Jones v. Missouri-Edison Electric Co.

• Citation: 144 F. 765
• Decision Date: 17 April 1906
• Docket Number: 2,302.
• Parties: JONES v. MISSOURI-EDISON ELECTRIC CO. et al.
• Court: U.S. Court of Appeals — Eighth Circuit

144 F. 765

JONES v. MISSOURI-EDISON ELECTRIC CO. et al.

No. 2,302.

United States Court of Appeals, Eighth Circuit.

April 17, 1906

(Syllabus by the Court.)

The relation of a stockholder to his corporation, its officers and his co-stockholders is one of contract in which the pertinent statutes and the settled law are embodied. Where the law or the applicable statutes empower directors and the holders of three-fifths of the stock of a corporation to consolidate with another corporation, a consolidation wrought by the faithful exercise of this power is neither void nor voidable at the option of the holder of the minority of the stock.

The relation of the holders of the majority of the stock of a corporation and that of its directors to the holders of the minority of the stock is fiduciary. A corporation is a trustee for its stockholders. Where the holders of the majority of the stock of a corporation combine, elect and control its directors, to execute a preconceived scheme and use the powers of the corporation to carry it out, they put themselves in the place of the corporation and become trustees for the holders of the minority of the stock.

Any sale of the corporate property by the majority stockholders to themselves, and any disposition by them of the corporation or of its property to deprive the minority stockholders of their just share of the latter, or to get gain for the majority at the expense of the minority, is a breach of trust which renders the sale or disposition voidable and the property recoverable at the suit of the corporation or of a minority stockholder on his own and its behalf.

The fact that the minority stockholders may maintain an action at law for the value of their stock is no bar to their suit in equity to avoid the contract and transaction. They have the option to avoid the transaction and follow the trust property in equity or to affirm it and to recover as damages at law the value of their stock.

The complainant avers in his bill that pursuant to a preconceived scheme the holders of three-fifths of the stock of the Edison Company elected biddable directors and consolidated the corporation with the Union company whose stock was owned by the majority, against the protest of the holder of a minority of the preferred stock of the Edison company, upon such terms that while before the consolidation the preferred stock of the Edison Company represented one-half of the combined net assets of the two corporations, it represented less than 5/32 thereof after the consolidation, and while the stock of the Union company represented only 6/32 of the net combined assets before the consolidation, it represented four-fifths thereof after the consolidation. Held (1) the contract and act of consolidation constituted a fraud in law upon the holders of the minority of the preferred stock and an abuse of the fiduciary relation which the holders of the majority and the directors bore to the holders of the minority of the stock; (2) the contract and act of consolidation were voidable in equity at the suit of the Edison Company or at the suit of one of its minority stockholders on his own and its behalf; (3) the consolidated corporation holds the property of the Edison Company charged with the same trust imposed upon it in the hands of the majority stockholders thereof who represented the consolidated corporation also in the consolidation; (4) a court of equity has plenary power to rehabilitate the Edison Company if that action be necessary to secure to the minority stockholders complete relief. But it may consider at the final hearing the substantial rights of all the parties and the controlling equities and mold its decree to do complete equity to the minority stockholders and to avoid inequity to the other parties to the suit; (5) the directors of the Edison company who signed the agreement of consolidation were proper parties to the bill, which contained a prayer for the rehabilitation of the Edison Company and for the transfer to the complainant upon its books of certain shares of the corporation of which he was the equitable owner; (6) the bill states a good cause of action in equity.

The rule that the existence of a corporation may be questioned only by the state is no bar and has no application to a suit by a minority stockholder to avoid for fraud or breach of trust a contract and act of consolidation and to restore to the corporation injured, or to its stockholders, the powers franchises, and property transferred by these means to the consolidated company.

Where a complainant is uncertain whether upon a certain state of facts he is entitled to avoid a contract or transfer for fraud or breach of trust and to recover back his property, or to enforce a lien upon it for its value, he may pray for each in the alternative, and a court of equity will grant him the relief to which it deems him entitled.

A consolidation of corporations wrought by fraud or breach of trust does not so extinguish the old corporations that they and their minority stockholders are deprived of their rights to maintain suits in equity to avoid it.

A claim of a minority stockholder on behalf of his corporation and his claim on his own behalf, founded on the same facts, which warrant the same or similar relief, may be joined in the same bill.

The joinder in a suit by a minority stockholder to avoid a consolidation, of the majority stockholders and the directors who took an active part in creating the consolidation, does not render a bill multifarious. A bill is not multifarious which presents a common point of litigation, the decision of which will affect the whole subject-matter and settle the rights of all the parties to the suit. The union of several causes of action for the same demand or relief does not create multifariousness.

The statutes of the state of Missouri empower any two corporations of that state organized or created solely for manufacturing purposes whose objects and business are of the same nature, to consolidate into one corporation upon the consent of the owners of three-fifths of the capital stock of each. Rev. St. Mo. 1899, Secs. 1334, 1335, 1336. The appellant, who was the complainant below, had the legal title to 10, and the equitable title to 992 shares of the preferred stock of the Missouri-Edison Electric Company, a corporation of the state of Missouri, which was consolidated on September 9, 1903, with the Union Electric Light & Power Company, hereafter called the 'Union Company,' a corporation of the same state, into the Union Electric Light & Power Company, which will henceforth be styled the 'Consolidated Company.' He exhibited his bill on his own behalf, and on the behalf of all others similarly situated, and also for the use of the Edison Company against the three corporations and the directors of the Edison Company, to avoid this consolidation, or to have the value of his stock ascertained and the amount thereof adjudged to be a lien upon the property of the Edison Company and the Consolidated Company, and to secure a decree that the latter company should pay this amount. The directors demurred to the bill upon the grounds that it did not state facts sufficient to constitute a cause of action against them and that it was multifarious. The consolidated company interposed a separate demurrer upon the same grounds. The demurrers were sustained, and the bill was dismissed, upon the ground that it stated no cause of action against any of the defendants, and from the decree of dismissal, the complainant appealed.

The alleged facts set forth in the bill which are deemed material to the decision of the questions presented by the appeal are these: The North American Company, a corporation of the state of New Jersey, which is engaged in the acquisition of electric light and power plants, conceived in 1901, and commenced to execute the scheme of consolidating all the electric light and power plants in the city of St. Louis, and of thereby dispensing with competition and securing a monopoly of the business of furnishing electric light and power in that city. There were four corporations empowered to conduct this business. The North American Company acquired substantially all the capital stock of two of them, the Citizens' Electric Light & Power Company, which had a capital stock of $2,000,000 and property of no greater value than $600,000, and the Imperial Electric Light, Heat & Power Company, which had a capital stock of $1,500,000 and property which was worth not more than $1,500,000 and was mortgaged for that amount, and consolidated them on May 16, 1902, into the Union Company, which had a capital stock of $10,000,000 $2,000,000 of which was preferred, and net assets not exceeding $600,000, or 6 per cent. of the stock which represented them. The North American Company associated and allied with itself in the execution of its scheme a trust company and certain citizens of the city of St. Louis and these schemers purchased, about May 15, 1903, of the directors of the Edison Company, substantially all their stock, 1,725 shares of the preferred stock of that company which was in its treasury and other shares of its stock sufficient to make the aggregate of their holdings more than the three-fifths requisite under the statutes to authorize a consolidation with another corporation. These schemers had previously conceived the plan of depriving the stockholders, and especially those preferred stockholders of the Edison Company, who did not sell their shares to them, of the larger part of the value of their stock by selling the property of their corporation to themselves by means of the legal device of a consolidation of the Edison Company with a corporation which they owned. It was for the purpose of carrying...