Terry v. Eagle Lock Co.

A court of equity will in many cases refuse to interfere with a corporation at tlie instance of a stockholder, in respect to an unauthorized contract which has heen fully executed, when, if the same stockholder had applied in season for an order to restrain the execution of the contract, the court might have felt bound to grant the relief prayed for. Especially is this so where the petitioner has stood by and allowed the illegal transaction to be consummated, and has induced or allowed others to become interested in the corporation in the belief that the existing state of things was legal. The Eagle Lock Co., a joint stock corporation located in this state, was in 1871 carrying on the business of making locks, and then had a capital of $100,000. At that time the Gaylord Co. was a like corporation, organized under the laws of the state of Massachusetts, and there carrying on principally the same business, and selling in the same markets. After a negotiation between the two companies, the stockholders of the Eagle Lock Co. voted to buy all the property of the Gaylord Co for $50,000 of new stock of the former company, to be created out of its surplus, the latter company to preserve its organization, and its business to be carried on by trustees for the benefit of the Eagle Lock Co. The purchase was made, the stockholders of the Gaylord Co. transferred all their stock to the Eagle Lock Co , and the $50,000 of new stock was created and issued to them in payment. The arrangement proved a profitable one and for five years large dividends were made from the general earnings among all the stockholders. The new stock had during this time been by successive transfers so mingled with the old that it could not be traced. T, one of the old stockholders of the Eagle Lock Co., had in 1871 opposed and voted against the action of the company in the matter, but took no steps to prevent the consummation of the arrangement, and down to 1876 had done nothing to bring into question the title of the Eagle Lock Co. to the Gaylord Co. property, and its right to enjoy the benefit of the arrangement, and no question was raised upon these points by any one, while the stock of the company had been largely bought and sold in the belief that the proceedings were legal and that the stock was $150,000, T himself having in 1872 sold as administrator of his father’s estate a large amount of stock, and since the present suit was brought a number of shares of his own, the purchasers, with a single exception, not being informed of any supposed invalidity in the proceedings of the company. Upon a bill in equity brought by T to enjoin the Eagle Lock Co-from further managing the Gaylord Co. as an existing and separate organization, and praying that the whole arrangement he set aside, and the $50,000 of new stock distributed among the persons who were stockholders at the time it was created, and for other relief, it was held, (without deciding whether the Eagle Lock Co. had power to make the arrangement,) that the petitioner had no sufficient standing in court to enforce his demand. Aside from this, it did not appear that the transaction had been injurious to the petitioner. And there was no ground upon which the stockholders of the Gaylord Co. could equitably be compelled to give up the $50,000 of stock they had received, even if they still held it. They had paid a full consideration for it in transferring their stock to the Eagle Lock Co. And the same amount of stock could not he created for the purpose and added to the capital for the benefit of the holders of the stock at the time of the increase, as that would be a wrong to the persons who had become owners of the stock since. And the company could not he required to pay an equivalent in cash, as that, by reducing the assets, would equally wrong the later purchasers of the stock. And the court would not make any decree affecting these parties unless they were all before the court. And held that there was no legal objection to the mode adopted for carrying on the business of the Gaylord Co. as a distinct corporation by trustees appointed for the purpose. And it seems that the Gaylord Co., while thus operated, might lawfully engage in any business authorized by its fundamental law. How far the doctrine of ultra vires applies to trading and manufacturing corporations under our joint stock laws: Quiere. The stockholders of the Eagle Lock Co. on the 5th of August, 1875, voted to increase its capital stock two thousand shares out of tire surplus earnings of the company. This increase was for a special object, though not so stated in the vote, which object immediately after failed. Thereupon a special meeting of the stockholders was held on the 18tli of the same month and before any action had been taken under the vote to increase the stock, and that vote was rescinded. No certificates of the new stock were ever issued, nor any certificate of the increase filed, as required by law, with the town clerk or secretary of the state. Thus matters stood until July, 1876, when the present petition was brought, praying that the petitioner’s share of the stock thus created, upon the basis of his then ownership of the stock, might he issued to him or its value paid to him in cash. In the meantime there had been important transactions of the company, and a large amount of stock had changed hands, all upon the basis of the unincreased capital, all of which was known to the petitioner. Held—I. That the mere vote to increase the stock did not give it an existence, so that the petitioner as a stockholder acquired a vested interest in it. 2. That the company had full power to rescind the vote increasing the stock. 3. That the petitioner by his acquiescence for so long a time, with knowledge of all the facts, had lost whatever equity he might originally have had.

Bill in Equity to set aside certain transactions of tlie respondent corporation, to compel the issuing to the petitioner of certain shares of its stock, and for an injunction, with a prayer for general relief; brought to the Superior Court in Litchfield County. . The following facts were found by a committee upon the bill and the answer of the respondents. The Eagle Lock Company is a corporation located in the town of Plymouth, in this state, which was, in the year 1854, organized as a joint stock corporation under the general statute with regard to such corporations then in force, with a capital stock of $85,000, divided into thirty-four hundred shares of twenty-five dollars each; the object of which association, and the business to be carried on by the corporation, were stated in the articles of association of the company as follows: “ To deal in, manufacture and sell, all kinds of chest, cupboard, drawer, wardrobe, trunk, pad and other locks, and bag frames, which are made in whole or in part of brass, iron, steel, wood or metals of any name or description, whether wrought or cast, and to purchase any and all things necessary to use in manufacturing as aforesaid; also to buy, sell and deal in goods, wares and merchandise, manufactured in whole or in part of any of the aforesaid materials, and all such property and estate as may be necessary or incidental to the prosecution of said business.” Its original capital had been 'increased to $100,000, and continued’ such till September lltli, 1871, when it was increased, in the manner and for the purpose hereinafter stated, to $150,000, at which it remained till August 5th, 1875. James Terry, the father of the petitioner, died on the 19th of April, 1871, leaving a will by which ho appointed Joseph EL Adams and R. D. H. Allen his executors. Adams died before the testator. On the 22d of April, 1871, the will was duly proved before the court of probate, and the petitioner was appointed, administrator with the will annexed, in the place of Adams. Allen has never resigned his trust as executor, hut has acted therein only by signing instruments of conveyance, and a notice of the settlement of the administration account. The petitioner has settled the estate in all other respects. At the time of liis decease the testator was the owner of four hundred and fourteen shares of the stock of the Eagle Lock Co., which remained the property of his estate till January 1st, 1872, when it was distributed according to the terms of his will, the petitioner receiving sixty-nine shares thereof. On the lltli of September, 1871, the petitioner owned in his own right forty shares of the stock, and on the 5th of August, 1875, he owned one hundred and fifty shares. On the 11th of September, 1871, the Gaylord Manufacturing Company was a corporation under the general laws of the state of Massachusetts, having been organized in the year 1863. In its articles of association its object was stated as being that “of carrying on the business of manufacturing and selling hardware and leather goods.” It then owned a factory, water power and real estate situated in the town of Chicopee in the state of Massachusetts, which were used in and connected with its manufacturing business; also tools, machinery, stock and manufactured goods. The Gaylord Manufacturing Co. and the Eagle Lock Co. were engaged in business substantially of the same character and kind and in the same markets. The capital stock of the Gaylord Company was $100,000, and the par value of its shares was $100. The officers and stockholders of the two corporations, believing in good faith that the interests of both companies would be furthered thereby, agreed that the Eagle Lock Co. should purchase the factory and other property of the Gaylord Co., and pay therefor $50,000 in the stock of the Eagle Lock Co., which stock was to be created by the Eagle Lock Co. and to be issued to the stockholders of the Gaylord Co. at the rate . of two shares of the new stock for one share of the Gaylord Co. stock transferred to the Eagle Lock Co. On tlie 11th of September, 1871, at a meeting held in pursuce of proper notice, the stock was created; and it was issued to the stockholders of the Gaylord Co. in pursuance of the arrangement, and under the following resolutions of the Eagle Lock Company: “ Resolved—That the capital stock of the Eagle Lock Co. be increased two thousand shares, and that the directors be authorized to issue to each of the stockholder’s of the Gaylord Manufacturing Co. of Chicopee, Mass., certificates of two shares of the stock of the Eagle Lock Co., when they shall transfer to trustees appointed as hereinafter provided, one share of the stock of the said Gaylord Manufacturing Co.; the par value of the said Gaylord Manufacturing Co. stock being one hundred dollars per share. “ Resolved—That we appoint now, and at each annual meeting hereafter, a board of eight trustees, who shall receive and hold the certificates of said Gaylord Manufacturing Co. stock, and shall hold the office of trustee until the next annual meeting after their election, or until their successors shall be appointed, and shall have power to fill all vacancies that shall occur during the time of their office; who shall organize by the appointment of a president from one of their number, and of a secretary and treasurer, and who shall take the entire management of the affairs of said Gaylord Manufacturing Co., keep an account of all their receipts and disbursements, and make dividends of the profits of said company at their discretion, and pay over said dividends to the treasurer of the Eagle Lock Co., and make a full report of tlioir standing and affairs at each annual meeting of the Eagle Lock Co.” The petitioner was present at the meeting of September lltli, 1871, was opposed to the amalgamation with the Gay-lord Co., and previous to the passage of the resolutions he, in conversation with one and another of the stockholders, objected to it, and voted against the adoption of the resolutions. In pursuance of the resolutions trustees were appointed. The Eagle Lock Company then had a surplus of $250,000. No purchase was made of the franchise or corporate rights of the Gaylord Co. further than would result from the following facts: The two corporations were advised that a proper and sufficient conveyance of the property of the Gaylord Co. could he made by transferring’ all the stock of the latter company to trustees who should hold the same for the sole use and benefit of the Eagle Lock Co.; and.such conveyance was made by the stockholders of the Gaylord Co. of all their stock to sttch trustees, who have ever since held the same and paid over all earnings and profits of the manufacture and sales by the Gaylord Co. to the Eagle Lock Co. The corporations by their officers intended to give and receive a full conveyance of all the property of the Gaylord Co. to the Eagle Lock Co., and supposed that the transfer of the stock to trustees effected that result. No other conveyance of the property has been made. In the stock ledger of the Eagle Lock Co. accounts appear with the stockholders of the Gaylord Manufacturing Co. in which are charges of stock of the .Eagle Lock Co., which are balanced by credits for stock of the Gaylord Co., transferred to the trustees; and certificates of stock of the Eagle Lock Co. were duly issued to themT" ” Tlie'Gaylord Manufacturing Co. has continued to exist as a corporation, and has made its returns to the authorities of Massachusetts under the corporation laws of that state. The proceeds of the business have been received by the Eagle Lock Co. through the trustees. In the course of their business the Gaylord Co. has made and sold swords, the manufacture and sale of which has been a source of profit. Between the 11th of September, 1871, and the bringing of this petition, the Eagle Lock Co. has paid upon the stock issued to the stockholders of the Gaylord Co., in dividends, $70,000 more than the Eagle Lock Co. had during the same time received from the Gaylord Co.; but during this period the sales of the Eagle Lock Co. amounted to $1,700,000, and in consequence of this arrangement it has been enabled to make sales at a profit much larger than the $70,000, over and above what they would have made had this arrangement not been made, namely, fifteen per cent, more on the total amount of sales. At a meeting of the stockholders of the Eagle Lock Go., held on the 5th day of August, 1875, in pursuance of a special notice, the following votes were passed: “ Voted, That the capital stock of the Eagle Lock Company be, and the same is hereby, increased two thousand shares, and that said increase be out of the surplus earnings of the company.” “ Voted, That the directors be authorized and directed to cause to be issued said stock to the present stockholders pro rata, according to the stock respectively owned by each, and that any fractional share may be adjusted by the payment of money at the rate of four dollars for one.” The record not showing by what majority the vote was passed, the respondents objected that it was not competent for the petitioner to show, aliunde the record, that it was passed by a vote of stockholders holding two-thirds of the whole stock. And the petitioner objected that it was not competent for the respondents to show whose stock was voted upon in the affirmative. If parol evidence was admissible to prove how the vote was passed, aliunde the record, then it was agreed by the parties that persons representing twotliirds of the stock of the company did vote therefor, provided the stock issued as before stated to the Gaylord Manufacturing Go. stockholders and voted on, was legally and properly voted on; otherwise it was not passed by a two-thirds vote, but by a majority vote only. The vote was not a stock vote by ballot, but was taken mod voce. No certificate of this increase of stock was ever filed in the office of the secretary of the state, or in the office of the town clerk of Plymouth. It was stated at the meeting of August 5th, 1875, and before the above votes were passed, that the stock was proposed to be created and issued to the stockholders to be by them transferred to N. G. Miller, at the rate of $100 per share, to enable the Eagle Lock Go. to obtain his services as president and manager of the company, it being deemed advantageous to the company to procure his services; and the increase of stock was voted for that special purpose, it being supposed that the offer of the stock would be an inducement to Miller to devote his services to the company. The petitioner was present at the meeting and voted in favor of the passage of the vote, and after it was passed signed an agreement with the other stockholders, that their shares of the new stock might be issued to Miller at $100 per share. Before the 18th of August, 1875, the proposed arrangement with Miller became impracticable and could not be carried into effect. On the 18th of August, 1875, in pursuance of notice a meeting of the stockholders of the Eagle Lock Co. was held, at which a vote was passed rescinding the vote of August 5th increasing the capital. The petitioner however was not present at this meeting, and received no actual notice of it, being out of the state. Up to the date of the petition there was no dispute of the title of the Eagle Lock Co. to the property purchased of the Gaylord Manufacturing Co., and the Eagle Lock Co. has enjoyed all the benefits and fruits of the purchase, and its rights had never previously been questioned; all which was known to the petitioner. No separate account has been kept by the Eagle Lock Co. with the holders of the stock issued September lltli, 1871, and it has been sold by the holders to other parties, and again resold by them, so that (ht the time of bringing this bill a large amount of the same had become intermingled with the original stock of the Eagle Lock Co., and cannot be distinguished from it. j There are holders of this stock who were not individually made parties to the present suit. The trustees made annual reports to the Eagle Lock Co. of their proceedings in relation to the trust, but there was no evidence that the petitioner ever saw the same. On the 11th of September, 1871, the $50,000 of stock issued by the Eagle Lock Co. to the holders of the stock of the Gaylord Manufacturing Co. was of the same value as the $100,000 of the stock of the latter transferred to the trustees. The $50,000 of stock created on the lltli of September, 1871, and the $50,000 created on the 5th of August, 1875, were created out of the surplus earnings of the Eagle Lock Co., which were ample for that purpose. The petitioner was aware that the Eagle Lock Co., from September 11th, 1871, till the bringing of the present suit, was paying dividends on the increased stock, and did not object to its paying such dividends, nor to its taking the earnings of the Gaylord Co. The petitioner knew that the stock of the Eagle Lock Co. was being bought and sold between September 11th, 1871, and July, 1876, and that its capital stock was then $150,000. On the 25th of June, 1872, the petitioner, as administrator on the estate of his father, transferred to sundry persons the four hundred and fourteen shares owned by the deceased, and the company issued certificates to the transferees therefor, and he did not inform them of the liability of the proceedings of September 11th, 1871, to be annulled. The petitioner after the present suit was brought transferred one hundred and sixty shares of the stock to three different parties, and at the present time is the holder of but one share. In making these transfers he informed one of the purchasers that the arrangement with the Gaylord Co. was liable to be broken up, or that there was a liability to the issue of $50,000 more stock, but he informed neither of the others. Upon these facts the case was reserved for the advice of this court.