Court Opinion

ID: 8194129
Source: CourtListenerOpinion
Date Created: 2022-09-09 23:17:16.221063+00
Date Added: 2024-06-11T16:40:42.453518
License: Public Domain

Crownhart, J.
(dissenting). This case presents corporate finance at its worst. The defendant Wallis represented two masters with opposite interests. Representing the Plow Works he was the buyer of the Tractor Company’s products, and represehting the Tractor Company he was the seller of its products. As might be expected, he could not fairly represent both, and it appears that he clung to his first love, the Plow Works, with the result that the Plow Works prospered at the expense of the Tractor Company. Naturally there came a time when the minority stockholders in the Tractor Company became dissatisfied and protested. Wallis then seems to have conceived the idea of freezing out the minority interests in both companies. He entered into a secret agreement in writing with certain so-called bankers, Souders & Company of Chicago, by the terms of which he was to procure all the stock of both companies, or in lieu thereof he was to sell out the whole assets of both companies so that a new corporation to be organized should acquire all the properties of both companies. The new company was to pay Wallis a large sum in cash and deliver to *392him a controlling interest in the new company. Mr. Quarles learned of this agreement soon after it was made. Mr. Quarles was a qualifying director in each company and the attorney for both companies. Mr. Wallis had or controlled a two-thirds majority of the voting stock in each company.
Wallis, to carry out the agreement with Souders & Company, had a special meeting called of the Tractor Company stockholders, one of the purposes of which was to sell the properties of the company. At this meeting he represented his desire to secure options on all the stock of the company not held by him. ITe gave as a reason the necessity of refinancing the Tractor Company and the failure to accomplish this otherwise. He was asked if all the stock was to go into the new company on the same basis, and he replied that it was; that he was both a purchaser and seller, and that he expected to malee out of the deal but that he might lose. His answers did not disclose the Souders & Company contract and were evasive and misleading. He evidently intended to be understood as taking a chance on his holdings in the new company. He was taking no chance of loss in the exercise of his options. If he exercised them he knew to a certainty that he would profit some fifty per cent, on the purchase price of the stock, over and above his interest. He finally secured the options, which he later exercised, and he put the stock so purchased into the new company at some fifty per cent, profit over the purchase price.
There are courts which hold that the officers of a corporation have no duty to disclose the true facts in relation to the corporate affairs when purchasing stock from other stockholders, but Wisconsin has adopted a better rule, and that rule is stated by Mr. Justice Siebecker, speaking for the full court, in Timme v. Kopmeier, 162 Wis. 571, 156 N. W. 961, as follows:
“Directors of a corporation occupy a position of trust and confidence and are considered in the law as standing in a *393fiduciary relation toward the stockholders and as trustees for them. The directors of a corporation are not permitted to use their position of trust and confidence to further their private interests, nor to become parties to contracts concerning corporate affairs intrusted to their management which conflict with a free and impartial discharge of their duties toward the stockholders. Any participation by them in contracts dealing with matters of corporate interest which is antagonistic to their free and impartial discharge of official duties is denounced by the law, unless all of the stockholders with full knowledge assent thereto.”
This rule is well sustained in other jurisdictions. See Dawson v. National L. Ins. Co. 176 Iowa, 362, 157 N. W. 929, where the authorities are collated.
Let us then apply the rule to the facts in this case. “The directors of a corporation are not permitted to use their position of trust and confidence to further their private interests, nor to become parties to contracts concerning corporate affairs intrusted to their management which conflict with a free and impartial discharge of their duties toward the stockholders.”
It stands without contradiction that Wallis entered into a contract with Souders & Company to dispose of all the stock or property of the Tractor Company to further his private interests. It cannot be doubted that this contract did conflict with the free and impartial duties, he owed to the stockholders for the very simple reason that they were not to' participate in the benefits flowing therefrom. Wallis was to skim the cream for himself. This was a secret contract which Wallis did not disclose, even when questions were put to him making it impossible to conceal it without evasion. Wallis withheld information that it was his duty to disclose. He withheld it to defraud his cestuis que trust, and he did defraud them by reason of such concealment. I do not see how there can be any doubt about the facts nor the Wisconsin law as applied thereto. Wallis should be held liable to an accounting. Mr. Quarles occupies a more deli*394cate position than Wallis. Mr. Quarles occupied a high place at the bar of this court. He was not only an officer of the corporation, but its attorney as well. He took an active part in the negotiations as a partisan of Wallis. He knew of the Souders & Company contract and concealed the fact from the stockholders. The only thing that can be said for him was that he did not receive any of the profits of the fraud direct. His firm received $2,500 as attorneys’ fees in the proceeding. He said he expected to be well paid. I think the cause should be reversed.
I therefore respectfully dissent.
A amotion for a rehearing was denied, with $25 costs, on October 16, 1923.