Moses v. Tompkins , 84 Ala. 613 ( 1887 )

CLOPTON, J.

The appeal in each of the above stated cases, is taken from a decree of the chancellor, overruling a motion to dissolve a temporary injunction, the motion being rested on want of equity in the bill, and o.n the denials of the answer. The appeals were submitted, and will be considered together, involving mainly questions in common. The bills are -filed by appellees, as shareholders of the Sheffield & Tuscumbia Street Railway Company, and seek to enjoin appellants, who claim to be directors of the corporation, from selling the stock of complainants for the payment of assessments and. calls thereon; from making other calls; and from constructing, with material belonging to the corporation, a line or branch of the railway from the Memphis & Charleston railroad to the main line of the company. When the motion to dissolve an injunction is founded on the ground, that the 'bill is wanting in equity, the substance, the facts stated, and not the manner in which they are alleged, must be considered; all amendable defects should be regarded as amended; and when the motion is based on the denials of the answer, the allegations of the bill will be taken as true, unless contradictory of each other, or positively denied; matter hi avoidance can not be considered. Though generally, when the answer fully and unequivocally denies the material allegations of the bill, the injunction will be dissolved, the rule is. not inflexible. The injunction will not be dissolved, if any circumstances are apparent, which called for a departure from the general rule. We eliminate from consideration all matters not proper to be considered under these rules.

It is insisted, that there is no independent equity in the bill, separate from the question of the legality of the election of the defendants. As a general rule, courts of equity will not take jurisdiction for the mere purpose of inquiring into the legality of the election of officers of a private corporation, nor of moving from office an officer in actual possession. In such case, a complaining shareholder must resort to the remedies at law — an action of quo tvarranlo, or the special proceedings provided by statute. But 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 legality of the election, coming in question collaterally and incidentally. — Nathan v. Tompkins, 82 Ala. 437.

The bills, as we interpret them, do not solely and primarily invoke the jurisdiction of the court to inquire into the legality of the election of the directors, nor to vacate their offices. The first special equity is to prevent the sale of the stock of the complainants for the payment of an assessment and call made and ordered by the defendants in the capacity of directors, who it is alleged, were not legally elected or appointed, to prevent a threatened injury to a pecuniary right, which, if consummated, will subject complainants to a multiplicity of suits, and to litigate their title to the stock under the disadvantages of embarrassment and complication by the claims of third persons, who may become purchasers thereof. The special equity is, that persons, assuming to act as directors without legal authority, are proceeding colore officii to do acts which will, primarily and directly, destroy or impair the property rights of complainants as stockholders. In order that an assessment,and call for the payment of subscriptions to the capital stock of a corporation may be legal and enforceable, it must, ordinarily, be made by the corporate authorities, in whom the power is vested by the charter, or by-laws, or by the general laws. In Garden G. 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 nonpayment 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; the declaration of tlie forfeiture declared invalid; and it was held that there must be properly appointed directors to make a call, and to declare a forfeiture of shares for non-payment. It has also been held in other cases, that the illegality of the election of the persons, who, as directors, make a call, may be set up in resistance to a suit for its recovery. — People's Mut. Ins. Co. v. Wescott, 14 Gray, 440. To prevent irreparable mischief, multiplicity of suits, the destruction and impairment of the pecuniary rights of the stockholders, equity will interfere, at the instance of a stockholder, and restrain the sale of his stock for the payment of a call made by illegally elected or appointed directors. The validity of the election of defendants, as directors, arises collaterally and incidentally, and the duty to inquire into and decide the question is necessarily involved.

The company was incorporated in January, 1887, under the general laws; and at the first meeting of the stockholders, seven directors, being the number provided for by the bylaws, were elected, consisting of McMillan, Hull, Swartz, Bussell, Almon and the defendants A. H. Moses and A. H. Kellar. By the by-laws and the statutes, their terms of office continued until the annual meeting of the stockholders in April, 1888, and until their successors were elected and qualified. — Code, 1876, § 1923. The by-laws further provide: “No person shall be elected, and if elected, shall serve as a director, who does not own in his own name and right at least ten shares of stock in the company, and who shall have held said stock continuously since, at least, the preceding annual election of directors.” McMillan, Hull, Swe-tz and Russell sold their stock, and Almon sold all of hi . except four shares, thereby disqualifying themselves for serving as directors. In consequence thereof, Moses and Kellar, remaining directors, elected in May, 1887, their co-defendants Nathan, Samuel Kellar, M. L. Moses and A. J. Moses to fill the vacancies. We shall not inquire whether such self-disqualification, and the failure to act as directors thereafter, were tantamount to a formal resignation, and operated to create a vacancy. Were such result conceded, the question still remains, did the two remaining directors have authority to fill the vacancy? By the by-laws, a majority of the board of directors constitute a quorum for the transaction of business; and by statute, “where the corporate powers are directed to be exercised by any particular body, or number of persons, a majority of such body or persons, form a board for the exercise of such powers.” — Code, 1876, § 2024. And, in special reference to the incorporation of “Street Railroad Companies,” the statute, after providing for the' election of directors, at the first meeting of the incorporators, expressly provides: “A majority of such directors shall form a board, and be competent to fill vacancies in their board, make by-laws, and transact all business of the corporation.” Code, 1876, § 1924. It is manifest from the provisions of the by-laws and the statutes, that no number of directors, less than a majority acting as a board, is empowered to transact the business of the corporation or to fill vacancies in the board.

The next question is, does the ratification of their election by the stockholders, at the meeting in August, 1887, legalize and validate their appointment? It is unnecessary to inquire, whether or not the meeting was called by proper authority, and in a legal manner, or whether or not the requisite majority of stock was represented; in either event 'the result is the same. It was a special, as distinguished from an annual meeting. By the statutes, the stockholders are authorized to elect directors at the meeting called, in the first instance, for the organization of the company, and annually thereafter at such time and place, as • the stockholders at their first meeting shall determine, or as the by-laws of the corporation may require. — Code, 1876, §§ 1924, 1925. Vacancies occurring in the board of directors, in the meantime, are to be filled by tbe board. When the charter of a private corporation, or the general laws invest the board of directors with the power to transact the business of the corporation, to manage its affairs, and to fill vacancies occurring in the board, the power is exclusive in its character. — Gashwiler v. Willis, 33 Cal. 11. Had the persons elected by Moses and Reliar to fill tbe vacancies been originally elected by the stockholders, at the meeting- in August, 1887, the election would have been invalid; and the stockholders can not ratify an act which they have no power to do originally. When the board of directors was reduced below the number requisite to form a quorum, its power as a board to fill the vacancies was suspended. If it be said, that a corporation may thus be left without proper officers or agents to manage its affairs and transact its business, it may be replied, that such state of things need exist only until a meeting of the stockholders at which they are authorized to elect a full board; and there may be other remedies which it is needless to point out. A board of directors is not essential to the existence of a corporation. The failure to hold annual meetings, or to elect directors regularly, does not operate a forfeiture of the corporate franchises; those in office hold until the election or appointment and qualification of their successors. The corporation exists per sa for the purpose of perpetual succession and of preserving its franchises. — Code, 1886, 1679-1681. The condition of the Sheffield & Tuscumbia Street Railway Company is somewhat anomalous, and presents a casus omissus, a contingency not contemplated or provided for, but which may have been supplied by the provision of section 1610 of Code of 1886 that “vacancies occurring in the board must be filled by the remaining directors;” but as 'to this we express no opinion, since the present cases do not fall within its provision.

'It is further insisted, that though the persons appointed to fill the vacancies were not legally elected, they are actually holding and exercising the powers and functions of the office, and are directors da facto; and inasmuch as the power to make assessments and calls is vested in the board of directors, a call made by directors da- facto can not be collaterally called in question by a stockholder. To constitute an officer da facto, there must be a color of election or appointment, or an exercise of the functions of the office under such circrimsiances and for such length of time without interference, as to justify the presumption of a due election or appointment. — Cary v. State, 76 Ala. 78. Tlie mere exercise of the functions of the office is in itself insufficient. The bills allege only two official acts of the defendants i,s directors, and it may well be doubted whether the allegations make a prima facie case of directors de facto. The facts set up in the answers, on which this claim is rested by the defendants, can not be considered on a motion to dissolve the temporary injunction. But passing this question, we shall proceed to consider the right of a stockholder to set up the illegality of the election, though the persons may have become directors do facto, in resistance to an assessment and call on subscriptions to the capital stock. We are cognizant that some courts of the highest authority have held, that the power of persons to act in behalf of the corporation, who have become directors de facto, can not be collaterally questioned by a stockholder, without a judgment of ouster against them in a direct proceeding for that purpose. An analysis of the cases would show, we think, that in a majority of them the election was not illegal and void, but irregular and voidable, because of ineligibility, or other cause, or if originally illegal, that the shareholder assailing its validity, had affirmatively acquiesced in their acts as directors. The doctrine of the validity of the acts of officers defacto rests on public policy and justice. The official dealings of directors do fado with third persons are sustained as rightful and valid, on the ground of continuous acquiescence by the corporation, and suffering them to hold themselves out as having such authority, thereby inducing others to deal with them in such capacity. The theory of the doctrine of officers de facto, and the principles sustaining the validity of their official acts, are that, though wrongfully in office, yet exercising power and functions appertaining to such office, justice and necessity require for the protection and preservation of the rights and interests of third persons, that their acts, within the scope of official authority and duty, shall be sustained. The stockholders are not third persons in their relation to the corporation. If persons undertake to exercise the functions and discharge the duties of directors in opposition to the will of a majority of the stockholders, they are mere usurpers, and their acts can not be deemed valid, when invoked for their own protection. Otherwise, the wrongful assumption of official authority and its exercise would operate to constitute the usurpers, as between themselves and the corporation and shareholders, a board invested with the power to transact its business and administer its affairs. In such case, the necessity and justice of the rule as to the validity of the acts of directors da fado do not exist, and the rule itself is inapplicable. The acts of officers da facto are only valid, when third persons have rights and interests to be protected. By the terms of their contract an assessment or call, made by directors duly appointed, is essential to create a liability on the stockholders. The validity of the acts of directors da fado and their authority may be called in question/ by a stockholder,' whenever such acts are destructive or affecy his property rights, or impose a liability on him as such/ and the rights of third persons do not intervene. — Thorington v. Gould, 59 Ala. 461; People's Mu. Ins. Co. v. Wascott, supra.

The bill filed by Tompkins, referring to the defendants, alleges: “That said individuals claiming to be and to constitute the directory of said company, have resolved to build a branch road or track from the Memphis & Charleston Bail-road in Tuscunibia, Alabama, via Dickson & Fourth streets, using certain property of the corporation in its construction. Orator avers that the said parties are not the directors of said company, nor are they authorized to use or expend the property or effects of the corporation in constructing such branch, or in any other manner. He avers, that such action is against the will and approbation of the holders of the majority of such capital stock, and is not beneficial to said corporation, or the stockholders thereof.” The other bill contains substantially the same averments. It will be observed, that it is not charged that such acts are ultra vires, or in violation of the chartered privileges and powers, or constitute a breach of trust. In this aspect, the bill merely presents a case of internal disputes and unfortunate and injurious dissensions. Admitting the truth of the allegations, such use of the property and effects of the corporation is a conversion, an injury to the company, fastening a personal liability on the defendants, and redress for which should be primarily sought in the name of and by the corporation, and for which adequi he legal remedies are provided. Equity will not interfere, a"u the instance of a stockholder, with the internal business management of a corporation by the directors, whether da jura or da fado, so long as it is kept within the scope of the chartered powers and the purposes of its creation, unless such administration of its affairs is destructive or injurious to the corporation, and the corporation itself refuses, or is incapable to seek redress. The only ground on which the interference of the court is - invoked is, the illegality of the election of the defendants, and that their management does not accord with the will and approbation of a majority of the stockholders. To enjoin the defendants from any use of the property and effects of the corporation would, under the circumstances, be tantamount to their amotion from office. The complainants in the two bills, who are in accord and cooperating, claim to hold and own a majority of the capital stock. There is, therefore, no excuse for not seeking a remedy within and by the corporation. Had it been averred ■ that the complainants, or either of them had instituted an appropriate proceeding under section 3170 of Code of 188(5, or the corresponding section of Code of 1876, or a quo warranto, to exclude from office the defendants unlawfully holding and exercising the office of directors, it may be that a court .of equity would have enjoined them from using or appropriating any of the property and effects of the corporation in any manner, and from performing the functions of the office until the determination of the action.

The bill filed by Tompkins alleges, that he purchased .the twenty shares of stock subscribed by Scott, paying therefor a valuable consideration, and had the same transferred to him on the stock-book of the company. This makes a case of prima, facie ownership, and of the incidental right to vote the stock. The defendants set up in their answer an agreement between Scott and others, by which this stock was to be voted by trustees. The character of this contract was considered at the present term, in another case between A. H. Moses and Tompkins, and was held to be voidable, and to have been avoided by Scott, when he sold and transferred the stock. The bill further, alleges the purpose of the trustees to vote the stock in a particular way, and that the effect of the vote will be to control the election of the directors. Under the circumstances, we think the injunction as to this matter should be retained until the final hearing of the case.

The decree of the chancellor is modified so far as it continues in force the injunction against using the property and effects of the company in constructing the branch road; and a decree here rendered dissolving the injunction to this extent. The decree of the chancellor, as thus modified, is affirmed.

STONE, C. J.

My own opinion is, that when the board of directors was reduced to two out of seven members, the corporation was without power to discharge any corporate function, save, perhaps, to convene the stockholders, for the purpose of electing other directors, or making provision therefor. I am clearly convinced, and do not think my brothers differ with me in this, that the attempt made to fill the board of directors by the remaining two, was utterly without authority, and confers on the persons attempted to be appointed, no legal power to act as such. — People v. A. & S. R. R. Co. 55 Barb. 344; Stale ex rel. v. Smith, 48 Vt. 266. I further hold, that any disposition made of the funds of the corporation, by this irregularly constituted board, is a conversion by them, and, if done in obedience simply to the orders of such board, it will fasten a personal liability on them.

Taking the averments of the bill to be true, I think they present a sufficient execuse for not appealing for relief to the corporate authorities, if' corporate authorities there be capable of rendering relief. To ask the only two remaining directors to take steps to prevent themselves from doing authorized acts, would certainly present an anomaly. Injunction is the only efficient remedy, and I think it should be retained, until the rehabilitation of the corporation can be perfected by legitimate methods. I dissent from so much of the ruling of my brothers, as modifies the injunction. — Pender v. Lushington, L. R. 6 Ch. Div. 70.