Winter v. Southern Securities Co.

1. A bona fide stockholder has the legal right to inspect the books and records of the company, where the examination is asked for in good faith for a specific and honest purpose, and not to gratify curiosity, or for speculating or for vexatious purposes; and provided further that the purpose of the stockholder desiring to make the examination is germane to his interest as a stockholder, proper and lawful in character, and not inimical to the interests of the corporation itself, and the inspection is made during reasonable business hours. 14 C.J.

855; 7 R.C.L. 322, § 298 et seq.; Cook on Corporations (7th ed.), § 511; Thompson on Corporations (2d ed.), § 4515. There is no allegation in the present case that the petitioners were induced to purchase stock in the Southern Securities Company by reason of fraudulent acts of the officers and directors of the corporation.

2. The petitioning minority stockholders having the right to inspect the books and records, including the minutes of the directors' meetings, for the purposes and under the circumstances named in the preceding headnote, and none of the acts of the officers and directors complained of having been committed since June, 1910, and the petition in the case having been filed in the year 1922, the court properly sustained that ground of the demurrer based on laches. The delay on the part of the petitioners for such length of time was unreasonable.

3. No law of this State prohibits a private corporation from purchasing and holding stock in other corporations, except that embraced in article 4, section 2, paragraph 4, of the constitution of Georgia, which prohibits the granting of power to a corporation to purchase stock in another corporation when the purchase may have or be intended to have the effect of defeating or lessening competition or encouraging monoply. The purchase of the stock of the insurance company by the securities company, therefore, was not contrary to law. None of the acts of the officers and directors of the securities company, as alleged in the petition with reference to the conduct of its business, are sufficient to constitute fraudulent or ultra vires acts. Whether such acts are wise and beneficial to the company whose business they were conducting is not a matter which concerns the court. Independently, therefore, of the question of laches, the court did not err in sustaining the demurrer and dismissing the petition on the ground that the allegations of the petition did not authorize a court of equity to take charge, through a receiver, of the assets of the defendants.

4. On review of the case of Alexander v. Searcy, 81 Ga. 536 (8 S.E. 630, 12 Am. St. R. 337), this court declines to overrule that decision. 1. The principle announced in the first headnote does not require elaboration.

2. Under the allegations of the petition the proceeds arising from the sale of the original stock issued by the Securities Company had already been used by the officers and directors of that company in the purchase of the stock of the Insurance Company prior to the acquisition of any stock in the Securities Company by the petitioners in this case; and as to that transaction they have no right to complain. Also, under the allegations of the petition, the proceeds arising from the issue of the additional shares when the capital stock was increased was loaned to the insurance company as such funds were received during the period from the year 1906 to the year 1910. Part of the stock acquired by the petitioner Dodd was of the original issue. Stock of the petitioner Winter was of the new issue and acquired through a broker on

January 26, 1910, and the sale of all of the new issue of stock was completed on June 6, 1910. The petitioners, having the right to inspect the books and records of the Securities Company, had at least constructive notice, and accordingly, as matter of law, were charged with notice from June 6, 1910, but took no action until the filing of this petition in 1922. It has been held by this court: "The general rule is, that while a minority of the stockholders of a corporation may maintain a bill in equity in behalf of themselves and other stockholders for fraud, conspiracy, or acts ultra vires, against a corporation, its officers, and others who participate therein, when the minority stockholders have been injured or damaged by such acts, they must act promptly. If they postpone their complaint for an unreasonable time, they forfeit their right to equitable relief." Alexander v. Searcy, 81 Ga. 536 (supra); see also Smith v. Coolidge Banking Co., 147 Ga. 7 (92 S.E. 519), and Bartow Lumber Co. v. Enwright, 131 Ga. 329 (62 S.E. 233).

In the last-cited case Mr. Justice Holden, speaking for the court, said: "The right to control the affairs of a corporation is vested by law in its stockholders — those whose pecuniary gain is dependent upon its successful management. The majority stockholders, or the majority of the directors, when directors are chosen to act on behalf of the stockholders, have the right to determine the business policy of the corporation, and the minority must submit to their judgment in such matters, when exercised in good faith and not involving acts ultra vires, or in breach of trust. As was said by this court in Hand v. Dexter, 41 Ga. 454, 461, ``The very foundation principle of a corporation is that the majority of its stockholders have the right to manage its affairs, so long as they keep within their charter rights.' No principle of law is more firmly fixed in our jurisprudence than the one which declares that the courts will not interfere in matters involving merely the judgment of the majority in exercising control over corporate affairs. In 10 Cyc. 969, the rule is thus stated: ``The true distinction is between acts in excess of the powers of the directors and in breach of their trust, and acts which are within their powers and which merely involve an exercise of the discretion committed to them. The rule here is that in the absence of usurpation, of fraud, or of gross negligence, courts of equity will not interfere at the suit of a dissatisfied minority,

merely to overrule and control the discretion of the directors on questions of corporate management, policy, or business, but will allow the majority to rule, and will leave the dissatisfied minority to redress their grievances through ordinary corporate methods.' Based on decisions in consonance with the doctrine as above announced, the codifiers of the code of this State have embodied these rules of law in two sections of our Civil Code, as follows: § 1859 [Civil Code of 1910, § 2223]. ``So long as the majority stockholders confine themselves within their charter powers, a court of equity will require a strong case of mismanagement or fraud, before it will interfere in the internal management of the affairs of a corporation.' § 1860 [Civil Code of 1910, § 2224]. ``A minority stockholder may proceed in equity in behalf of himself and other stockholders for fraud, or acts ultra vires, against a corporation, its officers, and those participating therein, when he and they are injured thereby. But there must be shown — 1. Some action or threatened action of the directors beyond the charter powers; or, 2. Such a fraudulent transaction completed or threatened, among themselves or shareholders or others, as will result in serious injury to the company or other shareholders; 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 other shareholders; 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 shareholders, which can only be restrained by a court of equity; and it must also appear — 5. That petitioner has acted promptly; that he made an earnest effort to obtain redress at the hands of the directors and stockholders, or why it could not be done, or it was not reasonable to require it. 6. The petitioner must show that he was a shareholder at the time of the transaction of which he complains, or that his shares have devolved upon him since by operation of law.' See also Lamar v. Lanier House Co., 76Ga. 640; Alexander v. Searcy, 81 Ga. 536 (8 S.E. 630);Empire Hotel Co. v. Main, 98 Ga. 176 (25 S.E. 413); Gibsonv. Thornton, 107 Ga. 545 (33 S.E. 895); Reynolds v. Martin, 116 Ga. 503 (42 S.E. 796)."

It would serve no useful purpose should this court express an opinion upon the advisability of the corporate transactions of which

complaint is made. Whether the course of management pursued by the officers and directors of the Southern Securities Company will eventually prove to be wise or foolish, time alone will disclose. That question does not concern the court. The only question that concerns the court is whether or not the petition is subject to demurrer. One ground of the demurrer is that in equity the petitioners are barred on account of laches. As stated in the first headnote of the case of Bartow Lumber Co. v.Enwright, supra; "The internal management of a corporation will not be interfered with by the court, at the instance of a minority stockholder, unless the majority stockholders are acting without the charter powers, or a strong case of mismanagement, or fraud, is shown." And this is especially true where the complaining minority stockholders have delayed for some eleven or twelve years the bringing of their suit, as in this case. The court properly sustained the demurrer and dismissed the petition on the ground of laches.

3. The fact that the Securities Company purchased all of the stock of the Insurance Company furnishes no reason for the interference of a court of equity. In Cox v. Hardee, 135Ga. 80 (68 S.E. 932), it was said: "We know of no law in this State . . which prohibits granting to private corporations power to purchase and hold stock in other corporations, except that embraced in article 4, section 2, par. 4, of the constitution, which simply prohibits the grant of power to a corporation to purchase stock in another corporation, when the purchase may have or be intended to have the effect of defeating or lessening competition or encouraging monopoly." And see Trust Company ofGeorgia v. State, 109 Ga. 736 (35 S.E. 323, 48 L.R.A. 520). The charter of this company specifically provided that it might acquire and own stock in other corporations, without placing any limit upon the amount thereof or the percentage of stock which it could acquire in any one company. The charter power is as follows: "to buy, sell, hold and own, in any lawful manner, bonds, stocks, debentures, and securities of all kinds, and also to buy and sell the same on commission; to buy, sell, hold, own, mortgage or encumber property, both real and personal, to borrow or lend money, and give or take proper security therefor, and to do such other and further acts, not inconsistent with the laws of this State, to

further carry out and promote the interest of said company." The purpose of the suit is not to enjoin a threatened or impending action; it seeks the equitable powers of the court to have a court receiver take charge of both the Insurance Company and the Securities Company, not at the instance of creditors of either company, but at the instance of minority stockholders of the latter company only. It is not alleged that the Securities Company owes any debts. Under such circumstances it must be assumed that there are no creditors. The only complaint is that by reason of the manner of conducting the business affairs of the company by its officers and directors the Securities Company has made no profits and declared no dividends since the year 1910. The trial judge was authorized to adjudge that the facts alleged in the petition did not amount to a charge of bad faith or dishonesty or fraud as to the complaining minority stockholders. The court was also authorized to find from the allegations of the petition that the charter of the Securities Company authorized the directors to purchase the entire stock in the Insurance Company and to lend it money. The failure to take security for the money loaned to it, a separate corporation, owned completely, or to all practical purposes owned, by the lending company, did not amount to an ultra vires act. The charter of the Securities Company contained the following power: "to borrow or lend money, and give or take proper security therefor." Petitioners contend that this provision of the charter authorized the lending of money only when security was taken. We do not think this a proper construction of the power given. The power given is "to borrow or lend money," also to "give or take proper security." The company was authorized to do either or both. That provision of the charter did not prohibit the company from borrowing money without giving security, or lending money without taking security, but authorized both. That was a matter left to the business discretion of the officers and directors chosen by the majority stockholders to conduct the business affairs of the company. Independently, therefore, of laches, we are of the opinion that the trial court properly refused to take equitable jurisdiction of the case, and to turn over to a court receiver the assets of going concerns, where no demands of creditors were involved, and where one of the corporations owes no debts and the

other owns assets amounting to millions, as in the case of the Insurance Company, and especially since the interests of numerous policyholders were involved. In a case like this, where the suit is by minority stockholders, interested to a comparatively small degree, every reasonable construction will be given to the allegations of the pleadings consistent with leaving the affairs of the company in the hands of those chosen by the majority stockholders.

4. We are requested to review and overrule the case ofAlexander v. Searcy, 81 Ga. 536 (supra). After carefully considering and reviewing that case, we decline to overrule it. We not only think the case, as decided, is founded upon correct principles, but it has been adhered to in other cases, and the portion of it which supports this ruling has become a part of the Civil Code (1910), and is found in section 2224.

Judgment affirmed. All the Justices concur, except RussellC.J., dissenting, and Hill, J., disqualified.