Hill v. Erwin Mills, Inc.

80 S.E.2d 358 (1954) 239 N.C. 437

HILL
v.
ERWIN MILLS, Inc. et al.

No. 739.

Supreme Court of North Carolina.

February 24, 1954.

John T. Manning, Durham, and Joyner & Howison, Raleigh, for plaintiff, appellant.

Reade, Fuller, Newsom & Graham, Durham, and Brooks, McLendon, Brim & Holderness, Greensboro, for defendants, appellees.

DENNY, Justice.

The defendants and each of them interposed a demurrer in this Court to the plaintiff's complaint on the ground that it does not state facts sufficient to constitute a cause of action; for that (1) the plaintiff is not entitled to maintain in his own right an action to restrain a threatened loss not peculiar to himself without allegation that he exhausted his remedies within the corporation before resorting to suit; (2) the plaintiff is not entitled to obtain the intervention of the court to impose his own judgment in a matter reserved to the discretion and judgment of the officers and board of directors of the corporation; and (3) the plaintiff is not entitled to equitable relief where he has an adequate remedy at law. He must allege facts as to such inadequacy.

This Court, in the case of Murphy v. City of Greensboro, 190 N.C. 268, 129 S.E. 614, 617, said: "When a person becomes a stockholder in a corporation, he assents to the execution of all the powers which the law confers upon the corporation, and agrees to abide by the action of the governing body as to all matters properly under its control. For this reason, before bringing suit against the corporation to protect its rights or to redress its wrongs, he must ordinarily seek remedial action through the directorate or the other controlling authorities of the corporation itself." See 13 Am.Jur., Corporations, section 422, page 474, et seq., and cited cases. But there are exceptions to the general rule with respect to such actions. The Supreme Court of the United States in the case of Hawes v. City of Oakland, 104 U.S. 450, 26 L. Ed. 827, pointed out a number of exceptions to the rule requiring demand and refusal. The Court said: "We understand that doctrine to be that, to enable a stockholder in a corporation to sustain in a court of equity in his own name, a suit founded on a right of action existing in the corporation itself, and in which the corporation itself is the appropriate plaintiff, there must exist as the foundation of the suit:

"* * * Such a fraudulent transaction, completed or contemplated by the acting managers, in connection with some other party, or among themselves, or with other shareholders as will result in serious injury to the corporation, or to the interests of the other shareholders;

"Or 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;

"Or where the majority of shareholders themselves are oppressively and illegally pursuing a course in the name of the corporation, which is in violation of the rights of the other shareholders, and which can only be restrained by the aid of a court of equity."

The Court, in the above case, also pointed out that in addition to the grievances which warrant an action by a stockholder, the stockholder 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." Certainly, the plaintiff alleges sufficient facts in his complaint to meet this requirement.

Moreover, this Court, in discussing the identical question now before us, in Murphy v. City of Greensboro, supra, quoted with approval from Cook on Corporations, section 741, page 3250, the following statement: "So also in the state courts there are occasions when the allegation that the stockholder has requested the directors to bring suit and they have refused may be omitted, since the request itself is not required. This occurs when the corporate management is under the control of the guilty parties. No request need then be made or alleged, since the guilty parties would not comply with the request; and even if they did the court would not allow them to conduct the suit against themselves." Therefore, when it appears that the control of a corporation is in the directors, or a group of stockholders, whose actions are questioned, and that a minority stockholder has exhausted all the means available to him, within the corporation itself, to obtain a redress of his grievances, a demand that the corporation bring an action for such relief is not required. In such a suit, a stockholder may prosecute the action without alleging demand and refusal. Murphy v. City of Greensboro, supra; Cannon v. Wiscassett Mills Co., 195 N.C. 119, 141 S.E. 344; Hawes v. City of Oakland, supra; Jones v. Van Heusen Charles Co., 230 A.D. 694, 246 N.Y.S. 204; Tarlow v. Archbell, Sup., 47 N.Y.S.2d 3; Collier v. Mayflower Apartments, 196 Ga. 419, 26 S.E.2d 731; Caldwell v. Eubanks, 326 Mo. 185, 30 S.E.2d 976, 72 A.L.R. 621; Schmidt v. Schmidt, Tex.Civ.App., 52 S.W.2d 778.

Minority stockholders do not have the right to dictate corporate policies. However, they are required to submit to the will of the majority only so long as the majority act in good faith and within the limitation of the law. 13 Am.Jur., Corporations, section 422, page 474, et seq.

The rights and powers vested in those holding a majority of the capital stock in a corporation imposes on them a fiduciary relationship as between them and the minority stockholders. It is the duty of the management of a corporation to exercise good faith, care, and diligence, to make the property of the corporation produce the largest possible amount, to protect the interest of the minority stockholders, and to secure and pay over to them their just proportion of the corporate income.

"It is well established that courts of equity will entertain jurisdiction, at the instance of minority stockholders of a private corporation who are unable to obtain redress within the corporation and have no adequate remedy at law, to restrain threatened ultra vires acts on the part of the majority or to prevent any other act on the part of the majority which may be denominated as a breach of trust or a breach of the fiduciary duties owing to the minority." 13 Am.Jur., Corporations, section 423, page 475, et seq.

The plaintiff alleges in sum and substance that the proposed contract with Woodward (which the directors of the defendant corporation have approved and directed its president and secretary to execute with Woodward since the institution of this action), will result in irreparable injury and damage to the corporate defendant and to the plaintiff and other minority stockholders. The plaintiff not only alleges in detail the facts which he contends will result in the alleged irreparable injury and damage to the corporate defendant and to the plaintiff and other minority stockholders, but alleges that the execution of the contract with Woodward will be to the financial advantage of Woodward and certain majority stockholders including some of the individual defendants. These allegations are admitted for the purpose of testing the sufficiency of the plaintiff's complaint.

It is the general rule that when the fairness of transactions between a corporation and one dominating its policies is challenged, the burden is upon those who would maintain such transactions to show their inherent fairness to all parties concerned. Fletcher Cyclopedia Corporations, Section 918, page 341, et seq. This question was considered in Mayflower Hotel Stockholders Protective Committee v. Mayflower Hotel Corp., 89 U.S.App.D.C. 171, 193 F.2d 666, 671, where the propriety of a proposed contract placing the management of the Mayflower Hotel in the hands of the Hilton chain for a period of five years was questioned. The control of the Mayflower corporation had been obtained by the Hilton Hotel chain, just as the "Abney Group" has control of the corporate defendant. Among other things, the Court said: "Nevertheless the fact is, as recognized by the trial judge, that Hilton, which was then the majority stockholder of Mayflower, sat on both sides of the table for all practical purposes. While this does not render the contract illegal per se it brings it under careful scrutiny. * * * The burden is upon such a stockholder, as it is upon the director, to prove not only the ``good faith of the transaction but also to show its inherent fairness from the viewpoint of the corporation and those interested therein.'" See also, Mayflower Hotel Stockholders Protective Committee v. Mayflower Hotel Corp., 84 U.S.App.D.C. 275, 173 F.2d 416.

In Pepper v. Litton, 308 U.S. 295, 60 S. Ct. 238, 245, 84 L. Ed. 281, the Court said: "A director is a fiduciary. * * * So is a dominant or controlling stockholder or group of stockholders. * * * Their powers are powers in trust. * * * Their dealings with the corporation are subjected to rigorous scrutiny and where any of their contracts or engagements with the corporation is challenged the burden is on the director or stockholder not only to prove the good faith of the transaction but also to show its inherent fairness from the viewpoint of the corporation and those interested therein. * * * The essence of the test is whether or not under all the circumstances the transaction carries the earmarks of an arm's length bargain. If it does not, equity will set it aside."

It is likewise said in 18 C.J.S., Corporations, § 490, page 1166, that, "There is no law which makes it impossible for a majority stockholder to enter into a contract with his company. However, such a contract will be scrutinized with much greater care than if made with a third person, and where it is unfair or unconscionable a court of equity will interpose at the instance of the corporation or the minority stockholders to prevent it from being used oppressively and in violation of the rights of the minority; * * *. Minority stockholders are not precluded from attacking the contract as fraudulent by the fact that it is completely executed * * *. A corporation which, through stock ownership, controls and conducts the business of another is held to the strictest account and to the observance of the highest rectitude in a transaction with its subsidiary, and has the burden of proving its fairness. The validity of a transaction may be tested by considering whether or not the proposition submitted to the subsidiary would have commended itself to an independent corporation."

We cite the above authorities for the purpose of showing the right to maintain an action of this character and not for the purpose of prejudging or in anywise expressing an opinion on the merits of the present controversy. We hold, however, that the allegations of the complaint are sufficient to withstand the demurrer interposed by the defendants.

The sole remaining question for disposition is whether the court below committed error in dissolving the temporary restraining order theretofore issued in this cause.

This Court has discussed the law so many times and so recently in Lance v. Cogdill, 238 N.C. 500, 78 S.E.2d 319 and in Huskins v. Yancey Hospital, 238 N.C. 357, 78 S.E.2d 116, as to when a temporary restraining order should or should not be issued, as well as when such order should be continued to the final hearing, we deem it unnecessary to discuss the subject here. See Tobacco Growers' Co-op. Ass'n v. L. Harvey & Son Co., 189 N.C. 494, 127 S.E. 545, 47 A.L.R. 928; Hurwitz v. Carolina Sand & Gravel Co., 189 N.C. 1, 126 S.E. 171; Tobacco Growers' Co-op. Ass'n v. Bland, 187 N.C. 356, 121 S.E. 636; Cobb v. Clegg, 137 N.C. 153, 49 S.E. 80; Lewis v. Roper Lumber Co., 99 N.C. 11, 5 S.E. 19; Perry v. Michaux, 79 N.C. 94; McCorkle v. Brem, 76 N.C. 407; James v. Lemly, 37 N.C. 278.

In light of the findings of the court below, we have concluded that the evidence on this record will not warrant a reversal of his Honor's ruling.

Even so, our ruling here on this question or the action of the court below in dissolving the temporary restraining order previously issued in the cause, will have no bearing whatever on the rights of the parties when the action is tried on its merits. Lance v. Cogdill, supra; Huskins v. Yancey Hospital, supra.

The demurrer is overruled, and the order entered in the court below dissolving the temporary restraining order is

Affirmed.

ERVIN and BOBBITT, JJ., took no part in the consideration or decision of this case.