BILL tI. WESTERN UN:ION TEL. CO.
(Oircuit Court, S.D. Net/) York. March 26,1883.)
CORPOR.l'l'IONS'-LBA8lIl BY BOARD OIl' DIRJIIOTORS- VALIDITY-l!.uORITY OlP BoARD Ol!' LESSOR DIRECTORS OIl" LEBSEE.
As the directors of a corporation are its agents, and represent stockholders, who are often practically voiceless in behalf of their own interests, they are held to the exercise of the utmost good faith in theadministratiop. of their trust; and where a statute authorizes a telegraph company to lease or sell its franchises and property to any other telegraph company, provided the lease or transfer be approved by a three-fifths vote of its board of directors, and also by the consent in writing, or by a vote at a general meeting, of three-fifths in interest of the stockholders, a lease of the property and franchises of a telegraph company is voidable at the election of the lessor, if at the time the lease was made a majority of the board of the directors of the lessor were directors of the lessee also, and the lessee owned nearly two-fifths of the stock of the lessor.
8AJl:m--8UIT BY STOCKHOLDER, WHO MAINTAINABLlL
An individual stockholder can maintain an action to set aside mch a lease only when it is made to appear to the court that he has exhausted all the meaus to obtain, within the corporation itself, the redress of his grievances, or action in conformity with his wishes, and that he has made proper to induce action on the of the other stockholdera.
Oharle, M. Da Oosta !Lnd Luke A.. Lockwood, for complltinant. wSwayne, for defendants. WALLAOE, J.. The complainant, 'J. stockholder of the Gold & Stock Telegraph Company, has filed a bill to set aside a lease of the property and franchises of that company to the Western Union Telegraph Company for the term of 91} years, and now moves for an injunction pendente lite to restrain the lessee from disposing of the property acquired under lease. The lessor and lessee are both corporations of ,this state, and by the act of May 2, 1870, authority is conferred upon any telegraph company organized under the laws of this state ,to lease or sell its franchises and property to any other telegraph complltiyorganized under the laws of the state, provided the lease or transfer be approved by a three-fifths vote of its, board of directors, and also by the consent in writing, or by a vote at a general meeting. of in of the stockholders. The theory of the complainant's bill is that the lease was ultra vires, because the necessary .cop-sent of the and stockholders has not been given, and that" it was made for an inadequate consideration, and in breach of trust by the directors, and in the interest of the lessee. Both theDiUon
BILL V. WESTERN' UNION TEL. CO.
ories hinge upon the circnmst!lJnce that 'themajdrity of the board. 'of directors of the lessor were directors of the lessee at the time the . lease was made, and upon the further circumstance that the lessee owned nearly two-fifths of the stock of the lessor at the time. It is insisted for the complainant that the statutory authority to lease has not been pursued, because the three-fifths vote of the board of directors was cast by directars who were incompetent to vote, they being at the time directors of the lessee, and also because ' uisite majority of consenting stockholders has not been obtained if the vote Of consent of the lessee is exclnded. Concededly, in the absence of statutory authority, the lessor corporation could not legally enter into such an agreement as is here assailed. Such a surrender of its franchises and abdication of its functions would be ultra vires. A majority of the stockholders could not sanction it, and a board of directors could not confer color of validity upon the transaction. It is fundamental that the majority have no 'power to represent the whole body in any matter which is outside the legitimate purposes for which the corporation is organized. If the directors of the lessor were not competent to vote because , they were at the time directors of the lessee, the lease is void. It can· not be supposed that the requisite quorum has been obtained, or that the statute contemplates or is 'satisfied by a vote' of directors who are; incompetent to vote. But the theory that the directori! were incompetent to vote confounds the distinction between want of power ahd abuse of power; between a disqualificatidn to vote whieh renders the vote nugatory, and the exercise of:a power which has been conferred, but which ought not to be exerted.' A director is not incompetent to vote because a sense of propriety may dem-and that he should not vote upon a particular occasion, nor is an agent incompetent to make a contract because the contract he has made was unfair or evenfraudulent towards his principal. If the directors were incompetent to vote tllGl lease would be absolutely void, and no action of the stockholders' could validate it. If, however, the act of the directors was culpable or obnoxious to equity under the circumstances, while the corporation might repudiate their conduct, it migh,t also ratify it, and; would rat· ify it by accepting the benefits of the transaction, with knowledge'of the facts. The contention that the vote of the lessee must be excluded in certaining whether the quorum of stockholders have consented,doeR not seem A stvckholclel' IDll.> <1.1 ways rote in his own interest.
Upon the second theory of the complainant's case the inquiry arises whether, by reason of the relations sustained by the lessor's directors to,Wards the lessee, their action in voting for the lease was in coutravention of their duties to the lessor, and so obnoxious in the view of a court of equity as to render the lease void at the election of the lessor. It is well-settled that if directors of a corporation enter into a contract in its behalf with themselves as the other contracting party, the corporation may repudiate such contract. In Thoma8 v. Brownville, etc., Ry. Co. 2 FED. REP. 877, it is held that a contract between a railroad company and a construction com· pany is void where any of the directors of the railroad are members of the construction company, unless ratified by a board of disinter. ested directors. In Wardell v. Union Pac. R. Co. 4 Dill. 330, it is held that a contract made in behalf of the corporation by the executive committee of the board of directors, in which the members of the executive committee have a secret interest, is fraudulent as against the corporation, and the latter may repudiate it. Other authorities directly or impliedly decide that the contract may be upheld, if, the presence of interested directors, there was a quorum of disinterested directors who participated in making the contract. Butts v.. Wood, 37 N. Y. 317; Coleman v. Second Avenue R. Co. 38 N. Y. 201; U. S. Rolling Stock Co. v. A. JJ G. W. R. Co. 34 Ohio St. 450; Flagg v. Manhattan Ry. Co. 10 FED. REP. 413. These adjudications proceed upon the principle, familiar and elementary in the law of that the same person cannot act for himself, and at the same time, and in the same transaction, as the agent of another whose interests are conflicting. If an agent to sell becomes the purchaser, or an agent to buy he himself the seller, a court of equity, upon the timely application of the principal, will presume that the transaction was injurious. Although the honesty of the agent may be unquestioned, and he may have attempted to exercise scrupUlous impartiality as between his own interests and those of his principal, it is the right of the latter to repudiate the transaction. Directors of corporations are its agents, invested with wide powers and clothed with large discretion; they represent stockholders who are often practically voiceless in behalf of their own interests; and they are held to the. exercise of the utmost good faith in the administrationof their trust. They abuse the fiduciary relation which they sustain to the corporation and the stockholders, when they enter into contrMts in which their private interests may antagonize the intr jsta eoMmW""d. to their care. 1.'he law does not require the corp1r-"_
WESTERN UNION TEL. 00.
tion to take the chances that the directors have not abused their position under such circumstances. Practically and logically there can be no difference in the complexion of the transaction when the agent or the director, instead of interposing his personal interests between his principal and himself, interposes those of a third person. Undoubtedly the same person may be the agent of two distinct principals, and bind them both by his acts for each; but this is where he is expressly or impliedly authorized to act for each in the transaction with the other. Brokers fall within this category. But this does not advance the argument in favor olan agent wno is selected for the sole duty of representing a single principal. The principal bargains for all the zeal and ability of his agent, and is entitled to their exertion in his own favor. He does not expect that his agent will place himself il,l a position where his obligations to another will raise a conflict of duties and interests. If the agent disregards this reasonable expectation, and attempts to serve two masters, the principal may assume that the agent has been unfaithful, and repudiate his act. Applying these principles to the case in hand the conclusion is obvious. If the directors could not enter into a contract with the lessee which the lessor could not repudiate because of the peculiar relations existing between the lessee and the directors, they could not bind the lessor by a vote which was the equivalent of a contract, or was indispensable to the validity of the lease. Assuming that the lease was voidable at the election of the corporation, because its directors were also the agents of the lessee, it remains to determine whether the complainant, as a stockholder, can invoke the aid of the court to annul the lease. If he is not in a. position to do so, it is immaterial whether the lease was for an inadequate consideration or not, or whether it was one which, for any reason, the corporation might repudiate. The question relates to the right of a stockholder to assert what, primarily, it is the province and the duty of the corporation itself to assert. His right to maintain an action like this is recognized only when the corporation refuses to assert the rights of the stockholders. The law is well stated in Morawetz, Corp. § 384, as follows:
the directors of a corporation have complete power to control its action, and decide whether it shall enter into a litigation or not. In such case, therefore, a shareholder cannot obtain the interposition of equity without shOWing that the directors are either unwilling or unable to bring suit on
behalf of the corporation. And even when the directors or ordinary managing officers of a corporation are at fault, it does not necessarily follow that the corporation is disabled from proouring justice for itself. For the majority of stockholders, in corporate meeting, have supreme authority under the charter to manage the corpomte affairs; and whenever it is possible to obtain justice to the corporation by calling a stockholders' meeting and removing the offending officers and electing new ones, this remedy must be pursued. In such case a stockholder cannot obtain relief in equity, since the ground for relief fails; namely, that the corporation, his trustee, is unable to protect the trust."
In the recent case of HctwCS v·. Oakland, 104 U. S. 450, the supreme court has reviewed the authorities, and deduced -the rule which it is the duty of this court to apply. The stockholder must show that he has exhausted all the means to obtain, within the corporation itself, the redress of his grievances, or action in conformity to his wishes. "He must make an earnest effort with the managing body of the corporation to induce remedial action on their part, and this must be made apparent ,to the court. If time permits, or has permitted, he must show, if he fails with the directors, that he has made an honest effort to obtain action by the stockholders as a body n the matter of which he complains, and he must show a case, if this is not done, where it could not be done, or it was not reasonable to require it." And, in order to emphasize its views so clearly that no misapprehension can exist as to the duty of stockholders in this behalf, the supreme court promulgated rule 94 at the same term at which Hawes v. Oakland was decided. By this rule of practice it is made essential in every bill brought in this cqurt by a stockholder in a corporation founded on rights which may properly be asserted by the corporation, to allege "with particularity the efforts of the plaintiff to secure such action as he desires on the part of the managing directors or trustees, and, if necessary, of the stockholders, and the causes of his failure to obtain such action." It is sufficiently clear, in view of the action of the directors here, and their present attitude in affirming the validity and expediency of the lease, that any effort to induce them to take action in behalf of the corporation to annul it would be futile. The ceremony of an application to them on behalf of the complainant would be farcical. It may, therefore, be dispensed with, and the allegations of the in this behalf are probably in substantial compliance with rule 94. But the bill fails to aver that any effort has been made by the complain. ant to secure snch action on the part of the stockholders as, upou his theory of the transQation, they OUgllt to take. The bill ex-
BILL V. WESTERN UNION TEL. 00.
presbly avers that the lease was not consented to by three-fifths in interest .of the stockholders. It appears, however, from the defendants' answer and affidavits, that three-fifths in interest have consented. The complainant's case must rest upon the allegations of his bill. As to substantive allegations, upon a motion for an injunction, he is confined to the statements of his bill. Neither according to his· allegations nor upon those of the defendant does it appear that an effort to induce the proper action on the part of the stockholders has been made or ought to be dispensed with. If a majority do not approve the lease, as stated by complainant, then he should have endeavored to induce them to remove the offending directors, and elect new directors who would assert the rights of the corporation. If, as stated by the defendants, a majority sented to the lease, it does not appear that they knew what relations existed between the directors aud the lessee when the consent was given, and therefore it is not apparent that they intended to ratify the action of the directors, much less that, in view of the circumstances, they would deny to the stockholders an opportunity to repudiate the transaction as unfair or injurious to them. It does appear that nearly two-fifths of the stock of the lessor was and is owned by the lessee corporation. Assuming that the lessee, as a stockholder owning two-fifths of the stock of the lessor, would'refuse to assist in any remedial action, there is still a majority of stock held by those who have no interest except to protect their own rights and promote the good of the corporation. The complainant bas failed to show a case within the adjudications, or the ninety-fourth rule, which entitles him to maintain this action. If it should be assumed that a majoritv of the stockholders of the the act, of the directors, lessor have adopted, or are willing to notwithstanding they were also directors of the lessee, the complainant is without remedy and without equities, as by permission of the statute such a lease is within the legitimate discretion of the corporation. It would not be equitable or just that a single stockholder, or a minority of the stockholders, should be permitted to defeat the wishes and thwart the interests of the ,majority. It is an implied condition of the association of stockholders in a corporation that the majority shall have authority to bind the whole body in any transaction within the corporate powers. ' It maybe that the facts are sucb that the complainant. may be able to amend his bill, and present a case entitt'ing him to relief. As the case is now prc8ented. an injunction must be denieJ.
¥EDERAL REPORTER. LOUISIANA STATE LOTTERY CO. CLARK and others.'"
(Oircuit 001J;rt, E. D. Louisiana. February, 1883.)
When two or more persons claim the same thing by different or separate interests, anel another person, not knowing to which of the claimants he ought of to render a debt or duty, or to deliver property in his custody, fears that he may be hurt by some of them, he may exhibit a bill of interpleader against them. 2. COUNSEL FEES-REV. ST. § 824. The fee bill is intended to regulate only those fees antI costs which are strictly chargeable as between party and parly, and not to regulate the fees of counsel, and other charges and expenses, as between solicitor and client, nor the power of a court of equity, in cases of administration of funds under its control, to make such allowances to the parties out of the fund as justice and equity may require. J.'rustees v. Greenough" 105 U. B. 535, 536.
On Motion for Rehearing on Allowance of Counsel Fees. Simon Silverman instituted suit in the state court against the Louisiana State Lottery Company, claiming that he was the true and lawful owner of a certain half ticket of the lottery company which had drawn a prize of $30,000, of which he had beon unlawfully dispossessed, and procured a writ of injunction enjoining the lottery pany from paying the prize to any other person, and prayed for a judgment against the lottery company for the amount of the prize. Subsequently Clem. C. Clark instituted another suit in the same state court, upon said lottery ticket, alleging that he was the true and lawful owner thereof, and prayed for judgment against the lottery company for the amount of the prize, and made Silverman a party defendant. The lottery company removed both suits to this court, and then filed the bill of interpleader in this case against both Silverman and Clark, admitting that the lottery ticket had won the prize claimed, and its liability to pay the same, but averring that it did not know which was the proper party to whom it should pay the same, and prayed for a writ of injunction compelling Silvermana'nd' Clark to litigate their respective claims in this suit, etc. After considerable testimony had been taken, and Clark compromised and adjusted their differences, and obtained an order upon the lottery company to pay over the money, and thereupon the court made an order, contradictorily with the defendants, allowing the lottery
by Joseph P. Hornor, Esq., of the New Orleans bar.