Court Opinion

ID: 6566744
Source: CourtListenerOpinion
Date Created: 2022-07-20 19:20:33.786899+00
Date Added: 2024-06-11T15:56:46.091149
License: Public Domain

Mr. Justice Teller
dissenting:
The majority opinion gives to chapter 27 of Mills Code, commonly known as the quo warranto statute, a construction so at variance with what I think it should be, that I deem it proper to state in some detail the grounds of my dissent.
The opinion cites authorities to show that quo warranto is the proper proceeding to test the right to the office of director of a private corporation, but ultimately determines the case on a construction of our statute, holding that one who assumes, without right, to act as a director usurps or unlawfully holds a franchise.
As to the authorities cited on the question of procedure, it is sufficient to say that they refer to statutory procedure, more than one-half of the states having statutes expressly providing for the testing of a right to office in a private corporation by quo warranto, or by some other statutory action.
Since, however, the opinion bases the reversal of the judgment on the ground that a franchise has been usurped, and not upon the ground that the right to an office, eo nomine, is under our statute to be determined by quo warranto, I do not think it necessary to pursue that branch of the question.
The majority opinion states, in effect, that the plaintiffs in the suit consider that a question as to the exercise of a franchise is involved, when it says:
"This is where, according to the allegations of the complaint, the Sylvester board have usurped,- intruded into and are exercising franchises already granted, the right to exercise which belongs to the Elder board.”
The complaint contains no allegation that even suggests that plaintiffs regarded the office of director as a franchise, *126nor does the record anywhere contain anything to that effect.
The opinion quotes from People v. Londoner, 15 Colo. 247, 25 Pac. 183, a definition of a franchise, and a statement that “franchises are usually conferred upon corporations for the purpose of enabling them to do certain things. The franchises are vested in the corporate entity,” but the quotation omits the very important concluding words of the paragraph, viz: “rather than in the officers.”
How this can be supposed to sustain the position taken by the court is not apparent.
If franchises vest in the corporation, rather than in the officers, the holding of the office of director, although not lawful, is not an illegal holding of a franchise. With deference to the opinion of the majority, I submit that the decision is reached by a confusion of ideas. The holding is that to act as a director upon a false claim of right, so to do is a wrongful exercise of a franchise. If that be true, the right to act as a director must be a franchise, and there must be as many franchises as there are directorships. The mistake lies in considering the individual action of a director as an exercise of a corporate franchise. It is the combined action of a majority — the action of the board — which becomes the action of the corporation and constitutes the exercise of a franchise. That this is so will appear from a simple illustration.
Suppose a board of five directors, of whom two are not entitled to the office, but acting therein; the board, the three de jure directors concurring, performs some corporate act. If it is within the corporate franchise, no one can complain of it. If it is not an authorized act, nevertheless it is not due to the holding of office by the de facto directors, and the ground of complaint is not against them, but against the board, for the exercise of a franchise not granted to the corporation. The case is not different when the de facto directors concur in the action. Its validity depends not on their title to office, but on the terms of the secondary franchise, the franchise to do.
*127How, then, can it be said that, because men not entitled to act as directors have so acted, there has been a wrongful exercise of a corporate franchise?
The opinion recognizes, as it must, that, in general, corporations have but two franchises; one to be a corporation, and the other to do whatever the charter authorizes to be done. No additional franchises to be directors have been mentioned, and no such franchise is known to the law.
Speaking of a franchise, the court said in Arapahoe County v. Printing Co., 15 Colo. App., at p. 203, 61 Pac. 499:
“As applied to corporations, it constitutes its right to do business, and, also, in so doing, to exercise certain special powers and privileges which do not belong to citizens of the county generally of common right, and is vested in the corporate entity.”
In Am. S. & R. Co. v. People, 34 Colo. 240, 82 Pac. 531, this court discussed franchises, pointing out that there is a primary franchise to be, and a secondary one to do, i. e., to carry on the business which the corporation is organized to transact; but nowhere is there a suggestion that there are still other corporate franchises. A franchise is a grant or special privilege conferred by the sovereign power of the state. A corporation can not come into being without the power so to do is granted by the state, either by general or by special legislation; and when so in being, it can do only that which its charter authorizes it to do. Does any one suppose that the power to act as a director is a grant from the state in the sense in which a franchise is said to be granted? True, the office is created by law, but the right to hold it is conferred by the stockholders. It is the right to hold the office, and not the office, which is in controversy. In the case of the Adams Mining Company, the secondary franchise is the right to do whatever a mining company may do under our laws. If it does no more than that, its franchise has not been wrongfully used, whether it has been under the control of directors de jure or de facto. If it exceeds its powers, it is for the state to take *128action to prevent a misuse of the franchise. Commonwealth v. Ins. Co., 5 Mass. 230, 4 Am. Dec. 50. There being no franchise to act as a director, there can be no usurpation of a franchise by an unauthorized holding of such office.
If an unfounded claim to the office of director of a private corporation is a franchise, it is at least surprising that the majority opinion cites no case to that effect. It is also to be noted that in the decisions of this court and the Court of Appeals no case can be found in which the term franchise is used as including an office. Furthermore, since the question of right to office in a private corporation in no way concerns the public, the majority opinion is squarely in conflict with the case of People ex rel. v. C. E. Ry. Co., 8 Colo. App. 301, 46 Pac. 219. The syllabus of that case states that:
“Proceedings in the nature of quo warranto are available only to protect public interest as contradistinguished from private rights. As a rule, whenever it is discovered that such proceedings are brought for the latter purpose, they are not entertained.”
In the opinion it is said:
“There seems to be no dissent from the general position that in order to support an action by the people for the redress of a wrong, that wrong must appear to have been done to the people.”
The controversy in the case at bar is one wholly concerning private rights. So long as the corporation does not exceed its chartered powers, the public is not at all interested in the question as to who exercises those powers.
The opinion reiterates that the exercise of powers as a director by one not entitled to the office is the usurpation of a franchise, and adds: “Quo warranto in such a case affords a remedy,” followed by the citation of a number of authorities. The case from 26 Colo. App. is not in point, since it concerned a claim to be a corporation, in which it is not denied that quo warranto is the remedy. The other citations support the statement that quo warranto affords *129a remedy, but not that the unlawful holding of the office of director is the usurpation of a franchise. Upon the first point, however, the cases cited are not pertinent in this case, because they are without exception from jurisdictions in which the scope of quo warranto has been enlarged by statute to include offices in private corporations. An examination of the citations from text books shows that the general statement that quo w-arrcmto is the remedy in a case like this is based on decisions where the writ was proper because of the statutory provision above mentioned.
If the common law information applied, it is very remarkable that it never has been so applied in England, and that in this country the information has been by statute made available in an inquiry like this, or other statutory proceedings have been provided.
The majority opinion then discusses what is called "‘the merits of the case as tried,” including, it is said, the question of the validity of the meeting of December 18, 1913. It is stated, in such discussion, that “plaintiffs contended throughout the trial below that they were chosen directors at the 1913 meeting. Defendants contended that no valid meeting had been held, and that they were hold-over directors. The issue as finally settled .and tried involved nothing but the legality of the 1913 meeting, which depended upon the regularity of the call.”
The above statement as to the defendants’ contention is ■without any support in the record, and must have been based upon allegations in the brief of plaintiffs in error.
The complaint, p. 12 of Abstract, charges the defendants —plaintiffs in error here — with claiming to be directors under the election of December 18, 1913. The fourth defense (Abstract, p. 30) alleges “that the annual meeting of the stockholders was held on Thursday, the 18th day of December, 1913; * * * .that Sylvester and the other defendants were elected directors for the ensuing year, and entered upon the discharge of their duties,” etc.
Nowhere in the pleadings is the legality of that election questioned, and the case was tried throughout on the theory *130that the persons then elected were entitled to the offices. Indeed, the first defense sets up that since there was an election of directors on December 9, 1914, “the validity or invalidity of the election held December 18, 1913, was no longer of any importance.” This refers to the validity of the election, and not of the meeting. The only reference to the validity of the meeting was made by the court in the inquiry whether defendants admitted that the annual meeting of December 18, 1913, was a properly called meeting. To this the attorney for the defendants replied: “I want that question passed upon by the court.” The court then said: “I see your contention is there was no proper meeting, and if there was no proper meeting, you are at least hold-over directors!,” ,The attorney said: “They must show a proper meeting.” The cause then proceeded, and a mass of evidence was introduced on both sides to show what was done at the 1913 meeting.
The right to the proxies held by the respective parties was litigated at length, and the question suggested by the court was not again mentioned at the trial. Evidently the parties recognized that without raising that issue by the pleadings, it could not be tried, and, as both sides, in terms, based their claims to office on that election, and defendants themselves introduced in evidence the call for that meeting, the court was justified in finding that the validity of the call was admitted. The first mention of the matter on the part of the defendants is in the motion for a new trial, where it is pointed out that the meeting was held on the third Thursday in December, while the by-laws named the second Wednesday of that month for the annual meeting.
It is impossible, therefore, to support a reversal on that ground, without violating the rule that a new issue can not be injected into a case after trial.
• If, as is clear, our statute does not cover a contest over an office in a private corporation, and there is no other remedy at law, it would seem that equity should have jurisdiction.
*131In Pagosa Springs v. People, 23 Colo. App. 479, 130 Pac. 618, it is held that the equity powers granted to the district courts by our constitution are not limited to cases known to equity jurisprudence at the time the constitution was adopted, and that they should be expanded to include cases in which the law affords no remedy. That case involved an election under the local option statute, and it was held that a denial by election officials of the right to vote was a fraud on the rights of an elector.
This principle has been recognized in other jurisdictions, where officers of corporations have attempted by fraud to obtain control.
In Trask v. Chase, 107 Me. 137, 77 Atl. 698, it was held that an unauthorized sale of stock, to enable a majority of the directors to secure control of the company through ownership of a majority of the shares, was a fraud on the other stockholders; and that a suit in equity to redress the wrong was proper, even though there might be another remedy.
It seems to be the practice in Kentucky to test the right to corporation offices by suits in equity, the parties found not to be entitled to the offices being restrained from claiming them, Proctor Coal Co. v. Finlay et al., 98 Ky. 405, 33 S. W. 88; Schmidt v. Mitchell, 101 Ky. 570, 41 S. W. 92, 72 Am. St. 427, 58 L. R. A. 809.
To deny stockholders the right to vote is as great a fraud as to issue new stock to gain control of the corporation, the result in each case being to take from the holders of a majority of the stock the right to control.
The case at bar, as here presented, charges the defendants with fraud and collusion in the holding of an election of directors of a private corporation with a view to the control of the corporation and its property.
, This gives the court jurisdiction, though there are other grounds upon which the jurisdiction may be sustained.
The right of a majority to elect directors and control the corporation is a vested property right. State v. Greer, 78 Mo. 188; Smith v. R. R. Co., (C. C.) 64 Fed. 272; Hays v*132. Commonwealth, 82 Pa. St. 461; Baker’s Appeal, 109 Pa. St. 461.
Decided December 3, A. D. 1917.
Rehearing denied February 4, A. D. 1918.
A court of chancery must, therefore, have jurisdiction to try a case in which such right is involved, there being no remedy provided by statute.
The right to vote at a corporate election may be protected by a court of chancery, and there are many cases in which the authority has been exercised, even to the extent of holding the state powerless to change the manner of voting from that prescribed in the charter.
It would be a vain thing for a court to intervene as to the manner of electing, if it had no power to give relief when a fair and valid election is prevented by fraud, or otherwise.
The evidence fully sustains the finding of the trial court that “the rights of the majority stockholders were most grossly violated by the defendants,” and it would be a reproach to our jurisprudence if no adequate and immediate remedy were provided. Equity furnishes that remedy.
It may be conceded that equity has no jurisdiction to decide an election contest when it involves only the question of the right to vote, or the regularity of the election in some particular, when there is no charge of wrong doing or bad faith; but, where there is a charge that defendants conspired to prevent and prevented a fair election, for the purpose of retaining control of a corporation, some of the defendants thus conspiring having property interests to be conserved by such control, a different rule prevails. A court of equity may then act to prevent the fruition of the fraudulent designs.
The fact that the title to corporate offices was also involved did not oust equity of jurisdiction.
Having taken jurisdiction on settled equitable grounds, the court was entitled to retain it and try all the issues. These propositions require the citation of no authorities.
The judgment is right and ought to be affirmed.