Riley v. Callahan Mining Co.

• Decision Date: 08 February 1916
• Citation: 28 Idaho 525,155 P. 665
• Parties: HAROLD RILEY et al., Appellants, v. CALLAHAN MINING COMPANY, a Corporation, et al., Respondents
• Court: Idaho Supreme Court

155 P. 665

28 Idaho 525

HAROLD RILEY et al., Appellants, v. CALLAHAN MINING COMPANY, a Corporation, et al., Respondents

Supreme Court of Idaho

February 8, 1916

MINING CORPORATIONS-DISCONTINUANCE OF BUSINESS-DEGREE OF GOOD FAITH REQUIRED FROM DIRECTORS AND OFFICERS-TRUST RELATION TO STOCKHOLDERS-ULTRA VIRES ACTS-STATUTORY CONSTRUCTION-ARTICLES OF INCORPORATION-RIGHTS OF MINORITY STOCKHOLDERS-MEASURE OF RELIEF GRANTED TO-EQUITABLE POWERS OF COURT.

1. A combination of the holders of the majority of the stock of a corporation to elect directors and officers and to control the acts of the corporation in order to carry out some particular purpose or policy, imposes upon such directors and officers a high degree of good faith and diligence in protecting the interests of all the stockholders, and constitutes them trustees in effect for such of the stockholders as object to the policy pursued by the majority stockholders.

2. The directors and officers of a corporation hold the corporate funds in trust, and any attempt on their part to divert the use of such funds to their personal profit or interest is a violation of the trust imposed by virtue of the office.

[As to directors of a corporation as trustees for the company, see note in 139 Am.St. 602.]

3. A corporation organized to do a general mining business, not having been granted the power to loan money in its articles of incorporation, cannot loan the corporate funds out at interest on a promissory note, and such act is ultra vires.

4. The amendment to sec. 2767, Rev. Codes (Sess. L. 1909, p. 163) by which "every corporation as such" is granted the power "to purchase, own, vote, sell or hypothecate the stock and bonds of other corporations," is not an unqualified grant of power, but must always be construed in the case of any particular corporation with reference to the purposes for which the corporation was organized as expressed in its articles of incorporation.

5. Sec 2714, Rev. Codes, requires articles of incorporation to state the purpose for which the corporation is formed, not only to inform the sovereign which creates the corporation, but also in order to formulate in a solemn and binding manner the contract of association between the incorporators, and express the actual considerations which induced them to thus associate themselves together.

6. Where a corporation organized to do a general mining business transfers all its property to another mining corporation in exchange for shares of stock in the latter, and exercises its corporate functions in no other way than by holding and voting such stock for a period of nearly three years, such discontinuance of the business for which it was organized will not of itself work a forfeiture of its charter or compel a dissolution, but is a circumstance to be considered by the court in a suit by minority stockholders to compel a distribution of the corporate assets upon this and other grounds.

7. Findings of fact reviewed, and certain findings approved and others disapproved as not being sustained by the evidence.

8. Where a corporation organized to do a general mining business transfers all its property to another mining corporation in exchange for shares of stock in the latter, and wholly discontinues mining operations, and minority stockholders demand a distribution of the stock so held, and it appears that such minority stockholders have no representation on the board of directors or among the officers of the corporation but that such officers and directors have combined to exclude the minority stockholders from participation in the business of the corporation and have attempted to commit acts which are prejudicial to the interests of all the stockholders and ultra vires, held, that the minority stockholders are entitled to equitable relief compelling such corporation to reduce its capital stock to the extent required to enable it to distribute among such minority stockholders their proportionate share of the corporate assets, in exchange for the surrender and cancellation of their shares of stock.

APPEAL from the District Court of the First Judicial District, for Shoshone County. Hon. Wm. W. Woods, Judge.

Action by minority stockholders in an Idaho corporation, asking for the appointment of a receiver, the dissolution of the corporation, and a division of the assets of the corporation. Judgment for defendants. Reversed.

Reversed and remanded, with direction. Costs awarded to appellants.

C. W Beale and John H. Wourms, for Appellants.

The old doctrine that minority stockholders had no relief and the conduct of the affairs of the corporation could only be investigated by the state on relation of the attorney general, if not supplanted, has, to a very great degree, been modified by the modern doctrine of minority rights and existing business necessity. (Hall v. Nieukirk, 12 Idaho 33, 118 Am. St. 188, 85 P. 485; Gibbs v. Morgan, 9 Idaho 100, 72 P. 733.)

The officers of a corporation are trustees for the creditors and stockholders. The officers being in a place of trust, are, of course, obliged to execute their duties with fidelity, not for their own benefit, but for the common benefit of all the stockholders of the corporation. The directors and trustees of a corporation hold a fiduciary relation to the stockholders. (Symmes v. Union Trust Co., 60 F. 830; Miner v. Belle Isle Ice Co., 93 Mich. 97, 53 N.W. 218, 17 L. R. A. 412.)

A breach of duty by a person acting in a fiduciary capacity is "constructive fraud." (Warren v. Robinson, 21 Utah 429, 61 P. 28.)

A receiver should have been appointed, stock and cash distributed, and the Callahan company dissolved. (Gibbs v. Morgan, supra; Hall v. Nieukirk, supra; Smith on Receiverships, sec. 225; Miner v. Belle Isle Ice Co., supra; 4 Thompson on Corp., 2d ed., sec. 4622; Ponca Mill Co. v. Mikesell, 55 Neb. 98, 75 N.W. 46; Treat v. Pennsylvania Mut. Life Ins. Co., 203 Pa. 21, 52 A. 60; Jones v. Missouri-Edison Electric Co., 144 F. 765, 75 C. C. A. 631; Wheeler v. Abilene Nat. Bank Bldg. Co., 159 F. 391, 89 C. C. A. 477, 16 L. R. A., N. S., 892, 14 Ann. Cas. 917.)

The expressly granted power to own stock does not give the corporation any more right to own stock outside of the purposes for which the corporation was organized than does the expressly granted power to contract give it the right to make contracts outside of those purposes. (Salmon River Min. etc. Co. v. Dunn, 2 Idaho 26, 3 P. 911; State v. Atlantic City & S. R. Co., 77 N.J.L. 465, 72 A. 111; Gerhard v. Welsh, 80 N.J. Eq. 203, 82 A. 871; Williams v. Johnson, 208 Mass. 544, 95 N.E. 90; Robinson v. Holbrook, 148 F. 107; Bowditch v. Jackson Co., 76 N.H. 351, Ann. Cas. 1913A, 366, 82 A. 1014; Central R. Co. v. Collins, 40 Ga. 582; Stacy v. Glen Ellyn Hotel etc. Co., 223 Ill. 546, 79 N.E. 133, 8 L. R. A., N. S., 966.)

"Courts of equity are established for the administration of justice in those peculiar cases where substantial justice cannot be administered under the express rules of law, and to adopt a rigid rule that recognizes no exceptions would be to rob such courts of much of their efficacy and power for administering even handed justice." (Twin Falls County v. West, 25 Idaho 271, 277, Ann. Cas. 1916B, 185, 137 P. 171; Sharon v. Tucker, 144 U.S. 533, 12 S.Ct. 720, 36 L.Ed. 532; Toledo etc. R. Co. v. Pennsylvania Co., 54 F. 746, 19 L. R. A. 395; 1 Story, Equitable Jurisprudence, 13th ed., p. 21; 16 Cyc. 478.) Equity commonly achieves its end by directing the parties over whom it has jurisdiction in personam to act in such a way that the desired result is accomplished. (Hart v. Sansom, 110 U.S. 151, 3 S.Ct. 586, 28 L.Ed. 101; Northern Securities Co. v. United States, 193 U.S. 197, 24 S.Ct. 436, 48 L.Ed. 679.)

J. P. Gray and J. E. Gyde, for Respondents.

The mere cessation or suspension or discontinuance by a corporation of corporate business, unless by a resolution of the stockholders to discontinue business, will not operate as a dissolution of the corporation. (Cook on Corporations, secs. 631, 634, 747; Law v. Rich, 47 W.Va. 634, 35 S.E. 858; 5 Thompson on Corporations, 2d ed., sec. 6488.)

The method of dissolution of a corporation is provided by statute. (Kohl v. Lilienthal, 81 Cal. 378, 20 P. 401, 22 P. 689, 6 L. R. A. 520; O'Dea v. Hollywood Cemetery Assn., 154 Cal. 53, 97 P. 1; Tapscott v. Mexican Colorado R. Land Co., 153 Cal. 664, 96 P. 271; Thompson on Corporations, sec. 6510.) An ultra vires act is not ground for dissolution. (Sternberg v. Wolff, 56 N.J. Eq. 555, 42 A. 1078.)

In the absence of express statutory authority, jurisdiction of courts of equity does not exist over corporate bodies to such an extent as to justify them in dissolving corporations, or of winding up their affairs and sequestrating their property. (Wallace v. Pierce-Wallace Pub. Co., 101 Iowa 313, 63 Am. St. 389, 70 N.W. 216, 38 L. R. A. 122; Dudley v. Dakota Hot Springs Co., 11 S.D. 559, 79 N.W. 839; Fischer v. Superior Court, 110 Cal. 129, 42 P. 561; Havemeyer v. Superior Court, 84 Cal. 327, 18 Am. St. 192, 24 P. 121, 10 L. R. A. 627; People's Home Sav. Bank v. Superior Court, 103 Cal. 27, 36 P. 1015; note to Neall v. Hill, 76 Am. Dec. 508; French Bank Case, 53 Cal. 495; Mason v. Supreme Court, 77 Md. 483, 39 Am. St. 433, 27 A. 171; Empire Hotel Co. v. Main, 98 Ga. 176, 25 S.E. 413; Richardson v. Clinton Wall Trunk Mfg. Co., 181 Mass. 580, 64 N.E. 400.)

If there is any necessity for action to protect the funds of the corporation, injunctive relief is proper. (High on Receivers, 4th ed., sec. 288; Clark and Marshall on Corporations, sec. 566.)

There cannot be found a single case where it has been held that a corporation that has sold its property to another corporation engaged in exactly the same business as...