Smith v. Gray

• Decision Date: 05 October 1926
• Docket Number: 2743.
• Parties: SMITH et al. v. GRAY et al.
• Court: Nevada Supreme Court

250 P. 369

50 Nev. 56

SMITH et al. v. GRAY et al.

No. 2743.

Supreme Court of Nevada

October 5, 1926

Appeal from District Court, Elko County; J. M. McNamara, Judge.

Suit by Henry Smith and others and all other stockholders of the Nevada Copper Mining, Milling & Power Company, a corporation who are similarly situated, against E. F. Gray and others. From judgment for defendants and order denying motion for new trial, plaintiffs appeal. Affirmed.

William H. Pratt, of Tacoma, Wash., and E. J. L. Taber, of Elko, for appellants.

G. A McElroy, of Los Angeles, Cal., and F. M. Bottorff, of Berkeley, Cal., for respondents.

SANDERS J.

This is an equitable action brought by three stockholders of the Nevada Copper Mining, Milling & Power Company, a corporation suing for themselves and other minority stockholders similarly situated, against respondents, praying injunctive and other equitable relief, the nature and character of which will sufficiently appear in the statement of facts. After a full hearing upon the pleadings and evidence, the trial court found in favor of respondents, and, upon its findings of fact and conclusions of law, ordered, adjudged, and decreed that plaintiffs take nothing by reason of their complaint, and that defendants have judgment against plaintiffs dissolving a temporary restraining order issued at the commencement of the action, and for their costs. The plaintiffs appeal from said judgment, and also from an order denying their motion for new trial.

The parties will be designated here as they were in the court below, and we shall refer to the corporation defendants as the Nevada Company and the Gray Company. The pleadings are too lengthy to attempt a detailed statement of their various allegations, and we find it difficult to make a condensed statement of the facts; but the case is one that cannot be thoroughly understood without a full knowledge of all the conditions and causes which led to the acts of which complaint is made.

It is a long story. Prior to, or during, the year 1905 Henry Smith plaintiff, grubstaked one Jeffrey McDermott to search and prospect for mineral on the public domain. McDermott located a number of copper bearing lode prospects in the Salmon river mining district in Elko county, Nev., far in the interior, and 40 miles from any railroad. The locations were considered to be of such promise that in 1905 the plaintiff Henry Smith promoted and organized the Nevada Company under the laws of the state of Arizona, with an authorized capital stock of 1,500,000 shares, of the par value of $1 each, for the purpose of taking over and financing the development thereof through sale of treasury stock of the corporation. Upon its organization all said locations were conveyed to the corporation for a stock consideration. Smith and McDermott continued in control of the majority of the stock of the corporation up to the year 1907, when McDermott sold and transferred his stock to one E. F. Messinger, an incorporator, and one of the directors of the corporation. Smith and Messinger continued in control of the majority of the issued stock up to the year 1918. A large amount of stock was sold to the public, and its proceeds were devoted to the exploration and development of the property. A large amount of low-grade ore was exposed by the development work carried on under the management of Henry Smith, which, in the judgment of the interested parties, justified the further development of the mining ground. The company, however, was unsuccessful in selling enough of its treasury stock to raise sufficient funds to prove the value of the ore bodies at depth. It was a stupendous undertaking in an unproven mining district, attended with the usual risk and hazard of mining investments, and it required extraordinary effort and a large amount of capital to prove the value of the property and to secure transportation facilities. While all the officers and stockholders apparently believed in the merit of the property, it was deemed for the best interest of the company to discontinue the sale of stock for development purposes, and instead to make a sale, or interest in the property some person or persons, company or corporation with sufficient capital to develop it, secure transportation, and, if possible, put the property upon a paying basis without further expense to the stockholders. The property consisted of 49 patented, and 2 unpatented, mining locations, mine machinery, tools, and mine equipment.

In August, 1918, E. F. Messinger arranged a meeting between Henry Smith and one E. F. Gray. The said Gray was a successful promoter of several dividend paying copper mines, one of which was the Nevada Consolidated, at Ely, Nev. Gray made an examination, and considered the property to be of such merit as to warrant further development, and as a result he entered into negotiations with the officers of the company. A special meeting of the board of directors of the company was held on the 11th day of September, 1918, at Tacoma, Wash. The members of the board at that time consisted of E. F. Messinger, Henry Smith, G. H. Reed, A. E. Irving, and E. S. Price. At this meeting the following resolution was passed and adopted:

"* * * Upon motion duly seconded and carried the president and secretary were authorized and instructed to enter into a written lease and bond binding the company to sell its entire holdings in the Salmon river mining district, Elko county, Nev., to Mr. E. F. Gray, of Seattle, Wash., for $250,000, to be paid as follows: $25,000 of the purchase price to be expended in development work and improvements on the ground within one year from date of signing of the lease and bond; $25,000 cash to be paid on or before the expiration of the second year from the signing of the bond; and $200,000 or the full purchase price, to be paid in cash on or before the expiration of three years from the signing of the lease and bond; said E. F. Gray to have the right to make full payment at any time during the life of the lease and bond; 25 per cent. royalty to be paid to the Nevada Copper Mining, Milling & Power Company on all ores shipped during the life of the bond, same to apply on the purchase price. Said lease and bond to contain a clause which provides that said E. F. Gray agrees that on or before one year from date of signing the lease and bond he agrees to give an option on 2,500 shares of stock in a holding company, which he proposes to organize on the following terms: At a price based on pro rata ratio on bonded price of the property herein bonded to unit value of stock in the holding company at $100 per share. Said stock, or any part thereof, to be applied in settlement in lieu of cash to shareholders of the Nevada Copper Mining, Milling & Power Company who may desire same. * * *"

Pursuant to this resolution, the president and secretary, under the seal of the Nevada Company, granted to E. F. Gray, in consideration of $1, and of the terms and conditions of the agreement, the right, privilege, and option to purchase all the property of the Nevada Company described therein for the price of $250,000, payable as provided in the above resolution.

Pursuant to the resolution, E. F. Gray promoted and organized the Gray Mining Company, a corporation, under the laws of the state of Deleware, with 100,000 shares of capital stock-of no par value. Upon its organization, E. F. Gray assigned to the Gray Company said option agreement, which assignment was approved by the Nevada Company. The Gray Company took possession of the property covered by the option, and proceeded to carry out a plan and policy for its development upon a large and expensive scale. During the first year of the option it expended in excess of the $25,000 required by the option agreement in development work on the property. It extended a tunnel into the property for a distance of 2,500 feet, which exposed 4,000,000 tons of commercial ore. The successful development of the property attracted a large number of people to the mining district. An independent townsite company was organized, and as a result the town of Contact came into existence.

At this stage of development the Gray Company took up the question of transportation. An independent company was formed to build a railroad between Rogerson, Idaho, and Wells, Nev., which would pass through the town of Contact. It was represented that the building company would have sufficient funds to construct said road, provided certain amounts could be secured from the states of Idaho and Nevada. A certificate was granted by the Interstate Commerce Commission to construct the road, but the parties were unable to finance the enterprise. Thereafter certain committees from Idaho and Nevada, of one of which the defendant E. F. Gray was a member, succeeded in having the Union Pacific Railway Company build and equip a railroad between said points.

During the running of the option, the Nevada Company, on August 19, 1920, upon request of the Gray Company, extended the period of the option to September 23, 1922. On August 9, 1921, the option was again extended to September 23, 1923. On August 25, 1922, upon the request of the Gray Company, the option was extended to September 23, 1924. The several resolutions extending the time of the option show that, because of the adverse business conditions, it was difficult for the Gray Company to finance the development work being carried on by it, and that it was deemed for the best interests of the Nevada Company to grant said extensions. On these dates E. F. Messinger, E. F. Gray, Myra K. Price, E. S. Price, and G. H. Reed composed the board of directors of the Nevada Company.

On September 1, 1922, the Gray Company, in accordance with the resolution of September 11,...