Meadows v. Bradshaw-Diehl Co.
| Decision Date | 23 March 1954 |
| Docket Number | BRADSHAW-DIEHL,No. 10555,10555 |
| Citation | 81 S.E.2d 63,139 W.Va. 569 |
| Court | West Virginia Supreme Court |
| Parties | MEADOWS et al. v.CO. et al. |
Syllabus by the Court.
1. Courts of equity have no jurisdiction to compel a private corporation to declare dividends, in the absence of proof of fraud, bad faith, or gross mismanagement.
2. Though an officer of a corporation occupies a fiduciary relation to stockholders, if on inquiry by a stockholder such officer is truthful as to the likelihood of dividends being paid and no fraud or other misrepresentation on the part of such officer is shown, there is no basis for setting aside a sale of such stockholders' stock to the corporation.
L. E. Woods, Jr., C. F. Bagley, Huntington, for appellants.
E. Garland Ray, George S. Wallace, George S. Wallace, Jr., Huntington, for appellees.
This suit brought in the Circuit Court of Cabell County, West Virginia, presents one controlling question: Whether the directors of the corporate defendant are guilty of actual or constructive fraud to the detriment of the two groups of plaintiffs who were holders of the second preferred stock in the corporation. The suit was brought by Maude Meadows, Mildred Bryant and Frances Hines on behalf of themselves and all other stockholders of the Bradshaw-Diehl Company, similarly situated, against Bradshaw-Diehl Company, a corporation, Glenn E. Fargo, George D. Bradshaw, Henry T. Diehl, Vincent N. Diehl, Selden S. McNeer and Helen Fargo.
After the suit was brought, W. A. Bibb, L. S. Bibb and Clara May Bibb filed a petition, the effect of which was to permit them to intervene in the original suit. They adopted the allegations of the original bill of complaint and joined in the special prayers contained in the bill filed by the original plaintiffs. The original plaintiffs will be hereinafter designated as the Meadows group, the intervenors as the Bibb group, the Board of Directors as the Board, except where it is necessary to refer to a particular member of such Board and Bradshaw-Diehl as Corporation.
In 1930 and prior thereto, the corporation was in financial difficulties. It owed considerable debts for money borrowed and merchandise purchased. It seems to have been under the management of George D. Bradshaw and H. T. Diehl who were members of the Board at the time of the institution of this suit.
The Corporation owed the First Huntington National Bank and the Ohio Valley Bank money in excess of $120,000.
A reorganization of the corporation was effected by agreement bearing date the 28th day of February, 1930. By that agreement, it was provided in substance that the capital structure of the corporation should be changed and that thereafter, the capital stock would consist of 1,000 shares of 6% cumulative first preferred stock of the par value of $100 each, approximately 1,219 shares of second preferred stock of the corporation and approximately 610.5 shares of the no par common stock.
In accordance with the agreement, the 1,000 shares of the first preferred stock was to have preference over any other stock as to payment of dividends and distribution of assets in event of liquidation; that the holders of such first preferred stock should have voting rights, one vote for each share of stock; that the holders of first preferred stock should be entitled to cumulative dividends at the rate of 6% and no more, payable semi-annually on the first days of January and July of each year.
It was further provided that the corporation should have the right to pay off and retire such preferred stock or any part thereof selected by lot, at any dividend period. The certificates of the second preferred stock of the corporation provided as follows: 'Six Per Cent. Second Preferred Stock of Bradshaw-Diehl Company, transferable only upon the books of the Company by the holder hereof in person, or by his duly authorized attorney, upon the surrender of this Certificate properly endorsed. The said Company at stockholders meeting held February 25, 1930, authorized the issue of One Hundred Thousand ($100,000) Dollars of Six Per Cent, Cumulative First Preferred Stock, par value One Hundred ($100) Dollars per share, with terms, conditions and provisions as follows:
'The holders of said new Six Per Cent, Second Preferred Stock shall be entitled to receive from the earnings or surplus or net profits of the Company, when and as declared, yearly dividends at the rate of six per centum per annum, and no more payable semi-annually on July 1st and January 1st of each year; said dividends shall be cumulative when the six Per Cent. Cumulative First Preferred Stock, authorized to be issued by stockholders of said Company at their meeting held February 25, 1930, has been paid off and retired;
'The holders of said Six Per Cent, Second Preferred Stock shall have no vote at meetings of the stockholders, but in the event the Company fails to pay at any dividend period any semi-annual cumulative dividend on said Second Preferred Stock after the retirement of said Six Per Cent Cumulative First Preferred Stock, then the holders of said Six Per Cent Second Preferred Stock shall be entitled to vote at any meeting of the stockholders of the Company, one vote for each share of stock.
'Upon any distribution of the assets of the Company, the holders of said Second Preferred Stock shall be paid subordinate to the prior rights of the said Six Per Cent Cumulative First Preferred Stock in said assets, at par and unpaid cumulative dividends if any hereunder, prior and superior to any other stocks of the Company heretofore or hereafter issued, except said Six Per Cent Cumulative First Preferred Stock.
'The Company shall have the right to pay and retire such Second Preferred Stock, or any part thereof, at any dividend period, the stock so to be retired, if less than all, to be selected by lot.'
The quoted portion of certificates evidencing shares of second preferred stock shows clearly the relationship of such stock to the first preferred stock.
The rights of the holders of no par common stock are not clearly delineated in this record, but it is a reasonable inference that the rights of the holders of such stock relative to dividends and distribution of assets were subordinate to the holders of the first and second preferred stock.
The reorganization was effected shortly after the signing of the agreement and all of the then stockholders of the corporation agreed to surrender all of their certificates of stock to the First Huntington National Bank, as Trustee, and in lieu thereof, to accept voting trust certificates showing their interest in the corporation. The agreement of February 28, 1930, was signed by all of the stockholders of the corporation and the First Huntington National Bank, Trustee. By the terms of the agreement, all of the affairs of the corporation and its management were placed in the hands of the First Huntington National Bank, as Trustee.
As part of the arrangement made by the First Huntington National Bank, George D. Bradshaw and H. T. Diehl made their joint note for the sum of $100,000 and deposited 1,000 shares of the first preferred stock in the corporation with such bank as collateral security for the note. Subsequently, Bradshaw seems to have been released from liability on the note; and the note, as reduced from time to time, was signed by H. T. Diehl, as sole maker, who deposited as collateral security, 800 shares of first preferred stock, so that at the time of the transaction with Glen E. Fargo, the 800 shares of first preferred stock was held as collateral security by the First Huntington National Bank for payment of the note above mentioned; 100 shares were held by George D. Bradshaw and 100 shares were held in the treasury of the corporation.
On or about the 21st day of June, 1940, Glen E. Fargo entered into an agreement with the First Huntington National Bank, Trustee, and all the stockholders of the corporation. The result of this agreement was that Fargo acquired for the sum of $45,000 nine hundred shares of the first preferred stock of the corporation; 60% of the no par common stock and none of the second preferred stock. The agreement of February 28, 1930 was revoked. The secretary of the corporation was directed by the agreement to issue to Fargo new certificates showing the ownership of the first preferred stock and sixty per centum of the no par common stock, and was further directed to issue to the persons entitled thereto certificates showing their ownership of the second preferred and no par common stock. According to this agreement, there was then outstanding 942.3 shares of second preferred stock and 1,000 shares of no part common stock.
It was likewise agreed that Fargo should acquire the 100 shares of first...
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...director has some fiduciary duty toward the shareholders, but we have extended it in later cases. Thus, in Meadows v. Bradshaw-Diehl Co., 139 W.Va. 569, 580, 81 S.E.2d 63, 69 (1954), we made this general statement: "Certainly the owners of the majority of shares of the corporation occupy th......
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