Court Opinion

ID: 6253839
Source: CourtListenerOpinion
Date Created: 2022-02-17 21:24:00.520782+00
Date Added: 2024-06-11T08:59:29.820657
License: Public Domain

Opinion by
Mr. Justice Fbazeb,
Defendants have appealed from a decree entered conformably to a bill in equity brought by Joseph W. Glenn as a stockholder of the Kittanning Brewing Company on behalf of himself and other stockholders joining therein asking the court to declare illegal and invalid a certificate for fifty shares of the capital stock of the corporation issued to F. B. Stage, one of the defendants, and a member of the company’s board of directors, and for an order that such certificate be surrendered to the company for cancellation and Stage enjoined from voting the stock or making transfer thereof. A preliminary injunction was subsequently made perpetual and a decree entered in accordance with the prayers of the bill.
. The main facts upon which the disposition of the case depends are not in. dispute..'' The board of directors' of the brewing company was composed of five members consisting'of the Original plaintiff Glenn, Harry G. Luker, *514who intervened Avith others as plaintiffs, and the three defendants. The capital stock of the company consisted of one thousand shares of the par value of $100 each, of Avhich seven hundred and fifty had been issued. The company carried on its business successfully for approximately ten years, gradually increasing its plant and equipment and accumulating a surplus until July, 1916, when the book value of its outstanding stock was $322.79 per share. In the meantime, by reason of differences among the stockholders, two factions had arisen. Plaintiff Glenn and Luker, two of the board of directors, represented one faction and the defendants Reese, Stage and Jessop, the remaining members and the majority of the board, the other. Plaintiffs faction though a minority of the board, owned or controlled a majority of the stock, consisting of 381 of the 750 shares outstanding; 359 shares were controlled by defendant faction and the remaining ten shares Avere in the hands of neutral parties. On July 7, 1916, at a regular meeting of the board of directors, attended by the thr-ee defendants only, a resolution was adopted authorizing the manager, Stage, “to sell any portion of the 250 shares of the treasury stock at a price not less than par, one hundred dollars per share, for the purpose of paying off the indebtedness of the company.” Notice of this meeting Avas not required to be given the directors, the court however found the secretary made an honest effort to notify the absent members by telephone, and that such notice was actually received by Glenn.
Agreeably to the resolution, and within a Aveek after the meeting, fifty shares of the company’s stock were issued to Stage at par. These shares gave defendants the control of the company. Defendants give as reason for the issuing of the additional stock, a demand by the Safe Deposit & Title Guaranty Company for payment of a demand note of the brewing company for six thousand dollars held by the guaranty company.
The findings of the court below, and the testimony in *515the case, show the brewing company intended to become endorser on the note of one McGregor for six thousand dollars to enable the latter to purchase a hotel property. The McGregor note was to be discounted by the guaranty company and its president had informed the brewing company that before such endorsement would be accepted the six thousand dollar demand note must be paid. No other demand was made for payment of the note. As a matter of fact, the trust company held, as collateral, bonds of the brewing company to the extent of eight thousand dollars and the brewing company also held in its treasury an additional number of its corporate bonds acceptable as collateral, and available for the purpose of raising funds for any legitimate purpose required by the company. The brewing company was under no obligation to become surety on the proposed loan, and did so merely as a matter of business policy, with a view to procure a new customer for its products. No opportunity was given other stockholders to subscribe proportionately for the purchase of the fifty shares of the stock issued, and they were without knowledge of the transaction until more than a month after the issue had been made. No reason on account of financial conditions of the company was apparent for issuing the additional stock and the court found the real purpose of the transaction was to place the control of the company in the hands of the faction represented by the defendants, and in its opinion stated as follows: “While ostensibly, the purpose in selling the said fifty shares of the unissued capital as aforesaid to Stage, was, as defendants contend, to pay the $6,000 note of the company, then owing to the Safe Deposit & Title Guaranty Company* was that in truth and in fact the real purpose? The circumstances, the surroundings, the existing conditions, the factional troubles, the singleness of purpose pursued, as shown and fairly deducible from the evidence, clearly point to the conclusion that the real, underlying purpose was to obtain control of the corporation.......We *516are confirmed in this view, when we see that no obligation rested upon the corporation to assist McGregor by loaning its endorsement to him, and that under all the facts in the case the loan could not be regarded as a desirable one from the standpoint of the security. Aside from said loan, there would have been no call from the bank — at least that is a fair inference from the evidence, for payment of the $6,000 note. However, if there had been necessity to pay off said loan, why should a sale of the unissued stock be resorted to when 21,000 dollars’ worth of the first mortgage bonds lay in the treasury of the company, available for sale or for collateral to obtain loans, and another $8,000 worth then up as collateral to secure said $6,000 note, which at once would be available upon payment of the note? It is not at all apparent that the financial condition of the company, at the time, demanded the sale of the said stock.”
The findings of fact by the court below are amply supported by the testimony in the case and will therefore not be disturbed: Myers v. Consumers’ Coal Co., 228 Pa. 444; Hull v. Delaware & Hudson Co., 255 Pa. 233. Nor does error appear in the legal conclusions on the facts found. No rule is better established than that the directors of a corporation stand in the position of trustees for the entire body of stockholders, and while stock, owned by the director is his individual property to be dealt with as he sees fit in the same manner and to the same extent as other stockholders, yet, when he acts in his official position, he is acting not merely as an individual but as representative of others and is prohibited from taking advantage of Ms position for his personal profit or to reap personal benefit to the detriment of the stockholders whom he represents. Whenever there is an intimation that a director has violated the duty thus, imposed upon him by virtue of his office, or has failed to act fairly and honestly toward those whom he represents, the lavt ceases • to look at the mere form of the device or means employed and “pierces through *517the surface and seizes upon the evils which lie within”: Tenth National Bank of Philadelphia v. Smith Construction Co., 242 Pa. 269; Hechelman v. Geyer, 248 Pa. 430.
The circumstances under which the stock in controversy was issued and purchased by one of the directors who voted for the resolution, were adequate to raise a doubt of the good faith of the directors. Assuming the resolution was proper and there was sufficient reason for issuing the stock, the directors who were present at the meeting had no right to subscribe for the new issue without first notifying all stockholders and affording them an opportunity to take up the stock in proportion to the amount of the shares already held by them. This is especially true, in view of the long standing dispute between the two factions and the attempt by both to obtain a controlling interest. The directors, as a board, had knowledge of this fact, and there were consequently particular reasons requiring them to act impartially and in the interest of the stockholders as a whole. The former were bound to give notice and afford the latter an opportunity to subscribe for the stock on equal terms and it is immaterial that such additional issue was made long-after the business of the company was begun: Morris et al. v. Stevens et al., 178 Pa. 563; Electric Co. v. Electric Co., 200 Pa. 516; Cook on Corporations, Section 286.
We cannot agree with the contention that a court of equity is without jurisdiction to set aside the transaction complained of and that plaintiffs’ remedy, if any, is by action at law for damages. Where the question of control of. the corporation is involved, the remedy at law for damages for an inqproper sale of stock may be entirely inadequate, and where an averment of fraud on the part of those having management of the company appears, as against the rights and interest of the stockholders, a court of equity has jurisdiction to inquire into the transaction and make such decree.as the circumstances may warrant: Electric Co. v. Electric Co., supra.
The fact that no previous demand was made by plain*518tiffs on the corporation to take action in the matter is of no importance under the facts in this case. Although the general rule is that a stockholder is not warranted in proceeding as an individual without a formal demand and refusal of the corporation to bring proper action: Commonwealth Title Insurance & Trust Co. v. Seltzer, 227 Pa. 410; jet plaintiffs are not required, either in law or equity, to do a vain or useless thing. The wrongdoers in this case were the majority of the board of directors and as they committed the wrong complained of, it is scarcely reasonable to suppose a demand upon them to bring corporate action would have produced results. Plaintiffs were therefore justified in instituting proceedings in their own name without first demanding action on the part of the corporate officers: Treat v. Pennsylvania Mutual Life Insurance Co., 203 Pa. 21.
The decree of the court below is affirmed.