ERVIN II. OREGON RY. &: NAV. CO.
Co. and another.
(OVl'cuit Court, S. D. New York.
May 27, 1886.)
RELATION OF MAJORITY AND MINORITY-
When a number of stockholders combine to constitute themselves a maJority, in order to control the corporation as they see tit, they become, for all practical purposes, the corporation itself, and assume the trust relation of the corporation towards its stockholders; and, if they seek to make profit out of it at the expense of those whose rights are the same as their own, they are unfaithful to the relation they have assumed. and are guilty, at least, of constructive fraud.
Although the minority of the stockholders cannot complain because the majority have dissolved the corporation, and sold its property. they may justly complain where the majority, while occupying a fiduciary relation towards the minority, have exercised their powers III a way to buy the prop· erty for themselves, and exclude the minority from a fair participation in the fruits of the sale. Under the rule of equity which entitles those whose property has been mis· applied by an agent or fiduciary to follow it into any form in whi.ch it has been converted. and impress it with a trust whenever its identity ca I be traced, or. at their election, to recover the value of the property in any form into which it has been transmuted, where the majority of the stockholders merge the business and property of the corporation with other business and properties belonging to themselves and embark the whole in a joint venture and sell the corporation's property to themselves, the inquiry, in a question with the minority, is, what IS the property worth to the purchasers as a constituent of their general properties?
SAME-FoLLOWING TRUST FUND.
The minority of the stockholders have an equitable lien, to the extent of their interest, upon the property of the corporation which has been sold by the majority to themselves, in breach of their fiduciary relation. Actors in the transaction by which the minority of the stockholders have suffered, are proper parties to suits at their instance. '
In Equity. William Allen Butler and Thomas H. Hubbard, for complainants. John F. Dillon and Artemus H. Holmes, for defendants. WALLACE, J. When this case was before this court on demurrer, (20 Fed. Rep. 577,) the questions of law arising upon the allegations of the bill were fully considered. It was then determined that, although the majority of stockholders of the Oregon Steam Navigation Company were authorized by the statutes of Oregon, under which the corporation was organized, to dissolve the corporation. dispose of its property, and divide the proceeds despite the opposition of the minority stockholders, and although the majority exercised this authority in the mode which the organic law of the corporation permitted, nevertheless they had no right to exercise their control over the corporate management for the purposes of appropriating the property or its avails to themselves, to the exclusion of a minority, or with. out reiJdering them a fair return. v.27F.no.9-40
The case is now here upon the proofs, and the following facts appear: At a meeting, regularly convened, of the stockholders of the Oregon Steam Navigation Company, on the thirty-first day of March, 1880, the sale and transfer of all the property and franchises of the corporation to the Oregon Railway & Navigation Company, and the dissolution of the first-named corporation, were authorized by a vote of a large majority of the shares into which the capital stock of that corporation was divided; and the directors were requested to take the necessary formal action for the purpose. The directors took action; the sale and transfer were concluded; the corporation received, as the purchase price, $2,300,000; the directors declared a final dividend of 46 cents on the dollar per share, payable only upon the surrender by stockholders of their certificates for cancellation; and the corporation was formally dissolved. This is the sale which is complained of. These proceedings were brought about chiefly by the instrumentality of the defendant Villard, who, early in the year 1879, conceived the scheme of amalgamating the properties of the Oregon Steam Navigation Company, the Oregon Steam-ship Company, and the Oregon & California Railroad Company, and consolidating them under one management, to control substantially the carrying business of Oregon and part of vVashington Territory, which had theretofore been controlled by these transportation companies. In February, 1879, he formed a syndicate for the purchase of the property of the Oregon Steam-Ship Company. This company, which was an Oregon corporation, then owned and operated a line of steam.ships plying between San Francisco and Puget sound, and other property appurtenant to its business. Its capital, which was originally $3,000,000, had been reduced to $1,000,000, and its $2,000,000 of outstanding mortgage bonds had been pledged for a loan of $1,200,000. The syndicate bought the franchises and property for $350,000, and took the assets of the company subject to a debt of $500,000, to which sum its creditors had consented to reduce their claims. Villard became its president. At this time the Oregon Steam Navigation Company, also an Oregon corporation, owned and was operating a fleet of steam·boats, barges, wharf property, and real estate, by which it conducted a water transportation business on the Columbia, Snake, and Willamette rivers, in Oregon. It also controlled and operated two short portage railroads along the Columbia river, by means of which freight and passengers were transported at points at which the river was not navigable. It had a capital stock of $5,000,000, divided into 50,000 shares; it had no bonded debt; its properties ahd equipment were being constantly improved; and its financial condition was healthy and prosperous. Although, prior to 1878, its dividends had been irregular and small, its business had so largely increased that in that year H paid to its stockholders dividends amounting to lOt per cent.
ERVIN 11. OREGON RY. & NAV. 00.
In May, 1879, Villard made a contract with one Ainsworth (who for several years had been buying up the stock of the Oregon Steam Navigation Company at low prices, and then owned or controlled a majority of the shares) to purchase of him a majority of the shares of the company, agreeing to organize a new corporation, with a capital stock of $6,000,000, which was to create its mortgage bonds for $6,000,000. By the contract between Villard and Ainsworth the new corporation was to acquire the property of the Oregon Steamship Company for $2,000,000 of its stock and bonds, and was also to acquire the property of the Oregon Steam Navigation Company for $6,500,000 of its stock and bonds, and Ainsworth was to receive, for the stock sold by him to Villard, 50 cents per dollar on its shares in cash, and 20 cents in bonds and 30 cents in stock of the new company at par. June 13, 1879, the new corporation contemplated by the agreement between Villard and Ainsworth was organized by the name of the Oregon Railway & Navigation Company, its articles of association being filed at that time pursuant to the laws of Oregon. The articles of association authorized the purchase of the property of the pre-existing corporations, and the stock of those companies. The new corporation created $6,000,000 of mortgage bonds, bearing 6 per cent. interest, and its capital stock was $6,000,000. June 27, 1879, the new corporation, by the action of its directors, set apart $2,000,000 of its bonds and stock, to acquire the propel'ty and pay the debts of the Oregon Steam-ship Company; also $3,557,000 of its bonds and $3,255,100 of its stock to acquire the stock of the Oregon Steam Navigation Company under the contract made between Villard and Ainsworth; and the next day Villard assigned that contract to the new company. Shortly afterwards the company acquired that stock, and July 7, 1879, cre4ited Villard with the price of 40,712 shares of the stock, at $6,615,700, as against the bonds and shares which had been set apart. Subsequently the new corporation acquired 5,736 additional shares of stock of the Oregon Steam Navigation Company under an arrangement known as the "Harriott and Noyes contract." Soon after the new corporation had acquired a majority of the stock of the Oregon Steam Navigation Company it assumed the management of the business of that company by the election of officers and directors, and the selection of agents, who were in its own interests. The Ainsworth party were identified in interest with Villard, and the syndicate which had organized the new corporation; and some of those who belonged to the combination began to represent the future prospects of the Oregon Steam Navigation Company as unfavorable, because its traffic would be depleted by a railroad about to be built by the new company. In the mean time they were purchasing such shares of stock as could be bought at satisfactory prices. During the first five months after the organization of the new corporation, commencing in July and ending December 1, 1879, the net earnings derived from its business operations were $699,864. Of
these earnings $559,650 were derived from the interest of the new company in the earnings of the Oregon Steam Navigation Company, including its appendage the Walla Walla & Columbia River Railroad Company. During the same period the total net earnings of the Oregon Steam Navigation Company, and including its share of those of the Walla Walla & ColumbiaRiver Railroad Company, were $687,807, while the earnings of the Oregon Steam-ship Company, the other constituent of the properties of the new corporation, during the same period, were $135,214. In a report made by the president to the stockholders of the Oregon Railway & Navigation Company, of the date of January 3, 1880, it is stated that a former estimate made by Villard that the annual earnings of the several companies to be controlled by the new cor· poration would be sufficient to pay the interest on $6,000,000 of its mortgage bonds, and a dividend of 10 per cent. on $6,000,000 of its capital stock, "had bAen more than realized by the traffic of the half year just closed, and that the prospects of the company for 1880 were even more promising than the results of the last six months would indicate. Early in February, 1880, the directors of the new corporation made a formal proposition to the directors of the Oregon Steam Navigation Company to purchase the property and franchises of that company at a valuation to be agreed upon between the two boards, or by two appraisers, one to be selected by each company. Thereupon the directors of the Oregon Steam Navigation Company adopted a resolution setting forth that the new company, being about to construct railroads which would render the most profitable part of the business afthe Oregon Steam Navigation Company nearly worthless, and would greatly depreciate the value of its property, had made a proposition that was greatly to the advantage of the Oregon Steam Navigation Company, and that it was advisable that such proposition be accepted, subject to ratification at a stockholders' meeting; and it was accordingly resolved to accept the proposition, and one Brooks was appointed an appraiser on the part of the corporation. One Biles was selected by the new company as its appraiser. Within a few days the two appraisers agreed upon the valuation of $2,300,000. These proceedings were followed by the meeting of the stockholders of the Oregon Steam Navigation Company of March 31, 1880, at which the sale was ratified, and the dissolution of the corporation voted. At that meeting 40,552 shares were voted by the new company in the name of its trustee; 5,161 shares were voted in the names of Harriott and Noyes, being stock actually belonging to the new company; and 536 shares were voted by other persons in the interest of the new company. At the time of the making of the Ainsworth contract, the property of the Oregon Steam Navigation Company was scheduled, as a basiB for the purchase, at a valuation of $3,320,000, exclusive of the franIt