Davis v. United States Electric Power & Light Co.

Page, J., delivered the opinion of the Court. The bill in this case was filed by certain stockholders of the United States Electric Power and Light Company of Baltimore City, on behalf of themselves, and of other stockholders of said company, in like situation with themselves. This company was incorporated under the general law of the State of Maryland, for the purpose of manufacturing electricity for illuminating purposes, and for use as a power, and for all other purposes to which electricity or magnetism may be'applied, and also for buying and selling dynamo electric machines for the manufacture of electricity, and all other machines and inventions connected therewith throughout the State. Eor a number of years, it has been engaged in the business for which it was incorporated in the City of Baltimore, and, at the time of the institution of these proceedings, was furnishing light and power to about one hundred and seventy-five customers.

Its capital stock consists of five thousand shares, of the par value of f 100 each, of which one thousand are unissued, twenty-five hundred and five are owned by the Brush Electric Company of Baltimore City, one hundred and ninety-six by Augustus G. Davis, one of the complainants, and of the remaining shares various amounts are held by the other complainants. The Brush Electric Company of Baltimore City was also incorporated under the laws of the State of Maryland, for the purpose of conducting the same business, and, prior -to the year 1886, was a rival and a competitor of the United States Company in the City of Baltimore. To prevent the ruinous rate-cutting and underbidding, which were the consequences of this rivalry, the Brush Company, in that year, became the purchaser ³⁸ of a majority of the stock of the United States Company. The affairs of the latter company seem to have been conducted to the satisfaction of both the companies, until November of 1891, when the alleged troubles began, which form the subjects of complaint.

The bill alleges, that on that day an election was held by the stockholders of the United States Company, at which was chosen, a board of directors, a majority of whom were persons principally interested in the affairs of the Brush Company, appointed by that company to carry out a policy dictated by the Brush Company as follows, viz., First, to conduct the affairs of the United States Company “in the interest of, and in order to feed, the Brush Electric Company, at the expense of the stockholders, not interested in the said Brush Electric Company; second, to permit it to earn only an income sufficient to provide for its running expenses; and third, to close up the affairs of the United States Company, and dispense with its operations, whenever it shall be found to be to the interest of the Brush Company.” Many acts, alleged to be in furtherance of this policj', are set out in the bill. As we shall consider these later on, they need not be more particularly referred to at this point. The complainants also charge, that, although the value of the shares of stock of the United States Company has been greatly lessened by these fraudulent doings, nevertheless their value has not yet been wholly destroyed, but will speedily be, unless control of the corporation be promptly withdrawn from those who constitute a majority of the board of directors; and that they are without remedy save by the “immediate appointment of a receiver, who can remove the conduct of affairs ” of the company from the control of these directors, and conduct the same under the direction of the Court, until its affairs can be finally wound up; that its business cam no longer be profitably conducted, and it is for the inte ³⁹ rest of the stockholders that it should he wound up, and its assets sold and disposed of according to the rights and .equities of shareholders and creditors, and for that purpose pray that a receiver may be appointed. The answer of the Brush Company which is adopted by all the other defendants, (except the two Safe Deposit Companies), denies the alleged policy of the directors of the United States Company, and affirms that, in so far as the officers and members of the Brush Company have taken part in the affairs of that company, “ they have been governed not only by the desire to give value to this defendant’s large interest in said company, but to deal fairly and honestly with all concerned.” It either denies or explains the several acts attributed by the bill to the Brush Company, and denies all fraud, or that the value of the shares of the United States Company has been lesseued by any act of the Brush Company, or of its officers and members, and demands full proof of all the allegations in the bill not specifically admitted.

There is no question raised as to the power of the Brush Company to purchase and hold the stock of the United States Company. Since the case of Booth, et al. vs. Robinson, et al., 55 Md., 433 , it is settled in this State, that “ one corporation may deal in the shares of another, without express authority so to do, unless where expressly prohibited, or the nature of its business renders it improper so to deal.” But it was contended at the argument, that the Brush Company, occupying the relation which it does to the public, had no right to participate at all in the election of directors. But we think this contention cannot he maintained. If it be conceded that the company can lawfully purchase and hold the stock, then, in the absence of any restriction contained in the charter it must follow, as an incident to the ownership of the stock, as well as by the express terms of the statute, that it shall have a vote at all meet ⁴⁰ ings of stockholders for each share of stock it may hold.

Mottu, et al. vs. Primrose, 23 Md., 501 . In that case the Court not only lays down this rule, hut proceeds: “While the minority of the stockholders are entitled to protection against the fraudulent or illegal action of the majority, that protection is not to be had by denying to the majority, their right annually to elect the Board of Managers.” The gravamen of the complaint made hy the bill is, that the Brush Company, having obtained control of the management of the United States Company, is using its power to make that company subservient to its own interest, to use it as a feeder, and finally utterly to destroy it, whenever it shall be to their profit so to do. This, as was said in Booth vs. Robiuson, (supra,) would be a fraud of the most flagrant character. It would subject the corporation at whose instance the scheme was devised and executed, not only to a civil liability for the injury done, but also to the penalties of misuser or abuser of its franchises; and in such a case “Courts can neither be too emphatic in condemning the act, nor too ready to afford the,strongest remedy allowed by law for the prevention or redress of the wrong.” In this case, the relief prayed for, must be granted, if at all, in the exercise of the ordinary powers of a Court of equity.

The dissolution of the company is not asked for; as indeed it could not he, without a compliance with the provisions of the Code having reference to that subject. The principles applicable to the appointment of receivers have been definitely settled in Maryland. The power is a discretionary one, to be exercised with great circumspection, and only in cases where there is fraud or spoliation, or imminent danger of the loss of the property, if the immediate possession should not be taken by the Court; and these facts must be clearly proved. But where these conditions have been fully ⁴¹ met, Courts do not hesitate to appoint receivers over the property of corporations, for the benefit of all concerned during the controversy.

Clark, et al. vs. Ridgely, et al., 1 Md. Ch. Dec., 70; Blondheim, et al. vs. Moore, 11 Md., 374 ; State vs. Northern Central Railway Co., 18 Md., 215 ; Voshell & Heaton vs. Hynson, et al., 26 Md., 83 . It is not here alleged that the United States Company is at present insolvent, or that its property is being wasted, hut that the directors, at the instance and for the benefit of the Brush Company, have adopted a fraudulent policy, and are carrying it out by the fraudulent acts set out in the hill, and that if this policy be persisted in, ruin will soon overtake that company, and its stockholders will suffer the loss of the value of their stock. If these allegations are clearly proved, the Court would he enabled to decide a gross fraud was being perpetrated, and it would have ample jurisdiction to take the affairs of the company from the control of the directors, and place them in fhe hands of a receiver, tobe administered under the direction of the Court, according to the principles of law and equity.

Before proceeding, however, to examine the evidence, it may he' well, to advert to the fact that “upon the question of the fraudulent intent or design charged,” though it he true that there maybe persons in the hoard of directors of the United States Company, who are interested in the affairs of the Brush Company, this circumstance alone, “while it should subject their conduct to rigid scrutiny by the Court, does not afford ground of presumption against the legality and fairness of the dealings and transactions between the two companies.” They were the chosen agents of the United States Company, and “tobe successful in any attempt to impeach the validity of their acts,” with a view to making them or the rival corporation responsible, “there must he distinct charges of misconduct, fully supported-by proof. ” Booth vs. Robinson, (supra,) and authorities there cited. ⁴² Is the charge of fraud made by the bill sustained by the proof? It appears from the record, that, prior to 1886, the two electric companies were engaged in the business of furnishing light and power in the Oity of Baltimore. A strong rivalry between them sprang up, in which rate-cutting and under-bidding for business, were practised by both companies, to an extent that jeopardized the prosperity, if not the existence, of both of them. To put an end to this ruinous condition of affairs, and to secure harmonious relations with its rival, the Brush Company, on the 18th of June, 1886, purchased two thousand five hundred and five shares of the stock of the United States Company, being a majority of the entire number of shares then outstanding, at a cost, in the aggregate, of about $60,000.

It is not claimed by the complainants that the purchase was in any respect tainted with fraud, either as to the manner in which it came about, or as to the purposes actuating any of the parties to the transaction. At the time of this purchase the affairs of the United States Company were in bad condition. Prompt action was needed to save it from ruinous disaster. Mr. Baldwin, referring to its condition at this period, states ££it was most deplorable." ££They were without money or credit.” Their indebtedness was nearly $30,000; and their building, (constructed on leased ground,) as well as their plant, (estimated to be worth about $85,000,) required large outlays for repairs, which in the judgment of competent persons sent to examine them, were absolutely necessary to save the property from ruin.

The complainants admit, that until November, 1891, the affairs of the United States Company were successfully managed. The Brush Company, after its purchase of stock seems to have rendered to the United States Company most substantial aid. It became the surety for the United States Company for the sum needed for immediate ⁴³ expenditure, and two years later, when the latter company had failed to find a market for its bonds, the Brush Company accepted them in payment of sums due to itself, and prevailed upon the creditors to take them also for their claims, and by this means, $45,000. out of an entire issue of $60,000 were successfully placed. Thus relieved of its pressing necessities, and of disastrous rate-cutting, the United States Companybecamemoreprosperous.

Its business and revenue steadily increased. No dividends were declared, but its net earnings were applied to betterments, until now it is free from debt, with a plant estimated to be worth $200,000, its stock enhanced in value from $24 to $50 per share, and, in the opinion of Mr. Clark, the President, enabled before very long to pay a three per cent, dividend on the capital stock of $500,000. In addition to this, the bonds of the company which were sold in 1886 at ninety cents in the dollar, now, in the opinion of Mr. Clark, the President, “ought to