Opinion ID: 2050852
Heading Depth: 1
Heading Rank: 2

Heading: Does the record show fraud upon the part of the Society, acting through its directors, whereby they induced the adoption of the Amendment?

Text: In February 1955, at the annual meeting of the stockholders of the Society, the treasurer of the Society, William F. Noe, gave a report which pictured the Society to be in dire financial distress and recommending some plan to modify the cash redemption of Class A stock, and to provide for outside management of the business of the Society and still keep control in the hands of members of the faith. At this time a special committee was appointed to formulate a preliminary plan leading to such end. William F. Noe, treasurer, and Louis R. Marz and Harry A. Geiger, directors, were appointed. The proposed amendment was formulated by the committee with the assistance of Counsel which it employed. This was approved by the directors on October 5th 1955. As was required by Section 491.20, Code of Iowa, I.C.A., a 60 days notice of a special meeting of the Class A stockholders was sent out on Oct. 10, 1955 with December 12, 1955, being the date set for the meeting. Attached to the notice was a brief statement of the contents which makes no mention of the 300,000 Class B stock provision but stresses the financial status of the Society and the provision for eliminating the cash redemption feature. Also attached was a personal letter from H. G. Moershel, President of the Society and a trustee and president of the Amana Church Society, endorsing the Amendment as a step toward bettering the financial status of the Society. The Committee arranged three special meetings of Class A stockholders to be held on October 21, 24 and 25 for the purpose of discussing this proposed amendment. Mr. Noe and two directors attended with Noe apparently being in charge. No official record of the proceedings at these meetings was made but it appears that Noe read, at each meeting, what was clearly a carefully prepared statement and in which the financial status of the Society was stressed with emphasis upon the redemption feature. Nowhere in the paper he read is there any reference to the proposed 300,000 shares of Class B stock and its possible effect upon the future control of the Society, nor did any other director there attempt to explain it. In commenting upon the question of sale of Class A stock by the owners thereof, the statements read were clearly confusing if not deceptive. At these meetings it was mentioned that an amendment to the proposed amendment, dealing with issuance of Class B stock, would be offered by any stockholder but no copy was distributed. It appears that at least four members of the Society, all being managers of stores or farms, were opposing the amendment and circulating petitions against it. They were informed that they should not discuss it until the December 12th meeting. Mr. Moershel, after further study of the amendment, had fear that under it the control of the Society might pass into the hands of strangers and wrote a letter to the stockholders to such effect. He asked permission to send it out which was refused by the Directors. At the time harsh words were exchanged and he was called a Benedict Arnold. Some of the directors arranged for a deputy sheriff to be at the December 12th meeting, trouble being anticipated. At such meeting only Class A stockholders were admitted other than David C. Bleakley, the attorney who prepared the Amendments and who, according to the minutes gave an inspirational talk. Each stockholder signed his name as he entered the meeting. Voting was by roll call, a request for a secret ballot being voted down. A request by a stockholder to permit another attorney to be present was refused. Two requests that consideration of the amendment and the amendment to the amendment, which was offered at the meeting by one of the directors, be postponed to allow further study was denied upon Mr. Bleakley's statement that such was not practical or necessary. There is a dispute in the record as to whether Mr. Bleakley, at an October meeting in response to a question as to future control of the Society, said it would not go outside or whether he said it would not so pass so long as Class A stockholders did not exchange for Class B stock, or, if having done so, did not sell it. No reference or statement as to the 300,000 Class B shares with voting rights and freedom to sell. The amendment and amendment thereto was adopted by a vote of 377 yes to 7 no with some not voting. The rule is well settled that directors of a corporation stand in a fiduciary relationship to the corporation and to its stockholders. While perhaps not strictly trustees, they are required to act in the utmost good faith when dealing with the stockholders. 13 Am.Jur. Corporations, sec. 997; Anno. 24 A.L.R.2d 75; Gord v. Iowana Farms Milk Co., 245 Iowa 1, 60 N.W.2d 820. The instant case is not the usual situation where a director has personally profited at the expense of the corporation and stockholders and damages are sought based thereon. The instant case presents a new proposition in that it is claimed, in effect, that the directors, by taking advantage of the faith and confidence imposed in them by the great majority of Class A stockholders, procured the adoption of an Amendment to the Articles of Incorporation, which concerns the very vitals of the Society, without a full disclosure to them of the full impact thereof. It is true, as contended by defendant, that no duty rested upon the directors to do other than furnish a copy of the proposed amendment to the voters at least sixty days prior to the voting date. Had they stopped there a very different situation might well have existed, but they did not so stop. Three meetings were called of the Class A stockholders for the stated purpose of giving them full information relative to the amendment. One cannot read the prepared statement read at such meeting without appreciating the absence of any information upon the vital question of future control of the Society and the effect thereon of the 300,000 Class B shares of stock. Having undertaken such a duty, it was incumbent that it be performed fully and specifically. It was not so done. That a full and fair discussion of the Amendment and Amendment thereto was desired by the directors is belied by the fact that pressure was placed upon stockholders in the manager group to prevent outside discussion and petitions against adoption thereof; by the refusal of the directors to sanction a letter from Mr. Moershel, calling attention to the chance of control passing into the hands of strangers, being sent the stockholders; by the fact that the amendment to the proposed amendment, which directly concerned this proposition, was not revealed until the December 12, meeting, although it was prepared and approved by the directors in November; by the fact that delay of the voting date to allow more study of the amendment to the amendment was denied; and by the fact that outside counsel was refused attendance at the meeting. If dealing with the ordinary corporation for pecuniary profit, the foregoing facts might have a more insignificant meaning, but one cannot read this record and the case of State v. Amana Society, 132 Iowa 304, 109 N.W. 894, 8 L.R.A.,N.S., 909, cited and quoted from by the trial court, without a realization of the dependency of the average Class A stockholder upon their leaders in matters not only spiritual but temporal. As stated in the record, but a small percentage of such stockholders have had schooling beyond the eighth grade but could intelligently vote upon the amendment if it was properly explained to them. Equity and good conscience demands that the amendment adopted December 12, 1955, be held to be inoperative, at least until such time as it may be adopted by the Class A voters after being fully and fairly informed thereon. State ex rel. Weede v. Bechtel, 244 Iowa 785, 56 N.W.2d 173. The trial court was in error in finding no fraud upon the part of the stockholders. By fraud we do not infer personal gain or intentional dishonesty, but perhaps an over zealous attempt to adopt the amendment based upon the confidence knowingly placed in them; and which we think, under this record, was unduly taken advantage of. While not strictly in point, see Bosch v. Meeker Co-op. L. & P. Ass'n, 253 Minn. 77, 91 N.W.2d 148. III. One other proposition is presented and it concerns the order of the trial Court restricting the allowance of attorney fees for plaintiffs' attorneys to services rendered on the interlocutory appeal, and reserving for future hearing, proof as to value thereof. Plaintiffs contend error in the restriction to the interlocutory appeal only and not the entire case. Defendant asserts error in the allowance of any fees. This action is clearly a stockholders derivative action brought for the purpose of preserving two heretofore fundamental attributes of corporate structure, or in fact, one attributethe keeping of the corporation a close one, by confining all corporate control in hands of members of the instant religious belief, by making Class A stockholders the speaking representatives of the faithful. While it is true, the contractual right to cash redemption amounts to a benefit for the recipients thereof, of more or at least of equal importance is that, by this means, control remains in the hands of the members of the religious group. That this has been a matter of prime importance to the Society from the start thereof down to at least 1952 cannot seriously be denied. It still appears to be a prime corporate attribute, at least in the eyes of some stockholders. The legal questions involved in the allowance of attorney fees in actions of this kind, are fully and clearly set forth in State ex rel. Weede v. Bechtel, 244 Iowa 785, 56 N. W.2d 173, and authorities therein set forth; see also, Bosch v. Meeker Co-op. L. & P. Ass'n, 257 Minn. 362, 101 N.W.2d 423. The trial Court recognized plaintiffs' right to attorney fees for services in the interlocutory appeal even though it nullified the results thereof. Those, this court is now restoring and in addition, has granted further relief by nullifying the amendment in toto and thereby reserving the corporate control in hands of the Class A stockholders. The amount of fees allowable depends upon the substantial benefit gained by the corporation or its stockholders and the time and skill of the attorneys. This is a matter for the trial court to take testimony upon and determine. The cause is remanded for a decree not inconsistent herewith. Reversed and remanded. GARFIELD, C. J., and OLIVER, THOMPSON, PETERSON, THORNTON and SNELL, JJ., concur. LARSON, J., takes no part. BLISS, J., not sitting.