Farwell v. Great Western Tel. Co.

• Decision Date: 13 June 1896
• Citation: 161 Ill. 522,44 N.E. 891
• Parties: FARWELL et al. v. GREAT WESTERN TEL. CO. et al.
• Court: Illinois Supreme Court

161 Ill. 522

44 N.E. 891

FARWELL et al.

v.GREAT WESTERN TEL. CO. et al.

Supreme Court of Illinois.

June 13, 1896.

Appeal from appellate court, First district.

Bill by Charles B. Farwell and others against the Great Western Telegraph Company and others. From a judgment of the appellate court (47 Ill. App. 579) affirming a decree dismissing the bill, complainants appeal. Reversed.Tenney, McConnell & Coffeen, for appellants.

Thomas J. Sutherland, Black & Fitzgerald, Chas. E. Pope, U. P. Smith, Eric Winters, John M. Hamilton, and Wm. J. Ammen, for appellees.

PHILLIPS, J.

Charles B. Farwell and four other stockholders in the corporation known as the Great Western Telegraph Company filed in the circuit court of Cook county a bill in chancery in behalf of themselves, and of all other stockholders in said company who would come in and contribute to the expenses of the suit, against the Great Western Telegraph Company, Selah Reeve, David A. Gage, Josiah Snow, Jeremiah M. Terwilliger, Judson M. W. Jones, Thomas J. Sutherland, Adelaide K. Sutherland, George F. Harding, John Clark Hilton, Franklin D. Gray, John J. McClellan, and Edwin R. Bowen, on the 3d day of October, 1888, which was subsequently amended by changing the name of Edwin R. Bowen to Elias R. Bowen, and also by making Elias R. Bowen, receiver, party defendant. From the record it appears that on the 2d day of December, 1867, the Great Western Telegraph Company, a corporation, was organized under an act of the general assembly of the state of Illinois approved February 9, 1849, entitled ‘An act for the establishment of telegraphs.’ The principal office of this corporation was located in the city of Chicago, and its capital stock consisted of 120,000 shares of $25 each, which was subscribed for and taken at the time of its organization by the following named persons, who subscribed for the number of shares, and amounting as follows:

+----------------------------------------+
                ¦Selah Reeve, 117,897 shares  ¦$2,947,425¦
                +-----------------------------+----------¦
                ¦Hasbrouck Reeve, 100 shares  ¦2,500     ¦
                +-----------------------------+----------¦
                ¦David A. Gage, 1,000 shares  ¦25,000    ¦
                +-----------------------------+----------¦
                ¦Josiah A. Snow, 1,000 shares ¦25,000    ¦
                +-----------------------------+----------¦
                ¦Dwight Johnson, 1 share      ¦25        ¦
                +-----------------------------+----------¦
                ¦John Hall, 1 share           ¦25        ¦
                +-----------------------------+----------¦
                ¦Valentine F. Gardner, 1 share¦25        ¦
                +----------------------------------------+
                

The full number of shares being thus subscribed, a liability existed on the part of each subscriber to the company for the par value thereof, respectively, for the amount taken.

It is elementary that stock may be issued by subscription made in writing, or even by an equivalent act, for which cash is to be paid for the stock so subscribed for, or it may be issued to be paid for in property or labor, or both, or issued as a stock dividend. In the organization of a corporation the stock must be subscribed for to be paid in cash, labor, or property. In the absence of an agreement as to the manner of payment, by the mere act of subscription alone a money payment may be enforced. There has arisen much controversy and litigation as to whether payment for the issue of stock may be made by labor, property, work under contract, or valuable consideration other than money. It is not now questioned that it may be done, in the absence of statutory provisions requiring payment to be made in cash. Wyman v. Powder Co., 8 Cush. 168;Hayden v. Cotton Factory, 61 Ga. 234;Reichwald v. Hotel Co., 106 Ill. 439;Liebke v. Knapp, 79 Mo. 22;Clark v. Farrington, 11 Wis. 306; Railroad Co. v. Hickman, 28 Pa. St. 318; Railroad Co. v. Cramer, 23 Ind. 490. But, when such payment is made otherwise than with cash, it is necessary that the property or services shall be reasonably worth the sum at which they are so taken. Where a valuation is made in good faith and without fraud, the payment by property or labor at such valuation is as effectual in satisfying the liability for the subscription as a payment in money of the same amount. Whether shares of stock, when the certificates are sold, may be treated as fully paid by the purchaser, is not necessary to determine in this case, as adjudications of this court with reference to this corporation have determined incidentally that question; and, with the statute now in force, that question is determined by it. After the subscription of stock was thus made to this corporation, an election was held to select a board of directors, and the president selected by the board entered into a written contract for the corporation with Selah Reeve for the construction of 2,000 miles of line. On the shares of stock subscribed by the persons who sought to form this corporation, no money was paid by any of them. Selah Reeve, who subscribed for the greater part of it, was insolvent, and a few months thereafter, on his own petition, was discharged as a bankrupt. On the 13th of January, 1868, the corporation elected, as a board of directors, Gage, Snow, Hall, Hasbrouck, Reeve, and Selah Reeve. Gage was elected president. Selah Reeve resigned as director, and on the 25th of March, 1868, entered into a written contract, through Gage as president, for the construction by him of 2,000 miles of telegraph line, on routes to be designated by the company. No time for the commencement of the work its completion, nor compensation per mile, was fixed, and the agreement contained this covenant: ‘In consideration of the aforesaid covenants and agreements, to be faithfully kept and performed by the said contractor, the said Great Western Telegraph Company doth hereby covenant and agree to and with the said Selah Reeve to issue and deliver to him certificates for shares in the capital stock of the Great Western Telegraph Company, to wit, one hundred and twenty thousand shares, on the execution of this agreement; the said shares to be owned and represented by the said Selah Reeve, in all meetings of the shareholders of said company, until such time as the same shall be subscribed and fully paid for by other parties.’

We quote from Terwilliger v. Telegraph Co., 59 Ill. 249, a further statement of facts: ‘Contemporaneously with the execution of this agreement, Reeve assigned to Snow, the secretary and treasurer of the company, the one hundred and seventeen thousand eight hundred and ninety-seven shares originally subscribed by him, in trust, to sell the same to such persons as either he or the company could procure to subscribe to the stock, at the rate of $10 per share, and to pay over the proceeds to Reeve under his contract with the company, or any contract supplemental thereto. The next day a supplementary agreement was made and executed between Reeve, the company, and Snow, as trustee. By this agreement an irrevocable authority is given to the trustee to sell stock, through the agents of the company, to subscribers, at $10 per share; the company paying to the trustee the money thus received, less a commission of fifty cents per share to be allowed to agents, and the trustee paying it to Reeve as fast as he should construct the line, in sections of ten miles each, to the satisfaction of the company. This contract also specifies the rate to be paid per mile for the construction of the line. The agreement also provides that the trustee shall represent all the stock assigned to him by Reeve, except so much as may be subscribed and paid for by other persons. The rate of compensation to be paid Reeve was, as shown by the evidence, largely in excess of the cost of construction. The next step of these parties was to put their scheme in a position to command the public confidence, and enable them to procure subscriptions and money. To this end they proceeded on the 30th of March, four days after the execution of the final contract between the company and Reeve, to elect twenty-two additional directors. These new directors were selected from well-known citizens and men of business in Chicago, but they were not stockholders. Some of them afterwards did subscribe, but the greater part refused to do so, or to act as directors. Of the few who subscribed, we infer from the record, only one paid any money on his subscription. The parties conducting this scheme, having thus placed themselves in a position to impose upon the public by the unauthorized use of names that would command confidence, proceeded to issue a prospectus setting forth the organization of the company with these names as directors; stating that the company was established, under state laws and an act of congress, for the purpose of cheapening telegraphic correspondence in the West, and that the stock would be apportioned, according to population, to the cities and villages of Illinois, Wisconsin, Minnesota, Michigan, Iowa, Indiana, Missouri, Kansas, and Nebraska. The prospectus further stated that the stock was $3,000,000, divided into shares of $25 each, and that on the payment of $10 on each share a certificate of stock for $25 would be issued, and no further assessment would be made. Prior to the election of the twenty-two directors, the old board had adopted by-laws. The first of these by-laws provided that the first annual meeting of the stockholders of the company should be held within ninety days after 2,000 miles of the company's line had been equipped with wire. Another by-law provided for the election of directors whenever any number of shareholders, holding a majority of the shares, shall present a written request, addressed to the president, for a meeting of shareholders for that purpose. The prospectus did not disclose the fact that a contract for 2,000 miles of line had already been made, and that all the stock, except an insignificant portion, had been placed, without payment, in the hands of a trustee of the contractor, with...