Decatur Mineral Land Co. v. Palm , 113 Ala. 531 ( 1896 )

COLEMAN, J.

Otto Palm and others, minority stockholders in the appellant corporation, filed their hill, in which it is averred that appellants, Thomas M. Scruggs and S. M. Nelson, controlled a majority.of the stock of the corporation, and used their power in the selection of the board of directors, and dominated the management of the corporation for their personal advantage. The principal wrongs complained of consist in the election of incompetent and unfaithful persons as president and secretary, to-wit, Thos. M. Scruggs and S. M. Nelson, and the appropriation by the directors of exhorbitant and unreasonable amounts to their salaries, and neglect of duty on their part. The bill prays for the removal of these and other members of the board of directors, for an injunction to restrain the board from voting unreasonable salaries hereafter, for an account to ascertain how much they have received over and above what is just and reasonable, a decree for such excess, and a cancellation of the notes held by such officers against the corporation for unpaid salaries, in excess of what they should be allowed. The bill also prayed for a receiver.

It will be seen from this statement of the purposes of the bill, that the corporation is the proper complainant, and that stockholders are not allowed to apply to a court of equity for relief in such a case, except upon averment and proof that the corporation has refused, upon application, to remedy the wrong, or upon sufficient aver-ments to show that application to the board of directors or stockholders would have been in vain, or the circumstances were such as to excuse the complaining stockholders from first seeking a remedy in this way, if there can be any other in any case.

At the final hearing, the court granted relief to com." plainants, in so far as tlie bill prayed for a cancellation of the outstanding and unpaid claims of the president and secretary for salaries, and awarded an injunction to restrain the board of directors from voting unreasonable compensation to said officers, and allowed complainants a solicitor’s fee to be paid by the corporation. Tlie respondents appeal from this decree. If the complainants were entitled to the relief granted, the benefit resulted to the corporation, and through it to all the stockholders, as such, alike. The complainants could receive no advantage which would not operate equally for the advan-tange of all the stockholders. If the corporation had filed the bill, there can be no doubt, that its solicitors would have been entitled to reasonable compensation to be paid by the corporation. Its refusal necessitated the filing of tlie bill by the stockholders. Under these facts we have no doubt that the corporation is charge able, with whatever compensation the complainants’ solicitors are entitled to. The amount of the fee, however, should have been determined from the evidence. We do not think the court could take judicial knowledge of the value of services rendered by the solicitors.-Clark v. Knox, 70 Ala. 607. The evidence shows, that S. M. Nelson and Kate G-utherz were sisters, and Thomas M. Scruggs their nephew, that these three stockholders owned but little less than a majority of the entire outstanding stock, that at some of the meetings of the stockholders, their stock exceeded a majority of the stock present and voting, and that at other meetings their stock and that held by them as proxies constituted a majority. The stock owned by these three shareholders and that controlled by them was voted in concert, either S. M. Nelson or Thomas M. Scruggs generally voting that owned by Kate Gutherz.

It is reasonably clear that they dominated the stockholders’ meetings, and elected the board of directors, of which the said Scruggs and Nelson were always included as members. The by-laws authorized the directors to fix the salaries of the officers and elect them. Thomas M. Scruggs and S. M. Nelson were members of the board of directors which fixed the salaries of the president and secretary, and which elected them to these offices, and it is satisfactorily shown that both were instrumental in fixing the amount to be paid, and in electing themselves to their respective offices. The pleadings and evidence show that the board of directors consisted of seven members. In the 7th paragraph of the bill it is averred, that four members, to-wit, H. B. Scott, S. M. Nelson, Thomas M. Scruggs and J. 0. Eyster, met and re-elected Scruggs president at a named salary, J. C. Eyster vic¿-president, andS.M. Nelson secretary. Of necessity, Scruggs and Nelson voted for themselves. This averment is nowhere controverted. We are of opinion that the evidence leaves no room for reasonable controversy that the salaries voted to the president and secretary, when considered with reference to the duties required of and performed by them, and the financial condition of the corporation, were out of'all proportion, and unreasonable. These salaries not only consumed all the income, but encroached annually upon the capital assets, and if continued, would eventually leave nothing for the stockholders. The duty of a director is to act for the interest of the stockholders, ahd manage the affairs of the corporation for their benefit, and not for his personal gain. There was a direct conflict between the duty owed by these directors to the stockholders, and their self interest; and, as is frequently the case under such conditions, the frailty of human nature sacrifices duty to self interest. They fixed the salaries at exorbitant prices, then elected themselves to the offices. The fact that the president may have been unwilling to accept the office at a less salary, proves nothing in favor of the fairness and reasonableness of the amount. A minority stockholder who cannot obtain redress against such . a wrong, through the board of directors or the stockholders, is entitled to the intervention of á court of equity. — 1 Morawetz on Corp., §§ 508, 518 etseq.; Cook on Stocks & Stockholders, § 657, and notes.

This brings us to the consideration of a question which vitally affects complainants’ standing in a court of equity. The respondents demurred to the bill upon the ground that the bill admitted that complainants had not applied to the board of directors of to the stockholders for redress, and failed to state sufficient reasons for not doing so. The demurrer was overruled, and the same question and issue was raised by answer. After careful consideration, we are of opinion that the court erred in its rulings upon the demurrer, and in its con-elusion from the facts bearing upon this issue. In the case of Tuscaloosa Manufacturing Co. v. Cox, 68 Ala. 71, we used this language: “If it be supposed an unwise course is being pursued, or that the interests of the corporation are suffering, or likely to suffer through the inefficiency or faithlessness of an official, an appeal should first be made to the directory or governing body, to redress the grievance. Failing there, in ordinary cases the next redress will be found in the power of the ballot, which usually comes into exercise at short intervals. 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. It should be a strong case, however, to justify such interferences. ’ ’

In the case of Merchants & Planters Line v. Waganer, 71 Ala. 581, we quoted approvingly from the case of Hawes v. Oakland, 104 U. S. 450, the following principles of law as applicable : “A stockholder could appeal to the courts for relief, ‘where the board of directors, or a majority of them, are acting for their own interest, in a manner destructive of the corporation itself, or of the rights of ’the other shareholders.’ This is precisely what is avei’red in this case. ‘But,’ Justice Miller adds, ‘in addition to the existence of grievances which call for this kind.of relief, it is equally important that before the shareholder is permitted in his own name to institute and conduct a litigation which usually belongs to the corporation, he should show to the satisfaction of the court that he has exhausted all the means within his reach to obtain, within the corporation itself, the redress of his grievances, or action in conformity to his wishes. He must make an earnest, not a simulated effort, with the managing body of the corporation, to induce remedial action on their part, and this must be made apparent to the court. If time permits, or has permitted, he must show, if he fails with the directors, that he has made an honest effort to obtain action by the stockholders as a body, in the matter of which he complains ; and he must show a case, if this is not done, where it could not be done, or it was not reasonable to require it.’ ”

In the case of Steiner v. Parsons, 103 Ala. 215, after citing the foregoing authorities it was held, that mere averments of conclusions, without averment of the facts which sustained the conclusions, were insufficient. The reasons for the principle are so strongly and clearly stated in the cases cited, that we consider it unnecessary to fortify them by additional argument or authority. It is a settled question in this court. The abstract abounds with averments, that the directors were dominated by the president and secretary, and that an application to the board would have been useless ; but with one exception to be noticed presently, there is not a single fact averred to show why the board of directors would not have interposed at the request of ihe complainants. The fact referred to is the statement that Thomas M. Scruggs, S. M. Nelson and Kate Gutherz had the voting power to control the meeting of the stockholders and did dominate at these meetings. We obseiwe here that this is the only material fact established by the evidence bearing upon this issue. The question then is, does the fact that these three stockholders controlled the election of the seven directors and did elect them by their votes, without more, authorize the legal presumption that the directors thus elected would refuse to discharge their duties as directors to the corporation and the stockholders, when requested by the stockholders? The case of Mack v. DeBardeleben, 90 Ala. 401, can not be regarded as an authority. In the first place, the question was not before the court. In the second place, the decision of the question was expressly pretermitted, and arguendo, it was stated that possibly “the presumption would be, that he (a director) would exercise his power in the -interest of the company to which he owed his election.” There is no ground for such a presumption in the present case. The directors were stockholders. In the absence of causes to influence them otherwise, the presumption is that they would do their duty, and this presumption is greatly strengthened when the effect of duty was to promote their personal interest.-Porter v. Pittsburg Bessemer Steel Co., 120 U. S. 670. With the exception of the stockholders who as officers received salaries, the interest of the other members of the board of directors, as well as their official duty, required a prompt interference to redress the wrong. The pleadings and evidence show that two of the directors are complainants. J. C. Eyster, M. R. Leadingham and we presume H. B. Scott, together with Thomas M. Scruggs and S. M. Nelson, comprise the seven who constituted the board of directors. We find no averment in the bill, that H. B. Scott, M. R. Leadingham and J. C. Eyster, or any two of them, voted for the salaries, or for Scruggs as president and Nelson as secretary, nor do we find any sufficient aver-ments in the bill, to show that they, or at least two of them, would not have co-operated with the two members who are complainants in the present'bill. We are satisfied that an application to the stockholders would have been a “vain and useless undertaking.” It is clear that the president and secretary dominated the stockholders. If any further evidence than that already stated was needed on this point, it is to be found in the ratification by the stockholders at a meeting b eld since the beginning of this suit, at which the salaries fixed and the election and conduct of the president and secretary were approved. At this meeting, the president and secretary, voting their own stock and that of their relative Kate Gutherz, had no difficulty in obtaining a ratification of their own previous actions. This fact, however, did not relieve the minority stockholders from applying to the directors, unless there were other circumstances which relieved them from this duty. The bill and evidence is insufficient on this point. Ordinarily, we would render a decree here, annulling the decree of the court below, and dismissing complainants’ bill, but we find difficulties owing to the condition of the case as presented in the abstract, when submitted for final decree. In the ber ginning of the abstract it is stated that the bill is filed against the corporation and six named directors. Included in these named directors is Kate Gutherz. The bill shows that Falk and Palm are also directors. This would make eight directors, yet the pleadings elsewhere and the evidence show that seven directors constituted the entire board. In the answers it is admitted that Kate Gutherz is a director as averred.. Process is prayed against her as a respondent. The minutes of the stockholders’ meeting held February 8, 1892, at which the directors were elected, who were in office at the time of the filing of the bill, does not show that she was elected a director, but names other seven. She was made a respondent to the bill. The abstract fails to show that as to her the case was at issue. She has not answered, and there has been no decree pro confesso against her. Again, the bill makes S. M. Nelson a material defendant, and the decree affects her personally. She has no answer on file. There is a mere reference in one place that she filed a plea of coverture, but this plea does not seem to have been considered by the parties or the court in any way. The abstract abounds in errors as to dates, some of which only we have been able to correct from other parts of the abstract. In this condition of the record, we have felt it our duty to reverse and remand the cause, and have stated the law applicable to the case, for the future guidance of the court.

Reversed and remanded.