Jesse v. Four-Wheel Drive Auto Co.

• Decision Date: 08 July 1922
• Citation: 177 Wis. 627,189 N.W. 276
• Parties: JESSE ET AL. v. FOUR-WHEEL DRIVE AUTO CO. ET AL.
• Court: Wisconsin Supreme Court

177 Wis. 627

189 N.W. 276

JESSE ET AL.

v.FOUR-WHEEL DRIVE AUTO CO. ET AL.

Supreme Court of Wisconsin.

July 8, 1922.

Appeal from Circuit Court, Waupaca County; Byron B. Park, Judge.

Suit by H. M. Jesse and others against the Four-Wheel Drive Auto Company and others. Judgment for plaintiffs, and defendants appeal. Affirmed.

This is an action to compel certain directors of the defendant company to pay back to the corporation treasury, corporate funds expended by them in the defense of a so-called “Mahon suit,” and to enjoin further expenditures on such account.

The defendant, Four-Wheel Drive Auto Company, was incorporated in January, 1909, and began in a very small and limited way to manufacture auto trucks, auto parts, and auto accessories at Clintonville, Wis. Until the month of September, 1914, the company was in straightened financial circumstances. Soon after the declaration of the World War in August, 1914, the company entered into contracts with certain of the Allied Powers for the sale of its motor trucks, and the business of the company developed rapidly and the profits were very large, aggregating in five years to about 1,000 per cent. on the original capital stock.

During the period from September 1, 1914, to January 15, 1916, certain directors purchased 121 shares of the stock of the defendant company, of the par value of $12,000, for themselves individually, from Thomas J. Mahon and other shareholders in the company.

Shortly prior to the annual meeting on January 27, 1920, these stockholders brought suit against the individual directors, alleging that the directors conspired and combined for the purpose of obtaining their stock of the company, and that they concealed and failed to disclose important and material facts, which it was their duty to disclose, before making the purchases, thereby causing the stockholders to sell at a grossly inadequate price. They demanded a rescission of the sales and an accounting of profits. This action is referred to as the “Mahon suit.”

A general notice of such annual meeting was mailed to all stockholders. No mention was made of any unusual business to come before the meeting. At this meeting the total stock represented was 12,079 1/2 shares out of a total of 15,000 shares, of which 4,450 were by proxy, 3,292 by the defendant's directors, and 4,337 1/2 otherwise owned. The proxy stock, together with that owned by defendants far exceeded one-half of the stock represented at the meeting.

At said annual meeting the following resolution was introduced and voted on:

“Be it resolved that we hereby extend a vote of confidence and thanks to the directors for the faithful and efficient manner in which they have conducted the affairs of this company.

Be it further resolved that, whereas an action has been started against the directors personally of this company by T. J. Mahon and others, that the directors be and are hereby authorized to defray the expense of defending said action out of the funds of this company.”

There was no opposition made to the resolution. The resolution was not presented until the afternoon session, and some of those present in the forenoon had gone. The complaint in the Mahon suit was not read at the meeting, and it appears that many of those present did not comprehend the resolution.

The trial court held that the stockholders present at the annual 1920 meeting did not have the power to bind those absent and not represented by proxy, because the proposition to defray the directors' expense in defending the Mahon suit was extraordinary and outside of the usual business transacted at annual meetings of the stockholders; that before the unanimous vote of those present could become binding upon all the stockholders, notice must have been given prior to the meeting that the proposition would be presented for action; that those present at the meeting and not voting are not estopped to maintain that the action taken at the meeting was void as to themselves and as to those not present who refuse to be bound by the resolution; that the Mahon suit does not affect the corporate rights and privileges of the Four-Wheel Drive Auto Company to any extent, permitting the directors under their administrative powers, or the stockholders except by unanimous vote of each and every of them, to defray the expenses of the directors made defendants therein. The judgment restrains the Four-Wheel Drive Auto Company from paying out funds of the company to defray the expenses of the Mahon suit, and adjudges that the defendant directors return to the corporate treasury all funds so paid out by them. The judgment also gives a lien on the amount recovered for expenses of this action, including attorney's fees.

From the judgment in favor of the plaintiffs the Four-Wheel Drive Auto Company and its directors appeal.

Otto L. Olen, of Clintonville (P. H. Martin, of Green Bay, of counsel), for appellants.

R. H. Morris, of Clintonville (B. R. Goggins, of Wisconsin Rapids, of counsel), for respondents.

CROWNHART, J. (after stating the facts as above).

This case presents a question of first impression to this court. We find no case directly in point. The respondent cites us to Chabot v. Chabot, 109 Me. 403, 84 Atl. 892;Hooker, etc., Co. v. Hooker, 88 Vt. 335, 92 Atl. 443; and Pickering v. Stephenson, L. R. 14 Eq. 322, as authorities for his position. In principle they have a bearing on this action.

This action presents a question of business morals quite as much as of law. Through corporations the major portion of the business of the country is conducted. Formerly the corporation was small, the shareholders were comparatively few, and they took an important part in the management of the corporation. Now corporations are often of tremendous proportions, with shareholders widely scattered and many of them without knowledge of the inner...