at the appointed hoiir and place, and, after waiting an hour, no others appearing, adjourned for want of a quorum. After-wards, at 12 o’clock, four other directors, McMillan, Hull, Almon, and Bussell, met and held a meeting, at which the by-laws were amended, so as to repeal the provision that no stockholder shall be eligible as director, unless he shall have held his stock continuously since the last annual election of directors; to allow any stockholder the right to vote, without reference to the time he had held his stock ; and to change the annual meeting of the stockholders, from the third Tuesday in April, 1888, to the second Tuesday in May, 1887; and after the amendment of the by-laws, the president called a meeting of the stockholders to be held on May 10, 1887.

The bill further alleges, that a meeting of stockholders was organized, on the day appointed, in pursuance of the call of the president. At this meeting, seven new directors were elected, consisting of the defendants, Tompkins, Wood-son, Almon, White, Boylston, Crowe, and Steele ; the former president McMillan, vice-president Hull, and director Bussell, transferred their stock to Tompkins, April 27, 1887; and subsequently, the new directors elected Tompkins president, Woodson treasurer, Almon secretary, and White superintendent. And at this meeting of the stockholders, propositions for consolidation submitted by the Sheffield Street Bailway Company were adopted, and resolutions were passed, that the consolidation should be carried into effect, and that the stockholders of the two corporations convene at once as stockholders of the consolidated company, to enact by-laws, elect a board of directors, and to do all things necessary and proper to effectuate the scheme of consolidation.

It is unnecessary to consider the illegal and ultra vires character of the attempted consolidation. This is admitted but the equity of the bill is assailed, on the ground that it proceeds against the individual defendants, not as officers of the corporation, but as third parties usurping the right and power to manage its affairs and property; and that complainant does not bring himself within the exception, by an averment that he has appealed to, or requested the governing body, or the shareholders, to redress the grievance complained of, and has failed to obtain remedial action. There can be no doubt, that before a stockholder can bring suit in respect to the acts of the directors, whether intra or ultra vires, or in respect to inira vires acts of a majority of the shareholders, or to injuries' arising from the inefficiency or unfaithfulness of the managing body — cases where the injury is to the corporation as such, and not directly to the stockholder — he must aver and show an honest effort to obtain redress within the corporation, and to induce action on the part of the directory and of the stockholders, one or both, as may be proper, or a reasonable excuse for not doing so. In Tuskaloosa Man. Co. v. Cox, 68 Ala. 71, after stating the general rule, it is said : “We will not say there may not be cases,in which the strong restraining arm of the Chancery Court may be invoked in the first instance. The whole governing force may become corrupt, or may enter into a combination, either ultra vires, or so destructive of the policy and property of the corporation, as to show an appeal to the directory would be fruitless, and delay extremely perilous.”

But the case made by the bill does not come within either of the classes mentioned. It substantially avers, that at the meeting of the shareholders, the defendants Tompkins, Almon, Boylston, and White, claiming to represent five hundred and ten shares of the capital stock, voted them unanimously in favor of the consolidation; to which the stockholders representing and holding the other four hundred and ninety shares, who were absent, were opposed. It is true the bill assails the legality of the election of the new directors, and while the amendment to the bill alleges, that they claim to be directors and officers of the corporation, it also alleges that they procured themselves to be elected for the purpose of transferring the franchises, and consolidating it with the other corporation. The case made by the bill is that of a shareholder seeking preventive remedy against the wrongful and illegal acts of a majority, done in a convention of stockholders, which would operate a virtual dissolution of the corporation, and the formation of a new one — to impair the obligation of the contract of corporation. A stockholder may bring suit, where the wrong complained of is unauthorized by the charter, or by the general law, and is committed by a majority in excess of their powers. The courts will provide a remedy against any violation of, or departure from the chartered purposes of a corporation, which is a direct injury to the individual shareholder.

In Dodge v. Woolsey, 18 How. 331, it is said : “ It is now no longer doubted, either in England or the United States, that courts of equity, in both, have a jurisdiction over corporations, at the instance of one or more of their members, to apply preventive remedies by injunction, to restrain those who administer them from doing acts which would amount to a violation of charters, or to prevent any misapplication of their capital or profits, which might result in lessening the dividends of stockholders, or the value of their shares, as either may be protected by the franchises of a corporation, if the acts intended to be done create what in the law is denominated a breach of trust. And the jurisdiction extends to inquire into, and to enjoin, as the case may require that to be done, any proceedings by individual's, in whatever character they may profess to act, if the subject of complaint is an imputed violation of a corporate franchise, or the denial of a right growing out of it, for which there is not an adequate remedy at law.” The principles of this case were approved, as explained, in the subsequent case of Hawes v. Oakland, 104 U. S. 450; in which Miller, J., speaking of the powers of a court of equity in respect to controversies growing out of the relations between the stockholder and the corporation, tersely observes : “ The exercise of this power, in protecting the stockholder against the frauds of the governing body of directors or trustees, and in preventing their exercise, in the name of the corporation, of powers which are outside of their charters, or articles of association, has been frequent, and is most beneficial, and is undisputed. These are real contests, however, between the stockholders and the corporation of which he is member.” When the injury is to the shareholder individually, or there is a real contest between him and the corporation, growing out of the acts of a majority of the stockholders in convention, and in excess of their powers, express or implied, he may maintain a suit to prevent the wrong, without the vain and useless ceremony of attempting to induce the same majority to sue themselves. A dissenting stockholder may, under such circumstances, enjoin an unauthorized consolidation. — Bliss v. Anderson, 31 Ala. 621; Elkins v. Cam. & At. R. R. Co., 36 N. J. Eq. 467; 1 Morawetz on Cor. § 252; Cook on Stock and Stockh., § 671.

3. It is further insisted, that the injunction was properly dissolved on the statements of the answers ; that after the resolutions to consolidate were adopted, the defendants examined into the question of the legality of the proceedings, and determined, in view of the fact that a minority of the stockholders objected, or rather their assent had not been obtained, that consolidation would be abandoned, and had been abandoned at the time the original bill was filed, of which complainant would have been regularly notified, and of which he could have informed himself by inquiry of defendants. The answers do not aver that the resolutions have been rescinded, or any attempt made to rescind them, or any official declaration of the abandonment. The resolutioDS remain in force on the minutes, so far as the majority could impart vitality. In view of the character of the resolutions — that the consolidation “ do noto take place,” and be fully carried into effect- — -a secret, uncommunicated intention to abandon, resting in the minds of the majority as individuals, does not meet the requirements of equity. There should be an open, authoritative expression. But, apart from these considerations, the fact of abandonment is affirmative matter, set up in avoidance of admitted allegations of the bill; and not being responsive to any averment, can not, under our rulings, be considered on the motion to dissolve the injunction. — Farris v. Houston, 78 Ala. 250; Jones v. Ewing, 56 Ala. 360.

4. While a court of equity, if such be the mere purpose, will not inquire into the legality of an election of directors, nor exercise jurisdiction to remove an officer of a corporation from an office of which he is in actual possession; yet, when the court has rightfully taken jurisdiction for one purpose, and the question of the legality of the election, or whether a certain person holds such office, incidentally and collaterally arises in the suit, it will inquire into, and decide it, as it would any other question that may arise. — Johnston v. Jones, 23 N. J. Eq. 216. The manifest purpose of changing the by-laws, so as to fix the time of the annual meeting of the stockholders in May, 1887, instead of April, 1888, nearly a year earlier, and of calling the meeting of May 10, 1887, was to obtain control of the corporation by electing a directory favorable to consolidation, though the intention to consolidate may have been subsequently abandoned. Under these circumstances, and in view of the attempted consolidation, the legality of their election incidentally arises in a suit of which the court has jurisdiction, and may properly be inquired into.

5. The corporation was incorporated and organized in January, 1887. At the first meeting of the stockholders, seven directors were elected; and by the by-laws, the third Tuesday in April, 1888, was fixed as the time of the annual meeting of the stockholders, and of the annual election of directors. At the stockholders’ meeting held May 10,1887, seven new directors were elected, who elected from their own number a president, secretary, and treasurer. The argument, by which it is sought to sustain the legality and validity of this election, is, that four of the directors first elected sold and transferred their stock in April preceding, and therefore became disqualified to longer act as directors, and the directory as originally constituted ceased to exist; that the remaining directors had no authority to transact any business, and that the power to fill the vacancies was vested alone in the stockholders. Section 1923 of the Code, being a section of the article providing for and regulating the incorporation of street railroad companies, provides, that the persons named in the certificate of incorporation, or any three of them, may give notice “for the stockholders to meet, at such time and place as they may designate, for the purpose of choosing seven directors, who shall continue in office until the time fixed for the annual election, and until their successors are elected and qualified.” And section 1925 declares,’’anew election shall be annually held for directors, at such time and place as the stockholders at their first meeting shall determine, or as the by-laws of the corporation may require ; and the directors chosen at any meeting shall, as soon thereafter as may be consistent, choose one of their number to be president, and shall appoint a secretary and treasurer of the corporation. The directors, before entering on their duties, shall each take an oath, or affirmation, faithfully to discharge their duties.”

The sale and transfer of their stock did not operate, ipso facto, to remove the four directors from office, though it may have afforded sufficient cause for removal; and certainly did not remove the remaining directors, who had not parted with their stock, nor constitute a cause therefor. Without proceedings looking to removal, or even declaring vacancies, the m ajority of the stockholders elected an entire new bpard, thus indirectly superseding all the directors first elected. The statutes fix the term of office of the directors, contemplating only annual elections. The term of office of those first elected continues until the time fixed for the annual election, which was the third Tuesday in April, 1888. No power is conferred by the charter, or by statute, and there is no inherent power, to remove directors, who are elected for a definite period fixed by statute, before the expiration of that period, whatever may be the incidental power to remove for cause. — Imperial Hotel Co. v. Hampton, L. R. 23 Chan. Div. 1; Cook on Stock and Stockh. § 627. All the powers and authority of the corporation, except the power to increase the capital stock, are conferred by statute on the board of directors. — Code of 1876, § 1928. They are more ;than mere agents subject to removal at pleasure. They really constitute the governing body ; and the charter of incorporation, the statutes and the by-laws, are a contract between the shareholders, as to their election and the duration of their term of office. A majority of the board of directors can not abrogate, nor extend their term of office, by merely changing the time of the annual meeting of the stockholders. If they have such power, they could cause quarterly or monthly elections, by successive amendments of the by-laws changing the time of the annual meeting. — Elkins v. Cam. & At. R. R. Co., supra. A different question might have been presented, if the stockholders had merely declared and filled vacancies; but no means are furnished, from which to determine what four of the new directors, if any specially, were elected to fill vacancies. In such case, the entire election must be declared invalid. Having so determined, and inasmuch as they claim the right to the offices, by virtue of such election, not only as directors, but also as president, secretary, treasurer, and superintendent, with authority to manage its affairs; and as it appears that they are interested in both companies, whose interests are necessarily rival and antagonistic to some extent, the court will restrain them from interfering as such officers with the control and management of the affairs and property of the corporation.

The case is not in a condition to enable us to intelligently and satisfactorily decide the incidental contestation in respect to the stock purchased by Tompkins from Scott, growing out of the agreement between complainant, Scott and other's, to put their stock in tbe hands of trustees to vote. The agreement, which is before us, expressly provides, that either party may sell his stock, subject to the trust. The complaint is, that Scott sold without giving the other parties the refusal, as required by the contract. But the bill éontains no offer, nor an averment of willingness, to take the stock at the price for which it was sold. On motion to dissolve the injunction on bill and answer, it would be improper to pass on the rights of the parties, involving a consideration of facts and circumstances the proper subject of proof. The validity and effect of the agreement only come up collaterally on thisJmotion, as bearing on the right of Tompkins to vote the stock ; which, as the bill now stands, and by reason of our conclusion as to the validity of the proceedings of the meeting of May 10, 1887, ceases to be a practical, or material question for the purposes of this suit. We see no sufficient reason, why the injunction restraining him from selling the stock should be longer continued, as it does not appear that, under the circumstances, any injury will result to complainant.

For like reasons, we have deemed it unnecessary to express any opinion as to the regularity of the meeting of the directors on April 27, 1887. Though the bill may, in some respects, require amendment, we have regarded all amendable defects as cured.

The decree of the chancellor is affirmed, so far as it dissolves the injunction restraining Tompkins from selling the-stock acquired from Scott, and reversed in all other respects; and the injunction is reinstated; except as to the sale of the stock.