Court Opinion

ID: 5555647
Source: CourtListenerOpinion
Date Created: 2022-01-11 00:40:38.930548+00
Date Added: 2024-06-11T08:35:19.086684
License: Public Domain

Warner, Judge,
dissenting.
This is a bill filed by the complainants as stockholders in the Macon and Brunswick Railroad Company, against the company, alleging that they are the holders and owners of seventeen hundred and forty-four shares of the capital stock of said company, which has been bona fide paid to said company at the rate of $100 00 per share, and that their interest as such stockholders in said company is greatly endangered by the illegal conduct of the president and board of directors of said company in violation of the charter thereof, with a prayer for relief and injunction. The complainants allege, amongst other things in their bill, that their company, in direct violation -of their charter, which provides that the stock of said company shall consist of a certain number of shares, to be subscribed and paid for at $100 00 per share, have made a contract whereby they have issued $1,500,000 00 of preferred stock, which was estimated and valued at the sum of $300,000 00 only; that this preferred stock was issued for the purpose of enabling the holders thereof to obtain the control of the affairs of the company, to the injury of the bona fide stockholders thereof, inasmuch as it is provided in said contract that a majority of the board of directors shall each be a holder of two hundred shares of said preferred stock, and that such directors shall be elected as soon as there are parties qualified to serve; that said company shall not increase the further issue of bonds, or the common or preferred stock of the company, except by consent in writing of a majority in amount, of the holders of the preferred stoch. The complainants further allege and charge in their bill that the company, after having obtained the State’s aid by an indorsement of their bonds for $10,000 00 per mile to enable them to build their road, and after they had *63been running their trains thereon for several months through to Brunswick, obtained from the State additional State aid, by an indorsement of their bonds to the extent of three thousand dollars per mile, under the pretext that it was wanted for the purpose of paying off $1,100,000 00 of the second mortgage bonds of the company, whereas the contrary thereof is the truth; that it never was the intention of said company to extinguish any part of said indebtedness held by themselves, but to retain the $600,000 00 of the State’s indorsed bonds, for the use and benefit of said preferred stockholders, to the exclusion of the complainants and other stockholders in said company. It is further alleged and charged in said bill that notwithstanding said company has received the State’s indorsed bonds, on the representation that the road had been completed so as to entitle the company to receive the same; yet, in fact, the road has not been so completed, but is still in an incomplete and unfinished condition, rendering it not only unsafe, but dangerous as a highway of travel, and thereby exposing the complainants, as stockholders in the road, to heavy damages for loss in running trains over such a defective road. The bill alleges especially the defects in the construction of the road, which is supported by the affidavits of two engineers who worked on it at the time of its being constructed. The bill also alleges and charges that tile directors of said company, made such by virtue of said preferred stock, have purchased five thousand shares of the stock of the Macon and Western Railroad Company on their own private account, and not for the Macon and Brunswick Company, and have paid therefor in the Macon and Brunswick State indorsed bonds. The bill further charges that a majority of the said preferred stockholders are non-residents of this State; that their interests are in conflict with the interests of the original bona fide stockholders in said company; and that the holders of such preferred stock, under said illegal contract set forth in the bill as an exhibit thereto, are enabled to control the management of said company, and the *64financial affairs thereof as they may desire; and that said company has not set apart annually, and deposited with the Governor, two per cent, upon the amount of the bonds indorsed by the State, as a sinking fund, for the payment of said bonds, as required by the Act and resolutions granting the aid of the State to said company.
After hearing the parties by their counsel on the application for an injunction, the Judge granted the same, whereupon the defendants excepted. The contracts made by corporations, within the limits of their respective charters, as well as those of natural persons, are under the protection of the law, and it is the duty of the Courts to maintain and enforce them; but when incorporated companies undertake to-make contracts or do other acts not authorized by their respective charters, or in violation thereof, then it is equally the duty of the Courts to restrain them. The allegations and charges made by the complainants in this bill against the-President and Directors of the Macon and Brunswick Railroad Company, are, to speak in the mildest terms, of a very grave character', and it is due to them, as well as to the public, that they should have an opportunity to meet them, not by sharp, technical objections, but squarely on the merits thereof, on the final hearing before the proper- tribunal. If a railroad corporation can be allowed, without express authority granted to it for that purpose, to make a contract b^ which they can provide for the issuing of preferred stock of the company, and prescribe thereby that the holding of a certain number of shares of that preferred stock shall constitute a necessary qualification for a director in that company, without any regard to the amount to be paid for each share of such prefaired stock, and thus obtain in that way the control of the affairs of the company, there will not be much security for the rights of the minority bona fide stockholders who have paid the full amount of their stock as required by the charter of the company; that is- to say, $100 00 for each share of stock therein. Although the State is not com*65plaining in this case, but only the stockholders of the company, still the principle involved is the same as if the State was complaining, and it is an important principle in view of the extent to which State aid lias been granted to railroad companies in this State. The Act of the General Assembly granting State aid to this company, provides, that the indorsed bonds shall not be sold for less than ninety cents in the dollar, but if the company, as was done in this case, can make a contract by which they create cheap preferred stock, and then make a contract for the sale of the State’s indorsed bonds and the cheap preferred stock to the same purchaser, though the indorsed bonds might be nominally rated at ninety cents in the trade, what would be the average price paid for the whole? How much money would the purchaser in fact pay for the cheap preferred stock and the State indorsed bonds? By this arrangement the strong indorsed State bonds as well as the original paid up stock are diluted and weakened by the company’s cheap preferred stock, in the same manner as good, strong brandy is diluted and weakened by pouring into it plenty of water. If all the company’s stock was such as required by its charter, $100 00 per share, and that amount actually paid in therefor, then that stock could not be used to dilute and .weaken the value of the indorsed State bonds or the original paid up stock of the company, but the cheap preferred stock issued outside of the provisions of the charter could be so used. And it is charged in this bill that the $1,500,000 09-of the preferred stock issued by the company under the contract was estimated and valued at only the sum of $300,000 00, and that this latter amount was not actually paid in to the company in money, but was to be paid in work after the same was issued. The facts’ of this case illustrates the practical effect of a railroad company being allowed to issue preferred stock in a different manner from that which-is prescribed by its charter. And the principle involved in this case is applicable to every other railroad in the State, and is especially important for the pro*66tection of the interests of the people in view of the extent to which State aid has been granted to the several railroad companies in this State.
There is another important principle involved in this case, of which the original stockholders in this company complain, and that is the indorsement of the bonds of the company by the State, when the road has been imperfectly built and in an unfinished condition. If the road is in the condition as stated in the bill of complaint, and the indorsement of the bonds was procured from the State for the benefit of the preferred stockholders in that company, then it was not only a legal fraud on the complaining stockholders, but a legal fraud on the people of the State. I say a legal fraud, because it was a fraud perpetrated under the form and color of law. It is true, the State is not complaining here now, but the principle applicable to railroads constructed with State aid, should not be ignored. The only security which the State has for her indorsement of the bonds of railroad companies is the roads and their equipments. If the State’s indorsement shall be procured on the bonds of a half finished or improperly constructed road, the bonds sold, and the money arising therefrom in the pockets of unknown persons, and the road is sold on the foreclosure of the State’s mortgage, such a road might not, and probably would not sell for enough to pay the debt due the State, but the bonds would have to be paid by taxation of the people. The facts disclosed by this record shew what has happened in regard to this road, and what may and probably will happen in regard to other roads to which State aid has been granted, if the Courts fail to protect, by the exercise of that restraining process with which they are clothed when corporations undertake to make contracts and do other acts not authorized by their respective charters, or in violation of the Acts of the General Assembly, granting to them State aid by the indorsement of their bonds.
The purchase of the five thousand shares of stock of the *67Macon and "Western Railroad by the directors of the Macon and Brunswick Company, on their own private account, and paying therefor with the indorsed State bonds of the latter company, in the manner and for the purpose as charged in the bill of complainants, was unauthorized and illegal as against the rights of the complaining stockholders. The appropriation of $600,000 00 of the State indorsed bonds by, and for the use of the preferred stockholders, to the exelusion of the complainants and the other stockholders of the company as charged and set forth in complainants' bill, was unauthorized and illegal as against the rights of the complaining stockholders of the company. I am, therefore, of the opinion that the judgment of the Court below granting the injunction in this case should be affirmed.