Theis v. Durr

Maeshall, J.

According to tbe facts found as indicated, and they are not only well supported by tbe evidence but in tbe main are admitted by tbe answer, tbe dominating spirits among appellants conceived that by tbe preliminary contract mentioned in tbe statement they got tbe worst of tbe bargain in agreeing to contribute $20,000 in money against, as an equivalent, tbe patent right, to make up a capital of $40,000, in a corporation organized to acquire and use in all legitimate ways sucb patent right, and sought by means of tbe statutory authority to reduce capital stock in sucb an organization to even up with tbe respondents, to accomplish that under the. guise of statutory authority, by arbitrarily extinguishing their liability for $12,000 upon their capital stock subscriptions,, and canceling'a corresponding amount of full-paid stock as-if tbe same bad no consideration to support it. By that it-was supposed tbe $20,000 agreed in tbe preliminary contract,., and in effect in tbe corporate organization, to be contributed-; as an equivalent for tbe patent right, would be reduced to-$8,000, regardless of tbe wishes of respondents.

While appellants’ claim, as regards advantage having been taken of them in tbe preliminary contract and partial execution thereof, is referred to upon appeal as explaining, and perhaps palliating, tbe proceedings to enable them to obtain without tbe aid of any court, and without tbe consent’ of tbe other stockholders, a satisfactory measure of redress for their supposed misfortune, counsel do not venture to suggest that sucb claim, if it were in all respects well founded, warranted using, as they did, tbe statutory authority relating to tbe reduction of capital stock against tbe protest of respondents.

It must be conceded that liability to pay a subscription in *658 debtedness for stock in a corporation can only be rightfully satisfied as to a stockholder not consenting, by payment according to the subscription contract. No reduction of authorized and subscribed for capital stock can be accomplished except by voluntary surrender by subscribers pro rata, or some method which will not prefer one stockholder over another. Corporate power in that regard does not authorize an arbitrary preferential cancellation of stock, or cancellation of a subscription liability for stock without in some proper manner treating all stockholders with like favor. The idea with which appellants started out, that they could effectively use their superior voting power to obtain an advantage over the holders of full-paid stock, has no support in reason or in law, and, as we understand it, no one connected with the case ventures to claim to the contrary. If the majority of stockholders of a corporation could so treat its assets and be immune from judicial interference in respect thereto, there would be no protection for the minority but the conscience of the majority, which would be a very uncertain reliance. The law in respect to the matter is well stated in Purdy’s Beach, Priv. Oorp. § 195a, thus:

“A statute which authorizes a corporation, at any meeting .called for the purpose, to reduce its capital stock and the number of shares therein, does not empower it to effect a reduction by purchasing shares of a particular subscriber. Unless ¡such course is adopted as will work exact and even justice vto all owners of stock, the statute is inoperative. When the purpose is to reduce the capital stock by purchase of shares they may not be purchased from any particular stockholder alone without consent of all, but each stockholder is entitled to share pro rata, with all the others, in his surrender of shares for such purchase. No stockholder can be forced to sell his shares for reduction of the capital stock. Therefore when the transaction would operate for the relief and benefit of those from whom the stock is purchased and would increase the liability of the remaining stockholders, it is invalid.”

*659 It is argued on behalf of appellants that, conceding they could not rightfully force an adjustment of their differences with respondents in the manner attempted, the statute gave them the right to reduce the authorized capital stock, which was the only thing really accomplished by the proceedings annulled by the judgment; that the real wrong from respondents’ standpoint was, or will be, effected, if at all, by executing the purpose of the resolution; that so far as appellants had a right to do what was done their motives in the matter cannot, be judicially inquired into and their acts condemned upon the ground that such motives were bad. Counsel invoke the rule that the motives of members of a legislative body in doing what they may rightfully do are not a subject for judicial inquiry. That, at least, has its limitations as regards private corporations, if it has any application thereto at all. Dillon, Mun. Corp. (4th ed.) § 311.

We do not intend by the foregoing to suggest that a court of equity can supervise or revise corporate action within the scope of the corporate power where there is no bad faith in the matter; only error of judgment. In such matters the members of a corporation, as to authority lodged with them, and the board of directors in the field where that is the governing body, are supreme within the limits of honest administration and of the boundaries of discretion. . But where the act of either such body, though lawful in itself, is designed to accomplish some illegitimate object,- — the mainspring of the transaction is some ulterior motive, — and the result, if permitted to operate, will be injurious to the corporation or members not concerned in the transaction, such a member may successfully invoke equity jurisdiction for protection of the corporation where the proper officers will not do it That cannot be too strongly impressed upon the minds of those in control of corporate affairs. Wildes v. Rural H. Co. 53 N. J. Eq. 425, 32 Atl. 676 ; Berger v. U. S. Steel *660 Corp. 63 N. J. Eq. 506, 53 Atl. 14 ; Robotham v. Prudential Ins. Co. 64 N. J. Eq. 613, 53 Atl. 842 .

In the last case cited it was distinctly held that the purpose of the governing body of a corporation in determining upon a particular line of action may of itself render such action invalid and subject to annulment at the suit of stockholder s-This language was used in the opinion:

“It is well settled that an act may be intra vires or ultra vires, according to the purpose which the directors have in view in -doing it. The expenditure of money of a corporation by its directors is per se, often a neutral act; whether such expenditure is intra vires or ultra vires must, in large numbers of instances, depend upon the pui’pose — the actual honest purpose — which the directors have in view.”

There was no need in this case to go very far to discover that the purpose of appellants in passing the resolution complained of was entirely illegitimate. Such purpose clearly appeared by the records of the corporation. They showed that, while the formal resolution voted on and certified to be filed as required by law did not disclose its real object, an amendment thereto covering the matter was in due form adopted and was in reality made a part thereof. The resolution so amended was acted upon the first time the matter was up for consideration and lost for want of the requisite two-thirds vote in favor thereof. The same resolution as amended was reconsidered and passed on the second occasion of the matter being taken up. If there was any question as to the scope of the amended resolution, it would be solved by the subsequent resolution instructing the board of directors how to carry out the reduction of stock.

So it comes down to this: The authority to reduce authorized capital stock was in form exercised for the wrongful purpose of creating a basis for favoring the majority of stockholders at the expense of the minority. In short, a statutory *661 authority given for one purpose was abused by being nsed for another and clearly illegitimate purpose. The doctrine advanced, that if stockholders by combining a ruling majority exercise a corporate power with bad motive to the pecuniary loss or prejudice of the corporation and outside stockholders, only the mere consequences in that regard, not the wrongful use of power, is open to judicial investigation and redress, has no foundation here. Abuse of power to the direct or indirect injury of stockholders in a corporation, as well as usurpation of power with like effect, as we have seen, is a subject that may be dealt with by courts and by the remedies which equity affords when there is no othér remedy, or no other remedy which is reasonably effective. It would be difficult to conceive of a plainer, more wrongful, obviously fraudulent abuse of corporate power than the one under consideration. The authority to reduce capital stock is limited by its purposes. When it is exercised clearly for an illegitimate purpose, especially when such purpose is fraudulent, as in this case, the act is void. In Niagara S. Co. v. Tobey, 71 Ill. App. 250, it was held that a statute like ours contemplates a reduction of capital stock only on a basis which deals with all stockholders alike, and that any other attempted reduction is void as to a nonconsenting stockholder. Currier v. Lebanon S. Co. 56 N. H. 262, is to the same effect.

We view the resolution, in form reducing.the capital stock as the statute authorizes, the same as if the amendment referred to, and the real purpose as plainly indicated by the corporate proceedings had both before and after such passage, were embodied therein by express words. It is quite clear that in the absence of such purpose such passage would not have occurred. The elements in the transaction are inseparable. Each was a part of a single scheme conceived by appellants to benefit themselves at the expense of the corporation and of the respondents. If they had any claim against *662 the first parties to the preliminary contract, the way attempted was not the proper one to enforce it. They directly and indirectly wronged respondents and wronged the corporation beyond the power of redress, efficiently, at the suit of respondents by any other remedy than that which a court of equity affords. Appellants, through a board of directors composed mostly of their own number, were in the control of the corporation. They insisted upon carrying out their scheme of so converting its assets to their own use as to put themselves on the ground floor, so to speak, as they viewed the matter, with holders of full-paid stock. Presumably, before this action was commenced they in form took to themselves the corporate assets represented by their subscription liabilities. The directors refused to recognize the holders of full-paid stock to any greater extent than forty per cent, of their holdings. They insisted that they were justified in so doing by the resolution reducing authorized capital stock. There was no reason whatever to expect that the wrongs committed would be remedied by those in control of the corporate affairs. All of respondents were united in interests and similarly affected. The situation was one which in its entire scope could only be dealt with in an equitable action. There may not be any precedent for just such an action as this, and none is necessary to sustain it Since it is clearly within the principles of equity jurisprudence, that is sufficent.

As to the form of the relief, it may be that some other would have been more orderly, but, as at present advised, it would seem that — since the proceedings were mere steps in the execution of a wrongful purpose to change the relations of one class of stockholder’s of the corporation to their advantage, and those of another to their disadvantage, and so not to any extent within the statute relating to the reduction of authorized corporate stock — there could not be a more direct way to remedy the mischief than by judicially declaring the whole of such proceedings void and directing their can- *663 eellation of record. In any event the remedy which the conrt awarded was efficient. Appellants were not prejudiced by any mere matter of form.

By the Court.- — -The judgment is affirmed on both appeals.