213 U.S. 435
29 S.Ct. 540
53 L.Ed. 862
DELAWARE & HUDSON COMPANY
ALBANY & SUSQUEHANNA RAILROAD COMPANY et al.
Argued February 23, 24, 1909.
Decided May 3, 1909.
Messrs. James M. Beck, Alfred Opdyke, and William S. Opdyke for the Delaware & Hudson Company.
[Argument of Counsel from pages 436-438 intentionally omitted]
Messrs. E. Parmalee Prentice, George Welwood Murray and Charles P. Howland for the Albany & Susquehanna Railroad Company et al.
[Argument of Counsel from pages 438-442 intentionally omitted]
Mr. Justice McKenna delivered the opinion of the court.
The certificate of the court is as follows:
'This cause comes here upon appeal from a final decree of the circuit court, southern district of New York, which directs that the defendant, Delaware & Hudson Company (hereinafter called the Delaware Company) pay to the defendant the Albany & Susquehanna Railroad Company (hereinafter called the Susquehanna Company) the amount of $1,107,923.24.
'The case was fully argued and submitted on briefs. It thereupon developed that there was a question presented whether the bill could be maintained under the 94th equity rule. That question is a preliminary one, it has been held to be jurisdictional in character. Chicago v. Mills, 204 U. S. 321, 51 L. ed. 504, 27 Sup. Ct. Rep. 286; Doctor v. Harrington, 196 U. S. 579, 49 L. ed. 606, 25 Sup. Ct. Rep. 355), and this court desires the instruction of the Supreme Court for its proper decision.
Statement of facts.
'The facts upon which the question arises are as follows:
'The defendant corporations are both citizens of the state of New York; the complainants are citizens of the states of Connecticut and Rhode Island. The bill was brought to obtain an accounting for various sums of money which it was alleged became due at intervals during a series of years from the Delaware Company to the Susquehanna Company as rental or in the nature of rental under a lease made in 1870. For the convenience of all, a copy of the pleadings is hereto annexed, marked Exhibit 'A,' which may be referred to for a more detailed statement of the cause of action. The bill does not 'set forth with particularity the efforts of the plaintiffs to secure such action as they desire on the part of the managing directors or trustees.' Nor did the proofs show any such efforts. Nor does the bill set forth any efforts to secure 'such action on the part of the shareholders.' Nor did the proofs show any such efforts. Nor did the bill set forth, or the proof show, 'the causes of their failure to obtain such action' otherwise than is hereinafter disclosed.
'The complaint was filed on June 12, 1906. The Susquehanna Company was organized ganized under the act of April 2, 1850, which provides that 'there shall be a board of thirteen directors . . . to manage its affairs,' and for many years before this suit was brought a majority of the board of directors of the Susquehanna Company consisted of persons who were officers, directors, or employees of the Delaware Company. At the time this suit was instituted the directors and officers of the Susquehanna Company the dates of their election as such, and their relations to the Delaware Company, with dates of election, were as shown on the following statement:
Names of directors of Susquehanna
Company and dates of election as Position in Delaware & Hudson
directors and officers. Company and dates.
Robert M. Olyphant, 1878. Director since 1872.
President from 1884 to 1903.
Chariman of the board since 1903.
George I. Wilber, 1883. Director since 1901.
David Wilcox, 1894 (vice pres- General counsel, 1894 to 1903.
ident, May 9, 1906). Director since 1899.
President since 1903.
R. Suydam Grant, 1901. Director since 1886.
Charles A. Peabody, 1902. Director since 1902.
William S. Opdyke, 1903. General counsel since 1903.
Director since 1905.
Abel I. Culver, 1903. A vice president since 1903.
Charles A. Walker, 1892. Treasurer, 1892.
Robert Olyphant, 1887 (presi-Son of Robert M. Olyphant.
dent since 1889).
William L. M. Phelps, 1873
(secretary since 1870). Secretary of the Albany &
elected by the board of
Robert C. Pruyn, 1890. Nominees of the Delaware
James M. Manning, 1890. Company, as stated in the
Delaware Company's answer.
'Of these, Robert M. Olyphant, R. Suydam Grant, Charles A. Peabody, William S. Opdyke, Abel I. Culver, and Robert C. Pruyn, at the time this suit was begun, did not own or hold, in their own right, any shares of stock in the Susquehanna Company, but shares of stock of that company owned by the Delaware Company were transferred to each of them on the books of the Susquehanna Company by the Delaware Company for the purpose of qualifying them as such directors. Charles A. Walker owned five shares of Susquehanna stock from 1901 to 1906; it does not appear that he owned any stock in the Susquehanna Company during the year 1906.
'So far as appears from anything shown in this record, none of the directors or officers of the Delaware Company ever, before or after the bringing of this suit, treated the claim therein set forth otherwise than as one of doubtful validity, the payment of which was to be resisted.
'On June 12, 1906, and for thirty years prior thereto, the capital stock of the Susquehanna Company had been fixed at and limited to 35,000 shares. Of this capital stock on June 12, 1906, the Delaware Company owned 4,500 shares and its directors or officers owned or controlled 4,340 shares; the complainants owned 1,312 shares, and a so-called 'protective committee' who, from and after December, 1905, had been opposing the administration of the Delaware Company upon the questions involved in this bill, controlled 6,688 shares. The entire 35,000 shares were held by 546 different persons, of whom 423 owned 50 shares or less, and of whom 383 resided in the state of New York.
'An annual meeting of the Susquehanna Company was held subsequent to the beginning of this suit, on October 16, 1906. At that meeting the nominess of the protective committee were elected, receiving 15,501 ballots, the nominees of the former management receiving 15,441 ballots. About two weeks before such annual meeting the Susquehanna Company, being then controlled by the directorate above named, filed a demurrer to the bill, which is hereto annexed as Exhibit 'B.' Copies of such demurrer were sent by stockholders opposed to the existing control to all stockholders, and thereafter and before the meeting proxies for several thousand shares were received by the persons who voted for the nominees then elected.
'Upon the facts above set forth, the questions of law concerning which this court desires the instruction of the Supreme Court are:
'First. 'Does the fact that, before institution of this suit, complainants made no demand for relief upon the board of directors of the Susquehanna Company, prevent them from maintaining this ball?'
'Second. 'Does the fact that, before institution of this suit, complainants made no effort to obtain relief at a stockholders' meeting, prevent them from maintaining this bill?"
The questions in connection with the 94th equity rule present the issue in the case. The rule is as follows:
'94. Every bill brought by one or more stockholders in a corporation against the corporation and other parties, formed upon rights which may properly be asserted by the corporation, must be verified by oath, and must contain an allegation that the plaintiff was a shareholder at the time of the transaction of which he complains, or that his share had devolved on him since by operation of law, and that the suit is not a collusive one to confer on a court of the United States jurisdiction of a case of which it would not otherwise have cognizance. It must also set forth 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 shareholders, and the causes of his failure to obtain such action.'
Do the facts show a compliance with the rule, or rather that part of it which we have expressed in italics? The other parts of it are not involved.
It is the contention of appellant that the averments in the bill, as exhibited in the certificate, do not satisfy either the language of the rule or its substance. The argument is that (1) a shareholder, as a condition of his suit, must show that he has exhausted all the means within his reach to obtain within the corporation itself the redress of his grievances; that his efforts must be earnest, not simulated, and this must be made apparent to the court; (2) his failure to apply to the managing body of the corporation will not, in the absence of fraud, be excused by the fact that such managing body are also officers, directors, or employees of the corporation against which the suit is brought; (3) if the facts of this case excused from a preliminary demand upon the directors, the complainants were required to show 'that they could not have secured appropriate action by an appeal to the stockholders of the Susquehanna Company.' The appellees counter these contentions by asserting that (1) the case is not within the requirements of rule 94. 'The bill shows, under oath,' it is said, 'that the directors were hostile, and that demands upon them would be 'idle and nugatory.' . . .' (2) Complainants (appellees here) were not required to appeal to the stockholders of the Susquehanna Company because (a) the stockholders, under the charter of the company, could not grant relief; (b) even if such power existed, the stockholders 'could not oust directors from office before expiration of their terms.' And it is further contended that, at the time the suit was instituted, 'the Delaware Company controlled the stock vote of the Susquehanna Company.'
These opposing contentions present a not unusual case where the rule or principle of law is clear enough, but its application to a particular case is not so clear, and there is a contest of plausible constructions between which it is not always easy to decide. The purpose of rule No. 94 hardly needs explanation. It is intended to secure the Federal courts from imposition upon their jurisdiction, and recognizes the right of the corporate directory to corporate control; in other words, to make the corporation paramount, even when its rights are to be protected or sought through litigation. Cases in this court have indicated such right. But the directory may be derelict and the interests of stockholders put in peril, and a case hence arises in which the right of protecting the corporation accrues to them. Rule 94 expresses presses primarily the conditions which must precede the exercise of such right, but emergencies may arise in which the antagonism between the directory and the corporate interest may be unmistakable, and the requirements of the rule may be dispensed with; or, it is more accurate to say, do not apply. There are cases which illustrate these contingencies. As a typical case of the first kind, that is, which enforces the doctrine that the rights of the corporation must be asserted through the corporation. Hawes v. Oakland (Hawes v. Contra Costa Water Co.) 104 U. S. 450, 26 L. ed. 827, is cited. In that case Dodge v. Woolsey, 18 How. 331, 15 L. ed. 401, was declared to be the leading case on the subject in this country, and, examining the latter case, it was said that it did not establish, nor was it intended to establish, a doctrine different in any material respect from that found in the other American cases and the English cases. And the doctrine was said to be that, to enable a stockholder in a corporation to sustain in a court of equity 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 a foundation for the suit some action or threatened action of the managing board of directors which is beyond their authority; a fraudulent transaction, completed or contemplated, which will result in serious injury to the corporation or stockholders; 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 other stockholders; or where a majority of the stockholders themselves are oppressively and illegally pursuing a course inimical to the corporation or to the rights of the other stockholders. The court expressed the possibility that other cases might arise, but said 'the foregoing may be regarded as an outline of the principles which govern this class of cases.'
Determined by the principles enumerated, the court affirmed a decree sustaining a demurrer to a bill by a stockholder of the Contra Costa Waterworks Company, filed in behalf of himself and other stockholders against the company, its directors and the city of Oakland, to enjoin the city from taking, and the directors from permitting it to take, water from the works of the company without compensation. The bill alleged a request of the directors to take proceedings, and that they declined to do so. The bill also alleged injury to the corporation, diminution of dividends of the complainant and other stockholders, and a decrease of the value of their stock. Appellant adduces, as repeating and illustrating the doctrine of Hawes v. Oakland, the following cases: Dimpfell v. Ohio & M. R. Co. 110 U. S. 209, 28 L. ed. 121, 3 Sup. Ct. Rep. 573; Quincy v. Steel, 120 U. S. 241, 30 L. ed. 624, 7 Sup. Ct. Rep. 520; Taylor v. Holmes, 127 U. S. 489, 32 L. ed. 179, 8 Sup. Ct. Rep. 1192; Corbus v. Alaska Treadwell Gold Min. Co. 187 U. S. 455, 47 L. ed. 256, 23 Sup. Ct. Rep. 157. The latter case is quoted by appellant as putting unmistakable emphasis on rule 94, and that the facts of the case at bar do not satisfy its requirements. The object of the suit was to enjoin the board of directors of the corporation from paying a license tax levied upon the corporation under the provisions of an act of Congress. Corbus, the complainant in the suit, was a stockholder of the corporation, and alleged, as the reason of the suit by him, that he was unable to request the directors of the company to refuse to pay the tax or apply for the license required by reason of their great distance from him; but that he had made such request of the officers of the company residing in Alaska, and that they had refused to comply with the request. Of this allegation the court said that it showed no compliance with rule 94, and that complainant simply relied on the distance of the directors from where he resided as an excuse for not applying to them. 'We are of opinion,' it was said, 'that the excuse is not sufficient. He should, at least, have shown some effort. If he had made an effort and obtained no satisfactory result, either by reason of the distance of the directors or by their dilatoriness or unwillingness to act, a different case would have been presented; but to do nothing is not sufficient.'
A case sustaining the second proposition which we have mentioned, to wit, where the circumstances take the cases out of the rule, is Doctor v. Harrington, 196 U. S. 579, 49 L. ed. 606, 25 Sup. Ct. Rep. 355. The suit was brought by Doctor and others as stockholders of a corporation called the Sal Sayles Company to set aside a judgment obtained by the Harringtons against that company. The bill alleged that the suit was not collusive; that complainants were unable to obtain redress from the company or 'at the hands' of its stockholders. It further alleged that the board of directors of the corporation was 'under the absolute control and domination of the defendant, John J. Harrington, and that said Harrington, by reason of having the possession of a majority of the capital stock of said corporation,' likewise controlled 'the action of the stockholders.' It was further alleged that he refused to give any information with regard thereto, and declined to redress the wrongs of which complaint was made, or give complainants any opportunity to lay before the board of directors or the stockholders of the company the facts set forth.
It will be observed, therefore, that there was no compliance with the requirements of rule 94, as expressed in its letter. The efforts that were made to secure the action of the managing directors or trustees were not 'set forth with particularity.' Nothing was alleged but the domination of John J. Harrington and his control of the directors. What he did, in what way he exerted control, was not alleged. In other words, the bill seemed to show a case, not of compliance with the requirements of rule 94, but circumstances which excused from such compliance.
Coming to consider the effect of those allegations, we said that rule 94 contemplates that there may be, and provides for, a suit by the stockholder in a corporation, founded on rights which may be properly asserted by the corporation. And we further said that 'the ultimate interest of the corporation made defendant may be the same as that of the stockholder made plaintiff, but the corporation may be under a control antagonistic to him, and made to act in any way detrimental to his interest. In other words, his interests and the interests of the corporation may be subservient to some illegal purpose.' And we decided that these principles were satisfied by the allegations of the bill, and that such antagonism existed between the complainants in the suit and the directors of the corporation that they would 'suffer irremediable loss if not permitted to sue.' In other words, the complainants were in such a situation by reason of the power which Harrington possessed over those who managed the corporation—directors and stockholders—that appeals to them for action would have been futile. Prior cases were considered, including Dodge v. Woolsey and Hawes v. Oakland, and the conclusion reached was pronounced to be in accordance with their doctrine.
Do the facts in the case at bar present the same situation that was passed on in Doctor v. Harrington? The certificate shows the following facts: The complaint was filed June 12, 1906. The suit was brought to obtain an accounting for various sums of money, which it was alleged became due at intervals during a series of years from the Delaware Company to the Susquehanna Company as rental, or in the nature of rental, under a lease made in 1870. The Susquehanna Company was organized in 1850, and, under the law, its board of directors consisted of thirteen members, a majority of whom for many years before this suit was brought were also 'officers, directors, or employees of the Delaware Company.' Indeed, they served as its president, vice president, treasurer, secretary, directors, and general counsel,—officers of dominating influence, it must be said. It appears that certain of the persons occupying those offices did not, at the time the suit was brought, own or hold, in their own right, any shares of stock in the Susquehanna Company, but shares of stock in that company owned by the Delaware Company were transferred to each of them on the books of the former company by the latter company for the purpose of qualifying them as directors. The number of shares of the capital stock of the Susquehanna Company, and how held or owned, and the attitude of the owners thereof to the Delaware Company, appear in the certificate and need not be repeated.
The certificate recites the following: 'So far as appears from anything shown in the record, none of the directors or officers of the Delaware Company ever, before or after the bringing of this suit, treated the claim therein set forth otherwise than as one of doubtful validity, the payment of which was to be resisted.'
The situation was unique. The company whose interest it was to assert the right to payment and to demand it was under the control or could be influenced by the company whose interest it was to deny indebtedness and resist payment. And though there are allegations in the bill of contrary import, the good faith of the directors need not be questioned. They might, notwithstanding, be firm in their views,—firm to resist appeals against them. Their views seemed to persist through many years. At any rate, a situation was presented fully as formidable to the interest of stockholders in the Susquehanna Company as that presented in the Harrington Case. And it may be well doubted whether the directors of the Susquehanna Company, so being directors of the Delaware Company, and who, either from an apathy that endured through many years, could discern no right in that company to assert, or, through conviction of the absence of right, were the best agents to begin or conduct a litigation of such right. It was certainly natural enough that a stockholder should seek more earnest representatives, and consider that the directors 'occupied,' to use the language of Dodge v. Woolsey, 'antagonistic grounds in respect to the controversy' as to him. The attitude of the directors need not be sinister. It may be sincere. It was so in Chicago v. Mills, 204 U. S. 321, 51 L. ed. 504, 27 Sup. Ct. Rep. 286, and Ex parte Young, 209 U. S. 123, 52 L. ed. 714, 13 L.R.A. (N.S.) 932, 28 Sup. Ct. Rep. 441, and other cases. In this case it was certainly determined. It continued until after this suit was brought. Both the Delaware Company and the Susquehanna Company, then under 'the administration of the Delaware Company,' to quote from the circuit court of appeals, demurred to the bill.
But it is contended that efforts should have been made and alleged to move the corporation to action through a stockholders' meeting. In this contention there is again similarity to the Harrington Case. It was there alleged that Harrington controlled the action of the stockholders 'by reason of having possession of a majority' of the capital stock of the corporation. The control in the case at bar, therefore, may not have been as direct as in Doctor v. Harrington, but it was practically efficient. The stock of the Susquehanna Company consisted of 35,000 shares, of which the Delaware Company and its directors and officers held 8,840. The complainants and a so-called protective committee, a committee which, the certificate states, 'from and after December, 1905, had been opposing the administration of the Delaware Company upon the questions involved in this bill,' controlled 8,000 shares. The certificate also states that the 'entire 35,000 shares were held by 546 different persons, of whom 423 owned 50 shares or less, and of whom 383 resided in New York.' The proposition then is, that notwithstanding the power of 8,840 shares, held by the managers of both corporations, against 8,000 held by complainants and the protective committee, complainants were required by rule 94 to engage and organize all other stockholders, or enough of them to direct or change the corporate management; in other words, struggle for the control of the corporation with an adverse board of directors. And such struggle, appellant contends, 'could not be regarded as presumptively futile,' as there would be an appeal to 'the self-interest of the remaining stockholders;' and, it is pointed out, that the certificate recites that control through the stockholders was subsequently obtained. But it was obtained after the suit was begun and the antagonism of the directors was more clearly exhibited. The circumstances of this case preclude, therefore, an acceptance of appellant's proposition. Rule 94 is intended to have practical operation, and to have that it must, as to its requirements, be given such play as to fit the conditions of different cases. Therefore, considering that this case, by reason of its facts, falls within the principle of Doctor v. Harrington, we do not review the cases cited by appellees, wherein, it is contended, suits were justified by demand on the directors alone, nor consider whether stockholders have the power to compel directors to institute suits to which the directors are opposed.
We answer both questions certified in the negative.