Peeples v. Southern Chemical Corp. ( 1942 )

The petition in equity by minority stockholders against the corporation, its president and secretary, and the wife of the president, alleging fraudulent conversions of the asserts by the president, aided and abetted by the secretary and the president's wife, and showing that the major portion of the corporate assets had been removed beyond the limits of the State, and admitting that no effort had been made to obtain redress at the hands of the directors or stockholders, but reciting that it was impracticable and useless to make such effort, does not show a right of the petitioners to maintain the suit, in that it shows that no effort has been made to obtain redress within the corporation, and shows no reason why it could not have been done, or that it was unreasonable to require it. Accordingly, it was not error to dismiss the petition on the motion of the defendants.

No. 14221. JULY 15, 1942. REHEARING DENIED JULY 27, 1942. The petitioners, as minority stockholders in the Southern Chemical Corporation, named Southern Chemical Corporation, G. B. Bryan, its president, George D. Webster, its secretary, and Mrs. G. B. Bryan defendants, and alleged in the petition as amended, that each of the petitioners owned ten shares of the capital stock of the defendant corporation, which they acquired by purchase on April 6, 1940; that the president and secretary have charge of the books and management of the corporation's affairs; that on April 6, 1940, G. B. Bryan owned a majority of the stock of the defendant corporation; that immediately after the petitioners acquired their shares of stock they made demand upon the president and secretary that the stock be transferred to petitioners; that this demand was repeatedly made, but the officers refused to make the transfer; that immediately after the petitioners acquired their shares of stock there was placed on record a mortgage purporting to have been executed by the corporation in January, 1938, pledging all of the assets of the corporation to Mrs. G. B. Bryan to secure a purported indebtedness of $2,000. On information and belief the petitioners alleged, that the mortgage was a scheme and device entered into by the defendants for the purpose of defrauding other stockholders, and that the alleged indebtedness never existed; that G. B. Bryan threatened to have the mortgage foreclosed unless petitioners surrendered their stock to him without being paid therefor; that a damage suit against the defendant corporation is pending in Fulton superior court, and the president threatens not to defend said suit unless petitioners surrender their stock to him without payment; that the corporation is insolvent; that the president is operating the corporation for his personal benefit, appropriating to his own use all income derived from such operation; that at the time the petition was filed practically all of the machinery and fixtures of the defendant corporation had been removed from its place of business in Atlanta, Georgia, beyond the limits of the State by the president, without notice to or consent of all of the stockholders of the company; that at the time the suit was filed the president, without authorization by the directors or stockholders, disposed of all of the property or assets of the corporation with the exception of approximately $150 worth of materials which remained at the corporation's place of business in Atlanta, but which could not be used in manufacturing, due to the previous removal of necessary equipment. On information and belief it was alleged, that the corporation's property was transferred to Auto Parts and Supply Company of Denver, Colorado, and that such transfer and use of the property by the transferee was for the sole benefit of the defendant Bryan, its president; that the president of the corporation left Atlanta with the bulk of the corporate assets around the middle of May, 1940, and carried them to Denver, Colorado; that between that time and when the present petition was served on the defendant Webster, the latter was collecting money due by debtors to the defendant corporation and transmitting it to the president individually, on the order of the defendant Bryan as president and general manager of the corporation, which funds were not used for the benefit of the corporation, but were fraudulently converted to his own use by the president, and he has made no accounting therefor; that during the same period, and acting under orders of the president, the secretary Webster shipped to the president manufactured products and merchandise belonging to the corporation, which property was fraudulently converted to his own use by the president, all of which was done under the guise of satisfying the purported mortgage; that, so far as the petitioners know, the president has not returned to Georgia except on one occasion since leaving in May, 1940; that he has failed and refused to account to the stockholders for the assets of the corporation removed by him at the time he left the State; and that both of the petitioners wrote to Bryan, the president, requesting that their respective shares of stock be reissued to petitioners and entered on the books of the company, but the president refused to do so. Copies of the letters were attached, each stating that the par value of the ten shares of stock was $500, and one of the petitioners proposing to sell his ten shares for $100, and the other for $150. It was further alleged that in September, 1940, petitioner Peoples went to the place of business of the defendant corporation, to discuss with the president the issuing of the certificate to petitioners and entry on the books showing the petitioners as stockholders; that the president was absent, but the petitioner talked with the secretary; that during this discussion it appeared that some of the machinery and equipment was missing; that the petitioners started an inquiry which lasted over a period of several weeks, during which time they learned that Bryan, the president, had removed practically all of the machinery, fixtures, and assets, "making it useless for petitioners to seek redress at the hands of the stockholders or directors of the corporation, and [they] thereafter promptly instituted these proceedings;" that petitioners employed counsel and were preparing to file mandamus proceedings to have the stock transferred to them, but when they learned of the president's action in removing the assets of the corporation they abandoned the idea of bringing mandamus proceedings, and sought in this action a receivership to preserve the remaining assets; and that "under the circumstances petitioners show that the seeking of redress at the hands of the directors and other stockholders would have been impracticable and useless." The prayer was, for receiver to take possession of the assets of the corporation; for injunction to restrain the defendants from altering or changing the assets of the business; that Mrs. G. B. Bryan be enjoined from foreclosing, transferring, or changing the status of the mortgage which she holds against the corporation; that the mortgage on final hearing be declared null and void and canceled; that the defendant officers be required to make an accounting to petitioners and other stockholders, of the management of the business; that the court through a receivership liquidate the corporation, pay outstanding debts, and distribute the assets pro rata among the stockholders; and for general relief.

The defendants filed a motion to dismiss the action, one ground of the motion being that no cause of action was alleged. The motion was sustained, and the petitioners excepted. "So long as the majority of stockholders confine themselves within the charter powers, a court of equity will require a strong case of mismanagement or fraud before it will interfere with the internal management of affairs of a corporation." Code, § 22-710. The majority have a right to manage these affairs as they wish, so long as they keep within their charter and act in good faith. Equity will not interfere to prevent unwise or improvident acts or policies. Hand v.Dexter, 41 Ga. 454. The conditions upon which equity will interfere in behalf of a minority stockholder are set forth in the Code, § 22-711; and while it is there said that a minority stockholder may proceed in equity for himself and other stockholders for fraud or acts ultra vires against the corporation, its officers, and those participating therein, when the stockholders are injured thereby, it is further stated that to do this there must be shown (1) completed or threatened action of the directors beyond charter powers; or, (2) such fraudulent transaction completed or threatened, among themselves or stockholders or others, as will result in serious injury to the company or other stockholders; or (3) that a majority of the directors are acting in their own interest in a manner destructive of the company, or of the rights of the other stockholders; or (4) that the majority stockholders are oppressively and illegally pursuing, in the name of the corporation, a course in violation of the rights of the stockholders, which can only be restrained by a court of equity;and it must also appear (5) that petitioner has acted promptly, that he has made an earnest effort to obtain redress at the hands of the directors and stockholders, or why it could not be done, or why it was not reasonable to require it; and (6) that petitioner was a stockholder at the time of the transaction of which he complains, or that his shares had since devolved on him by operation of law. We have restated the terms and conditions set forth in the Code which must be met as a condition precedent to the prosecution by a minority stockholder of a suit in equity, in order to emphasize the inescapable requirements of the law in such cases.

In Colquitt v. Howard, 11 Ga. 556 (3), after recognizing that corporations are amenable to the courts generally for the misuser or nonuser of their franchise, and that persons in the exercise of the corporate powers may, in their character as trustees, be accountable to a court of chancery for a fraudulent breach of trust, it was said: "If then, the directors of this, or any corporation, should refuse to prosecute, by collusion with those who had made themselves answerable by negligence or fraud, or if the corporation is still under the control of those who must be made defendants in the suit, the stockholders (or any one of them for himself and the others) who are the real parties in interest, may file a bill in their own names. In such a case, the averments in the bill should clearly and distinctly give jurisdiction, for equity interferes with great caution with the common-law jurisdiction over corporations." Under that decision, failure of the directors to sue, standing alone, is not sufficient, but this failure must be due to collusion of the directors with those who have made themselves answerable, or, if the corporation is still under the control of the directors or others who must be made defendants, a minority stockholder, for himself and others, may maintain a suit in equity, but in that event the averments in the petition must clearly and distinctly give jurisdiction; for equity interferes with great caution with common-law jurisdiction over corporations. In Hand v. Dexter, supra, it was said: "If the majority of this corporation are, in fact, managing the affairs in the interests of Hand, let the minority appear at the annual meeting, or call one, according to the by-laws, and demand that the true state of the company and its affairs be presented to the meeting. If this be refused, or if, on examination, anything rotten appears, the presumption is that right will be done. If not, let all the facts — not guesses and suspicions — be presented to the chancellor. As it is, the court is groping in the dark, under mere general charges, and is just as apt to do wrong as right in entertaining jurisdiction of the bill. For these reasons we think the bill is demurrable and ought to have been dismissed." It is the duty of a minority stockholder to seek protection within the corporation, and whatever complaint he may have he will not be allowed to assert it in a court of equity unless his petition shows that he has made an earnest effort within the corporation, or shows why this could not be done, or that it would not be reasonable to require him to make such effort. The amended petition shows that the defendant corporation had directors, and nothing appears to show that such directors and stockholders were incompetent, unwilling to act for the protection of the corporate interests, or had knowledge of any of the facts of which the petition complains. If the directors, acting in good faith, thought that there was no basis of fact supporting the complaints made in the present petition, or if for other reasons it was in their judgment in the interest of the corporation that no suit be filed, a minority stockholder would not be authorized to maintain an action in his own name, without first having made an earnest effort to get the directors and stockholders to bring such action. In Bush v. Bonner,156 Ga. 143, 149 (118 S.E. 658), it was said: "The mere failure or refusal of the directors of a corporation to bring a suit does not give the right to do so to minority stockholders. The wisdom and expediency of a suit by a corporation must be left to the discretion of the directors. They may believe that a suit would not be productive, or that a satisfactory settlement can be secured, or that the publicity of a suit would be damaging to the future interest of the corporation. As said in the Albright case, supra [151 Ga. 485 (107 S.E. 335)], ``they necessarily have a large discretion in that matter.' ``In order for a minority stockholder to maintain an action of this character, it is imperative that fraud and complicity on the part of the directors must be shown. Even conversion of the property of the corporation by a third person gives no right of action to the stockholders, in the absence of an allegation of fraud or collusion on the part of the directors.'" In Steele Lumber Co. v. Laurens LumberCo., 98 Ga. 329 (24 S.E. 755), this court held that the corporation itself was a proper party to prosecute an action against a third party for fraud, cancellation, and damages for a conversion of the corporation's assets. In that case two stockholders joined the corporation in bringing the action; but it was held that these stockholders were improper parties, and might be disregarded in granting relief to the corporation. Who shall be allowed to invoke legal process in behalf of a corporation, the directors who are free from fault and who were chosen and empowered to act for the corporation, or the minority stockholder, who wishes to substitute his own judgment for that of such directors? To this question the statutes and decisions emphatically answer, the directors. On the right of a minority stockholder to sue in equity, see generally Nussbaum v.Nussbaum, 186 Ga. 773 (199 S.E. 169); Nussbaum v.Nussbaum, 188 Ga. 224 (3 S.E.2d 721); Collins Glennville Railroad Co. v. Bradley, 189 Ga. 355 (5 S.E.2d 915).

Recognizing the rule requiring a minority stockholder to make an earnest effort to obtain redress at the hands of the directors and stockholders, as contained in subsection 5 of § 22-711, the petitioners claim the right to maintain this suit by virtue of the alternative therein, to wit, it was unreasonable to require it. The requirements there stated can not be avoided by such a general assertion of the petitioners' opinion or conclusion. They have the burden of making it appear by averments in the petition that they have made the required efforts to obtain redress within the corporation, or showing by averments of specific facts why this could not be done, or that it was unreasonable to require it to be done. The petitioners stand upon the single statement that, under the circumstances, seeking redress at the hands of the directors or stockholders would have been impracticable and useless. This is not sufficient. Without deciding whether the averments of the petition meet the conditions required under either subsection 1, 2, 3, or 4 of the Code, § 22-711, but assuming for the present that the petition is sufficient in that respect, there is nothing alleged to show why appeal to the directors and stockholders could not have been made in this case. Therefore subsection 5 is not satisfied. If all of the allegations of the petition are true, and knowledge of such facts had been brought to the directors and stockholders, nothing to the contrary appearing, it will be presumed that they would have acted just as promptly as petitioners in providing adequate measures to conserve the assets and protect the interests of the corporation. The petition by minority stockholders was not maintainable, and the judge did not err in dismissing the action.

Judgment affirmed. All the Justices concur.