Henry L. Doherty & Co. v. Rice

• Decision Date: 06 September 1910
• Citation: 186 F. 204
• Court: U.S. District Court — Middle District of Alabama
• Parties: HENRY L. DOHERTY & CO. v. RICE et al.

186 F. 204

HENRY L. DOHERTY & CO. v. RICE et al.

United States Circuit Court, M.D. Alabama, Northern Division.

September 6, 1910

[Copyrighted Material Omitted] [Copyrighted Material Omitted]

Steiner Crum & Weil, Charles A. Frueauff, and Jno. R. Tyson, for complainants.

Ray Rushton, Horace Stringfellow, J. M. Chilton, and Ball & Samford, for respondents.

JONES District Judge (after stating the facts as above).

While the affidavits submitted on this hearing cover a wide range, and counsel have earnestly and ably urged many legal principles on the issues thus raised, the refusal or granting of a preliminary injunction depends upon two controlling questions: First, whether Rice's contract with complainants is such an one as a court of equity can and ought to enforce by decreeing specific performance; and, second, how far, if specific performance be allowed, can the court properly go for the relief of complainants, in view of the quasi public nature of the two defendant corporations, in restraining issuance of stock and bonds, and the contemplated improvements of their plant. The Citizens' Light, Heat & Power Company is a domestic corporation, chartered on July 2, 1903. Its original capital stock was $30,000, which, by amendment to its charter, was increased to $50,000, and afterwards, by proper proceedings in the probate court, on May 22, 1907, was authorized to be increased to $200,000. The total outstanding issue at the time of the filing of the bill was $50,000, divided into 500 shares of $100 each. The Citizens' Light & Power Company is also a domestic corporation, and what is known as a 'holding company.' It does no business itself, but votes and controls the stock in the first company, and has a capital stock of $100,000. The owners of the stock of the Citizens' Light, Heat & Power Company transferred their stock in that company to the Citizens' Light & Power Company in payment of subscriptions to the capital stock of the company, and received stock two for one.

The holders of the stock transferred it to certain individuals as trustees, and received, in return, trustees' certificates from them. The trustees were to exercise exclusively all the powers and privileges that could be exercised by the owners of the stock, with certain exceptions not here material; the instrument creating the trust further required the stock in the hands of the trustees to be voted as a unit by them on all questions, to be decided by a majority of the trustees. The trust can be dissolved at any time by a majority vote of the trustees, if concurred in by a vote of a majority of the owners of the trustees' certificates, which represent the stock placed in the trust. The trust is to continue for five years, with the privilege on the part of the trustees to extend it for an additional five years.

Alex. Rice, who owned and controlled 800 out of a total of 1,000 shares or the trustees' certificates representing them, contracted to sell these shares and stock certificates to Doherty & Co. on certain terms and conditions. Differences arose as to performance, and Rice declined to consummate the contract. Thereupon Doherty & Co. filed their bill against him to compel specific performance, and an injunction issued forbidding him to transfer the stock or trust certificates, and also against the two light companies forbidding them to permit any transfer of the stock to be made upon their books until the further order of the court.

After the injunction had been served upon the manager of the light companies, but not upon Rice, who evaded the service, Tillis, by aid of Rice's attorney and the officers and directors of the light company and the trustees who issued the certificates representing the stock, consummated the sale by transfer of the stock on the stock books, and had trustees' certificates issued to himself. Tillis not only took with notice of Rice's contract with complainants, but indemnified him against damage for its breach. The bill was amended, making Tillis a party, and a restraining order issued forbidding him, in substance, from doing anything to disturb the status which the court by its restraining order against Rice had decreed was proper to be maintained regarding the stock and trustees' certificates pending final decree. As the light companies, of which Tillis had obtained control by the transfer to him of the stock owned and controlled by Rice, are the instrumentalities by which he could effect his purpose as alleged in the bill, those corporations which were defendants to the original and amended bills were also restrained in substance from doing anything which could disturb the status. Before this restraining order was served, Tillis, by virtue of his control of the directorate of the Citizens' Light, Heat & Power Company, had that corporation issue 800 more shares of the capital stock, for which he subscribed, thus making him the owner, including the certificates gotten from Rice representing 917 shares in the Citizens' Light & Power Company, and half that number in the Citizens' Light, Heat & Power Company, and also of 800 additional shares out of a total issue of 1,300 shares by the latter company, and, as the bills allege, the light company now proposes a further issue of bonds, which had been authorized before this controversy arose, and very heavy expenditures to enlarge the plant and equipment.

Tillis is the owner and controller of the great majority of the capital stock of the Montgomery Traction Company, the largest consumer of electric current in this city, which is now furnished by the Montgomery Light & Water Power Company. That company has been doing business in Montgomery for 15 years past, and is and has long been a competitor of the light company in furnishing electric light and power in the city and suburbs. Doherty & Co. own the majority of its stock and control its operations. Tillis states in his affidavit that, not being able to attend personally to the negotiations, he authorized a friend, in the event there was an opportunity to do so, to purchase for him 'the absolute control' of the Citizens' Light, Heat & Power Company, and that, so far as he knows or believes, no one besides Doherty & Co. or the Montgomery Light & Water Power Company want the stock of the Citizens' Light, Heat & Power Company; 'that he knew, when he bought it, there was no general market value for the shares, and that, if he should ever want to sell them, probably the only one who would purchase them would be Doherty & Co. or the Montgomery Light & Water Power Company, and that they would only purchase it in order to get rid of said company as its competitor.'

It is quite evident, therefore, that the struggle here is in reality between Tillis under the form of the light company and the Montgomery Light & Water Power Company under the form of Doherty & Co. whether or not the contract with Rice shall be effectually enforced. Doherty & Co. control the Montgomery Light & Water Power Company, and expect to make it the ultimate beneficiary of the contract with Rice, if they enforce it. We may lay aside all questions as to the motives or intentions of the disputants, and confine the controversy to the legal and equitable rights of the parties under the circumstances disclosed under the evidence in the case as now presented.

Strenuous insistence is made by counsel for the respondents that Rice's contract with Doherty & Co., in view of the fact that the latter are owners of most of the shares of stock and controllers of the Montgomery Light & Water Power Company, is contrary to public policy and void, as tending to create an unlawful monopoly and stifle competition, and is therefore forbidden by the laws of this state.

We must look to the Constitution and laws of Alabama to solve this contention. Code of Alabama 1907, Sec. 3481, subd. 10, authorizes domestic corporations to 'subscribe for, acquire, hold and dispose of stocks, bonds or other evidence of indebtedness of any other corporation of this or any other state, or foreign countries, and while owners thereof to exercise the rights, privileges and powers of ownership, including the right to vote,' etc., and under subdivision 11 of the same section they may also consolidate before or after the completion of their works and plants with any other corporation or corporations under certain conditions hereafter noted. Under section 3640, any foreign corporation 'may acquire by subscription to the capital stock or by purchase or otherwise, and hold, own and vote shares of the capital stock of any corporation organized and existing under the laws of this state. ' Section 1260 of the Code authorizes cities and towns to regulate the manner and rates for furnishing gas, electricity, and water, and prescribe the quality of the gas and electricity furnished the inhabitants by any person or corporation.

They may prescribe penalties for violation of their ordinances upon the subject. The only limitation placed upon the right of domestic corporations to consolidate with one another is that telegraph and telephone companies shall not do so, and that banking and railroad companies shall not consolidate with any other than like kinds of corporations. Large latitude is given mining and manufacturing companies, street railroads, and railroads to hold stock in other like enterprises and to consolidate with them. The legislation of the state authorizes consolidations between corporations like those here involved, and allows foreign corporations to purchase stock in them, although the Legislature well knew that light and power corporations are always competitors, if there be more than one in the locality where the business of the corporation is carried on.

It is thus manifest that the Legislature,...