#### James J. Phelan, Plaintiff, *v.*The Edison Electric Illuminating Co. of Brooklyn et al., Defendants.

(Supreme Court, New York Special Term,

June, 1898.)

Corporations — Offer to stockholders of another corporation to purchase their holdings — Minority stockholders — Ultra vires.

An agreement by which an electric illuminating company offers the stockholders of an electric light company to purchase their stock in the latter company at 100 per cent, above par, upon the deposit with a trustee óf a majority of the holdings, and to pay for the stock in cash or by bonds of the electric illuminating company to be secured by a second mortgage on its property, and providing for a substantial forfeit if the electric illuminating company fails to perform, is not illegal, as section 40 of the Stock Corporation Law (Laws of 1890, chap. 546), permits one corporation to purchase stock directly from the stockholders of another; and hence a minority stockholder of the electric light company, who proceeds- merely upon the assumption that it is a scheme to ruin the business of that company, is not entitled to an injunction restraining the electric illuminating company from performance and from executing its proposed second mortgage. The court assuming that, if such a mortgage was executed, the assent thereto of two-thirds of the stockholders would be procured, as required by statute.

Motion by plaintiff for injunction *pendente lite.*

William F. Sheehan and Charles A. Collin, for plaintiff.

Edward M. Shepard, Paul D. Cravath and Frank Harvey Field, for defendants.

Bischoff, J.

The objeet of the action and of this motion is to restrain the defendant, the Edison Company, from carrying out a proposed agreement, offered to such stockholders of the Municipal *110Electric Light Company as desire to participate, whereby the Edison Company - agrees to purchase the holdings of such stockholders, if deposited with a designated trustee before a specified date, and to make payment for the stock thus purchased, at an advance of 100 per cent, over par value, either in cash or by delivery of bonds secured by a second mortgage upon the property of the Edison Company. The avowed desire of the purchasing corporation is to obtain a majority of the stock of the Municipal Company, and the proposed agreement is to be of effect only in the event of the deposit with the trustee of a majority of-the holdings. The agreement provides, also, for the payment of $15,000 by the Edison Company to the subscribing stockholders, should it be unable to perform its part of the undertaking at the date agreed upon.

The plaintiff is a stockholder of the Municipal Company, and seeks to restrain the prospective parties to this proposed agreement* from entering into it upon the ground that the Edison Company, a business rival of the Municipal Company, has no purpose in the whole transaction other than to' annihilate the latter’s business, when, in control of its affairs, and thus to render worthless the stock of which the plaintiff and other minority and dissentient stockholders are possessed. ■

By the preliminary injunction, as originally framed, the whole transaction was enjoined in the manner prayed for by the complaint, but by a subsequent modification of the order, the injunction was restricted to the matter' of any direct agreement between the Edison Company and the Municipal Company, leaving the former and the stockholders of. the latter at liberty to enter into and carry out any agreement or agreements for the purchase and sale of the stock in' question.

The proposed agreement, brought into controversy upon this motion, does not purport to be, nor does it involve, any contract to which the Municipal Company is or may be a party, and it is not apparent that the continuance of the injunction could do the defendants much harm, but it may be that the effect of the order, as it how stands, would be to enjoin the Edison Company from making its proposed mortgage, since thus much of the original order appears, perhaps,- to have been retained, and since the plaintiff moves that the original injunction be reinstated, the matter should properly be determined upon its merits.

*111■ So far as the injunction proceeds' upon the theory that the making of the mortgage by the Edison Company to secure the purchase price of this stock would be *ultra vires,*because not apparently authorized by a two-thirds vote of the company’s own stockholders, the order cannot be sustained.

The agreement, as proposed, is not based upon the intended making of any mortgage by the Edison Company which would be invalid, so far as appears, and it is not to be assumed that the company intends to act without observing the requirements of law. Moreover, it is quite clear that the assent of two-thirds of the stockholders to the mortgage is contemplated by the proposed agreement as a fundamental necessity, since the possibility of the Edison Company’s inability to complete this part of the agreement is set forth and provided for by the condition with regard to the payment of damages.

That the directors of the Edison Company had power to enter into the agreement, in this regard, and that the agreement, so far, was perfectly valid, was held by Mr. Justice Scott as against an attack by a stockholder of that company, whose position was indeed stronger than that of this plaintiff, and I have no hesitation in concurring in the views expressed by him in that case. Leeman v. Edison Electric Ill. Co., N. Y. Law Jour., May 3, 1898.

As to the nature of the agreement generally, there can be no doubt that the Edison Company has legal authority to purchase directly from the stockholders of the Municipal Company any or all of the stock of the latter, if desired (Stock Corp. Law, § 40), and if it should purchase a majority of that stock, naturally it would have a controlling vote in the matter of the latter corporation’s management.

Legally, then, the Edison Company is authorized to obtain control of the Municipal Company’s business policy, if it is able to acquire the stock; but, according to the plaintiff, equity should intervene upon the ground that when the purchasing corporation’s desire to obtain a majority of this stock is confessed, a sinister motive is disclosed, and that the court is to assume the sole object of the purchase to be the destruction of the purchased company’s business.

The whole matter, for the purposes of the plaintiff’s case must be said to rest upon assumptions, since the only direct proof upon the question of intent is found in the allegations, made in behalf of the Edison Company, that the latter’s object is to protect and preserve *112the business and property of the Municipal Company and to fully utilize the facilities possessed by both companies for furnishing. electric light within the territory in question. Upon the matter of probabilities, I cannot find from the facts that it would be to the interests of the Edison Company to wreck the- Municipal Company’s business rather than to continue it, with the greater profit which might be expected to result from the combination of the respective plants and the lessening, so far, of active competition.

The plaintiff’s apprehensions, and the surmises upon which he bases them, cannot afford warrant for the court’s interference in such a case as this, where the good faith of the purchasing corporation and of the stockholders, whose stock is offered for sale, is directly alleged and is not necessarily impugned by the circumstances of the case.

The court is not to balance the probabilities to a nicety for the purpose of determining whether the proposed transaction should or shotdd not be approved. The question is whether or not the Undertaking must clearly be subversive of the interests of the minority stockholders and consistent only with an obvious disregard of their rights.

As was said by Peckham, J., in Gamble v. Q. C. W. Co., 123 N. Y. 91, at page 99 : “ Generally, the rule must be that in such cases the will of the majority shall govern. The court would not • be justified in interfering even in doubtful cases, where the action of the majority might be susceptible of different constructions. To warrant the interposition of the court in favor of the minority shareholders in a corporation or joint-stock association, as against the contemplated action of the majority, where such action is within the corporate powers, a case must be made out which plainly shows that such action is so far opposed, to the true interests of the corporation itself as. to lead to the clear inference that no one thus acting could have been influenced by any honest desire to secure such interests, but that he must have acted with an intent to sub-serve some outside purpose, regardless of the consequences to the company and in a manner inconsistent with its interests. Otherwise the court might be called upon to balance probabilities of profitable results to-arise from the carrying out of the one or the other of different plans proposed by or on behalf of different shareholders in a corporation, and to decree the adoption of that line of policy which seemed to it to promise the best results, or at least to enjoin the carrying out of the opposite policy. This is no business for any court to follow.”

*113There is no question that if the plaintiff’s fears were shown to be founded in fact the injury suffered or threatened should and would be made the basis of equitable intervention. So much is held by the authorities cited in support of this motion, but the rule above quoted has not been departed from, so far as can be found, and its soundness is obvious and irresistible. If the matter eventuates, as the plaintiff prophesies, he may well be relieved in season,’but upon the present motion the proof of a threatened, inequity, as sought to be derived only from the admitted circumstances, is quite insufficient.

Motion denied and preliminary injunction vacated, with $10 costs.

Motion denied, and injunction vacated, with $10 costs.