Ellis v. Penn Beef Company
| Decision Date | 14 July 1911 |
| Court | Court of Chancery of Delaware |
| Parties | FRANCIS D. ELLIS, v. PENN BEEF COMPANY, JOHN W. ASHWORTH, CLINTON B. KRAMER and JONATHAN H. BROWN |
BILL BY STOCKHOLDER FOR CANCELLATION OF SHARES OF STOCK. The complainant was the holder of a majority of the shares of capital stock issued by the defendant corporation and by his bill sought to have cancelled the shares of stock issued to the defendants, Ashworth, Kramer and Brown, as well as the appointment of a receiver for said defendant corporation pendente lite, to conserve its property from dissipation pending final determination of the cause.
Upon presentation of the bill to the Chancellor, a rule was issued requiring the defendant company to show cause why a receiver pendente lite should not be appointed, and at the return thereof the cause was heard on bill and ex parte affidavits the material facts appearing in the opinion.
Ordered that the complainant within five days give bond in the sum of one thousand dollars to the State of Delaware.
Robert H. Richards and Christopher L. Ward, for complainant.
Saulsbury Ponder & Morris, for defendant corporation.
The bill and affidavits submitted on the rule to show cause why a receiver of the company should not be appointed present a case which calls for the intervention of the Court of Chancery. Two persons, Ashworth and Kramer desiring to engage in the business of selling meat in Philadelphia on commission, having leased a building for the purpose for ten years, obtained a charter in Delaware, using for the purpose a third person, Brown, as a dummy, as an incorporator, and afterwards as a stockholder and director. After organization and the adoption of by-laws, etc., the incorporators, Ashworth, Kramer and Brown, no one else being then interested, entered into an arrangement with Ashworth and Kramer whereby there was purchased for the company from Ashworth and Kramer a refrigerating plant and appliances, certain office furniture and the lease, for the consideration of $ 20,000 in full-paid common stock of the company, i. e., 200 shares at $ 100 par value, being all the authorized common stock. This was carried out by the issuance to Ashworth and Kramer of 200 shares of common stock, 100 to Kramer and 100 to Ashworth, and the latter transferred three shares to Brown, presumably to qualify him as a director. After the election of directors this action of the incorporators was ratified by them. Both the incorporators and directors, presumably by resolution, found the property and lease to be of the fair value of $ 20,000. As a fact neither Ashworth nor Kramer then or thereafter paid any portion of the cost of the refrigerator, which cost about $ 8,000; and so far as appears by any allegation on their part, have not paid any money as consideration for any stock issued to them, except two months' rent at $ 200 per month. Whether the lease is of value is disputed, and the weight of the evidence on the ex parte affidavits is that it was not. There is no evidence of value of the furniture, and it was not referred to in the argument.
A few after days after the incorporation, the company being without money capital, the complainant, Ellis, joined the enterprise by becoming a stockholder, paid in in cash $ 20,000, and received one hundred shares of common and one hundred shares of the preferred stock, the preferred stock having no vote. By agreement between Ellis, Ashworth and Kramer, Ellis was given control of the company by the transfer to him of fifty-one more shares of the common stock, twenty-five from Kramer and twenty-six from Ashworth, the total authorized and outstanding common stock being three hundred shares. Ellis knew when he became thus interested that the plant had not been furnished, but that it was the duty of Ashworth and Kramer to furnish it at their own expense, as the real consideration for their shares of stock. This they absolutely failed to do. Later Ellis paid in $ 4,800 more money and received forty-eight shares of preferred stock. Later, because of the failure of Ashworth and Kramer to pay for the plant, it was paid for from money of the company.
The business was unprofitable from the start, and dissensions arose between Ellis on the one side, and Ashworth and Kramer on the other; resulting in changes in the by-laws, the deposition of Ellis as president, after he had discharged Ashworth and Kramer from their supposed positions as salesmen; and other things occurred which show clearly that the dissensions are not only deep-seated, but also such as to entirely jeopardize the success of the enterprise. It is unimportant to consider these in detail at this time. There are also allegations of fraudulent misrepresentations to Ellis by Ashworth and Kramer, as promoters of the company, as to arrangements alleged to have theretofore been made for obtaining shipments of meat and provisions to the company to be sold on commission; but the conclusions now reached are not based on this branch of the case.
The complainant, being the only stockholder who has invested money in the business, now asserts that the other stockholders hold their stock without having paid, or rendered, the consideration fixed therefor; and asks that the shares be canceled, offering to surrender for cancellation the fifty-one shares of common stock which he received from Ashworth and Kramer; and in view of the probable jeopardy of his interest by reason of the dissension, asks that a receiver pendente lite be appointed to take charge of the affairs of the company until the rights of the stockholders to their stock be ascertained. Not only is the company a defendant, but also Ashworth, Kramer and Brown, being all the stockholders. An appearance is now made for the company only, and the rule was not served on Ashworth and Kramer. Brown takes no part in the controversy.
The appointment of a receiver pendente lite is a well recognized branch of the general preventive jurisdiction to protect from injury the thing in controversy, and preserve it for all parties in interest until disposed of as the court may direct. This is an exceedingly delicate and responsible duty, to be discharged with the utmost caution and only under such special and peculiar circumstances as demand summary relief. It is, therefore, not to be exercised doubtingly, but the Court must be convinced that the relief is needed, and that it is the appropriate means of securing a proper end. Serious injury to the complainant is an important element in deciding whether the relief should be granted. It is, however, a very beneficent remedy in a proper case, and should be used boldly. The remedy is, of course, provisional and not decisive of the ultimate rights nor conclusive of the merits. With a prima facie case made by the complainant, and probable cause for sustaining the bill, the preliminary relief should be granted, without going into the merits. In some cases the defendant is allowed to give bond for the security of the res to avoid a receivership.
The Constitution of Delaware requires that there shall be real value given in payment of shares of stock, and the general corporation law contains the same requirement. Article 9, § 3, of the Constitution is, as follows:
"No corporation shall issue stock, except for money paid, labor done or personal property, real estate or leases thereof actually acquired by such corporation."
Section 14 of the general corporation law is, as follows:
The situs of the shares of the company are in Delaware for the purposes of this case and the determination of the question raised therein, under section 130 of the general corporation law, which provides, as follows:
"For all purposes of title, action, attachment, garnishment, and jurisdiction of all courts held in this State, but not for the purpose of taxation, the situs of the ownership of the capital stock of all corporations existing under the laws of this State whether organized under this Act or otherwise, shall be regarded as in this State."
There are two main questions raised by the bill: (1) Whether a stockholder, who was not an incorporator, and who has paid in full for his shares, acquired since the organization, may maintain a bill to cancel shares held by the other stockholders, who have paid practically nothing for their shares, and who have admittedly failed entirely to give to the company the real consideration for which shares were issued to them, notwithstanding they as directors of the company have in fact declared that the consideration to be given by themselves was of fair value for their stock. (2) Whether the Court, in view of deep-seated dissensions between the officers and stockholders of the company, jeopardizing the interests of all, will appoint a receiver to take charge of the business of the company pending the suit for cancellation of the stock, in order to conserve the property and other interests, the alleged illegal stockholders being in control of the company, and none of the property of the company and none of the officers being in Delaware.
(1) A stockholder may maintain a...
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...to that of the Supreme Court of the United States as founded upon the sounder and better reason. It is to be noted, however, that the Penn Beef Case, in which Chancellor Curtis thus expressed himself favorable to the doctrine of the Bigelow Case as opposed to that of the Lewisohn Case, was ......
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