Byrne v. Schuyler Elec. Manuf'g Co.

• Decision Date: 08 January 1895
• Citation: 65 Conn. 336,31 A. 833
• Court: Connecticut Supreme Court
• Parties: BYRNE v. SCHUYLER ELECTRIC MANUF'G CO. et al.

31 A. 833

65 Conn. 336

BYRNE

v. SCHUYLER ELECTRIC MANUF'G CO. et al.

Supreme Court of Errors of Connecticut.

Jan. 8, 1895.

Action by one Byrne against the Schuyler Electric Manufacturing Company and the Schuyler Electric Company. Judgment for defendants, and plaintiff appeals. Reversed.

Frank Sullivan Smith and Watrous & Buckland, for plaintiff.

C. E. Perkins and E. Henry Hyde, for defendants.

ANDREWS, C. J. The Schuyler Electric Manufacturing Company is a corporation chartered by the legislature of this state, and is located at Hartford. The Schuyler Electric Company is a corporation formed under and pursuant to the joint-stock acts of the state, and is located at Middletown. For convenience, we may call the first-named company the "Hartford Corporation," and the other the "Middletown Corporation." The Hartford corporation was chartered "for the purpose of manufacturing, buying, selling, and dealing in all kinds of machinery, appliances, and apparatus adapted to the purposes of producing and distributing light, heat or power by the use of electricity, and with power to manufacture and sell plants for furnishing electric light heat, or power, and generally to manufacture such articles incidental to its business as it may deem for its interest" Its capital stock was of two kinds,—preferred stock, to the amount of $350,000, and common stock, amounting to $150,000. The common stock might be increased to an amount not exceeding $500,000, but only for the purpose of paying off and retiring a corresponding amount of the preferred stock. But no payment was to be made which should reduce the assets of the company below the sum of $150,000. The articles of agreement of the Middletown corporation are not given, but it is stated that that corporation was formed to continue the same business which the Hartford corporation was chartered to carry on. By an agreement between these two corporations, made on the 17th day of October, 1887, the Hartford corporation undertook to convey, and did, in point of form, convey, assign, and transfer to the Middletown corporation "its entire assets, including its letters patent stock, bonds, choses in action, and property of every description," and received in pay therefor 2,000 shares of the capital stock of the latter corporation, of the nominal value of $100 each. These shares of stock were subscribed for and issued to certain persons who had been named as trustees for that purpose by the Hartford corporation, and who subscribed as such trustees, and were so named in the issue of the same. The Middletown company accepted said transfer of property as full payment for the said shares of its stock. The property so transferred consisted of the various letters patent covering the system of electric manufacture and lighting according to which the Hartford corporation manufactured its electrical apparatus, and the machinery, tools, and appliances with which it performed its work. It was the property without which it was and is impossible for that corporation to carry on its manufacture, and without which it is put entirely out of business and out of all active existence. And the Schuyler Electric Manufacturing Company, instead of being engaged in the manufacture for which it was created, has become simply a cestui que trust of 2,000 shares of the capital stock of another corporation. The case shows that the officers and managers of this corporation have made the sale and taken the stock as above mentioned, not with the intention of winding up its affairs, and dividing the stock so received among their own stockholders, nor as a temporary arrangement resorted to merely to carry the corporation over a period of distress, but with the Intention to hold it as a permanent investment. To sum it all up, the result is to practically dissolve the Schuyler Electric Manufacturing Company, and to transfer its business to the Schuyler Electric Company.

The plaintiff is the owner of 250 shares of the common and 10 shares of the preferred stock of the Hartford corporation. He has at all times objected to all votes and acts of that corporation pursuant to which it transferred its assets and all its property to the Middletown corporation, and became the owner of the stock of the latter company. He brought the present action to the superior court, after the corporation and the directors had refused to take any action to rescind the said contract, averring in his complaint that the said agreement of the Hartford corporation was a fraud upon him, was ultra vires and void, and asked the court so to declare, and to afford him some remedy, either by an injunction or by the appointment of a receiver. Both said corporations were made defendants, and they both came into court and made answer. Their second defense sets forth the several votes of the Hartford corporation according to which the Middletown corporation was organized; alleges that the Hartford corporation was insolvent; that the Middletown corporation was organized for the purpose of continuing the business of the Hartford corporation; that all the assets and property were transferred and the stock received in payment, as is hereinbefore stated; and then says that, "if the plan for continuing the business of the said Schuyler Manufacturing Company by the organization of the Schuyler Electric' Company had not been carried out, the said Schuyler Electric Manufacturing Company would have been compelled to wind up its affairs either under a receiver or in insolvency, and in either case the assets of said corporation in the judgment of the directors would have yielded not much, if anything, more than enough to pay creditors, and the preferred stock would have been of little value, and the common stock of no value whatever"; and so the defendants aver that they did not act fraudulently towards the plaintiff, but in good faith, and for the best interests of the said corporation and all its stockholders. The state referee to whom the case was committed found the facts generally in accordance with the defendants' claims. The superior court accepted his report, found the facts to be as stated therein, and rendered judgment for the defendants to recover their costs. From that judgment the plaintiff appealed to this court.

Among the reasons of appeal are "that the acts of the stockholders and directors of the Schuyler Electric Manufacturing Company in authorizing the subscription to the stock of said Schuyler Electric Company were constructively fraudulent, ultra vires, and void as against a nonassenting stockholder; that the transfer of the assets of the said Schuyler Electric Manufacturing Company in the manner set forth was likewise constructively fraudulent, ultra vires, and void." These reasons of appeal present the two sides of the one transaction which is the subject of the plaintiff's complaint. Their full significance can only be appreciated when they are considered in connection with the purpose for which the property of the Hartford corporation was sold, and the stock of the Middletown corporation taken in payment, as set forth in the second defense, and found true by the referee. That purpose was to keep the Hartford corporation in nominal existence, and at the same time carry on its business through the agency of the Middletown corporation, upon the hope that the Hartford stock would become valuable by the successful operation of the Middletown company, and so, in effect, make the stockholders in the Hartford corporation stockholders in the Middletown one. A nominal corporation was co be maintained In Hartford; a real one, in Middletown. And although the entire property and assets of the Hartford corporation were thus Invested in a new business, and its stockholders are to gain or lose as that business is successful or otherwise, that new business is carried on under a different charter, and under different rules, in forming which the stockholders of the Hartford company have no voice, and under the direction of officers unaccountable to them. The Hartford corporation is the beneficial owner of four-fifths of the Middletown stock, but it can have no control over its business. It cannot have any direct control, for it is not the legal owner of that stock; and there is nothing in the agreement between these corporations to show that it can have any control over the action of the trustees. A unanimous vote of the Hartford stockholders could not displace one of the trustees, and appoint another in his stead. If one of them should die, a like unanimous vote could not name his successor. This is the scope of the reaons of appeal. The plaintiff insists that this is an arrangement into which he cannot lawfully be taken against his will, and he says the superior court erred because its judgment forced him into this scheme, when he had all along protested against it. Is, then, the plaintiff correct when he says there is error in the judgment of the superior court? That is, is the agreement which the Schuyler Electric Manufacturing Company undertook to make with the Schuyler Electric Company ultra vires?

An act is ultra vires of a corporation when it is not within the power of the corporation to perform it. The charter of any corporation is its enabling act. The corporation is empowered to do those things only for which it is created, and to do them in the manner specified in the charter. This is especially the rule in the case of private trading or manufacturing corporations. "The charter is the full measure of the powers which the corporation possesses. It cannot lawfully exercise any others. In ordinary cases every corporation is just what the incorporating act has made it, and is capable of exercising its faculties only in the manner the act authorizes." Farrell v. Railroad Co., 61 Conn. 127, 23 Atl. 757; Inhabitants of Berlin v. Inhabitants of New Britain, 9 Conn. 180; Bank v. Earle, 13 Pet. 587 (Taney, C. J.). And, as charters of this kind are...