Harden v. Eastern States Public Service Co.

• Decision Date: 28 November 1923
• Citation: 122 A. 705,14 Del.Ch. 156
• Court: Court of Chancery of Delaware
• Parties: REEVE HARDEN, and others, v. EASTERN STATES PUBLIC SERVICE COMPANY, a corporation of the State of Delaware

122 A. 705

14 Del.Ch. 156

REEVE HARDEN, and others, v. EASTERN STATES PUBLIC SERVICE COMPANY, a corporation of the State of Delaware

Court of Chancery of Delaware, New Castle

November 28, 1923

This was a bill for accounting by eighty-seven preferred stockholders of the defendant, on behalf of themselves and all other stockholders. A demurrer was filed by the defendant, and the facts material to the disposition of the questions raised thereby are stated in the opinion.

Demurrer sustained.

Robert H. Richards, and King & Vogt, of Morristown, N. J., for the complainants.

Caleb S. Layton, of the firm of Marvel, Marvel, Layton and Hughes for the defendant.

OPINION

THE CHANCELLOR

The bill is filed by the complainants, over eighty in number, in behalf of themselves and such others as may hereafter become parties. Eastern States Public Service Company is the sole defendant. The complainants are holders of preferred stock of the defendant corporation. The bill alleges that the defendant proposed to extend an electric transmission line from the town of Newton to the town of Hamburg, in the state of New Jersey, at a cost of $ 60,000, and that the residents of Hamburg were invited to subscribe to the preferred stock of the defendant for this amount. The complainants purchased their stock upon this representation, as well as upon certain other representations made on behalf of the defendant concerning its capitalization and earnings. These latter representations are nowhere alleged to have been either false or fraudulent. The line extending electric service to Hamburg was in fact built.

The bill, after reciting in some detail various intercorporate transactions between the defendant and certain other corporations (not here necessary to describe), proceeds to allege that the defendant has sold all its substantive assets without notice to the preferred stockholders, has refused and neglected to account to its stockholders for the consideration therefor, has issued stock without any consideration therefor, has permitted its property and franchises to be mortgaged without proper and adequate consideration, and has negligently permitted or willfully placed or attempted to place its assets in the hands of other corporations owned or controlled by officers, directors and stockholders who are the same as, or identified with, the officers, directors and stockholders of the defendant, and that from an earning condition showing a net profit, the defendant has come into a condition showing a current liability. It is further alleged that, notwithstanding repeated requests, the defendant has neglected to advise the complainants of its financial status or to give them an opportunity to examine its books.

The prayers are for a decree adjudging that the defendant has improperly and unlawfully expended the corporate funds and should account to the complainants as stockholders for the expenditure of said moneys, that it should exhibit to the complainants its books, and for such other and further relief as the nature of the case may require.

The allegations of the bill which charge mismanagement of the corporate assets must be taken to mean that such mismanagement has been on the part of the officers of the corporation. While the corporation is the owner of the assets, yet their control and management rest in the officers and directors, whose relation to the assets is one of a fiduciary character. This is elementary. When, therefore, the bill in this case charges a wrongful disposition of the corporate assets by the corporation, it must necessarily mean to charge that the particular wrongs were done by the officers and directors. When those in control of the corporation and its assets misuse their power and wrongfully occasion loss and damage, the injury done thereby has been done to the owner of the property --the corporation. Those whose duty it was to act for it and in its interest have in such case breached their duty and wronged their principal. It follows, therefore, that whatever cause of action may exist by reason of this breach of duty exists in favor of the corporation. The stockholders, however, who are to be regarded as the ultimate beneficial owners of the corporate assets, have an interest therein which equity in a proper case will protect. It is the duty of the corporation itself to proceed to redress the wrongs done to it and thus mediately to safeguard the interests of its stockholders. If it will not do so, or if the wrongdoers themselves are still in control of the corporation so that a suit on behalf of the corporation would be in fact a suit conducted by themselves against themselves then the stockholders are permitted to proceed. But when they do so, they do so on behalf of the corporation whose cause of action they assert. Their right is strictly a derivative one, and the relief obtained belongs to the corporation and not to themselves. Roberts, et al., v. Kennedy, et al., 13 Del.Ch. 133, 116 A. 253; Myers v. Occidental Oil Corp., (D. C.) 288 F. 997; Smith v. Stone, et al., 21 Wyo. 62, 128 P. 612; Continental Security Co., et al., v. Belmont, et, al., 206 N.Y. 7, 99 N.E. 138, 51 L. R. A. (N.S.) 112, Ann. Cas. 1914A, 777; 6 Fletcher's Cyc. Corp., § 4061.

From these principles it logically follows that in cases of fraud, ultra vires acts or acts of negligence on the part of those charged with the duty of managing the affairs of a corporation, the offending officers, and not the aggrieved corporation, are the proper parties to account. Myers v. Occidental Oil Corp., supra; Weir v. Bay State Gas Co., (C. C.) 91 F. 940.

The bill in this case calls upon the corporation to account. Whatever cause of action the complaining stockholders are entitled to assert is in behalf of the corporation. Yet they call on the owner of this cause of action to appear and answer it. The corporation cannot be required to answer such a bill and the demurrer is therefore good.

If the bill be not regarded as a bill seeking relief against the corporation, but rather as a bill seeking relief against the officers and directors in behalf of the corporation, then it is fatally defective for the want of indispensable parties. Such officers and directors...