Court Opinion

ID: 8065901
Source: CourtListenerOpinion
Date Created: 2022-09-09 06:02:14.910284+00
Date Added: 2024-06-11T16:38:12.102024
License: Public Domain

Kellogg, J. (dissenting):
Five men signed and filed articles of association, forming the United States Express Company, as a joint stock company, April 24, 1854, having capital stock of $500,000, divided into shares of $100 each. The subscribers took all the stock. The association was to continue for ten years from Hay first following, unless sooner dissolved by law or by the directors. It was provided by the articles that the entire management of the business was vested in the directors, and that the association should continue notwithstanding the death or the transfer of the stock of any of the stockholders; that no shareholder, other than one directly authorized by the board of directors, could use or sign the name of the company under any circumstances or pretext whatsoever, and that the directors might increase or diminish the number of directors, might increase the capital stock, might levy assessments upon the stockholders to meet liabilities and, by an amendment of the articles, the directors might from time to time extend the lifetime of the association. The stockholders thus became liable for the debts incurred by the association in the same manner as if they were partners, but they had surrendered all control of the business and of the money they had invested therein to the directors. Without power to act, the stockholders yet were interested (1) in the profits which might be paid to them from time to time by action of the board of directors; (2) in a distribution of the assets, if the directors should choose to liquidate the business; (3) in the enhancement and depreciation in value of the stock by the conduct of the business by the directors; and (4) in escaping personal liability on account of the acts of the directors. They were, therefore, vitally interested in the personnel of the directors who should control their business and determine the time for which such control should continue. The association, in fact, was a copartnership, with many of the *392characteristics of a corporation. In so far as the relations of a stockholder to the association itself are concerned, aside from the liability for debts, it is difficult to draw any substantial distinction between an association and a stock corporation.
The only question, however, of interest here is whether a majority of the stockholders may elect the directors, or whether the directors may for all time designate their successors.
The articles of association were evidently intended to conform to chapter 245 of the Laws of 1854, passed April fifteenth. That statute provided that where the property of a joint stock association is represented by shares of stock, it may be lawful to provide in the articles that the death of a stockholder or the assignment of his stock shall not work a dissolution of the association, and that the association shall not be dissolved except by judgment of a court for fraud in its management, or for other good cause to such court shown, or in pursuance of its articles of association, and “that the shareholders may devolve upon any three or more of the partners the sole management of their business.” The agreement provides at article 4 that the property, business and good will of the company “ shall be vested in, controlled and managed by a board of five directors, each of whom shall be the owner and holder in his own right of at least one hundred shares therein, to be chosen by the shareholders, as is herein provided; and Daniel 3ST. Barney, Elijah P. Williams, James McKaye, Ashbel H. Barney and Thomas M. James shall constitute the first Board of Directors, and they are hereby chosen and appointed each and every of them such directors to hold their offices for and until others shall be chosen in their stead, as is herein provided. It being however hereby expressly understood and agreed that in case of a vacancy occurring in said Board by death, resignation or otherwise, prior to a call for an election by the stockholders, the same may be filled by said Board of Directors, who may elect by ballot any stockholder eligible under the provisions herein contained.”
Article 5 provides that when two-thirds m amount of the shareholders unite in a written request for an election of one or more directors, the secretary shall call a meeting of stock*393holders for that purpose, hy sixty days’ notice, stating the time and place of the meeting.
Article 8 authorizes the hoard of directors to change, alter and fix the number of directors, and in case of an increase thereof, or otherwise, to fill the vacancy thereby created in the manner thereinbefore specified.
In the year 1862 there was an election of directors; no other election by stockholders has ever been held. The original directors selected by the articles have passed from the association, and none of the directors elected in 1862 is nowin service. Hone of the present directors was chosen by the stockholders, but all were appointed from time to time by the board of directors.
The articles provide that the five original directors shall serve until their sucessors are chosen in their stead. This does not necessarily mean that they are to continue directors indefinitely, ■unless they are recalled by a two-thirds vote of the stockhold.ers, at a special meeting called for that purpose, but is consistent with the idea that some other provision will define their term of office and in what manner the stockholders shall perform their duty and exercise their right of electing directors, but we find- no such provision in express terms written which was omitted either by design or by oversight. It may not have been a very material provision at the time in the minds of the associates, inasmuch as they owned the entire stock and all were upon the board. Perhaps they were satisfied that the four had the power to remove the other director, if they thought he should be removed. We must assume, however, that the articles intended to comply with the provisions of the law which contemplated that directors should be chosen by the stockholders. That was either their intention or else the articles were written by a shrewd lawyer, who by using the language of the statute showed an intent to comply with the law and then, by subsequent provisions, attempted to annul the effect of such compliance by, in effect, providing that the majority of the stockholders should never elect a director if the board of directors chose to exercise that right themselves.
We cannot assume that the articles were intended as a joke or to overreach the public with whom the stock might be marketed. We must consider that they were fairly made and *394fairly intended to carry out the provision of law, and that it. was within the contemplation of all the parties that a director who was to serve for a term must be selected by the stockholders, and that the provision for filling a vacancy was intended only to authorize the board to appoint some one to act as director until an election by the stockholders could be conveniently had. The right to fill a vacancy is limited to a vacancy occurring prior to a call for an election by the stockholders. If a call had been made for an election, a vacancy was not to be filled, but if it occurred when no election was in immediate prospect, then it should be filled.. The question of interest is, for how long a time should the vacancy be filled. Evidently until there was a regular meeting for the election of directors, or until the board of directors found it convenient to call one within a reasonable time. I do not think the provision means that no election of directors and no meeting of the stockholders for any purpose are to take place until two-thirds of the stockholders petition for such meeting. The directors were the sole agents and managers for the stockholders, and it is evident that it was contemplated that there should be regular meetings of the stockholders, or that the directors should from time to time call meetings to submit the acts of the board to their consideration and for such directions with reference to the business as the owners might choose to give and for any business that might properly come before them. This meeting to be called by two-thirds of the stockholders was evidently intended as a special meeting for the recall of a director or for an election which in the opinion of the stockholders was necessary, in the absence of a regular meeting in the near future and on account of the neglect of the directors to call such meeting. Clearly the directors who had the sole control of the business had power to provide for regular meetings of the stockholders and for such other meetings from time to time as the requirements of the business made necessary and desirable. The directors, by failing to provide for regular meetings and by omitting their duty to call a meeting for the election of directors, could not thereby deprive the stockholders of their right to elect and exercise that right themselves.
*395If the appellant is right in his contention, it follows that a board of directors who own one-third of the stock and one share more can keep the company alive perpetually, and they and the persons whom they elect and to whom they transfer their stock can absolutely control against the wishes of the other two-thirds. If the articles of association had provided that the directors should be appointed from time to time by the board of directors, and that that right should remain so long as the directors were able to control one-third of the stock and one share in addition, it would clearly be in violation of the provision that the directors are to be chosen by the stockholders.
Undoubtedly the right to form a joint stock association is a common-law right, but that right has from time to time been modified by statute, and perhaps the statutes have given to such an association a control over the property and rights of the stockholder which otherwise might nót be permissible. The provision giving the stockholders the right to devolve upon three or more of the partners the sole management of the business in my judgment means that unless the stockholders themselves are directly carrying on the business it shall be carried on by a board of directors selected by them. It is not optional with the associates to disregard the statute and make other provisions in the articles which take from the associates the right to participate in the control of the business.
This statutory provision is a limitation upon the right of the stockholder to participate in his own business, and is also a limitation upon the association which prevents the election of directors except by the stockholders. Aside from this statutory provision, if it were possible to provide in such articles that the time of the duration of the association should rest entirely at the will of the directors and that the directors, so long as they contz’olled one-third and one share in addition of the stock, should elect the directors pez'petually, notwithstanding the wishes of the majority, the provision is so -unusual, so much in conflict with the rights of property of the stockholder and with the rights of stockholders in corporations (which relation, pez'haps, furnishes the closest resemblance to a stockholder in such an association) that it would require expression in language which admitted of no other reasonable construction.
*396We are not discussing the right of the five original stockholders to agree among themselves as to the particular manner in which they should carry on their business. We stand fifty-nine years after that event, when the affairs of the company are controlled by persons then unknown, and probably to a great extent not then in existence.
The affairs of the association have changed materially since its inception. It now has $10,000,000 of capital, seven directors and an extensive business, evidently many times beyond the contemplation of the original stockholders. Instead of being a small association, controlled by the five men owning it, it has assumed great magnitude in its capitalization, business and the territory which it serves. Its stock has been placed upon the Stock Exchange for sale in the same manner and substantially upon the same conditions as the stock of a corporation. The public dealing in this stock undoubtedly is dealing in it on the assumption that it is in its nature substantially that of a corporation; they evidently do not purchase it with the understanding that it is practically disfranchised; that in fact it has no real voting power, The voting power of a stock is an element of value, and the small block of stock controlled by the directors is of a greater value than that of their associates who form the great majority of the stockholders, if such minority carries with it the control of the association, and thereby its offices and salaries.
Our government and institutions rest upon the expressed will of the majority, and the statutory provision referred to recognizes the fact that this association should be controlled by the majority of its stockholders. After the articles adopted the provision of the statute that the stockholders should elect the directors, if there is language qualifying that declaration it should be treated as surplusage and disregarded. In my judgment the articles were intended to be in conformity with the statutory provision, and the associates inadvertently omitted to state the actual term of the directors and when and how the stockholders should elect them. This was not a serious oversight, for the board of directors have the absolute control, under the law, of the affairs of the association, and have ample power at any time to call the stockholders together for *397the election of directors, or the consideration of any business affecting the association. The articles of association make it the duty of the board to prescribe such general rules for the government of their own proceedings as they deem for the best interests. The government of their proceedings is the government of the proceedings of the association. It was within their power and it was their duty to call meetings of the stockholders from time to time for the election of directors, with the right to themselves, if they deemed it important, to fill a vacancy, but such appointment would continue only •until the election of a director within a reasonable time. The directors have not performed the duty of calling a meeting for an election of directors within a reasonable time after vacancies have occurred.
We do not decide, because the question is not before us, for how long a time a director is elected. We simply decide that it is the duty of the directors to call a meeting of the stockholders forthwith for the election of an entire board of directors.
We have not overlooked the fact that the statute of 1854 under which the association was organized was repealed by chapter 235 of the Laws of 1894, being superseded by the revision that year of the law upon that subject. In place of the provision cited we find that the articles may “ 2. Prescribe the number of its directors, not less than three, to have the sole management of its affairs; 3. Contain any other provision for the management of its affairs, not inconsistent with law.” The Consolidated Laws substantially preserve this revision. (Consol. Laws, chap. 29 [Laws of 1909, chap. 34], § 3.) I do not think this change in the statute affects the construction of the articles of association.
The fact that the stockholders owned the association; that it would be unreasonable to commit their affairs to the control of a minority interest; that our government and institutions rest upon the express will of the majority, and that the power of a minority of the stockholders to perpetuate the association and their control in it, excluding the majority, is so antagonistic to the rights of property, and so in violation of the practice among corporations and other associations of individuals, that *398we may faMy assume that, if the provisions we are considering in this article have the meaning claimed for them by the appellant, they would be inconsistent with law.
The order appealed from should, therefore, be affirmed, with costs.
Judgment reversed, with costs, and judgment ordered dismissing complaint upon the merits, with costs.