Smiley v. New River Co.
| Decision Date | 18 March 1913 |
| Citation | 77 S.E. 976,72 W.Va. 221 |
| Parties | SMILEY et al. v. NEW RIVER CO. et al. |
| Court | West Virginia Supreme Court |
Submitted September 12, 1912.
Syllabus by the Court.
The majority of the stockholders of a solvent going corporation in the absence of fraud, or conduct amounting to fraud, and so long as they keep within their charter, have the uncontrollable right to manage the corporate affairs, and a court of equity will not interfere at the instance of a minority of the stockholders, by receivers or otherwise, to control corporate acts or management.
Where the equities of the bill on which a receiver of a solvent going corporation is sought are fully denied by sworn answers, and the evidence adduced in support of the bill does not overcome these denials a receiver should not be appointed.
Individual stockholders of a corporation having grievances must seek relief through the corporation itself, first by application to the directors, and then to the stockholders before appealing to a court of equity on their individual initiative.
Appeal from Circuit Court, Fayette County.
Bill by J. W. Smiley and others against the New River Company and others. Decree for plaintiffs, and certain defendants appeal. Reversed and remanded.
A. C Burnham, of Boston, Mass., Brown, Jackson & Knight, of Charleston, and Dillon & Nuckolls, of Fayetteville, for appellants.
John H Holt and E. E. Williams, both of Huntington, and Watts, Davis & Davis, of Charleston, for appellees.
Plaintiffs Smiley, Scarborough, Deegans, MacDonald, Sr., and MacDonald, Jr., suing on behalf of themselves and all other stockholders of The New River Company, who may join in the prayer of the bill and contribute to the costs of the suit, on grounds alleged, prayed for an injunction against The New River Company, its officers and agents, from pledging for loans $1,500,000, residue of an issue of $4,000,000, of its bonds, secured by mortgage; for the appointment of a special receiver for that company, and of its seventeen so called subsidiary companies, with authority and direction to take immediate possession, control and management of the properties and business thereof and to conduct the same until the further order of the court; for the appointment of a commissioner, to investigate, state and report the then condition of the accounts between The New River Company and its said subsidiary companies and between each of them; and there is a prayer for discovery, and for general relief.
On the hearing of the motion for an injunction and the appointment of a special receiver, on bill, demurrer and answer there, to by The New River Company, and by each of said subsidiary companies, and on ex parte affidavits and depositions taken in court, the court below, awarded the injunction prayed for and appointed Samuel Dixon, W. E. Deegans and Eugene P. Carver, special receivers, with the powers and authority prayed for, basing its action on its conclusion from pleadings and proofs, that "The New River Company has been, and is, managing the properties and business of each of the defendants, its subsidiary Companies, *** in an improper and illegal manner, and in violation of its charter powers, by the diversion of moneys belonging to one subsidiary company to the uses and benefit of another subsidiary company, which said subsidiary companies do not wholly have common stockholders, and which said management, in the opinion of the Court, is not only operating a fraud upon those stockholders in said defendant subsidiary companies who are not stockholders in the defendant The New River Company, to which fraud The New River Company, by such continued management, is making the plaintiffs herein particeps criminis, against their objection, contrary to their will and over their protest, but by such method of doing business and handling the funds of said subsidiary defendant companies is in the opinion of the Court, and as shown by the proof in this cause, rendering said subsidiary defendant companies, or some of them, unable to pay their royalties in accordance with the terms of their respective leases, threatening them with forfeiture of said leases, by which said defendant subsidiary companies are threatened with the loss of their properties, or a material part thereof."
Many other grounds for relief are alleged, but the decree is predicated solely on the grounds recited therein. The other grounds relate mainly to disagreements between plaintiffs, a small minority of the stockholders of The New River Company, and the other stockholders and directors of the holding and subsidiary companies, as to the proper conduct of the business, and particularly as to who shall be manager of the several corporations. It is not pretended that the holding company or any of the subsidiary companies are insolvent; indeed it is alleged that the properties of each are very valuable, and under proper management would be profitable to the stockholders.
While it is sought to support the bill as one for an accounting, for fraud alleged, to prevent a forfeiture of some of the leaseholds, and for discovery, it is quite evident that the only matter really relied on is that on which the court below based its finding and decree. All other matters are met by the demurrers and answers, and if any of them constitute good grounds for relief, they are not supported by proper or sufficient proof. One of these, a subject also of the protest to the stockholders of June 12, 1912, hereafter alluded to, relates to the proposed sale or pledge of the $1,500,000, residue of $4,000,000, of bonds of The New River Company, authorized in July, 1909, under the administration of said Dixon, and covered by the injunction in the decree appealed from. The bill in the sixth paragraph admits the sale of $2,500,000, of these bonds about the time of their issue, at seventy-five cents on the dollar; but in the protest of June 12, 1912, to stockholders, and in the bill with which it is exhibited, it is complained that the sale of the residue of the bonds at not less than seventy cents on the dollar, the terms on which protestants say they are informed it is proposed to dispose of the same, will result in a waste of the properties of the subsidiary companies, and in foreclosure of the mortgage securing the same, and in the destruction of the value of the stock of protestants in The New River Company, but the prayer of the bill and the injunction, as we have seen, is not against the sale of the bonds, but against the pledge thereof as security for loans, great or small, until the further order of the court, a prayer hardly covered by or consistent with any allegation of the bill. The sworn answers of the defendants, not controverted, meet the charge of the bill and protest, by showing that the sale of the $2,500,000 of these bonds at seventy-five cents was warranted by the nature of the bonds and the facts attending and involved in their issue; that this issue and sale at that figure was authorized in advance by the directors and subsequently unanimously ratified and approved by the stockholders, and that plaintiffs and protestants Scarborough and Smiley, present at the meeting, voted in favor thereof, Scarborough in the directors' meeting having seconded the motion therefor. We see nothing in the record, therefore, justifying the injunction against the sale or pledge of the bonds. No fraud is alleged or proven in connection therewith. Nothing in the law of corporations is better settled than that the majority of the stockholders of solvent going concerns, so long as they keep within their charters, and in the absence of fraud, or conduct amounting to fraud, have the uncontrollable right to manage their corporate affairs, and that courts of equity will not through receivers or otherwise, on the application of a minority, interfere with or attempt to control corporate action. And fraud if relied on must be specifically pointed out and proven. Generalities or conclusions of law will not do. Nor will mere mismanagement, mistakes in judgment, or unwise actions, amount to fraud in the absence of a showing that such action has been influenced by some outside purpose and regardless of the interests of the corporation. Alderson on Receivers, § 351; Hand v. Dexter, 41 Ga. 454; Republican Mountain Silver Mines v. Brown, 58 F. 644, 647, 7 C.C.A. 412, 24 L.R.A. 776; Worth Mfg. Co. v. Bingham, 116 F. 785, 790, 54 C.C.A. 119; Ranger v. Champion Cotton-Press Co. (C. C.) 52 F. 609, 610; North American Land & Timber Co. v. Watkins, 109 F. 101, 105, 48 C.C.A. 254; Gamble v. Q. C. W. Co., 123 N.Y. 91, 99, 25 N.E. 201, 9 L.R.A. 527; Farwell v. Babcock, 27 Tex. Civ. App. 162, 65 S.W. 513; Fluker v. Emporia City R. Co., 48 Kan. 577, 580, 30 P. 18; Callaway v. Powhatan Imp. Co., 95 Md. 177, 183, 52 A. 916; Hill v. Gould, 129 Mo. 106, 116, 30 S.W. 181; Edison v. Edison U. P. Co., 52 N.J.Eq. 620, 627, 29 A. 195; Texas Consol. C. & M. Ass'n v. Storrow, 92 F. 5, 12, 34 C.C.A. 182. No such showing is made in this case.
The ninth paragraph of the bill was intended to cover the matter upon which the decree below appointing receivers was predicated. That paragraph and the replies thereto present the concrete case, and may be best shown by quoting them in full, as follows:
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